Panel averse to composite general risk broking licence

The expert committee set up to examine remuneration system for general insurance brokers and agents has recommended that licensing of composite broking should be discontinued.

The committee, chaired by A C Mukherjee, recommended that licensing norms for composite brokers should be reviewed and no more licenses should be granted under this category.

"Existing composite brokers should seek separate licenses with separate business structures for the two types of broking, direct and reinsurance, at the time of renewal or before," the report said.

As per brokers regulation, there are two main types of brokers "" direct insurance brokers and re-insurance brokers. A broker authorised to do both businesses, re-insurance and direct are known as composite insurance brokers.

The committee is of the view that the present system of licensing composite brokers that deal with direct broking and reinsurance broking as one arm will prejudice the development of the non-life insurance market and consumer interest.

In a non-tariff market, as the industry was heading towards one, the composite broker could tie-up reinsurance arrangements at lower rates and bring pressure on the primary insurer to front for the business. Such practices in developing markets are quite common.

There is a conflict of loyalty as the composite broker works for the insured and the insurer as well. Hence, licensing composite broking should be discontinued.

The committee also said that it was not uncommon for composite brokers to deal with customers, particularly of mega risks, as direct brokers and collect underwriting information and present it directly to reinsures, circumventing or marginalising the direct insurer.

"That this has happened even in the earlier monopolistic regime is known. But licensing them in the current regime gives them recognition," the report mentioned.

The composite broker represents the insured as a direct broker, and simultaneously represents the insurer as its reinsurance broker. He gets paid twice for his services and advises to two risk carriers on the same risk.

According to the committee, composite broking has the inherent disability of conflict of loyalty and interests as the broker simultaneously represents the risk producer and the risk carrier.

Such an arrangement could in addition lead to proliferation of fronting arrangements. Further the duties, responsibilities and functions of the two roles are in contradiction to each other.

As such the committee recommends that the licensing of composite broking should be discontinued immediately.