'PSU banks becoming brokers may disappoint shareholders'

Industry divided ove P Chidambaram keeping his budget promise of enabling banks to become insurance brokers

Many insurance companies have welcomed the finance ministry's recent circular to public sector banks (PSBs) to become insurance brokers. However, some insurers with shareholder agreements with PSBs said all joint-venture partners might not support the move.

Finance Minister P Chidambaram kept his Budget promise of enabling banks to become insurance brokers in order to boost insurance penetration. While the Insurance Regulatory and Development Authority (Irda) had also earlier proposed the concept of open architecture of bancassurance, there were conflicting views in the industry on the same.

Bancassurance, wherein banks can sell policies of insurers with whom they have tied up, acts as an alternative distribution channel for insurers. According to data for 2012-13, as much as 65-70 per cent of new premium of bank-led life insurers was generated from their bank partners. Currently, insurers follow a corporate agency model as in Irda norms wherein each bank can tie up with one life, one general and one standalone health insurer to sell their products. (HOW THE BANCASSURANCE SAGA UNFOLDED)

“We and several other public sector bank-promoted insurers have not expanded the agency channel, since we had a strong branch network of banks to rely on. With this move by the ministry, our other shareholders will ask for detailed explanations for our actions,” said the chief executive of a private insurance company promoted by a bank.

The Reserve Bank of India (RBI) had recently brought out guidelines for banks to become brokers. However, with stringent capital requirements, life insurers had said banks would not see broking as an attractive proposition.

“The regulations would force insurers with existing shareholding arrangements with banks to renegotiate the contracts. Further, existing insurance shareholders have a lot of accumulated losses which will now take much longer to wipe out,” said an industry official.

For the life insurance sector as a whole, the bancassurance channel accounts for 30 per cent of total new business premium collection.

Insurers also fear there could be some shareholder conflicts on PSU banks having no other option, but to become brokers so that they could sell insurance. “Though the regulators and finance ministry officials have not said anything against banks promoting insurance companies to become brokers, the boards may not give a nod to this arrangement. This is because it may account to conflict of interest,” said a senior private life insurance executive.

Life and general insurance companies also do not have clarity on whether RBI’s recent draft proposal would hold ground. The senior vice-president of marketing and strategy at a private general insurance firm that has a bancassurance tie-up with a large public sector bank said RBI draft rules had led to an assumption that banks with a weak capital base would not become brokers. However, he added it was not clear whether this still applies or whether all state-owned banks automatically become insurance brokers.

"You are requested to implement the spirit of the Budget announcement within the framework of guidelines by Irda and RBI in this regard under intimation to this department (department of financial services) by January 15, 2014," said the circular by the department of financial services.

The implementation of these reforms comes at a time when the life insurance industry is entering a new product regime. From January 1, 2014, life insurers are required to sell products adhering to the new traditional product guidelines, which had necessitated additional training to all the distribution associates of insurers.