Bancassurance #3: The banks are ramping up their swindling operations while SBP sleeps
Commercial banks make more from duping small savers than from their investment banking activities.
I looked at the 2021 financial statements of MCB, UBL, and HBL. The bancassurance sales are back with a bang, defrauding the small savers and destroying their wealth. In this post, I try to find out why do the banks sell such a problematic product and remain flummoxed that why does SBP, otherwise a very powerful and very independent regulator of commercial banks, continue to “promote” this product.
If you haven't read my earlier posts on the bancassurance scam of the Pakistani banks, I recommend the below post.
Ammar wrote a great post calculating the return on bancassurance products.
Using simple arithmetic, he showed that after deducting the commission and fees that the banks charge, the person who signs up for the bancassurance product breaks even in the 7th year. For example, if the bank deceives you into signing up for a bancassurance product such that you invest Rs.100,000 premium every year, you will be able to get your principal back i.e. Rs.700,000 that you invested over a period of 7 years as Rs.100,000 every year if and only if the portfolio that your premium is invested in earns a cumulative return of at least 8% p.a.
…it should be clear that investing through an insurance policy results in sub-par returns.
Ammar goes on to show that over a 20-year horizon, an investor would be able to generate a much better return by investing in a conservative portfolio of 50% equity and 50% fixed income.
Even if you take a conservative stance and do a 50 percent allocation to equities (high risk), and a 50 percent allocation to fixed income (low risk), your return would still be much higher than what you get with an insurance policy. By avoiding an insurance company and managing it on your own, you can generate a terminal value of up to PKR 9.7 million, against PKR 4.4 million in best-case scenario of an insurance policy.
Investing in a bancassurance product simply doesn’t make sense.
The Regulators: SECP and SBP
After I wrote my initial post, SECP issued a Cover Your Ass circular warning the policyholders to carefully read all the terms and conditions and not rely on verbal promises of the insurance agents (in this case the staff deployed inside the bank).
A few months later, SBP issued a circular and a press release stating that bancassurance products sold through the branches are "often prone to misdeclaration about the quality of pricing of the products."
The press release further stated that SBP has issued a revised set of instructions that will "facilitate the sale of [bancassurance] products through digital channels and promote financial inclusion."
In a post, I thought that SBP is living in la-la land if it thinks that selling bancassurance products through digital channels will promote financial inclusion. I posted a Twitter exchange in the post where a person said that he moved all his money out of the account to avoid direct debit.
Ye hota hai SBP ka digital vision. Aisay hoti hai financial inclusion.
An Anecdote
A victim of bancassurance fraud posted this comment in Ammar's post.
Dear Sir I just got duped by Bank Alfalah IGI Vitality [Zindagi Premier Takaful Savings Plan policy]. After repeated requests I finally got my policy statement and was shocked to see 104,000 against 1st year premium of Rs 250,000 in my account. I raised some simple queries by email. I did receive some customer agent calls but I refused to talk and insisted on written reply for record. The Bank officer who sold the policy did not even inform me in writing / email / whatsapp that it is a recurring expenditure. I was led to believe that 250,000 will earn profit (minimum 8%) plus providing death / hospitalization coverage. No hint whatsoever regarding hefty insurance fee deductions. Well shockingly the bank agent can hardly differentiate between bank statement and policy statement. He has no clue regarding various parameters of policy statement which are way over my head. But then I am a layman trying to invest post retirement funds by taking out the policy in my son's name.
The poor man had received retirement funds. He wanted to invest some for his son’s education or other uses. Of the Rs.250,000 he invested as a premium, only Rs.104,000 came into his account. Rs.146,000 i.e. 60% of his savings went to pay the commission to the bank.
There can be no argument that bancassurance is a wealth-destroying product. SBP is being dishonest when it says that the product is “prone to mis-declaration.”
The product is not sellable at all without misdeclaration.
2021 Financials
The 2021 financials of the banks show banks ramping up their swindling operations.
MCB
MCB gives a nice spiel in its annual report about its efforts.
From MCB's 2021 Annual report
MCB Bank strives to help the dreams of its customers come true. Your dreams may be to give your child the best education, live a dignified life after retirement or to keep your loved ones financially secure and protected.
