Insurers can now enter broking

Corporate houses that are promoters of insurance companies can now launch insurance broking companies. The Insurance Regulatory and Development Authority (Irda) has issued a memorandum, permitting promoters of insurance companies to enter insurance broking after promoters, brokers and insurers meet the specified requirements.

Many countries allow groups to own insurance companies and promote insurance broking. With the lifting of price controls on non-life insurance products, the role of brokers has gained immense significance.

A broker acts as an intermediary between insurance companies and corporate clients. He helps in getting the best cover at the best possible rates and is paid commission by the insurance company.

The reason for not allowing corporate promoters of insurance companies to launch an insurance broking company was the possibility of a bias in favour of insurance companies of the group when a broker proposes covers to his clients, while he is expected to be impartial and protect his clients' interests.

"The conditions put forth are that the promoter company should give an undertaking that none of the clients within the promoter group will be compelled to use the broker for their insurance requirements," said Irda.

Citing the obligations of insurers, Irda said, "The insurer within the group should give an undertaking that it will not pay higher remuneration to the broker within the group compared to what is payable to other brokers for the same class of insurance or insurance product, it will not quote terms to the broker within the group that are more favourable than the terms quoted to other brokers on the same proposal for insurance and it will not design special insurance products for sale exclusively through the broker."

On the other hand, the broking company will have to make an explicit disclosure of it being a sister company of the insurer within the same promoter group, provide a logic to the client for promoting products of the group's insurer besides informing the client about the next best product, rates and terms offered by an insurer not part of the promoter group.

The broker would also have to ensure that not more than 25 per cent of the insurance handled by him in any financial year is placed with the insurance company within the promoter group separately for life and for general insurance business.

The broking company will also be required to disclose related party transactions with the insurance company belonging to the promoter group in its audited accounts and balance sheet as described in the Accounting Standard 18 of ICAI.