January 19, 2015
Seeking to increase insurance penetration in the country, the central bank – Reserve Bank of India (RBI) – has issued final guidelines to allow banks to act as brokers for insurers, set up their own subsidiaries and also undertake referral services for multiple companies..
“Banks may undertake insurance agency or broking business departmentally and/or through subsidiary,…,” RBI said in its guidelines for entry of banks into insurance business. Banks are also allowed to set up subsidiaries and joint venture companies for undertaking insurance business with risk participation, it said. They can also act as corporate agents without seeking prior approval from the RBI. However, they will have to comply with guidelines of the Insurance Regulatory and Development Authority of India (IRDAI). .
The new guidelines allow banks to act as brokers permitting them to sell insurance policies of different insurance companies. The guidelines follow an announcement made by the former Finance Minister P Chidambaram in 2013-14 Budget. According to the final RBI norms, a bank can enter insurance broking only if their capital to risk (weighted) assets ratio is 10% and above, and the net worth of the bank should not be less than INR10 billion (US$162 million). In addition, the net non-performing assets (NPAs) of a bank should be less than 3% of overall assets to be eligible for insurance broking. Many public-sector banks will be rendered ineligible because of this clause. According to bankers, their priority is now to tackle the rise in NPAs and improve the bottomline, rather than venture into a new sector. Bancassurance currently follows a corporate agency structure. This means that banks sell insurance as a corporate agent and these regulations allow each bank to sell insurance products of only one life, one general and one health insurance company each..
Mr Amitabh Chaudhry, managing director and chief executive officer of HDFC Life, told Business Standard that unless mandated to do so, banks might not be interested in becoming brokers. He added it is less onerous to be a corporate agent than a broker. The chief executive of a mid-size private life insurer said that a bank’s ownership of a stake in an insurer would restrain players from taking the broking route. “Once these banks become brokers, they would not be in a position to push products of their group companies. Private insurers, which get almost 60-70% of their new business from parent banks, might see a sudden slump if their parent bank becomes a broker. This is not something the shareholders would approve,” he said. Top private insurance companies are backed by banks, which will find a conflict of interest in the broking idea. For example, ICICI Pru Life, SBI Life, HDFC Life, IDBI Federal, SUD Life, Kotak Life and IndiaFirst are backed by banks like ICICI, HDFC, SBI, IDBI, Federal bank, Bank of India, Union bank of India, Kotak Mahindra, Bank of Baroda and Andhra Bank. .
GMeanwhile, IRDAI is evaluating fresh rules for banks to act as intermediaries for insurers in the wake of the RBI guidelines and changes made last month to the insurance law through the Insurance Ordinance. The categorisation of banks (corporate agents), brokers and agents has been altered and all of them are termed as ‘insurance intermediaries’ under the Ordinance. With the change, all intermediaries can seek partnerships with multiple insurers. This change is expected to significantly benefit insurers that do not have a major bank alliance partner. These include Reliance Life Insurance, Exide Insurance, Future Generali, Birla, Bajaj, Aegon Religare, Bharti Axa, Shriram Life and Sahara Life..