MCB Bancassurance plans provide you with the underlying financial security you and your family deserve. We work with our insurance partners to understand your needs based on your stage in life and provide tailor-make plans which are affordable and realistic. In addition, you and your family enjoy the peace of mind which comes from being ‘Har Pal Mehfooz’ in case of any unforeseen eventuality. Together with our insurance partners, we have a wide range options available which ensure that you and your funds are in good hands. All plans are underwritten by leading insurance providers and all funds are managed by experts in the field to give you the optimal returns based on your risk preferences and stage of life. Combining the best of banking and financial solutions, MCB Bancassurance provides a one-stop solution for your convenience and security.
The tailor-make [sic] plans are just different ways to dupe the policy-holders.
MCB signed up 41,000 new customers in 2021 which is lower than the 44,000 customers they signed up for bancassurance pre-pandemic 2019. If the trend continues and SBP doesn't shut it down, MCB is expected to surpass the 2019 peak in 2022.
The annual report goes on to say
Bancassurance business continued a steady upward growth trajectory, started over the past years. In 2021, the business regained momentum after a pandemic challenged 2020, and ended with a strong performance. Total sales volume in 2021 crossed PKR 3.0 billion. 2nd highest fresh premium volume since launch of the business in 2008, which was PKR 3.15 billion in 2019. This means that MCB is now at over 95% of our pre-pandemic peak, a stronger recovery than other industry player. Also putting MCB in a pole position to deliver new performance benchmarks in 2022
The 2021 bancassurance commission is approximately 44% of the fresh premiums underwritten. Not all the commission is from the first-year premium, but as covered in my earlier posts, the commissions are front-loaded with most of it deducted from the first year premium and a small portion from 2nd and 3rd year premium.
UBL
The biggest offender is UBL as it underwrote the highest premium and earned the highest commission among the three banks whose financial statements I reviewed for this post. From UBL’s annual report
The Bank also continued its strong momentum in the bancassurance space, as premium volumes of Rs. 3.7 billion were underwritten in 2021, which were up 41%. Resultantly, bancassurance commission income was up 32%, recorded at Rs. 1.5 billion for 2021.
Similar to MCB, the commission on bancassurance as a percentage of first-year premium is 40%
HBL
HBL financial statements do not provide any details beyond the bancassurance commision earned.
HBL's earned around Rs.900 million from bancassurance.
Federal Banking Ombudsman
As per the federal banking ombudsman annual report, the complaints it received with respect to insurance products increased by 44% between 2019-2020 and 19% in 2020-2021. The last row in the below table indicates that the Ombudsman hasn't categorized the complaints received through the PM portal. These are more than the aggregate of all the complaints received directly by the ombudsman. There is a high likelihood that some of those complaints would relate to bancassurance.
Federal Insurance Ombudsman
The federal insurance ombudsman hasn't uploaded the 2021 report. Business Recorder interviewed him in February 2022. It appears that he continues to receive complaints about bancassurance.
Insurance companies: FIO witnesses 25pc rise in complaints - Business & Finance - Business Recorder
Feb 11, 2022: On the issues related to Bancassurance, he said it is the combination of bank and insurance. The essence of banking is to maintain secrecy, but to sell out the bancassurance product bank officials and representatives of insurance companies are both hand in gloves in misrepresentation and selling of policies. “We have taken various steps to curb and mitigate these practices from the bank desk and referred the suggestions to SBP and SECP for taking strict actions.”
Repeating what the ombudsman said for emphasis.
Bank officials and insurance companies are both hand in gloves in misrepresentation
I am astounded that SBP continues to allow the sales of this product. Anyone who is even remotely financially savvy wouldn’t touch a bancassurance product with a ten-foot pole.
Two Questions
1. Why do commercial banks continue to sell this TOXIC product?
I should have noticed this earlier, but unfortunately didn't. If you review the MCB’s fee income table I shared earlier, MCB’s bancassurance income is seven times the income from its investment banking income. In the case of UBL, the income is three times the investment banking income. Only in the case of HBL, the investment banking fee is higher than bancassurance income, and that too only because in 2021 HBL doesn't appear to be as aggressive as it was earlier with respect to bancassurance. In 2019, HBL's bancassurance income was higher than its investment banking income by more than 50%.
This is a revelation.
The investment banking departments have huge overheads in terms of salaries, bonuses, exclusive offices, computers, etc. of the investment bankers. The investment bankers also make use of other resources of the bank, such as compliance and legal department, etc. Taking UBL as an example, after all those overheads, the investment banking department generated a fee income of Rs.500 million in 2021.
