Irda turns the heat on brokers to check unfair practices

The insurance regulator has clamped down on brokers and has come out with the minimum standards to be followed by the insurance community.

Unfair trade practices and unprofessional conduct by insurance players in placement of corporate and industrial risks has had detrimental impact on some corporate entities, thereby, necessitating the need for minimum industry standards.

This is a practice in many mature markets such as the UK, which has established the General Insurance Standards Council. Membership of this council certifies quality and ethics of its members, both insurance companies and brokers.

Ranbaxy Laboratories is a case in point where improper conduct by brokers and the insurance company affected the placement of the corporate risk. The Insurance Regulatory and Development Authority (Irda) suspended the composite broking licence of Corporate Risks India in March this year.

This broking outfit had been associated with the placement of Ranbaxy's risk cover. This is just one example of the misconduct by the industry, which said senior executives of broking firms, is negatively impacting the reputation of the Indian market when placing risk covers overseas.

The proposed insurance standards as drafted by the Irda states that brokers will not be allowed to block insurance or reinsurance capacity without being asked by the customer to seek risk cover.

"Brokers who are invited to quote terms should obtain a written appointment letter to develop terms," states the draft.

"There are quite a few examples of brokers approaching the market without the full knowledge or idea of the risk. This creates confusion in the market and the insurance market does not offer a proper pricing of the risk. In the international reinsurance market Indian brokers are ridiculed as "shoppers till the end". This poses a challenge for real brokers to convince the reinsurance community to take us seriously," said Praveen Vashishta, CEO and managing director, Howden Insurance Brokers India.

The draft pins down on the desk-top quoting method practiced by some brokers. This is done when the brokers, without asking the market for terms and pricing, simply quote a premium figure with no confirmation from the reinsurers.

In a recent example, a broker quoted a price for a leading Delhi-based corporate risk cover without confirming the reinsurer. As this was the lowest cover available, the insurance company concerned accepted the same, informed the corporate entity, and deposited the premium.

Later however, it found that no reinsurer was willing to offer cover at such a low price. The insurance company ended up paying for the risk from its own pocket. Fortunately no claim had arisen from that risk prior to placing the risk.

Irda chief C S Rao told Business Standard that there are problems with documentation undertaken when reinsuring risks. Since the reinsurance industry is still at a nascent stage in the country, he feels there is an urgent need to plug these malpractices. Else these could give rise to problems in the future, he added.

The industry however, is unhappy with the Irda clamping down on brokers developing reinsurance-based quotes on behalf of their corporate clients.

"This is not in the interest of the corporate customer as there is nothing stopping an insurance company from jacking up the price," said a Delhi-based broker.

A broker's role is to help his customer get the best price, which may not be possible if he is not permitted to get a quote from the international market, he added.