Published in Mint on March 23 2015
The insurance industry is ready for a new distribution channel—insurance marketing firm, officially abbreviated as IMF. The channel will be allowed to distribute policies of two insurance firms in the same line of business, and will also be allowed to distribute other financial products as allowed by the Insurance Regulatory and Development Authority of India (Irdai).
Mint explains the role of IMF and whether it will improve insurance penetration in any significant way.
What is an IMF?
An IMF can sell products of two life, two non-life and two health insurers. Other than this, the firm will also be allowed to sell other financial products such as mutual funds, National Pension System (NPS), banking and financial products of banks and non-banking financial companies regulated by the Reserve Bank of India (RBI), post office savings schemes and other financial products distributed by investment advisers licenced by the capital markets regulator. The net worth requirement to become an IMF is Rs.10 lakh.
There will be two kinds of licenced individuals: an insurance salesperson (ISP), who will be responsible for soliciting business; and a financial service executive (FSE), who will handle the distribution of other financial products. To become an ISP, the individual needs to have finished Class 12, cleared the IMF examination (under the purview of Irdai) and be a domicile of the area in which the IMF is registered.
The draft circular that came out last year in March had prescribed a minimum educational qualification of Class 10. It also set the insurance broker examination as a qualifying examination for ISPs. “Insurance broker examination is the toughest; the agency one is on the easier side. The IMF examination is likely to fall somewhere in between. Given that the role of IMFs is akin to insurance brokers’, the qualifying examination should be on par,” said P. Nandagopal, chief mentor, OpenWorld Money, a digital financial planning platform for money solutions, and former chief executive officer and managing director of IndiaFirst Life Insurance Co. Ltd.
Insurance agents can join IMFs and become ISPs, but will need to take IMF examination and also surrender their agency licence. FSEs have to be certified by the regulatory bodies of the respective products.
What role will it play?
Even as IMFs are allowed to sell policies of two insurers, they will have a fiduciary responsibility towards policyholders. For this, they will need to indemnify themselves as well. According to the code of conduct prescribed by Irdai, ISPs will need to do proper need analysis of their clients, compare products of the insurers they have, and recommend products based on clients’ needs. They also need to make sure that the policyholders fill up the proposal form with utmost sincerity and bring to the notice of the insurer any relevant material information.
The guidelines clearly state that IMFs will be accountable for their actions and, therefore, be responsible for indemnification for their acts. In other words, the insurers are not responsible for the actions of the IMFs they have a tie-up with. In terms of grievance redressal, IMFs are expected to take adequate steps to resolve the issues within 15 days, and keep Irdai informed about the number, nature and other particulars of the complaints.
For other financial products, handling of customer complaints and providing after-sales services will be governed by the conditions prescribed by the respective regulatory authorities.
How will IMFs help?
Some see this as the first step towards an open architecture in insurance distribution. “It has been a long standing demand of the industry to open up the distribution space. There are discussions that banks would soon become open infrastructure, and with IMFs, we have taken the first step to opening up the advisory channel,” said Deepak Mittal, managing director and chief executive officer, Edelweiss Tokio Life Insurance Co. Ltd.
Insurance currently has a tied agency model—an agent can sell products of only one insurer in the same line of business. Insurance brokers, however, can sell policies of multiple insurers. But unlike agents, brokers have a fiduciary responsibility towards customers. This seems to be a good opportunity for the industry. “This exhibits the thought process at Irdai about taking incremental steps towards open architecture. For newer insurers, IMFs can be an effective distribution channel to help increase footprint without significant capital drain. Even for existing large insurers, IMFs can be a way to reach out to tier 2 cities,” said Manoj Nagpal, chief executive officer, Outlook Asia Capital Ltd, a wealth management firm.
But the fact that IMFs can sell products of only two insurers from the same line of business is seen as restrictive. “The world is moving towards open architecture; it doesn’t make sense to restrict IMFs and narrow the choices for customers. The fact that IMFs have a fiduciary responsibility towards their clients and are responsible for all acts of commission and omission will ensure that they exercise due diligence,” said Nandagopal. However, IMFs won’t have to adhere to geographical restrictions (draft guidelines restricted IMFs to a district).
“Even though IMFs can sell insurance across the country, ISPs need to be domiciled in the area of registration. This means IMF is something that big agents and independent financial advisers will look at. For advisers, this will be a natural extension as they will be able to sell insurance too,” said Mittal.
Entrusting IMFs with fiduciary responsibility is a positive step towards consumer interest, but the remuneration structure remains a bone of contention. Other than the commissions (which is as high as 35%-40% for insurance agents in the first year), IMFs will also be allowed to receive fees or charges from life insurers, but in the form of service charges for recruitment, training and mentoring of ISPs. This shall not exceed 50% of first-year commission and 10% of renewal commission received by the IMF. No such payment is allowed for non-life or health insurance business. IMFs can also receive fees for undertaking insurance service activities. For other products, they can collect the applicable service charges.
“IMFs will get 50% more than agents, and this creates an arbitrage. The big insurance agents will demand similar compensation, which will increase the cost of distribution without significantly increasing penetration. All distribution channels should have a level playing field,” said Nandagopal. In fact, overcompensation to agents (in this case paying corporate agents over and above the commission) is one of the reasons why Irdai penalized many insurers.
“IMF is a good concept. However, increasingly conventional channels such as insurance brokers and agents are allowed fewer earning opportunities than new distribution channels such as IMFs. This creates an arbitrage because new channels can earn for solicitations and for outsourced services as well. The issue with allowing multiple sources of income is that it is hard to maintain an arm’s length between various activities,”said Kapil Mehta, executive director, SecureNow Insurance Broker Pvt. Ltd.
Asking distributors to be responsible and liable for their sales is definitely a good step, but allowing for extra payments gives room to overcompensation and arbitrage.