IRDA chairman not convinced on opening up bancassurance to two insurance companies

In 2009, an IRDA Committee had recommended opening up bancassurance to two insurers. But IRDA chairman J Hari Narayan does not seem convinced. IRDA may also allow brokers to offer consultancy services, even for insurance products that they have not sold themselves

The Insurance Regulatory and Development Authority (IRDA) had set up a committee in 2009 to examine whether banks could be allowed to sell policies of more than one life and one general insurer. The report of the committee suggested allowing two life and two general insurers to tie up with a bank. But at the recent ASSOCHAM global insurance summit, IRDA chairman J Hari Narayan told Moneylife that he was not convinced if the solution to the problems identified by the 2009 study lie in opening up bancassurance to two insurers.

Mr Narayan told Moneylife, "We need to enable insurance outreach by increase in number of bank branches to sell insurance products. As of today, a small percentage of bank branches are pursuing the same. If the number of branches selling insurance does not increase, there is less value with the same branch selling two insurers' policies. IRDA has not finalised its decision."He suggested the possibility of looking at state-wise or segment-wise regulatory changes to open up bancassurance.

Media reports have quoted the IRDA chairman as saying, "Banks have a problem in understanding insurance products. There are issues to deal with before banks can sell insurance correctly with proper advice to customers." Some insurance company heads seem to be in agreement. (See: Bancassurance: The more the merrier?).

 But the subject is still open for debate. We found varying replies from the insurance industry, based on the insurance companies' dependency on bancassurance. Insurers who have little business from bancassurance have less to lose and, hence, don't mind allowing banks to sell products from more than one life and one general insurance company. On the other hand, some insurance companies with significant support from bancassurance even refused to talk about the issue.

The jury is still out on this important debate. We have to wait to see what IRDA finally comes up with.

IRDA is also considering permitting broking consultancy. It will allow brokers to provide consultancy services for claims processing for anyone, and not just when the policy is sold by them. Obviously, there is keen interest from the broking community as it will allow brokers to expand and offer additional services without an increase in infrastructure and they can piggyback on the contacts developed in the industry for further business.

A recent McKinsey study states that an agency force is "all pervasive", but least productive. Having a persistency ratio of less than 75% is unhealthy for the industry. There are few insurers with greater than 75% persistency ratio and an equal number with less than 50% persistency ratio. The IRDA chairman touched upon the possibility of improving persistency ratio with a proper business model and an effective communication channel. He told Moneylife that 75% persistency ratio was too a high number to ask for.

According to an IRDA circular, "The average agent persistency rate is uniformly set as 50% which is to be reckoned only on number of policies. The persistency rate requirements will be effective for all agency renewals that are due from 1st July, 2014." In February, IRDA had pegged the persistency ratio at 50% with a rider that it should go up to 75% by 2015-16. Now the watchdog has relaxed these persistency norms for insurance agents, by removing the rider that the ratio should go beyond 50%.



Avinash Datta

6 years ago

The expereince of LIC in bancassurance is very bad. Many Banks haa switched over their loyalty and how many customers are snatched by these Banks are matter of study. It seems that LIC has not take any lesson from this.

Sunil Date

6 years ago

Banks are forcing their customers to buy policies for safe deposit lockers or for loans etc. More the merrirer. Now they wil sell one each policy of both the companies. Has IRDA done any independant survay of how policies are sold by banks and customer satisfaction ?

My friend and customer was persuaded (forced) to buy a 50K 10 yr pension product for his spouse who is a H/W; all for a safe deposit locker.

My colleague suggested to his friend to get the loan sanctioned and then cancell the hardsold insurance plan in free look period. This advise, because, the bank manager was not ready to compromise on the friend buying a pure term policy.

