Insurance distribution through banking channels - an 'ugly' path in the credit system

“Bad” trails in the credit system

Commercial banks (CBs) are a type of enterprise and an economic unit that plays the role of financial intermediary and profit-making business function in the market economy, while Life Insurance Company (LI) is also a business that provides financial protection for insured people against risks related to health, body and life. Thus, in terms of function, both are businesses that play the role of the lifeblood of the economy and ensure social security.

In order to grow stronger and stronger, commercial banks and life insurers have created a joint model in developing and distributing insurance products, called insurance distribution through banking channels (Bancassurance). Specifically, commercial banks will sign exclusive agreements with life insurers to cross-sell insurance products through banks with the initial purpose of creating a circle of benefits for all three parties: life insurers, commercial banks and customers. Therefore, the National Assembly has also amended and passed the Law on Insurance Business, effective from January 1, 2023, to supplement a number of regulations on the activities of institutional insurance agents (including credit institutions), and has also amended and supplemented regulations on Bancassurance activities for insurance companies and banks.

Obviously, the huge profits from Bancassurance are the motivation for both commercial banks and life insurance to strengthen cooperation. And to further exploit the benefits from this, commercial banks have taken advantage of the mentality of "having money to hold the knife by the handle" to create rules of the game with the trick of "selling beer with peanuts", specifically, soliciting and suggesting customers (who are in need of loans) to buy insurance to receive disbursement; at the same time, increasing interest rates to force customers to pay off the loan (pay off debt in one go) if they cancel the insurance contract.

Banks and insurance are businesses that play a vital role in the economy and ensure social security. Illustration photo: Thu Huyen

From here, the majority of customers are forced to buy insurance even though it is not a practical need. By this trick, some commercial banks have put customers in a "voluntary" situation to rationalize their bad behavior.

Bancassurance itself, from creating a circle of benefits for commercial banks, insurance companies, customers and state management agencies, has become an "ugly" path in the credit system. That is why the Minister of Finance has requested the Department of Insurance Management and Supervision to strengthen the management and supervision of insurance market activities, conduct inspections and examinations of insurance companies, including insurance agents and insurance brokers. Do not continue to let the situation of insurance companies cooperating with banks force customers to buy insurance before lending capital.

Strengthen management and supervision

Here, it must be affirmed that this inspection must be carried out in parallel with both insurance companies and commercial banks, because the key point of the above incident is the connection between life insurance companies and commercial banks in developing and distributing products, more specifically, the bank has applied KPIs to employees in selling life insurance. Thus, if there are violations, both must be handled, not just one. In addition, there must also be close supervision of product consultation because for a long time both commercial banks and life insurance companies have been "fraudulently and ambiguously involved" in this matter.

First, unlicensed commercial bank employees advise customers to buy financial investment products, especially those who do not have much knowledge in this field (such as retirees). Taking advantage of this, bank employees have given ambiguous advice so that customers do not deposit savings but instead deposit money into bond funds, stock funds, and deposit certificate products. The clearest evidence is that SCB Bank has advised customers to buy bonds in an ambiguous and dishonest manner when they have just closed their savings books, using beautiful words such as“Preferential products for long-term customers, with very low risk because the business is in the ecosystem with the bank”.

This is no longer a story about the simple bond of not just one bank but also a story of lax management. Therefore, the Ministry of Finance should tighten inspection as well as impose deterrent sanctions on the operations of the banking system. At the same time, it should study the proposals of foreign experts on the establishment of self-governing associations to issue rules to help improve the ethics of bank employees as well as employees of securities companies.

For borrowers who are struggling financially, being forced to buy insurance only pushes them further into poverty. Photo: Internet

Secondly, insurance agents are also very vague about the terms and conditions of the insurance product. Specifically, when consulting, the contract is one way but the explanation is another, especially exaggerating the insurance benefits, leading to inconsistency when customers request payment of benefits. Therefore, insurance companies must always ensure honesty, openness, transparency, and absolutely not let customers misunderstand the product.

If banks offer savings in bonds and stocks in the form of “savings”, they are actually making customers mistakenly think that this is a type of savings deposit, so that customers buy fund certificates, or worse, similar to the case of SCB and Tan Hoang Minh. Or when banks offer savings deposits, they must be very careful because of the ambiguity between savings deposits and certificates of deposit, long-term certificates of deposit. Once a bank proactively offers customers to buy certificates of deposit, there is a high possibility that the “interest rate of certificates of deposit”, when heard, customers will think that the interest is high, but in fact the actual interest received after 1 year is lower than the 1-month rolling savings deposit, or the bank is about to increase the savings interest rate, so the current interest rate of certificates of deposit is lower than the savings interest rate that is about to be increased.

If a customer borrows money to buy a house and the bank forces them to buy insurance before disbursing the loan (or disbursing quickly), the customer should confirm with the investor whether the investor has purchased insurance or not, because most investors have purchased it and it is included in the customer's home purchase money. But the most optimal way is to directly report to the State Bank via the hotline number or email of the State Bank.

Thus, the benefits that Bancassurance creates are indisputable, but strict management is needed to eliminate the "ugly" path it has created in the credit system. At the same time, banks need to build a strategy for distributing Bancassurance products based on the reality of market trends, directly classifying customers to provide insurance services that suit their real needs, creating the most favorable and satisfying conditions for customers to access both banking products and insurance products.