BackBanks can have multiple insurance tie-ups
Open architecture means more choice for customers; banks may not want to tie up with multiple insurers soon
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Open architecture means more choice for customers but banks may not be willing to tie up with multiple insurers immediately. The Insurance Regulatory and Development Authority of India (Irdai) has allowed both to exist, according to a 15 September 2015 notification by it on registration of corporate agents. These regulations will be effective from 1 April 2016.
Corporate agents are entities such as banks that solicit insurance policies for insurers. Agents are individuals doing the same job. A tied agency model, which was applicable till now, allows an agent or a corporate agent to sell policies of only one insurer from the same line of business, whereas open architecture allows them to sell policies of multiple insurers.
In its regulations on corporate agents, Irdai has allowed corporate agents to sell policies of up to three insurance companies in the same line of business. This means a bank can either continue to sell policies of one insurer or up to three insurers. As composite corporate agents, banks under open architecture can sell policies of up to three life insurers, three non-life insurers and three health insurers too.
“Bancassurance is a strong business model, which delivers a lot of value for customers. The discretion has been left by the regulator to the banks for taking an appropriate decision that would best suit them given their operating environment," said Anuj Mathur, chief executive officer, Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd.
Open architecture—though limited to three insurers—means more choice for you. For banks, it means more products to understand and explain.
Here’s what the latest guidelines mean and if banks will be ready to embrace open architecture anytime soon.
The demand for an open architecture
Insurers that are promoted by banks automatically use them as their corporate agents to distribute policies. This channel of distribution is called bancassurance. Given that the industry follows the tied agency model and most of the big banks are already shareholders in insurance companies, non-bank promoted insurance companies found it difficult to tap into the bancassurance channel.
Moreover, after the product reforms that started in 2010 put pressure on costs and led to a big decrease in number of insurance agents, bancassurance emerged as a sought after channel of distribution, bringing the demand for an open architecture on the table.
“Banks have the largest distribution infrastructure for financial services. Also, if you look at the private sector, it is the largest in terms of annual premium collection. This makes a case for open architecture," said Deepak Mittal, managing director and chief executive officer, Edelweiss Tokio Life Insurance Co. Ltd.
Mandating open architecture, which is what Irdai had proposed earlier, didn’t work given that bank-promoted insurers would no longer have monopoly over their bancassurance partner. Also, this would have affected the shareholder agreement and subsequent valuation. So, to address concerns of insurers and also to open the distribution space, Irdai chose to make open architecture optional.
The new regulations
The insurance industry has welcomed the guidelines. “They are very enabling. Banks have become popular because the industry has seen a huge dropout of agents. The persistency of policies is much higher through bancassurance and complaints much lower, making it a popular channel of distribution," said Vighnesh Shahane, chief executive officer and whole time director, IDBI Federal Life Insurance Co. Ltd. “However, what banks need to do is deep dive with one insurance company instead of spreading wide. Penetration of banks, measured as premium to savings account ratio, is still in single digits, which means banks need to integrate further with one insurer. It won’t be easy to deep dive with multiple insurers as insurance is not the core product of banks," he added.
To make sure that customers are able to benefit through open architecture, guidelines have stated insurers can’t force their corporate agents to sell their policies, neither can the corporate agents with open architecture promise exclusive arrangements. “The guidelines have placed policyholder’s interest at the centre. For instance, corporate agents will have to formulate their guidelines around sales keeping the policyholder’s interest in mind. In case of termination of contract, the insurer and the corporate agent need to make sure that policyholders are serviced. This used to be applicable only to brokers but is applicable to corporate agents as well now, which is a welcome step," said Anuraag Sunder, director-insurance, PwC India. “The guidelines also place greater emphasis on governance as it mandates that a corporate agent must have a board approved policy on open architecture and solicitation of insurance business. The regulator wants the board to be more responsible," he said.
Further, the guidelines have made it clear that insurers will not pay any signing fee or other charges to the bank or any other entity to become its corporate agents. “Corporate agents will only get a commission from the sale of insurance products. This means that insurers will not be able to push their products through the corporate agents through non-remunerative means or other cash incentives. The guidelines also state that corporate agents will have to disclose all their tie-ups to the customers and neither the agent nor the insurer can force a customer to buy a specific product," added Sunder.
Will banks open up?
To begin with, these guidelines have put to rest a lot of questions around open architecture. “Despite the Insurance Laws Amendment Act, 2015, in place, we haven’t seen much activity around the hike in foreign direct investments. One of the reasons is that foreign shareholders were waiting for the final guidelines on corporate agencies since mandating open architecture would have affected the valuation of bank-promoted insurance companies. In the next five months, we should see a lot of activity on this front now," said Sunder.
However, it may be some time before banks take to open architecture. “We are hopeful that corporate agents that don’t have equity arrangements with insurance companies or long-term partnerships will move towards open architecture. Some of this will happen within the banks and also with non-banking entities, but given that open architecture is optional, the speed is bound to be slow," added Mittal.
But insurers feel that banks will begin to see merit in open architecture. “Banks that are also shareholders in insurance companies may not immediately take a second partner. So, some of the bigger banks are likely to continue with current partners. But small- to medium-sized banks are interested in multiple tie-ups primarily for three reasons: to offer better choice to customers, drive up efficiency through competition and also to take in a second partner to address different segments. For instance, one insurance partner could support the wealth management business and the second could address the SME (small and medium enterprise) segment" said Mahesh Misra, chief distribution officer, Aviva India Life Insurance Co. India Ltd.
Open architecture may also lead to product segmentation. “It’s unlikely that banks will sell all the products of all partner insurers, since that would mean too much choice with little differentiation to offer. Instead, banks may pick the best product in a special category, say, child plan, of insurer A and retirement plan from insurer B to give the best value to customers," said Shahane.
However, some feel that the industry needs better integration more than an open architecture. “We are also positive about continuing with a single tie-up. This allows the insurer and the bank to devote time to training, standardisation of policies, improving skill levels of sales staff and various other customer centric initiatives," said Mathur, adding that this would also bring focus on system integration, which would ultimately lead to an extended service network across bank branches.
Open architecture gives more choice to customers, but it’s important to make sure that products that are easy to understand and comparable are sold so that the scope of misselling is reduced.
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