Melvin Joseph

6 years ago

It is nice to hear some sensible comment from the IRDA chairman against the industry body who is lobbying for distribution of insurance products of multiple companies.
Why banks want to sell multiple products. Is it in the interest of the customers? Absolutely No. They have already tied up with some insurance companies and now better terms and conditions are offered by other insurance companies! So, they want to go for it. If it is allowed, nobody in the bank will be selling the products of the first company.It is an accepted fact that bank employees are hard core missellers, because they cannot sell an insurance policy in the professional way.
The solution lies with the regulator.At the product approval stage, it should ensure that only genuine policies are approved. There should not be any hidden charges in the policies and make the charge structure transparent. Later, ensure that no insurance company is in a position to pay anything more than the approved commission to the agents/brokers/bancassurance partners.If such a rule comes, there will be product standardisation and simplification.In such a situation, no banks will be interested in selling multiple brands, because their benefits will be the same.If IRDA can do this, customers will benefit in the long run. Till that time, it will be a golden chance for some bank employees/managers to win foreign trips by selling wrong policies to the customers. Please read the attached link for more details on bank misselling.

Vikas Gupta

6 years ago

The Banks should not be allowed to sell insurance of even single insurance company. Most of the policies sold by the Banks are missold. Data is available about the Surrender & non-renewal of policies sold by Banks which is very high in comparision to other policies.

Deepak Khemani

6 years ago

Finally some sense in the decisions take by IRDA, if bank has tie up with more than 1 Insurance Co. then they will sell products wherein they get the highest Comission, customer be dammed.
The other day I was standing in a branch of SBI and a "poor" customer walked in to open a Savings Account so that he could send back his monthly earnings to his family at his native place, the concerned person told him clearly " take a single premium plan(ULIP) of 30,000/= only then will I give you an Account Opening form"


Raj Pradhan

In Reply to Deepak Khemani 6 years ago

that's hardselling. Not just ULIP, but also FMP. Banks try to sell FMP instead of FD.

Reliance drills two dry wells in KG-D6 block

Since last year, RIL has witnessed a drastic drop in reservoir pressure and water ingress in its gas producing wells, leading to a drop in output from 61 mmscmd to less than 44 mmscmd, instead of rising as planned to over 70 mmscmd

New Delhi; Reliance Industries (RIL) has drilled two new wells in its KG-D6 gas block, but both have turned out to be almost dry, with very little hydrocarbon presence, vindicating the company's stand that indiscriminate drilling will not help solve the problem of falling gas output, reports PTI.

"The wells were disappointing, showing presence of very little gas. It is simply not economical to produce gas from those wells," a source privy to the development said.

In July, RIL completed drilling of two wells to take the number of producer or development wells in the Dhirubhai 1 and 3 (D1 and D3) gas fields of the eastern offshore KG-D6 block to 20. It, however, decided not to make a further investment to connect them to production facilities and transport the gas by pipeline to its onshore plant.

"The two wells will not even yield 1 million standard cubic metres per day," the source said.

Since last year, RIL has witnessed a drastic drop in reservoir pressure and water ingress in its gas producing wells, leading to a drop in output from 61 million metric standard cubic metres per day (mmscmd) to less than 44 mmscmd, instead of rising as planned to over 70 mmscmd.

The company wants to carry out more geological and reservoir studies and induct better technology before drilling more wells, but the oil ministry, on the advice of its technical arm, the Directorate General of Hydrocarbons (DGH), has ordered RIL to drill 11 wells by March next year.

RIL's opposition to indiscriminate drilling has led to the oil ministry contemplating the disallowance of cost-recovery of a third of the $5.69 billion investment that the company has already incurred on field development.

Sources said RIL drilled one of the two wells over the main reservoir/channel of D1 and D3 and the other outside, but both gave disappointing results.

The D1 and D3 gas fields currently produce 37.1 mmscmd of gas and another 7.4 mmscmd comes from the MA oil field in the same block.

Of the 18 wells drilled, completed and connected to the production system in the KG-DWN-98/3 (or KG-D6) block, only 16 are currently producing, as RIL had to shutdown two because of high water ingress, they said.

Sources said the ministry and DGH are upset with RIL because the billionaire Mukesh Ambani-led firm has not adhered to its commitment to drill 22 wells by April, 2011, as laid out in the 2006 field development plan for D1 and D3.

They feel the main reason for the fall in output is this unmet drilling commitment, whereas RIL has been trying since early this year to explain that more wells will not lead to any significant increase in production.

Output, according to the company, will rise only when new pools or reservoirs of gas are brought into production. This can happen only when geology is studied afresh with deep-sea exploration specialist BP Plc, which has taken a 30 per cent stake in KG-D6.
RIL has so far spent $5.694 billion on the two fields and has recovered $5.258 billion from the sale of gas produced.

