 "RBI allows banks to sell multiple insurance products as brokers")
Customers could soon get an option to buy any insurance company's policy from one bank.
In its final guidelines on the subject, the Reserve Bank of India (RBI) has said banks may become insurance brokers and sell multiple products, though this is not mandatory.
To facilitate an open architecture of bancassurance, where a bank is enabled to sell products of all insurance companies, RBI had earlier issued draft norms on this.
In the final norms, a bank can enter insurance broking only if the capital to risk (weighted) assets ratio is 10 per cent or above and the level of net non-performing assets is three per cent or below. RBI said the bank’s net worth should not be less than Rs 1,000 crore, double the Rs 500 crore proposed earlier.
There was a call to have an open architecture of bancassurance in the insurance sector, as there were several late entrants in the market which did not have a bank to tie-up with. Former finance minister P Chidambaram had said banks could become insurance brokers to boost the latter sector’s penetration, now less than five per cent of gross domestic product.
Issues
Insurance sector experts said while the new guidelines are an enabling provision, banks would not become brokers for these products unless mandated to do so. Almost all private and public sector banks either have joint venture (JV) agreements or are corporate agents of insurance companies.
The chief executive officer of a non-bank promoted life insurance company said, “Banks are unlikely to become brokers unless forced. They do not see this as an advantage and would be held responsible for the policies sold. There are huge financial risks involved if they face a large claim during any financial year.”
Amitabh Chaudhry, managing director of HDFC Life, said: “Having a corporate agency model is easier for a bank. It will become a broker if it helps earn more revenue, if it enables them to give more choice or if it is forced.”
Chaudhry added a customer could buy a product from any insurance company and a mid-way path between the current corporate agency model and the insurance broker model can help open the sector. “A bank could be enabled to sell two policies of life, non-life or standalone health companies to begin with. This would be less complex than the broking model. We have to wait and see if any bank chooses the insurance broker model,” he said.
On December 20, 2013, a letter from the finance ministry, addressing public sector bank chief executives, said all these lenders should become insurance brokers and leverage their branch network for insurance penetration. Then finance minister P Chidambaram had in his budget speech said he was permitting banks to become insurance brokers.
The Insurance Regulatory and Development Authority of India (Irdai) had also earlier proposed the concept of an open architecture of bancassurance. However, those in the sector were divided. This was followed by both Irdai and RBI bringing out draft norms. Banks that had a JV agreement with insurance companies had expressed discontent. It would have meant they had to sell products of all insurance companies. As a broker, they would be liable for an insurance policy, unlike the case with a corporate agent. The liability is high, especially if the bank was to sell products of multiple insurers.
Following this, an experts’ committee was set up to review the proposal.
More detail
The central bank has clearly said only one entity in a banking group can undertake insurance distribution by either one of the two modes mentioned. The bank should have made a net profit for the past three continuous years and the record of the performance of subsidiaries, if any, should be satisfactory.
Banks which satisfy the eligibility criteria (as on March 31 of the previous year) can approach RBI to set up a subsidiary/JV company for undertaking an insurance business with risk participation.
RBI said a subsidiary of a bank and another bank will not normally be allowed to contribute to the equity of the insurance company on a risk participation basis. Further, it should ensure the risks involved in insurance do not get transferred to the bank. There should be an ‘arms length’ relationship between the bank and the insurance outfit.
The Insurance Laws (Amendment) Ordinance has also paved the way for an open architecture for bancassurance and all intermediaries, including agents and brokers, have been clubbed under one category.
RBI has said there should be a system of assessment of the suitability of products for customers. Pure risk term products with no investment or growth components that are simple and easy for the customer to understand will be deemed universally suitable products. More complex products with investment components will require the bank to necessarily undertake a customer need assessment, prior to sale.
The regulator has prohibited banks from any restrictive practices of forcing a customer to either opt for products of a specific insurance company or link the sale of such products to any banking product. It should be prominently stated in all publicity material distributed by the bank that the purchase by a bank’s customer of any insurance product is purely voluntary and not linked to availment of any other facility from the bank.
The share of corporate agents in the new business premium procured by private life insurers was significant at 47.6 per cent in 2013-14 (49.1 per cent in 2012-13), says Irdai’s annual report. For bank-promoted insurance companies, sectoral estimates suggest it is as high as 65-70 per cent.
