Should banks sell the policies of all insurance companies instead of the current practice of sticking to one company? The jury is not yet out.
The finance ministry is keen on it. The Insurance Regulatory and Development Authority (Irda) is all for it. However, there’s discomfort in the Reserve Bank of India. Most of the top banks in the country are also not happy about the government pushing for it.
The reluctance on the part of the RBI and banks is clearly visible in the latest report being prepared by an RBI panel. The RBI’s working group on bancassurance has suggested that no model should be unilaterally imposed on banks and that the choice of becoming a multiple corporate agent or a broker should be left to the respective banks and their boards. Under the existing regulations, a bank is allowed to distribute policies of one life and one non-life insurer as its corporate agency partner.
The panel’s interim report says that the Irda should amend the regulations to give five years to a bank to reach the 25 per cent cap on the insurance business placed with the insurance company of the promoter group required by the Irda. Put in other words, the RBI committee is saying that the Irda should not issue blanket orders to banks which are regulated by the RBI.
However, the panel is not unilaterally opposing the Irda/government move. The RBI panel suggests that by the end of the first year of operations, a maximum of 75 per cent of the insurance business could be placed with the group insurance company. At the end of the second year of operations, this should decrease to 60 per cent; end of the third year a maximum of 50 per cent; end of the fourth year a maximum of 35 per cent and a bank should achieve the 25 per cent cap by fifth year end.
The committee, headed by Reena Banerji, general manager, RBI, has members from the RBI, Irda, Indian Banks Association and senior officials from commercial banks and will submit its report to the finance ministry soon.
Why banks, RBI oppose?
Several banks at their meeting with the Central bank and the insurance regulator had expressed reservations about a clause in the broker regulations of the Irda, which said not more than 25 per cent of the insurances handled by an insurance broker (read bank) in any financial year should be placed with the insurance company within the promoter group separately for life and general insurance business. “We have a tie-up with our insurance subsidiary. This arrangement is working fine. Why should our subsidiary sell the policies of other companies?” asks an official of a nationalised bank.
The big worry is that complaints under mis-selling have registered a rising trend in recent years. “Unfair or fraudulent practices are adopted at the time of soliciting and selling insurance policies which have not been sought by the customer or where the customers feel that the policies sold are different from what they wanted or what they were promised,” said a senior RBI official.
The RBI group has suggested amending the clause requiring banks becoming insurance brokers to place exclusive staff or qualified person in each and every branch of the broker (bank). Such a clause would deter banks from broking business as getting exclusive persons to do this business in banks would involve fresh recruitment or carving out staff from existing system which may not be cost effective. “It’s wrong on the part of banks to become brokers and charge high commission from customers. Also, the RBI doesn’t allow stock market intermediaries to get a banking licence or get involved in a banking initiative. So why should banks get into broking business,” said the RBI official.
According to former Irda member KK Srinivasan, though both insurance agency and insurance brokering are departmental activities within a bank, RBI’s current guidelines for agents and proposed guidelines for brokers seem to create a regulatory arbitrage in favour of agents. “It is not made applicable to banks as agents. Perhaps the RBI feels that broking involves a greater risk to the bank,” he said.
Will customers benefit?
Customers will have a better bouquet of products from various companies to choose from. There are over a lakh bank branches in India and the number is expected to rise sharply in the coming months with the RBI planning to issue more bank licences. “Yes, to that extent, penetration of insurance in the country can increase,” agreed a senior RBI official.
The government says there is a need to increase insurance density. The general insurance density in India is about $9, while in China it is $53. Insurance density is the ratio of premium to population (per capita). India has the reputation as one of the most under-insured countries in the world as non-life insurance sector has a penetration of only 0.7 per cent.
PSU banks which control nearly three-fourth of the banking business can go a long way in promoting insurance in the country. But reports have it that as many as 55,000 bank branches in India have not even sold a single insurance policy. “Thus perhaps bancassurance in India is yet to take off in a big way. Is the dual regulatory oversight of bancassurance (it is regulated both by Irda and RBI), a factor in affecting its development in a healthy manner?” asked Srinivasan.
Both broking and insurance agency are permitted as departmental activity within a bank. However, a bank can either be an agent or a broker and not both. Also when an agent is permitted to work only with one life insurance company and one general insurance company, a broker can place business with any insurance company of the policy holder’s choice. “Thus a broker has a wider canvas. But both will be remunerated by insurance companies by way of agency commission or brokerage,” Srinivasan said.
The RBI working group is of the opinion that no single model will be appropriate for different types of banks operating in India. To meet the expectations of all stakeholders, the committee is of the opinion that along with the current corporate agency model, banks should be allowed to have any one of the following models — multiple corporate agency model (one bank allowed to sell policies of many insurers) and broking model.
“Whether an agent or a broker, a bank becomes a meaningful insurance intermediary only if the intermediary functions are in the hands of trained professionals. Otherwise its activity as an intermediary can create grave reputational risk for the bank for mis-selling etc,” Srinivasan says. The two regulators — RBI and Irda — instead of working perhaps as independent silos, need to work together in developing bancassurance on healthy lines.