IRDA has released draft guidelines on bancassurance tie-ups for insurance companies. The insurance regulator has sought feedback on these guidelines by December 12. How would these guidelines impact insurers and banks in product distribution?

We are delighted to share with our readers the views expressed by our panel of experts on the subject. Impact of draft bancassurance guidelines on product distribution

The Committee set up by IRDA on Bancasurance submitted its report in June 2011. Among various recommendations made by this committee the major recommendation was in regard to tie-ups between insurance companies and banks where it recommended a ‘partial open architecture model’ which meant one bank would be allowed to tie up with two life insurance companies, two general insurers and two health insurers. The committee felt that this would allow a bank’s customer some choice in any category of insurance products he wished to purchase from the bank, an improvement from the existing arrangement under which the bank’s customer can only buy product(s) of one life insurer, one general insurer and one health insurer his bank is authorized to sell.

Following this, insurance regulator IRDA has issued draft bancasurance guidelines on 23rd November and has sought views from various stake holders and the public, after receipt and consideration of which final guidelines would be released. The key points in the exposure draft are as follows:
• IRDA proposes to issue a ‘bancassurance agent’ licence which will be mandatory for all banks, Non Banking Finance Companies or NBFCs seeking to distribute insurance products to their customers. These licences would be issued for a period of three years and thereafter on a rollover basis for the same period.
• For purposes of product distribution the country has been divided in 3 zones viz. zones A, B and C. While Zone A consists of 13 metros and states which have a high population density and a high per capita income, Zone B consists of 9 states and Zone C of 17 states/Union territories. A notable omission has been Kolkata which does not appear in any of the three zones.
• One bancassurance agent should not tie up with more than one life, one non-life and one standalone health insurance company in any state, in addition to one each specialised insurance company.
• The draft norms have proposed to limit insurers, other than the specialised insurers, to tie up with not more than nine out of 13 states/cities in zone A and six out of nine states/cities in Zone B. Zone C, which comprises 17 states/union territories, has no restriction.
• The draft guidelines have also suggested capping the commission to 85% of the commission payable under the Insurance Act, 1938.
• Any sale of equity share of an insurance company having a tie up or proposing to have tie-up with the bancassurance agent either by transfer of the existing shares or by issuance of fresh share shall be with prior approval of the Authority. In case of any transfer which is below the Market Consistent Embedded Value (MCEV) of the equity calculated as per the Institute of Actuaries of India AI standard, the difference of MCEV and purchase price shall amortized over a period of five years from the date of sale and such amortized amount shall be part of the remuneration to the bancassurance agent. Ostensibly, the idea behind the above is insurance regulator’s concern that potential of bancassurance channel is largely untapped.

Quoting figures at a recent insurance summit, IRDA chairman J Hari Narayan had said that only around 10 percent of the total bank branch network sell insurance and there too the number of policies sold is between 1 to 1.5 policies, per branch which indicates that the banks have merely scratched the surface. At the same time it must be said that IRDA has always kept on the forefront the interest of policyholder. Also, the regulator has been endeavouring to provide level playing field to all insurers. How well do these guidelines stand on the above two parameters? Does the customer of a bank really get a choice because of this so called ‘partial open architecture’? The answer, sadly, is no. And this should be some cause for concern since banks are expected to evolve as one stop shop in serving the financial needs of an individual. Especially, when there are serious efforts on financial inclusion for the entire population of the country. On providing level playing field to new players you have to concede that an effort has indeed been made in achieving this objective. Insurers, which had tie-ups with banks having a pan country presence and in particular insurance companies which had such banks as their promoters would have to revisit their distribution tie-ups as these banks would have to vacate some space in zones A & B.

In particular, product distribution tie ups insurers such as SBI Life, HDFC Life, HDFC Ergo General, ICICI Prulife, Metlife (In which Punjab National Bank picked up 30 per cent stake), Max New York Life Insurance (in which Axis Bank acquired a minority stake of around 4 per cent early this year), ICICI Lombard have with their promoter banks would be affected adversely. This may not be true of Insurers promoted by more than one bank, more so if promoter banks have a pan India footprint. These insurers include Canara HSBC OBC Life Insurance, India First Life Insurance, Star Union Dai-ichi Life Insurance and Universal Sompo General Insurance Companies. Yet, one would certainly question the wisdom of the regulator in regard to providing a level playing field to all players, both young and new especially since this very objective has not been achieved. Insurers have a lot of issues on the content of these draft proposals which they have already conveyed to the regulator. Among these is the view that zone wise tie-ups with banks are likely to be besieged with a lot of administrative issues both for banks as also insurers. It is highly unlikely that the contents of the draft circular would be retained in the final guidelines. In an unlikely event of this happening, opening up this distribution channel is unlikely to serve any useful purpose. On the contrary, it would worsen matters both for insurers as also banks.