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Irda chairman J Hari Narayan.

Irda chairman J Hari Narayan.

Bancassurance deals may face regulatory scrutiny

Bancassurance deals may face regulatory scrutiny

New Delhi: Three deals said to involve the sale of equity stakes by insurance companies to banks may face scrutiny of the Insurance Regulatory and Development Authority (Irda) as they could be in breach of current rules.

Irda chairman J Hari Narayan.

Recent reports and insurance industry executives familiar with the developments have confirmed to Mint that these deals have taken place, subject to regulatory approval. None of the individuals want to be identified.

Industry insiders point to the key concern—that the cash component is being partly set off in the form of future commission income that the purchasing banks will earn.

Irda chairman J. Hari Narayan couldn’t be reached for comment on Tuesday.

MetLife and Birla Sun Life were not available for comment. Aviva denied that any such deal has been struck with IndusInd Bank.

“We have not paid any advance commission since that is illegal, or any upfront payouts," said T.R. Ramachandran, chief executive officer (CEO) and managing director of Aviva Life Insurance. “We are currently in talks with several parties, but have not signed a deal with anyone."

The reason that the regulator will frown upon some of these deals lies in section 40A of the Insurance Act, 1938: “No person shall pay to an insurance agent commission or remuneration in any form more than 35% of the first year’s premium, 7.5% of the second and third year’s renewal premium, and thereafter 5% of each renewal premium." This is applicable for regular premium policies, other than pension plans, offered by life insurance companies that are more than 10 years old. For insurance companies that are less than 10 years old, the first year commission is capped at 40%.

Since the banks haven’t done any insurance business, the upfront payment of cash in lieu of commissions is akin to advance payment of commissions. Further, according to section 64VB of the Insurance Act, an insurance contract does not come into effect unless premiums are paid in advance. So the insurer first needs to collect the premium, issue the policy and only then is a commission paid to the agent. Hence, payment of a commission even before the policy is sold or premiums collected is not allowed by law.

The law may be violated in spirit by disguising this under a different cost head. While the cash deals are to strengthen the distribution channel, the equity deals are more of a shareholder-level transaction and payouts can be dressed differently to circumvent regulations.

“The regulator closely monitors the payments made by the insurer to its bancassurance partner," said Amitabh Chaudhry, managing director and CEO of HDFC Standard Life Insurance Co. Ltd. “This is to make sure that banks are remunerated according to section 40A of the Insurance Act, where they aren’t eligible for any payout from the insurer other than commission and certain co-branded literature. However, discounts in valuation of equity or consideration paid for a brand is a way around this regulation."

Even as new draft guidelines on bancassurance will allow for such deals to take place in the future, they will be able to control the discounts offered to some extent. The draft guidelines clearly say that if equity shares are sold below market value, the difference between the market value and purchase price “shall be 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".

In other words, the discount in equity (the difference between the fair value and the purchase price) will need to be recovered by the insurance company. This will in turn require an insurance firm offering a discount to factor in the business volumes that its bancassurance partner will need to get so as to recover the cost.

Even as projections regarding future business will tend to be more realistic, in turn reflecting on the equity discounts, the draft guidelines may discourage banks from selling insurance products.

“Treating amortization of a valuation discount as part of compensation may result in significantly lower commission payout to the banks," said Sanket Kawatkar, practice leader (life insurance) for India at Milliman Inc., a financial consultancy. “This may run the risk of banks losing interest of future bancassurance sale." However the guidelines are quiet on what happens if the insurance firm is not able to recover costs.

The regulator recently approved the sale of a 4% stake in Max New York Life Insurance Co. Ltd to Axis Bank Ltd.

Rajesh Sud, managing director and CEO of Max New York Life, said it didn’t offer any upfront payouts to Axis Bank. “We have not paid any upfront commission nor have we funded Axis Bank to buy a stake. However, the value of the deal is confidential," he said.

deepti.bh@livemint.com

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