However, the oil ministry wants to limit cost recovery in the block in proportion to the slippage in output with reference to the stipulated timeline, reducing RIL's entitlement to $3.405 billion.

RIL, however, feels such a move would be illegal, as the Production Sharing Contract (PSC) does not have any such provision and the $1.85 billion already recovered by RIL cannot be reversed.

"If the PSC were indeed to be re-written to link cost recovery to levels of production, it would also have to include provisions for allowing the contractor (RIL) to recover costs in excess of his investment in case he were to achieve a rate of production higher than that estimated at the time of capex approval," RIL senior vice-president (commercial) B Ganguly wrote to the ministry on 16th September.

RIL said as per the PSC, all costs and production numbers provided in the field development plan (like the one approved for KG-D6 in 2006) are only estimates based on the understanding of the reservoir and the market prices at any given point of time and "such estimates cannot be construed as constituting a commitment under the PSC."

"There is no provision under the PSC that can limit cost-recovery to either production levels achieved by a contractor or to the extent that facilities are utilised under a development plan at any given point of time," RIL wrote.




6 years ago

All bluff. All his good news coincides with insiders selling stock. Remember 2008 when they spoke of new gas finds and oil in the bottle . The nest investors heard was that they made a cool sum in the highs by selling treasury stock. Now hammer the stock down and add back stock to treasury or promoter front cos so that next round of trading can happen! He sold shares to LIC at cool prices. Will buy it back atleast 50% lower na. Uske liye aise news zaroori hai. Botttom line, cant rely on reliance.

RBI issues norms for setting up of IDFs by banks, NBFCs

An NBFC sponsoring IDF-Mutual Fund should have a minimum net owned funds (NOF) of Rs300 crore and capital adequacy ratio of 15% while sponsors of NBFC-IDFs will have to contribute a minimum equity of 30% and a maximum equity of 49% of the IDF-NBFC

Mumbai: The Reserve Bank of India (RBI) today announced guidelines for permitting banks and non banking financial companies (NBFCs) to set up Infrastructure Debt Funds (IDFs), to help meet long-term financing for the sector, reports PTI.

IDFs would be set up either as mutual funds (MFs) or NBFCs, RBI said in a statement.

Outlining the parameters for setting up IDF-MF, the central bank said an NBFC sponsoring IDF-Mutual Fund should have a minimum net owned funds (NOF) of Rs300 crore and capital adequacy ratio of 15%.

Besides, its net NPAs should be less than 3% of net advances and the NBFCs should have been in existence for at least five years and earning profits for the last three years, it said.

Banks and NBFCs would be eligible to sponsor (as defined by SEBI regulations for mutual funds) IDFs as mutual funds with prior approval of RBI, it said.

It also said that the Securities and Exchange Board of India (SEBI) has amended the (Mutual Funds) Regulations to provide regulatory framework for IDF-MFs.

Banks acting as sponsors to IDF-MFs would be subject to existing prudential limits including limits on investments in financial services companies and limits on capital market exposure, it said.

The finance minister, in his budget speech for 2011-12, had announced setting up of IDFs to accelerate and enhance the flow of long term debt in infrastructure projects for funding the government's ambitious programmes in the sector.

The government has said that the infrastructure sector requires an investment of $1 trillion during the 12th Five Year Plan beginning next fiscal. Of this, 50% of the funding is expected to come from the private sector.

As for the setting up of IDF-NBFC by banks and non-banking finance institutions, sponsors of NBFC-IDFs will have to contribute a minimum equity of 30% and a maximum equity of 49% of the IDF-NBFC.

Banks and NBFC-Infrastructure Finance Company (NBFC-IFCs) may sponsor IDFs as NBFCs with prior approval by RBI.

Post investment in the IDF, the sponsor must maintain minimum CRAR and NOF prescribed for IFCs.

The IDF should be assigned a minimum credit rating 'A' or equivalent of CRISIL, Fitch, CARE, ICRA or equivalent rating by any other accredited rating agencies, it said.

Tier II capital cannot exceed Tier I. Minimum capital adequacy ratio should be 15% of risk weighted assets, it added.

Detailed guidelines for setting up IDFs banks and NBFCs would be issued separately, it said.


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