Telecom players are in a situation where neither can they shut operations easily nor they can survive due to uncertain regulatory environment. This is more like the famous dialogue of Ajit from a Bollywood film, “Dump this man in liquid oxygen. The liquid won’t let him survive, the oxygen won’t let him die”
Last week, the finance minister came out in complete support to have banks set up broking arms to sell products from multiple insurance companies to put the onus on the banks to have properly trained personnel that can possibly reduce mis-selling. Will it really happen
The Insurance Regulatory and Development Authority (IRDA) revised exposure draft on bancassurance has done away with the confusing zonal tie-up, but has left door open for banks to remain as corporate agent or to go with broking route. It will bring cheer to bank-sponsored insurance companies as the zonal tie-up was intended to benefit insurance companies lacking bancassurance alliance. Industry feedback on the earlier exposure draft may have led to the newly proposed guidelines. Bank-backed insurance companies may have influenced IRDA to go back to the status quo.
The revised draft also gives banks option to avoid finance minister P Chidambaram’s diktat on broking license to sell products of multiple insurance companies. Bank-backed insurance companies like ICICI Pru Life, SBI Life, HDFC Life, IDBI Federal, Star Union Dai-ichi, Kotak Life and IndiaFirst will benefit as banks like SBI, HDFC, ICICI, IDBI, Bank of Baroda, etc, can continue the existing tie-ups across the country. It will leave less scope for insurance companies like Bharti AXA Life and General, Aegon Religare, Aviva, etc, to find banking partners for their selling products.
According to GV Nageswara Rao, MD & CEO, IDBI Federal Life, “The new draft guidelines give choices to the bank on how it would like to structure its bancassurance distribution and it is a welcome move. The earlier draft made it mandatory for a bank to tie-up with a minimum of two insurance companies, which has been dispensed with in the new draft. A bank can choose to work with only one insurer on pan-India basis, which is positive and in the interest of customers.”
Amitabh Chaudhry, MD & CEO, HDFC Life said, “Instead of mandating zonal restrictions, the new exposure draft gives the bank a choice of becoming a broker or staying as a corporate agent. As a broker, the bank has no limit on the number of tie-ups whereas as a corporate agent it can decide to stick to one insurer or choose to tie up with multiple insurers. Broadly, a bank would need to make a choice of investing in one strong symbiotic relationship or fragmented relationships across multiple insurers. What the regulator has done is provide different options to banks to choose based on their risk profile and their long-term strategy for fee-based income. This option didn't exist earlier and now it does. So, it is good for banks. How banks will exercise this option is difficult to answer at a generic level.”
The new change in the revised draft is as follows—“A bancassurance agent desirous of a tie up with more than one class of insurer shall be allowed to do so under these regulations to a maximum of 20 states/Union Territories and a minimum of 10 states/Union Territories.” The guidelines has retained the following—“One bancassurance agent should not tie up with more than one life, one non-life, one standalone health insurance company and one each specialised insurance company in any of the state or Union Territories.”
It means that banks can go with same life, non-life, standalone and specialised insurance company across the country. In case they want to open up with another insurance company from one sector, they have to do it in minimum 10 regions (states/Union Territories/major cities) and maximum 20 regions. The country is divided into 40 regions. In short, one bank can tie-up with one to four insurance companies from same sector. It gives the bank complete freedom to make decisions and hence nothing major will change than what is present today.
Mr Rao adds: “Whether a bank which has promoted an insurance company would tie up with more insurers is a choice for the bank to make, although normally you would not expect the bank to work with other insurers. The exception can be when the insurer is not present in certain geographies or in certain product segments. A broker license allows a bank to choose the best set of products from all insurers to offer to its customers. However, it is also more complex to operate and it would require sophistication on part of the bank to handle on its own training as well as operational processes.”
Mr Chaudhry says, “The key question to consider for any bank is will an additional tie-up increase the insurance penetration and bring in additional new business or will it merely mean splitting of the existing business between two insurers at additional costs of managing the relationships? Banks will have to weigh the option of providing the choice to the customer with the benefits of having their own promoted insurance company getting full access to their network.”
It will have to be seen if the FM’s talk about banks setting up broking arms gets anywhere. The Reserve Bank of India (RBI) is not in favour of allowing banks to set up broking arms as their performance will affect the balance sheet of the bank itself, which will not be in the interest of the depositors. Moneylife is of the opinion that making banks accountable has not been successful till now and going for an open architecture can further complicate the matter.
Standalone insurance companies are Max Bupa, Apollo Munich, Star Health and Religare. Specialized insurance companies are ECGC (Export Credit Guarantee Corporation), ESIC (Employees’ State Insurance Corporation) and AIC (Agriculture Insurance Company).