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Neither the Insurance Laws (Amendment) Bill, 2008, mentions it, nor is the finance ministry considering this proposal with any seriousness. It was one of the most-discussed porposals of P Chidambaram, the finance minister in the last United Progressive Alliance government.
The Bill — to be tabled in the Upper House of Parliament — is silent on banks being allowed to become brokers. It has just mentioned that intermediaries would involve brokers and corporate agents, among others. It has not mentioned whether or not banks would be allowed to become brokers.
In past meetings between insurance companies and the finance ministry, the issue of banks becoming insurance brokers has been discussed. However, since there has been strong opposition from banks, which have insurance joint ventures, the ministry did not wish to take it up as an immediate priority.
In December last year, public sector banks (PSBs) were sent a letter by the finance ministry (then headed by Chidambaram) that they would be required to become insurance brokers so that they could distribute products of multiple companies through their branch network.
However, this proposal received flak, especially from those PSBs that were promoters of insurance companies. Following this, the directive was not implemented.
Insurance companies who do not have a bank-partner say that they saw it coming. “There was an initial expectation from us that there would be an open architecture of bancassurance. But, it does not seem to be on the top of their agenda. We will look to strengthen the other channels instead,” said the chief distribution officer of a mid-size life insurance company that does not have a bank partner.
The insurance regulator, too, has said it would be in the interest of the industry as a whole that banks be mandated to become insurance brokers.
At present, banks are permitted to sell products of only one life, one non-life and one standalone health insurer.
Draft guidelines on banks becoming insurance brokers by the Reserve Bank of India (RBI), released in November 2013, had said only banks with net NPA of less than three per cent for the previous financial year would be eligible to become brokers.
During FY14, net NPAs of several listed banks had crossed three per cent.
Since bancassurance follows the corporate agency model, non-bank promoted insurance companies and late entrants to the sector do not have any bank partner to sell their policies. The finance ministry circular said the model of corporate agency be dispensed with and each bank needed to train and orient its staff to conform to the then finance minister's Budget announcement.
PSBs were asked to implement the order of the ministry by January 15, 2014. However, several PSBs had vehemently opposed this proposal after which the finance ministry had to take a step back to review this model.
The insurance regulator had also earlier stated that there would support banks becoming brokers since it would expand the distribution system for the product.
As an insurance broker, the bank is liable to customers with respect to an insurance policy, unlike the case with a corporate agent. The liability is high, especially since the bank will sell products of multiple insurers.
At present, about 60-65 per cent of total premiums for the bank-promoted and insurers with bank partners comes from the bank channel. If this channel is opened up, each bank will have to provide customers with all insurance company products, something which banks said is a violation of their joint venture agreements with their respective partners.
