Irda may ask all banks to become insurance brokers

The Insurance Regulatory and Development Authority (Irda) is considering making it mandatory for banks to become insurance brokers. Public sector banks are, however, reluctant to take the route despite a finance ministry directive asking them to do so.

"We are looking at making it mandatory for banks to become brokers. We are in discussions with banks on the structure," said a senior Irda official. Though it wasn't clear whether all banks would have to become brokers, the official indicated the process would start with public sector banks.

Bancassurance, or the process of banks selling insurance products, follows a corporate agency structure. This means banks sell insurance as a corporate agent.

On December 20, 2013, a letter from the finance ministry to public sector bank chief executives said these banks should become insurance brokers and leverage their branch network for insurance penetration. In his Budget 2013-14 speech, Finance Minister P Chidambaram had allowed banks to act as insurance brokers.

In a recent interview with Business Standard, Vijayalakshmi Iyer, chairperson and managing director of Bank of India, said, "We have said banks that have insurance subsidiaries have the obligation to honour the MoU (memorandum of understanding) signed among various partners. It should be insisted for those banks that have a subsidiary in place. Broking requires a different set of skills. We don't have that kind of staff now. So, we will take time to develop those skills."

A circular by the Department of Financial Services had asked public sector banks to implement the spirit of the Budget announcement within the framework of guidelines by Irda and the Reserve Bank of India by January 15, 2014. Sources said Irda might ask banks that didn't adhere to this to become brokers compulsorily in the next three months. Sources said in the initial phases, the proposed 25 per cent cap on business from one's group company might be increased.

As an insurance broker, a bank is liable to consumers, with respect to an insurance policy, unlike a corporate agent. The liability will be high, as the bank will sell the products of multiple insurers.

According to data for 2012-13, 65-70 per cent of total new premium of bank-led life insurers was generated from their bank partners. For the overall life insurance sector, the bancassurance channel accounts for about 30 per cent of new business premium collection.