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Published in Mint on April 02 2015
Paving the way for an open architecture in insurance distribution, the Insurance Regulatory and Development Authority of India (Irdai), has issued draft guidelines on corporate agents. Corporate agents are entities such as banks that solicit insurance policies for insurers. Agents are individuals doing the same job.
According to this draft, corporate agents will be allowed to tie up with a maximum of three insurers, and mandatory with at least two insurers, from the same line of business. As of now, corporate agents observe a tied agency model, which allows them to sell insurance policies of only one insurer from the same line of business, and as composite corporate agents, they can sell policies of one life insurer, one non-life insurer and one health insurer. The guidelines propose to increase this number to three, opening the distribution space to some extent.
With this move, a corporate agent will be able to, say, tie up with three life insurance companies to distribute their policies as opposed to one currently.
For a customer, an open architecture offers more choice as distributors can reach you with a variety of products. But for insurers, the draft guidelines mark the end of monopoly arrangements with banks.
Mint explains some of the important points covered in the draft regulations.

For you and the insurer

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.
“Along with the regulations on insurance marketing firm (a new distribution channel that can sell products of two insurers from the same line of business), these regulations are driven towards bringing in competition and a level playing field,” said Deepak Mittal, managing director and chief executive officer, Edelweiss Tokio Life Insurance Co. Ltd.
While the draft seeks to open up the corporate agency channel, individual agents will continue with the tied model. So, an individual agent will continue to represent only one insurer and sell the policies of that insurer.
For customers, open architecture means more choice. When you walk into a bank—a prominent corporate agent for insurance, also called the bancassurance—you can sample products of up to three insurers. This is also likely to benefit insurers that are not promoted by banks and depend on the agency channel for business initially.
The bancassurance channel is more cost efficient than the agency channel, and has a captive customer base. This is why bank-promoted insurers with a ready-made bancassurance channel were able to adjust to the recent spate of regulatory reforms much faster. In comparison, others grappled with high rates of agent dropout.
“For someone who has enjoyed an exclusive relationship with partner banks, the initial reaction is to the impending operational challenge in the short run. But it will also mean tapping into a wider distribution base. For customers, it’s good as it offers more choice” said Vighnesh Shahane, chief executive director and whole-time director, IDBI Federal Life Insurance Co. Ltd, a joint venture between IDBI Bank Ltd, Federal Bank and Ageas, a Europe-based insurer.

Opening up in phases

To ease the initial pain that bank-promoted insurers are going to experience, the draft suggests opening the corporate agency space in a phased manner. So, in the first year of operation, the corporate agents are allowed to do up to 90% of the business (premium collection) from any one insurer in the same line of business, and the remaining 10% could come from the remaining two insurers. In the second year, this limit will come down to 75%, and to 60% in the third year. From the fourth year onwards, the draft has proposed that no corporate agent shall place more than 50% of its business with any one insurer.
The limits also make it mandatory for corporate agents to tie up with at least two insurance companies from the same line of business. “Insurers that primarily get their business from corporate agents will see the business almost halved in three years. This may not be a desired outcome. Bank-owned insurers fall in this category. So, corporate agents should be allowed the choice to continue with a tied model linked to one insurer, or to open up,” said Kapil Mehta, executive director, SecureNow Insurance Brokers Pvt. Ltd.
The issue of mandating an open architecture and limiting the business to 50% by the fourth year has not gone down well with the industry. “This will hurt bank-promoted insurers in a very big way. Insurers may not have an option but to go to court,” said a senior executive, requesting anonymity, of an insurance company. Other than the cap on business, the draft also wants to restrict the type of products that can be sold through corporate agents.
“The corporate agent shall, after a period of one year, solicit and procure insurance business through only those products that are approved by the Authority (Irdai) and are exclusively designed for the corporate agency channel by insurers,” the draft states. The aim seems to be to sell simple products through corporate agents to avoid confusion and reduce the scope of mis-selling.

Matter of accountability

Another important step that the draft takes is placing greater accountability on corporate agents. According to the draft, corporate agents will need to indemnify themselves for any act of omission, error or negligence on the part of their employees and directors. They will also be liable for any dishonest or fraudulent acts by employees, current or former. This seems to be a departure from the existing norm that holds the insurer liable for its agents.
“Corporate agents no longer come under the purview of agents but are classified as intermediaries, which puts them under the direct control of the regulator. The regulator can now inspect corporate agents and penalize them,” said C.L. Baradhwaj, chief compliance officer and chief risk officer, Bharti AXA Life Insurance Co. Ltd. This means that even as corporate agents don’t share a fiduciary responsibility towards customers (policyholders), the fact that Irdai can regulate them directly will put greater onus on the corporate agents. However, some feel that insurers should continue to be accountable. “There is a risk that insurers will be less accountable for the conduct of their corporate agents because the responsibility of approving a corporate agent is Irdai’s. Also, in each category, corporate agents will no longer represent one insurer but three. This will diffuse the responsibility that an insurer has. Insurers should remain fully accountable for the conduct and performance of their corporate agents, and this should be explicitly factored into the guidelines,” said Mehta.

Some loose ends

The draft guidelines don’t delve into the remuneration aspect in great detail, which, many in the industry say, is important to clarify. The draft states that the payment of remuneration by a corporate agent will be governed by the regulations notified in this regard by Irdai. “Insurers are guided by Irdai rules on remuneration to banks and other corporate agents. However, the authority has been silent so far on payouts made by insurers or their shareholders for regional or global bancassurance tie-ups. Also, equity stakes have been sold at huge discounts by insurers to banks in lieu of business commitments. Irdai needs to frame guidelines to cover such payments and ensure a level playing field,” said Amitabh Chaudhry, managing director and chief executive officer, HDFC Standard Life Insurance Co. Ltd.
Given that banks are unlikely to step up to the role of an insurance broker (they would then have a fiduciary responsibility towards customers), opening up the corporate agency channel will in a way force them to offer policies of multiple insurers, but some believe that banks may not be enthused.
“Insurance is not the core product for banks, and contributes only 2-3% to their revenues. Hence, selling insurance policies of multiple insurers may be a challenge for them. One would expect banks to seek more clarity on norms to comply with these guidelines,” said Shahane.