While the Reserve Bank of India (RBI) has bought out final guidelines for banks to become insurance brokers, high liability and lower revenue from this model may dissuade banks from doing do.
To facilitate an open architecture of bancassurance where a bank is enabled to sell products of all insurance companies, RBI had earlier brought out draft norms on the same.
Bancassurance, which refers to banks selling insurance products, now follows a corporate agent structure. This means that banks sell insurance as a corporate agent and these regulations allow each bank to sell insurance products of one life, one general and one health insurance company each.
As per the final RBI norms, a bank can enter insurance broking only if their Capital to Risk (Weighted) Assets Ratio is 10% and above and their level of net non-performing assets is 3% or below. RBI said that the net worth of the bank should not be less than Rs 1,000 crore, compared to Rs 500 crore criteria mentioned in the draft guidelines of RBI.
Insurance players also agree that unless they are forced to do so, large banks are not likely to voluntarily become insurance brokers.
Amitabh Chaudhry, MD & CEO of HDFC Life said that unless mandated to do so, banks may not be interested in becoming brokers. He said it was easier to be a corporate agent than a broker especially since the bank would be liable for the policies sold in the latter model.
There was a call to have an open architecture of bancassurance in the insurance industry since there were several late entrants in the market which did not have a bank to tie-up with.
Almost all the private and public sector banks either have JV agreements or are corporate agents of insurance companies. Banks like ICICI Bank, HDFC Bank, Axis Bank and YES Bank apart from State Bank of India, Punjab National Bank, Oriental Bank of Commerce, Canara Bank are corporate agents.
An existing JV agreement would restrain players from opting for the broking route, said the chief executive of a mid-size private life insurer. “Once these banks become brokers, they would not be in a position to push products of their group companies. Private insurers, which get almost 60-70% of their new business from these banks, may see a sudden slump if their parent bank becomes a broker. This is not something the shareholders would approve,” he said.
As banks have already tied-up with existing players, others like Reliance Life Insurance and Edelweiss Tokio Life Insurance do not have a bancassurance partner. On the other hand, players like Canara HSBC OBC Life Insurance that has three bank partners depends 100% on the bancassurance channel to procure business.
Rajeev Kumar, chief and appointed actuary at Bharti AXA Life Insurance said that the regulator could have a model wherein banks are able to earn higher revenues as brokers. “This will be an incentive for them to become brokers. While not all banks would want to become insurance brokers, even if one or two marquee players take this step, others may follow later,” he said.
Insurance Regulatory and Development Authority of India (IRDAI) had also favoured an open model of insurance distribution by banks. While proposals like one bank distributing insurance in certain geographies and others in other geographies was mulled, these were not favoured by the stakeholders.
Sector experts said that there could also be newer models between the current corporate agency model and insurance broker model to help open up the sector. Here, a bank could be enabled to sell two policies of life, non-life or standalone health companies to begin with.
Former finance minister P Chidambaram in his budget speech had also said that banks could become insurance brokers to boost insurance penetration, which stands at 4.1% of the Gross Domestic Product (GDP).
However, banks that had a joint venture agreement with insurance companies had expressed their discontent with this proposal. This would have meant that they had to sell products of all insurance companies.
As an insurance broker, the bank is liable to consumers 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.
This too, said the chief distribution officer of a private general insurer would be a deterrent for banks since they would not wish to take risks on the books, be it a subsidiary or a joint venture.
RBI has also said that the bank should have made a net profit for the last three continuous years and that the track record of the performance of the subsidiaries, if any, of the concerned bank should be satisfactory.