Open architecture in insurance sector
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We ask the experts whether open architecture in insurance distribution (where distributors can sell products of multiple insurers) will bring greater efficiencies or will it be counterproductive
Kapil Mehta, co-founder, SecureNow Insurance Brokers
Open architecture is good if two conditions are met. First, it should operate at the point of sale, where choice is presented to customers. Second, the salesperson should represent the buyer and not the insurer. These two conditions are not properly met.
Corporate agents can sell multiple insurers’ products. At the aggregate corporate level, this condition is fulfilled but at the sales level, only one insurer’s products are offered, making open architecture break down where it matters most—the front line. The purpose then, to partner with multiple insurers, is to negotiate better terms rather than offer choice.
When choice is provided, buyers assume that their interests are put ahead of the insurers. But that is not always true as agents that sell multiple products, represent insurers. In many of the newer distribution entities such as Insurance marketing Firms (IMFs), Common Service Centers (CSCs) and web aggregators, it is not immediately clear whose interest comes first. This anomaly should be corrected by having one of two simple distribution models: either be an agent and sell one insurer’s products or be a broker and follow open architecture. All intermediaries must fall into one of these categories. There also needs to be a product-wise distinction where only licensed brokers can follow open architecture on commercial insurances, which are more complicated than individual products.
Tarun Chugh, managing director and chief executive officer, Bajaj Allianz Life Insurance Co. Ltd
Open architecture will be a game changer for the life insurance industry. As seen in the mutual funds space, investors can buy multiple funds from one broker. Similarly, in life insurance, customers can buy plans from a bank that acts as a broker for more than one insurer. Hence, the model empowers customers to select their life insurance plans as per their choice at competitive prices. It will also reduce chances of mis-selling, with the intervention of multiple regulators like Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority of India (Irdai). The compliance and monitoring structure enforced by Irdai is bound to improve customers’ buying experience through bancassurance channels. For the banks, this will increase productivity and also boost competition. Public-sector banks are slowly seeing the benefit of third-party income and we expect they will see the gains in times to come. A few private-sector banks have already moved to a semi-open architecture and are seeing the benefits.
Open architecture will result in larger insurance penetration, accelerating financial inclusion and lower distribution costs. The model will find its merit when insurers and distribution channels work together in identifying customer needs and offering the right product. It would be good to see us move to open architecture so that customers get complete choice on a level field.
Anuj Mathur, chief executive officer, Canara HSBC Oriental Bank of Commerce Life Insurance
The enabling environment of the regulations, to promote multi-insurer tie-ups, is a welcome move. But it is pertinent to note that various distributors (most importantly banks) have different priorities and hence it is critical to evaluate the issue from their perspective. What this means is, we should evaluate the value that the regulation brings from a distributor perspective and, most importantly, what is the benefit that the end consumer would get because of this. In this context, it is important that open architecture is not mandatory and it has been left to the distributors to make their choice.
We prefer the tied model (where a distributor can sell insurance products of only one insurance company in the same line of business) to open architecture as this allows both insurers and the distributors to invest in developmental areas like training, system integration and technology-driven service-oriented initiatives. Insurance is a long-term product and it is critical that the customer is offered the right solution and, most importantly, serviced; and engaged over the period of a policy (typically 15-20 years). The challenge with insurers is to ensure that the value of insurance is reiterated to the consumer over the product’s life cycle. A tied model, therefore, allows the insurer, as well as the distributor, to think long term. It is key to customer centricity and is critical for the growth of the industry.
Rohan Sachdev, leader - financial services advisory services, EY India
The idea around open architecture was two fold: greater options for customers when reaching out to a bank for buying insurance, and to reduce the skew in the industry with a few bank-led insurers capturing the market.
But in hindsight, there are challenges around open architecture and these will need to be worked on.
Open architecture has benefited insurers that already had strong bank partners as banks were not keen on experimentation. Hence, the skew continues against non-banking insurers that operate without a financial partner, while the already strong Banking, Financial services and Insurance (BFSI) (BFSI)-led insurers are becoming stronger.
Most banks focus on selling Ulips, which are the current driver of growth. For example: in first quarter, a few bank-led insurers marked over 80% growth. Within Ulips, however, there is not much scope to offer customers different options as the ability to innovate is limited. Hence, the fact that even though one bank is selling multiple insurers' policies, the focus on Ulips negates the customer-first agenda. The need for training of staff within banks on additional products is a challenge as insurance is only a cross-sell item. Hence, the insurers that are succeeding are only those that are ready to invest heavily in the initial years with own manpower at bank branches. Thus it is not a very efficient operating model.