The finance ministry's recent circular to the public sector bank chief executives that they should become insurance brokers has been cheered by a large chunk of insurance companies. However, some insurers with existing shareholder agreements said that all joint-venture partners may not be supportive of this move.
Finance Minister P Chidambaram kept his budget promise of enabling banks to become insurance brokers, in order to boost insurance penetration. While Insurance Regulatory and Development Authority (Irda) had also earlier proposed the concept of open architecture of bancassurance, there were conflicting views in the industry on the same.
Bancassurance, wherein banks can sell policies of insurers with whom they have tied up, acts as an alternate distribution channel for insurers. According to data for 2012-13, as much as 65-70% of new premium of bank-led life insurers was generated from their bank partners.
Presently, insurers follow corporate agency model as per Irda norms wherein each bank can tie-up with one life, one general and one standalone health insurer to sell their product.
“We and several other public sector bank promoted insurers have not expanded the agency channel, since we had a strong branch network of banks to rely on. With this move by the ministry, our other shareholders will ask for detailed explanations for our actions,” said the chief executive of a private insurance company promoted by a bank.
Reserve Bank of India (RBI) had recently brought out guidelines for banks to become brokers. However, with stringent capital requirements, life insurers had said that banks will not see broking as an attractive proposition.
“The regulations would force insurers with existing shareholding arrangements with banks to renegotiate the contracts. Further, existing insurance shareholders have a lot of accumulated losses which will now take much longer to wipe out,” said an industry official.
For the life insurance sector as a whole, the bancassurance (corporate agency-bank) channel accounts for 30% of total new business premium collection.
Insurers also fear that there could be some shareholder conflicts on PSU banks having no other option but to become brokers so that they could sell insurance.
“Though the regulators and finance ministry officials have not said anything against banks promoting insurance companies to become brokers, the boards may not give a nod to this arrangement. This is because it may account to conflict of interest,” said a senior private life insurance executive.
Life and general insurance companies also do not have clarity on whether RBI’s recent draft proposal would hold ground.
The senior vice president of marketing and strategy at a private general insurance firm that has a bancassurance tie-up with a large public sector bank said that the RBI draft rules had led to an assumption that banks with a weak capital base would not become brokers. However, he added that it was not clear whether this will still apply or whether all state-owned banks will automatically become insurance brokers.
"You are requested to implement the spirit of the budget announcement within the framework of guidelines by Irda and RBI in this regard under intimation to this department (department of financial services) by January 15, 2014," said the circular by department of financial services.
In his Budget speech in February 2013, the FM had remarked that Banks will be permitted to act as insurance brokers so that the entire network of bank branches will be utilised to increase penetration. To enable this, the circular said that corporate agency model should be dispensed with, and banks need to adhere to FM’s proposal.
The implementation of these reforms comes at a time when the life insurance industry is entering a new product regime. From January 1, 2014, life insurers are required to sell products as per the new traditional product guidelines, which had necessitated additional training to all the distribution associates of insurers.
Timeline: How the bancassurance saga unfolded
October 2012
-Insurance Regulatory and Development Authority (Irda) releases draft guidelines on bancassurance. Talks about open architecture in this segment, where banks could either be corporate agent, tie-up with multiple insurers in different regions or become an insurance broker
-Banks still follow corporate agency model, where each bank can sell products of one life and one general insurer.
-No consensus among insurers on this draft
January 2013
- Reserve Bank of India (RBI) in its Financial Stability Report says that bank becoming brokers could lead to reputational risks
-It also said that banks assuming the role of insurance brokers might also lead to conflict of interests where the bank is also the promoter of an insurance company
February 2013
-Irda says that further changes would be made to the bancassurance regulations before it is finalised
-Irda tweaks bancassurance rules. Banks as a corporate agent can now sell products of one life, one non-life and one standalone health insurance company each
-In his budget speech, finance minister P Chidambaram permits banks to become insurance brokers to boost insurance penetration
March to August 2013
-Non-bank promoted insurance companies and late entrants to insurance with no bank partners push for open architecture of bancassurance
August 2013
-Irda finally gives its nod for banks to become insurance brokers
-In its regulations on licensing of banks as brokers, Irda said each applicant (scheduled bank) should have prior approval of RBI
-Banks say that they would have wait-and-watch approach
November 2013
- RBI brings out guidelines for banks to become brokers for insurance companies
- As per these norms, only banks with strong capital base can become brokers. Further, their net Non-Performing Assets (NPA) should be below 3%.
-Smaller banks pushed out of race to become brokers
December 2013
-Finance ministry sends circular to chief executives of public sector banks asking them to become insurance brokers
-Compliance to this circular and progress to be reported back to financial services secretary on January 31, 2014
-Industry divided over mandatory nature of circular. Non-bank promoted insurers laud the FinMin efforts, others concerned.
