IRDA's 'IMF' idea throws up more questions than answers

The insurance regulator's latest proposal to explore the possibility of introducing an intermediary, called Insurance Marketing Firm (IMF), has thrown up more questions than answers, say industry officials.

"An insurance agent (individual/corporate) represents the insurer while a broker represents a policyholder. Whom does the proposed IMF represent? I don't have the answer," a senior life insurance official, not wanting to be named, told IANS.

Industry officials told IANS that IRDA (Insurance Regulatory and Development Authority) is looking at a model where a distribution company would sell not only the policies of multiple insurers but also mutual funds and other financial services.

"What is the need for replicating the insurance broking model? An insurance broker sells products of more than one insurer. What is the need for a separate company?" asked R. Ramakrishnan, a member of the Malhotra Committee on Insurance Reforms.

Officials also told IANS that the proposed IMF would be allowed to sell other financial products.

"Don't ask me how the IMF would be different from companies now selling mutual fund/fixed deposits/insurance policies," another life insurance official said.

"Frankly speaking, the new proposal only shows the confused state of IRDA's mind. The regulator wants to increase insurance penetration but it is sort of confused as to how to go about it," said a chief executive officer of an insurance company, preferring anonymity.

On Jan 23, IRDA said it would set up a working group to explore the possibility of introducing a stand-alone IMF and other related issues.

According to IRDA, the idea of IMF has its source in a committee it had set up in 2007 to look into the insurance distribution channels.

The committee chaired by Life Insurance Corporation of India's (LIC) former chairman N.M. Govardhan had submitted its report in 2008 in which it said: "Regarding multiple tie-ups of a corporate agent with an insurer, it was decided that it was not appropriate at this point of time. A model akin to Independent Financial Advisors (IFA) may be considered in future."

While the committee spoke about corporate agents having multiple tie-ups, IRDA, it is reliably learnt, is now looking at a broking model for IMF.

According to a senior non-life insurance company official, IRDA is now open to ideas which include allowing captive IMFs.

The concept of captive IMFs would be lapped up by banks that have promoted insurance companies.

The government and IRDA want the banks to become brokers from being a corporate agent for an insurer. The Reserve Bank of India (RBI) has come out with a concept paper for banks becoming insurance brokers.

However, banks that have promoted insurance companies are naturally against the proposal as they will now have to sell products of other insurers.

"If the IMF is allowed on the agency model then banks would surely be interested," a life insurance official said.

"Entrusting marketing to an IMF is equivalent to outsourcing marketing functions. It may not take much time before other functions too are allowed to be outsourced, one by one. Imagine a situation when an insurer has outsourced all the functions. It can then function from just one floor of a building, with just a CEO, chief accountant, chief investment officer and chief actuary. What kind of coordination can then be there between independent companies handling different functions? Such a step will lead to deterioration in the quality of agents," Ramakrishnan said.

"Instead of addressing the root issue, IRDA seems to be looking at other avenues. IRDA could make a broking model attractive to banks by means of higher remuneration, powers (power to receive premium and issue contracts) and other ways," he said.

"Today the only difference between an insurance agent and a broker is that an agent can sell only the product of one insurer while a broker can sell products of all insurers. Interestingly in actual practice, a broker sells policies of only four insurers," the life insurance official said.

(Venkatachary Jagannathan can be contacted at v.jagannathan@ians.in)