Banks becoming insurance brokers to sell policies was one of the most talked proposals of P Chidambaram, finance minister in the previous United Progressive Alliance-led government. However, insurance sector sources said the finance ministry is now not too keen to push this model to the banks.
“In the recent meeting between private insurers and Finance Minister Arun Jaitley, the issue of banks becoming insurance brokers was also discussed. Since there has been strong opposition from the banks who have insurance joint ventures, the minister did not wish to take it up as an immediate priority,” said the chief executive of a life insurance company.
In December 2013, public sector banks (PSBs) were sent a letter by the finance ministry (then headed by Chidambaram) that they would be required to become insurance brokers so they could distribute products of multiple companies through their branch network.
However, this proposal received flak, especially from those PSBs that were promoters of insurance companies. Following this, the directive was not implemented.
“Though we expected an open architecture of bancassurance, it does not seem to be on the top of their agenda. We will look to strengthen the other channels instead,” said the chief distribution officer of a mid-size life insurance company that does not have a bank partner.
The insurance regulator, too, has said it would be in the interest of the industry as a whole that banks be mandated to become insurance brokers. At present, banks are permitted to sell products of only one life, one non-life and one health insurer.
In the meanwhile, the net non-performing assets (NPAs) of several banks have also risen above three per cent, which disqualifies them from becoming brokers. Draft guidelines on banks becoming insurance brokers by the Reserve Bank of India (RBI), released in November 2013, had said only banks with net NPA of less than three per cent for the previous financial year would be eligible to become brokers.
During FY14, net NPAs of nine listed banks including, United Bank, Allahabad Bank, Punjab and Sind Bank and Indian Overseas Bank, among others, had crossed three per cent.
Since bancassurance follows the corporate agency model, non-bank promoted insurance companies and late entrants to the sector do not have any bank partner to sell their policies. The finance ministry circular said the model of corporate agency be dispensed with and each bank needed to train and orient its staff to conform to the then finance minister’s Budget announcement.
PSBs were asked to implement the order of the ministry by January 15, 2014. However, several PSBs had vehemently opposed this proposal after which the finance ministry had to take a step back to review this model.
After this, RBI had set up a committee with representatives from banks and insurers on this model. While the final report is not out yet, sources said the panel, in its interim report, had suggested banks should not be mandatorily asked to become brokers but be given a choice to exercise this option at their own will.
There are several PSBs that have insurance joint ventures. Hence, companies such as Canara-HSBC-OBC Life Insurance, SBI Life Insurance, IPNB Metlife India Insurance among others, will have to part with their strong existent bancassurance network.
As an insurance broker, the bank is liable to customers with respect to an insurance policy, unlike the case with a corporate agent. The liability is high, especially since the bank will sell products of multiple insurers.
At present, about 65-70 per cent of total premiums for the bank-promoted and insurers with bank partners comes from the bank channel. If this channel is opened up, each bank will have to provide customers with all insurance company products, something which banks said is a violation of their joint venture agreements with their respective partners.