The draft bancassurance guidelines by the Insurance Regulatory and Development Authority (Irda), which proposed that banks could act as brokers and sell multiple insurance products, may be difficult to implement. Insurance industry players said while on one hand some insurers are not comfortable with the idea, on the other hand the Reserve Bank of India (RBI) has raised some concerns about the same.
RBI, in its recent Financial Stability Report, said that extant regulations do not permit banks to become insurance brokers. RBI had also said banks assuming the role of insurance brokers might also lead to conflict of interests where the bank is also the promoter of an insurance company. “Further, some provisions of the exposure draft, if implemented, may expose the banks to reputational risks,” RBI had said in the report.
Insurers believe the proposal may be delayed due to the differences in the industry, regarding the proposals. Amitabh Chaudhry, MD and CEO, HDFC Life, said since all the parties concerned have opposing views, the final guidelines would take time to be announced.
Adding to this, G V Nageswara Rao, MD and CEO, IDBI Federal Life, said certain risks in open architecture of bancassurance have been witnessed in nations abroad. “The main risk is that when a bank is allowed to sell multiple products, the tendency is to sell products that offer a higher commission than those which the customer needs.
If this risk is not mitigated, it will lead to reputational risks for a bank,” he said.
Insurers also feel reputational risks will occur only if misselling is done by banks. Amarnath Ananthanarayanan, MD and CEO, Bharti AXA General Insurance, explained banks could choose simpler products to sell and avoid wrong selling. “Banks can pick and choose the simpler products of companies, and when they are comfortable, can choose to sell complex products. If this is followed, there is no objection to having an open architecture for bancassurance,” he said.
Bankers also believe the final guidelines would have to be revised to placate everyone's views. “Some banks would have issues with their insurance company tying up with other banks. Apart from the reputational risks mentioned by the RBI, if the above issue is to be addressed, the guidelines would have to be revised,” said a senior official of a public sector bank.
Industry experts also explained that due to the unresolved issues with the draft, it will be difficult to finalise it before the end of the term of the current Irda chairman. “There are a lot of opposing views on the guidelines, and it appears that it will not come into force before the term of the current chairman ends,” said the chief executive of a private life insurance firm.
The term of current Irda chairman J Hari Narayan ends in mid-February 2013.