In contrast, there is no separate bancassurance team in the bank. It is the regular branch staff who is given bancassurance sales targets. No bonuses or increments for them if they don't achieve the target. When they achieve the target, earlier their bonuses used to be in the form of paid foreign trips but now that SBP has clamped down on international travel, they get gold biscuits. The insurance company also places its representatives in the branch. But these are not the bank's overhead. There is also an overhead of a call center whose job is to call the customer and get her to say yes to all the questions, but again the insurance company bears the cost of the call center. Thus, for a small overhead of gold biscuits as a bonus, UBL branch staff earned an income of Rs.1.5 billion.
The underpaid branch staff of UBL earned three times the income earned by UBL’s investment banking division.
No wonder banks continue to sell this DESTRUCTIVE product.
2. Why doesn’t the SBP SHUTDOWN this product?
The product is a scam. It is a wealth destroyer. You cannot sell the product without misrepresenting it. The number of complaints with the ombudsman against these products keeps increasing. This is how the regulators and ombudsman define the product
SECP
Carefully read all the documents presented before them before signing and ensure that they understand the terms and conditions of the product being offered. Reliance may not be placed on verbal promised made by insurance agent.
I don't think there is any other product that requires such repeated warnings from SECP to purchasers.
SBP
In addition to the typical banking products or services, banks often offer or sell other financial products that are provided by other financial institutions, generally referred to as bancassurance or third party products. Such offers are often prone to mis-declaration about the quality or pricing of products. Further, banks also don’t assume any responsibility after the sale of products, which leads to difficulties for customers and disputes.
Federal Insurance Ombudsman
The essence of banking is to maintain secrecy, but to sell out the bancassurance product bank officials and representatives of insurance companies are both hand in gloves in misrepresentation and selling of policies.
Earlier in August 2021, the federal insurance ombudsman also said this
Ombudsman vows to boost insurance industry’s growth - Pakistan - Business Recorder (brecorder.com)
He lamented that a bank manager has become a sales agent of insurance policies under the scheme, which is not part of his job description. It is also highly unfortunate that a bank manager misstates facts to banking customers regarding the insurance schemes to trap innocent customers. He said he has approached to the Securities & Exchange Commission of Pakistan (SECP), State Bank of Pakistan (SBP) and Pakistan Banks’ Association to take stock of the situation and save policyholders from fraudulent activities.
It is STUPEFYING that SBP allows the banks to market such a HARMFUL product.
As the rupee continues to depreciate, the cost of commodities and utilities rises, and the overall cost of living continues to increase, the savings of the pensioners, the old, the widows, and the financially non-savvy, that were never sufficient to cope with these challenges, will be further eroded by the commercial banks’ aggressive marketing of a product that cannot be sold unless misrepresented, under the "supervision" of SBP.
The MCB annual report stated that it earned a premium of Rs.3.0 billion on 44,000 new policies. The average premium turns out to be Rs.68,000 per annum. Thus, these aren’t rich people. They aren’t financially secure if their annual saving is around Rs.68,000 only.
It is scandalous that the banks that earn billions (HBL’s pre-tax profit is Rs.62 billion in 2021) aren’t above duping the pensioners, the retirees, the widows, and the financially not-savvy out of their hard-earned savings. MCB, UBL, and HBL collectively earned Rs.4 billion in 2021 from the bancassurance commission. These earnings didn’t come from investments of the savers. They came right out of the premium paid out by them. As I calculated above for MCB, these savings would not be more than tens of thousands of rupees and in a few cases a few lakh rupees.
To quote the federal insurance ombudsman, the Board of Directors of these banks are “hands in glove” in this scam. They know exactly what is going on here as they also sit on the boards of the associated insurance companies.
These directors are the corporate titans of Pakistan.
Just goes to show that it doesn’t matter how educated you are or how high you have risen through the corporate ladder or if you were head-hunted from an international financial institution. If all you care about is money, you don’t mind skimming the savings of the poor to add to the bottom line of the bank.
I don't think anyone at SBP or SECP would buy this product, nor would the corporate titans allow their near and dear ones to sign up for this product.
None of us MBA types or anyone who has read and understood the terms would buy this product. Ever.