UCBs get nod to sell policies

Irrespective of their net worth, urban cooperative banks (UCBs) can now act as a corporate agent for insurance companies, thanks to the central bank. Earlier, only UCBs with a minimum net worth of Rs 10 crore were permitted to act as a corporate agent without risk participation.

However, UCBs with a net worth of less than Rs 10 crore would have a referral arrangement with the insurance company, where the bank employee will refer the customer to the insurance company official who then sells the policy.

This arrangement spells out mutual benefits for both the parties involved. In the insurance companies' case, it will increase their penetration into remote areas where mostly life insurance agents play a major role. Secondly, it will give them access to tier-II cities, where UCBs have a major presence.

In the case of UCBs, they will earn renewal commissions that they were losing out on. As a referral agent for the insurer, the bank earns a one-time commission (also called referral fee) for referring the customer to the insurer, but loses on the renewal commissions, which a corporate agent earns (also known as Trail commissions).

The commissions range from 2-25 per cent of the premium, depending on the product sold and the commission structure filed with the Insurance Regulatory and Development Authority (Irda).

Strong UCBs bring Rs 2 crore premium for an insurance company, while the weak ones do a premium of Rs 10-50 lakh. However, industry officials point out that only a few UCBs have been able to generate substantive business for insurance companies as they lack selling capability.

Says Reliance Life Insurance Chief Executive Officer P Nandagopal, "It's a positive development for UCBs and for insurance companies. However, a lot needs to be done to make sure that UCBs emerge as a significant distribution channel of some size and quality. Currently, only a few co-operative banks are focused on insurance distribution. Hopefully, this should change for the better."

According to US Roy, managing director and chief executive officer of SBI Life insurance, "Today, it is the insurance agent who goes into the interiors to sell insurance. If a bank sells a insurance policy to a customer, it will give insurers more confidence. The move is good for UCBs. By acting as corporate agents, they can generate an additional source of revenue for themselves, and control their client's finances."

According to RBI's report on Trend and Progress of Banking in India 2006-07, there are 1,813 UCBs, of which 53 are scheduled UCBs while the remaining 1,760 are unscheduled UCBs.

Says an insurance official, "Insurance is moving in tier-II cities and UCBs can play a big role. UCBs are a substantial asset for relationship building but are yet to fire in a big way. Many of them have stayed with insurers for the last 2-3 years and have yet not done big business. In the coming years, we will see UCBs moving to larger insurance players."