RBI warns banks against mis-selling insurance products

A Reserve Bank of India report on Tuesday favoured the distribution of insurance products by banks, but it warned of the possibility of mis-selling, especially in the light of reported attractive performance-linked incentives for banks' staff and management.

"Distribution of insurance products by banks is popular the world over. It can provide very useful non-interest income (fee-based income) and positively impact profitability," said the RBI in its Financial Stability Report (FSR).

"While this may be seen as complementary to core banking business leveraging the banks' relationship with customers by offering a wide spectrum of financial services under one roof, there is a need to check the possibility of mis-selling, especially in the light of reported attractive performance-linked incentives for bank staff and management."

On reinsurance, the report said "reinsurance is one of the major risks and capital management tools available to primary insurance companies whereby the insurers (the 'cedant') buy insurance for risks that they cannot retain entirely with themselves, from one or more insurance companies (the 'reinsurer')."

Though a robust reinsurance programme protects the balance sheets of primary insurance companies against unexpected adverse losses and improves risk assessment, there is a need to assess the resilience of reinsurance firms in the face of increasing concentration of contingent liabilities in a few reinsurance entities, it said.

As per the report, "In an unexpected, but plausible scenario of simultaneous materialisation of major risk events, reinsurance companies may come under heavy stress which may have implications for primary insurance companies too, including potential risks of insolvency."