New Delhi: The finance ministry has allowed banks to sell insurance offered by more than one company, in keeping with finance minister P. Chidambaram’s articulated desire to reform the retail finance sector, although the measure comes with the caveat that the lenders will have to set up broking arms before they can do this.
It has also made it easier for insurance companies to launch new products, and invest.
Currently, the insurance regulator allows a bank to sell the products of only one insurer under the bancassurance model.
Apart from the obvious benefit of increasing the number of insured in the country, the move will also make banks more accountable for the policies they sell.
Announcing the agreement reached with the Insurance Regulatory and Development Authority (Irda) at a press briefing on Monday, Chidambaram said it was desirable for banks to act as brokers and that the fiduciary responsibility of the bank will be to the policyholders. “This will provide the intended policyholder a bouquet of products from which he/she may chose the appropriate product based on his/her needs and will also prevent mis-selling,” he added.
Though banks have always had the option to set up a broking arm, they have preferred to remain agents (which means the insurance company, and not the bank, is responsible for any mis-selling). In a report by the committee on bancassurance last year in June, Deepak Satwalekar, a retired chief executive officer (CEO) of HDFC Standard Life Insurance Co. Ltd and a member of the committee, had pointed to the reluctance of banks to assume any responsibility or risk for their mis-selling. “This is a very good move. If banks are keen on selling products of more than one company, then they should also accept responsibility for the sale of such products. Banks are the biggest mis-sellers, but as agents are not responsible for their sales practices,” Satwalekar said on Monday.
“Now the onus to sell properly would rest on the bank and not on the insurer,” said Atanu Sen, managing director and CEO of SBI Life Insurance Co. Ltd.
Banks will have to upgrade skills to understand insurance products. They will have to apply for a licence and open a subsidiary to act as a broker. “Reserve Bank of India has been reluctant to allow banks to become brokers because it doesn’t want them to contaminate their balance sheets. So the finance minister will have to ask the regulator to not intervene,” said Satwalekar.
According to Irda’s annual report for fiscal 2011, bancassurance accounted for about 30% of the new business collection for private insurers.
The tax department will review issues such as a reduction in service tax on first-year regular premium as well as single-premium policies, scrapping service tax on social security insurance schemes and microinsurance policies, and treating annuity policies on par with subscriptions to the National Pension Scheme.
Chidambaram has asked the department of revenue to finish reviewing the suggestions by 10 October “so that appropriate decisions may be announced shortly thereafter”. A similar meeting with the general insurance sector will soon be scheduled.
The finance ministry is adopting a faster “use and file” approval process for standard products, which is good news for India’s 24 life insurance companies. The current “file and use” procedure means filing with Irda and getting its approval before going to the market. The regulator will prepare a list of standard products that qualify for use and file. Under the system, once the insurer submits the product to the regulator, if there is no objection within 15 days, marketing can begin. Irda will also draw up guidelines so all products can be cleared within a period of 30 days. It will also evolve and notify guidelines to reduce arbitrage between unit-linked insurance plans (Ulips) and traditional products. After regulatory cost caps on Ulips, insurers moved to selling traditional policies. According to Irda, in fiscal 2011, 57.63% of first-year business was concentrated in non-linked business.
Chidambaram said Irda will also allow debt investment of up to 12.5% of investments in products rated lower than AAA (the highest credit rating). It will also allow investments in infrastructure special purpose vehicles (SPVs) floated by any company where the SPV is a wholly owned subsidiary of the parent firm and the debt instrument issued by the SPV is guaranteed by the parent company.
“This is a good move. Earlier the investment norms were risk free, but had lower yields,” said Amitabh Chaudhry, managing director and CEO of HDFC Standard Life.
The finance minister has also accepted the recommendation of the industry to do away with caps on different expenditure heads so long as the overall management expenses were within the overall limit specified in the rules.
“The caps will not be granular in the sense that it will not further get into different cost heads like salaries, infrastructure. However, the cap on commissions will stay. Even for the corporate agents, the insurers will still not be allowed to pay anything other than commissions,” said J. Hari Narayan, chairman of Irda
Draft guidelines on the proposed changes are expected shortly from Irda, and the final rules by November.