FinMin asks all public sector lenders to act as insurance brokers

In major relief to insurance companies without bancassurance partners, the finance ministry has asked all public sector banks to act as insurance brokers to boost insurance penetration in the country.

Currently, insurance penetration (the ratio of the percentage of total insurance premia to gross domestic product) is about five per cent.

In a December 20 circular to the chief executives of all public sector banks, the ministry said these banks should leverage their branch network for insurance penetration. “You are requested to implement the spirit of the Budget announcement within the framework of guidelines by the Insurance Regulatory and Development Authority (Irda) and RBI (Reserve Bank of India) in this regard, under intimation to this department (Department of Financial Services) by January 15, 2014,” said the circular. In his Budget speech, Finance Minister P Chidambaram had allowed banks to act as insurance brokers. Irda has already brought out guidelines for banks to become brokers, subject to approval of RBI.

Those without bank partners welcomed the move. The chief executive of a large non-bank promoted insurer said this would give more choice to customers. “But we need to wait and watch on whether all banks will agree to this proposal,” the executive added.

The circular also said the corporate agency model should be done away with and each bank had to train and orient its staff to conform to the finance minister’s Budget announcement.

Currently, bancassurance follows the corporate agency model, through which a bank can only tie up with one life, one non-life and one health insurer to sell their insurance products. Therefore, non-bank promoted insurance companies and late entrants to the insurance sector do not have any bank partner to sell their policies. In November, RBI had brought out draft guidelines for banks to become insurance brokers. It had said for this, banks needed net worth of at least Rs 500 crore and net non-performing assets below three per cent. This, industry experts said, dissuaded smaller banks from becoming insurance brokers.

Insurers with public sector bank partners had mixed views on the ministry’s announcement. A senior official with a life insurance company promoted by a public sector bank said while this would make banks more responsible, existing shareholder agreements might have to be revised. “Further, banks may choose to only expand broking in urban areas to justify their costs, which defies the purpose of insurance penetration envisaged by the finance minister,” said the official. He added there should have been more discussions with the industry on the matter.

Concerns of public sector bank-led insurers include large corporate-backed insurers being able to attract big public sector banks, bank staff not being able to understand the structure of various insurance products sold by the bank and insurers not willing to help train bank staff.

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

The Chairman & Managing Directors (CMDs) of public sector banks have been asked to report compliance and progress of the circular's contents to financial services secretary Rajiv Takru on January 31, 2014.