Publish in Mint on Jun 03 2015
Recent amendments to the draft guidelines on open architecture in insurance distribution will bring respite to bank-promoted insurance companies.
According to the Insurance Regulatory and Development Authority (Irda) draft that came out on 29 May, it is no longer mandatory for corporate agents to sell policies of at least two insurance companies in the same line of business.
The earlier draft that was published on 31 March, in an attempt to usher in an open architecture, made it mandatory for the corporate agents to tie up with a maximum of three insurers and a minimum of two insurers.
Corporate agents are entities such as banks that sell insurance policies for insurers. Up until now, corporate agents have followed a tied agency model, which allows them to sell insurance policies of only one insurer from the same line of business.
The earlier draft guideline, which sought to end the monopoly arrangement of insurance companies with banks, was welcomed by insurance companies that are not promoted by any banks and rely largely on the agency channel.
Because banks have a captive customer base and ready infrastructure, it is cheaper for insurance companies to use banks as corporate agents than the agency channel. In fact, this is one reason why bank-promoted insurers with a ready-made bancassurance channel were able to adjust to the recent spate of regulatory reforms relatively quickly, while others grappled with high rates of agent dropout.
The draft guidelines didn’t go down well with the bank-promoted insurance companies as it meant they would have to give up their monopoly. However, the new guidelines state that the corporate agents, instead of having tie-ups with a minimum of two insurers may now choose from one to a maximum of three insurers in any particular line of insurance business.
The new draft has also relaxed certain other limits on the way corporate agents can conduct business. According to the previous draft, in the first year of operation, corporate agents can conduct up to 90% of the business (premium collection) from any one insurer in the same line of business, and the remaining 10% from two other insurers. This limit will come down to 75% in the second year and 60% in the third. From the fourth year onwards, the draft proposed that no corporate agent would place more than 50% of its business with any one insurer.
The new draft completely removes the proposed caps. “Instead, the corporate agent shall file, at the time of seeking registration, with the authority (Irda) a board-approved policy on the manner of soliciting and servicing insurance products,” said the amended draft.
“The policy, amongst others, shall include the approach to be followed by the corporate agent in having single or multiple tie-ups, the partners in the tie-ups, the business mix, the type of products sold, grievance redressal mechanism and reporting requirements,” it added.
This may, however, mean that banks would continue with their tied arrangements. “The new draft does give more flexibility and it’s likely that certain evolved corporate agents that don’t want to become brokers because it’s cumbersome may want to tie up with more than one insurance company. However, I don’t think banks will open up as they wouldn’t want to get into selling third-party products too much,” said Kapil Mehta, executive director, SecureNow Insurance Broker Pvt. Ltd.