In its final guidelines on the subject, the Reserve Bank of India (RBI) has said banks may become insurance brokers and sell multiple products, though this is not mandatory.
To facilitate an open architecture of bancassurance, where a bank is enabled to sell products of all insurance companies, RBI had earlier issued draft norms on this.
Also Read
Bancassurance, which refers to banks selling insurance products, now follows a corporate agent structure. This means banks sell insurance as a corporate agent, the regulations allowing each to sell insurance products of only one life, one general and one health insurance company each.
In the final norms, a bank can enter insurance broking only if the capital to risk (weighted) assets ratio is 10 per cent or above and the level of net non-performing assets is three per cent or below. RBI said the bank’s net worth should not be less than Rs 1,000 crore, double the Rs 500 crore proposed earlier.
There was a call to have an open architecture of bancassurance in the insurance sector, as there were several late entrants in the market which did not have a bank to tie-up with. Former finance minister P Chidambaram had said banks could become insurance brokers to boost the latter sector’s penetration, now less than five per cent of gross domestic product.
Issues
Insurance sector experts said while the new guidelines are an enabling provision, banks would not become brokers for these products unless mandated to do so. Almost all private and public sector banks either have joint venture (JV) agreements or are corporate agents of insurance companies.
The chief executive officer of a non-bank promoted life insurance company said, “Banks are unlikely to become brokers unless forced. They do not see this as an advantage and would be held responsible for the policies sold. There are huge financial risks involved if they face a large claim during any financial year.”
Amitabh Chaudhry, managing director of HDFC Life, said: “Having a corporate agency model is easier for a bank. It will become a broker if it helps earn more revenue, if it enables them to give more choice or if it is forced.”
Chaudhry added a customer could buy a product from any insurance company and a mid-way path between the current corporate agency model and the insurance broker model can help open the sector. “A bank could be enabled to sell two policies of life, non-life or standalone health companies to begin with. This would be less complex than the broking model. We have to wait and see if any bank chooses the insurance broker model,” he said.
On December 20, 2013, a letter from the finance ministry, addressing public sector bank chief executives, said all these lenders should become insurance brokers and leverage their branch network for insurance penetration. Then finance minister P Chidambaram had in his budget speech said he was permitting banks to become insurance brokers.
The Insurance Regulatory and Development Authority of India (Irdai) had also earlier proposed the concept of an open architecture of bancassurance. However, those in the sector were divided. This was followed by both Irdai and RBI bringing out draft norms. Banks that had a JV agreement with insurance companies had expressed discontent. It would have meant they had to sell products of all insurance companies. As a broker, they would be liable for an insurance policy, unlike the case with a corporate agent. The liability is high, especially if the bank was to sell products of multiple insurers.
Following this, an experts’ committee was set up to review the proposal.
More detail
The central bank has clearly said only one entity in a banking group can undertake insurance distribution by either one of the two modes mentioned. The bank should have made a net profit for the past three continuous years and the record of the performance of subsidiaries, if any, should be satisfactory.
Banks which satisfy the eligibility criteria (as on March 31 of the previous year) can approach RBI to set up a subsidiary/JV company for undertaking an insurance business with risk participation.
RBI said a subsidiary of a bank and another bank will not normally be allowed to contribute to the equity of the insurance company on a risk participation basis. Further, it should ensure the risks involved in insurance do not get transferred to the bank. There should be an ‘arms length’ relationship between the bank and the insurance outfit.
The Insurance Laws (Amendment) Ordinance has also paved the way for an open architecture for bancassurance and all intermediaries, including agents and brokers, have been clubbed under one category.
RBI has said there should be a system of assessment of the suitability of products for customers. Pure risk term products with no investment or growth components that are simple and easy for the customer to understand will be deemed universally suitable products. More complex products with investment components will require the bank to necessarily undertake a customer need assessment, prior to sale.
The regulator has prohibited banks from any restrictive practices of forcing a customer to either opt for products of a specific insurance company or link the sale of such products to any banking product. It should be prominently stated in all publicity material distributed by the bank that the purchase by a bank’s customer of any insurance product is purely voluntary and not linked to availment of any other facility from the bank.
The share of corporate agents in the new business premium procured by private life insurers was significant at 47.6 per cent in 2013-14 (49.1 per cent in 2012-13), says Irdai’s annual report. For bank-promoted insurance companies, sectoral estimates suggest it is as high as 65-70 per cent.