In October 2012, finance minister P Chidambaram had indicated that banks which want to sell insurance policies of multiple insurers should do so as brokers and not as agents. He repeated his stance in the budget speech this year. But it took banking regulator Reserve Bank of India a little more than a year to finally move in this direction. On November 29, it came out with draft guidelines paving the way for banks to become insurance brokers.
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 would represent the interest of the insurer and not of the policyholder.
“The guidelines are bang on target. The draft has addressed all that is wrong with insurance distribution right now. Insurance broking has not worked for retail yet because insurance brokers function more like multiple corporate agents looking for revenue arbitrage opportunities. These RBI guidelines put a strong emphasis on the role of an insurance broker, which is a huge opportunity,” said P Nandagopal, CEO, IndiaFirst Life Insurance.
Here are the three major takeaways from the RBI draft guidelines:
To be eligible, banks will need to have a minimum net worth of `500 crore. The capital to risk-weighted assets ratio or the capital adequacy ratio would have to be at least 10% and the level of net non-performing assets not more than 3%. The bank should have made profits for the past three consecutive years. The performance of the bank’s subsidiaries or joint ventures will also be seen.
Based on this, almost 90% of the listed banks are eligible to enter this business. The approval for insurance broking, once granted, will be valid for three years, and then come up for a review.
The next set of guidelines aim to ensure that banks understand the business shift — becoming brokers from agents — and act in accordance. So, to avoid any conflict of interest, banks that opt to become brokers will not be allowed to enter any arrangement for corporate agency or insurance referral business directly or through subsidiaries. They will also need a comprehensive board-approved policy regarding insurance broking and services.
There will be a standardised system to assess the needs of customers across all branches. Banks will have to set up internal grievance redressal mechanisms that will lay out customer compensation policies and resolutions. “This will increase the quality of insurance sales and service,” said Amitabh Chaudhry, CEO, HDFC Standard Life Insurance.
The RBI draft has also outlined a remuneration structure so that banks don’t have much incentive to hard sell products. According to the draft, the staff engaged in insurance broking services will not be paid any incentive, in cash or kind that is linked to the income received from the broking business. The staff is also not permitted to receive any incentive directly from the insurer.
Additionally, the banks will also need to disclose to customers the details of remuneration received from various insurance companies for the broking business. This will also be disclosed in the “notes to accounts” in their balance sheets. RBI has given the nod to banks getting into insurance broking. But what of banks? Are they ready to take on this new job?
Not in banks’ favour
The aim of these guidelines is to emphasise fair sale of insurance policies so that banks as brokers don’t renege on their fiduciary duties towards customers. Banks, however, are unlikely to apply for the job. Even before the RBI draft guidelines raised the accountability standards for banks as insurance brokers, Insurance Regulatory and Development Authority (Irda) had come out with its own guidelines in August this year. These guidelines were not received well by the industry.
According to the Irda guidelines, banks as insurance brokers can’t do more than 50% of their business with one customer. They also can’t do more than 25% of the business with the insurance company within the promoter group. This was seen as a dampener for banks that have equity stakes in insurance companies. These insurers, in turn, depend on the bancassurance channel (using banks as corporate agents) to sell insurance.
The other factor that may keep banks away is the greater accountability that rests on them. “Banks with their own insurance companies would be committed to distributing through an agency relationship. In an agency relationship, the final responsibility of making a correct sale lies with the insurer. In a broking licence, this responsibility will shift to the bank — something banks would not be keen on. Another disincentive is that brokers have a far higher degree of regulatory supervision than agencies,” said Kapil Mehta, managing director SecureNow Insurance Broking.
RBI’s guidelines aim to raise the standard of distribution of insurance products. For customers, this is good news. “In the long term, banks can really change the shape of insurance products. They can weigh in on the industry as brokers and demand simple products that are easy to understand and explain. There is a big opportunity here,” said Nandagopal. But for that to happen banks need to be enthused about becoming brokers, which is not the case right now. RBI has invited comments and feedback on its guidelines by December 31.