Shares of life insurance companies came under pressure on Tuesday, with SBI Life Insurance and Canara HSBC Life Insurance seeing the sharpest declines among listed life insurers.

This followed comments by M Nagaraju, Secretary at the Department of Financial Services (DFS), in an interview with ET Now, where he said banks are being asked to avoid exclusive tie-ups with their own insurance subsidiaries and remain neutral instead.

Shares of SBI Life closed 3.32 per cent lower on Wednesday at ₹1,915, recovering from the intraday low of ₹1,892.50 on BSE. 

Among other life insurers, shares of Canara HSBC Life Insurance ended 4.36 per cent lower at ₹143.80. 

ICICI Prudential’s shares ended 1.4 per cent below at ₹549.95, Life Insurance Corporation of India (LIC) was down 0.5 per cent at ₹824.05, Max Financial Services was down 2.32 per cent to ₹1649.75 and HDFC Life Insurance was marginally up at ₹614.20.

“SBI Life derives almost over 60 per cent of its business from banca channel and substantial part of that is from SBI, which doesn’t follow an open architecture model. A matter as important as mandatory open architecture in India can only happen within the powers of Insurance Regulatory and Development Authority of India (Irdai), which needs to have a two-way communication process between the participant and the regulator. Hence, we don’t see this happening any time soon,” said Suresh Ganapathy, managing director, head of financial services research at Macquarie Capital.

According to analysts at Emkay, there is a strong case for bancassurance to remain exclusive. An exclusive tie-up eliminates the need of insurance company salespersons to be present across bank branches, hence reducing distribution costs.

Secondly, data affirms that the distribution cost in exclusive bancassurance has been much lower over the years; this enables the insurer to offer affordable products.

Thirdly, by offering products of its own subsidiary with the parent brand name, there is higher amount of ownership and care in the selling process, resulting in lower mis-selling.

“In this backdrop, forcing banks to go for open-architecture will reverse the cost advantage and eventually drive up prices for consumers. A consumer has many channels outside the bank to buy insurance, including agents, other banks, brokers, and now Bima Sugam too. In the backdrop of the government’s heightened concern about increasing distribution cost in insurance, the idea of forced open architecture is conflicting with the idea of reducing costs,” analyst at Emkay said in its report.

Nagaraju who took charge as Secretary of the DFS on August 19, 2024, will retire on May 31, 2026. 

Earlier in the year, the Economic Survey had also said that the insurance industry needs to reduce overall costs and distribution outgo to improve affordability, which will enable it to tap into the ‘missing middle’ and reverse the decline in penetration.

The escalating cost of acquisition is a structural constraint on the sector’s evolution – limiting inclusion, eroding consumer value and threatening long-term stability of the sector, the survey highlighted.

The high-cost model of the industry is acting as a risk to the core financial strength of insurers. Despite an increase in top-line growth, private life insurers have seen a stagnation in their net profit, as margins are compressed by escalating acquisition expenses. Similarly, the non-life sector faces high combined ratios, which is forcing them to rely on investment income to subsidise operations, exposing the bottom line of the companies to capital market volatility.