Selling Insurance – Perfect for banks, but 2 challenges to bear in mind

Indian banks are selling lot more insurance that you could have imagined. Recent data is quite astonishing. Indian banks earned ₹26,000 crore commissions from selling life and health insurance policies in FY26. Most of this came from group insurers.

Big 5 banks dominate insurance selling

The big 5 banks in India viz. HDFC Bank, ICICI Bank, SBI, Axis Bank, and Kotak Bank jointly accounted for about 75% of the total insurance selling revenues of banks in FY26. All these 5 banks have their own group insurance companies, so they are making real big money by selling insurance. The reasons are not far to seek. Banks have a relationship of trust with customers and it becomes much easier for these banks to cross-sell insurance products to their banking customers. Even banks are not complaining, because it helps them to reduce dependence on fund-based earnings, and boosts their ROI per customer.

Structural risks for the insurance company

One of the risks of such a model for insurance companies was highlighted by ICRA, in a recent note. According to ICRA, this sort of bancassurance arrangement makes the insurance company overtly dependent on the bank-distributor. These concerns are not without merit. Take the case of HDFC Life and ICICI Prudential Life. In these two cases, 58% and 30% of total sales of the insurance units were brought in by the banking principals. In a sense, the bank channel was literally driving new business premium (NBP). One can argue that there is nothing wrong with banks deepening their customer ROI by offering them more products. However, there are 2 key challenges in this model.

Challenge 1 – How to avoid mis-selling of insurance

To be fair, mis-selling of insurance is not a problem with banks alone. For a long time, insurance agents pushed endowment and moneyback policies to unwitting customers, when a pure term policy could have done the job more efficiently. In the last 25 years, these demarcations between insurance and investments have become a lot clearer. In the bancassurance model, the bank is the underwriter and also the commission earning agent of the insurance policy. Either due to pressure of sales targets or due to lack of adequate training in insurance, such mis-selling is rampant. Even though RBI has made mis-selling more expensive for banks, India still lacks an ecosystem that penalizes mis-selling.

Challenge 2: Is core banking going for a toss?

While the customer is exposed to the mis-selling, there is a bigger balance sheet risk for the banks. That has been visible in the last few quarters. Traditional banking was supposed to focus on raising low-cost deposits and deploy them in industrial and consumer lending. With a greater focus on selling insurance and mutual funds, banks are focusing less on deposit mobilization, and that is evident in the rising credit/deposit ratio. To make up for the gap, banks are relying on the short-term CD market, which brings to the fore, the risk of maturity mismatch for banks. More than the risk for insurers, it is the risk for customers of banks and for bank balance sheets that are of greater relevance!