Published in Mint on Jun 02 2015
Recent amendments to the draft guidelines on open architecture in insurance distribution will bring respite to bank-promoted insurance companies. According to the fresh draft put out by the Insurance Regulatory and Development Authority of India (Irdai) 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 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. Currently, corporate agents follow a tied agency model, which allows them to sell insurance policies of only one insurer from the same line of business.
Insurers that are not promoted by banks had welcomed the earlier draft guideline as it sought to end the monopoly arrangement of insurance companies with banks as their corporate agents.
Insurers that are promoted by banks automatically use them as their corporate agents to distribute policies. This channel of distribution is called bancassurance. Given that the industry follows a tied system of distribution and most of the major banks are already shareholders in insurance companies, non-bank promoted insurance companies found it difficult to tap into the bancassurance channel.
Bancassurance emerged as a much sought after channel of distribution ever since the insurance regulator, Irdai, took a series of product reforms to cut down costs. Banks have a captive customer base and ready infrastructure, which makes them a cost-efficient avenue for insurers. In fact, this is one reason why bank-promoted insurers with a readymade bancassurance channel were able to adjust to regulatory reforms relatively quickly, while others grappled with high rates of agent dropout.
“Forcing banks to offer products of multiple insurers is a good step because it doesn’t make sense to allow only a handful of insurance companies to have access to banking infrastructure. There should be a level playing field that will bring in more competition and allow for more choice to the customers,” said Rajesh Dalmia, partner, advisory services, EY.
But the original draft guidelines mandating an open architecture didn’t go down well with bank-promoted insurance companies as it meant they would have to give up their monopoly. There are two categories of banking relationships in the insurance space—promoter-cum-distributor banks, and banks that are only distributors (corporate agents). The former usually have long-term relationships and opening up the distribution space would directly affect the shareholder agreement and subsequent valuation.
So, to address the concerns of insurers, in its amendments, Irdai has made open architecture optional for corporate agents that includes the banks. The new guidelines state that 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.
No business limits
The most recent guidelines brought further relief as it lifted the cap on the way corporate agents could do business.
To enforce open architecture and, at the same time ensure that insurers that rely heavily on bancassurance have time to adjust, the previous draft had suggested some caps on business. In the first year, according to the previous guidelines, corporate agents could do 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. In the second year, this limit was reduced to 75%, and to 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. This rule was meant to ensure that business doesn’t get concentrated with one insurer in an open architecture environment and that customers have more choice. The new draft, however, completely removes the earlier 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.
How will banks respond?
While banks have been given the freedom to choose between an open architecture and a tied agency model, they may not opt to open up given that it would mean selling more third-party products.
“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, banks may not open up as they wouldn’t want to get too much into selling third-party products,” said Kapil Mehta, executive director, SecureNow Insurance Broker Pvt. Ltd.
Apart from this, there are bank-promoted insurance companies and banks would not want to affect this side of their business. “Open architecture would impact the business of bank-promoted insurance companies and so it would not be in the interest of the insurer, and consequently the promoter bank, to open up,” said Dalmia. “If business is affected, the insurance companies’ valuations, too, would be hit,” he added.
Open architecture, or opening up the distribution space whereby distributors are able to sell products of multiple insurers, has been a long-standing demand of the industry, especially from new entrants and insurers not promoted by banks, who felt squeezed out as older insurers had captured a large chunk of the distribution space. For customers, open architecture means more choice.
However, given that banks are also shareholders in the insurance business, and insurance is a third-party product, it is unlikely that banks will come forward.