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Published in Mint on Jan 19 2015
After deliberating for a year, the Reserve Bank of India (RBI) came out with guidelines on entry of banks into insurance business on 15 January, allowing banks to become either a corporate agent or an insurance broker.
As insurance brokers, banks become directly responsible for the sale of insurance policies because they have a fiduciary responsibility towards their clients, the policyholders. As agents, they are shielded from coming in the line of fire because they represent the interest of the insurer and not the policyholder. The insurance industry, to increase penetration, has been demanding an open architecture in the agency channel, allowing banks to become multiple corporate agents, as against the current tied agency model where banks can become corporate agent of only one insurer.
The previous government, instead of pushing for an open architecture, asked banks to become insurance brokers so that banks would not only reach out to customers with a wide range of products of multiple insurers, but also be responsible for sale of that product. The central bank has, however, not been keen on banks taking on this additional liability as insurance is not their core business.
This is why even as the previous finance minister indicated in October 2012 that banks should become brokers to sell policies of multiple insurers, a sceptical RBI took almost a year to finally move in this direction. It finally issued draft guidelines on 29 November 2013, paving the way for banks to become insurance brokers. These were preceded by the Insurance Regulatory and Development Authority (Irda) guidelines for banks to become brokers in August 2013. (The Authority is now named Insurance Regulatory and Development Authority of India, or Irdai.) But push came to shove when in December 2013 the Ministry of Finance asked all public sector banks to become insurance brokers within a month.
What followed was a pushback because not only was the deadline too close, banks were also not ready for the responsibility and a working group was formed to deliberate on the matter.
The pressure to become a broker has eased with RBI’s new guidelines. “The guidelines are welcome as they give banks the freedom to choose between (being a) corporate agent and insurance broker. But it’s early stages; we will now get into rounds with banks to see what they feel about it,” said G. Murlidhar, managing director, Kotak Mahindra Old Mutual Life Insurance Ltd.
According to the RBI guidelines, only one entity (among the bank and its group entities, including subsidiaries) can become a distributor, either through the corporate agency model or through the insurance broker model. It can do so either through a separate entity—a subsidiary or a joint venture—or departmentally within the bank.
If the bank chooses to have a separate entity, it will need RBI’s approval, and a net worth of at least Rs.500 crore after investing in the equity of that company. The capital to risk-weighted assets ratio or the capital adequacy ratio has to be at least 10%, and net non-performing assets, not more than 3%. The bank should have made profits for the last three consecutive years and the performance of the bank’s subsidiaries or joint ventures should be satisfactory. Banks should satisfy these criteria as on March 31 of the previous year.
The guidelines are different if a bank chooses to become an insurance distributor departmentally. In this case, it won’t need RBI’s prior approval or meet the eligibility criteria, but will be subject to Irdai’s rules. “At present, banks function as corporate agents departmentally. It seems eligibility criteria are more relaxed to do this,” said Vighnesh Shahane, chief executive officer and whole time director, IDBI Federal Life Insurance Co. Ltd.
Safety features
While the first part of the RBI guidelines talk about eligibility, the second part aims to enforce fair conduct. RBI wants banks to have a system to assess suitability of products. Those involved in selling insurance have to be qualified as stated by Irdai.
“Pure risk term products with no investment or growth components, which are easy for the customer to understand, will be deemed universally suitable products. More complex products, with investment components, will require the bank to necessarily undertake a customer need assessment prior to sale. It should be ensured that there is a standardized system of assessing the needs of the customer and that initiation, transactional and approval processes are segregated,” said the circular.
Further, to ensure that banks don’t force customers to buy policies of a particular insurer or bundle them with other banking products, the circular has stated that banks should prominently state in all publicity material that the purchase by a bank’s customer of any insurance products is purely voluntary, and is not linked to another facility.
The banks will also need to put in place a robust internal grievance redressal mechanism along with a Board approved customer compensation policy.
The guidelines have made it clear that violation of its instructions will be viewed seriously and will invite penal action against the banks.
Are banks ready?
RBI’s guidelines allow banks to become brokers and also raise the standards for banks distributing insurance policies. But the response from banks is expected to be lukewarm. “I don’t see banks becoming brokers because as brokers, the legal responsibility and compliances will be far higher. They are unlikely to earn more money as brokers. Plus, insurers give a lot of support to banks as corporate agents, which they will not get as brokers,” said Kapil Mehta, managing director, SecureNow Insurance Brokers Pvt. Ltd. “Small banks that are deeply into the advisory role may look at the broking model,” he added.
Irdai’s guidelines, too, make banks wary of the new role. According to the insurance regulator, banks as insurance brokers can’t do more than 50% of their business with one customer. They also can’t do more than 25% business with the insurance company within the promoter group.
This was a problem for banks that have equity stakes in insurance companies because these insurers depend on the bancassurance channel (using banks as corporate agents).
“It’s going to be difficult for banks to implement these caps as banks can’t control customer preference. Given that RBI has allowed banks to become brokers, Irdai will hopefully review its guidelines,” said Anuj Agarwal, chief executive officer and managing director, Bajaj Allianz Life Insurance Co Ltd.
Allowing banks to function as insurance brokers is good for customers.
“This is a step in the right direction. It means more choice for customers, but banks will have to deal with the fiduciary risk and reputational risk. Also, banks may not have the bandwidth to sell multiple products as insurance is not their core product,” said Shahane.
It seems unlikely that banks will be enthused about becoming brokers, and we expect a status quo in the way they sell insurance.