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New Delhi: The Insurance Regulatory and Development Authority (Irda) published fresh draft guidelines on bancassurance on Tuesday under which banks would be appointed corporate agents of an insurance company. But they don’t seem to be in consonance with directions issued by finance minister P. Chidambaram on 1 October to the insurance industry.

In his note, the finance minister had clearly indicated that banks wanting to sell products of more than one insurance company should opt to become brokers. As brokers, not only would the banks become responsible sellers but they would also be able to provide products from different insurance companies.

“It is desirable that banks may act as brokers where the fiduciary responsibility of the bank will be to the policyholder," the order stated. “This will provide the intended policyholder a bouquet of products and will also prevent mis-selling," the order noted.

However, the draft guidelines have done little to further this directive, instead lending more flexibility to the previous draft guidelines on bancassurance issued in November last year.

According to the guidelines, banks were allowed to sell products of multiple insurance companies, but in a controlled manner across different zones. The previous draft divided the country into three zones and the insurer could tie up with the same insurer in a limited number of states in each zone.

Now a bank can either continue to have a single relationship with an insurance company or with multiple insurers across states. The guidelines state: “A bancassurance agent desirous of tie up with more than one class of insurer shall be allowed to do so under these regulations to a maximum of 20 states/Union territories and a minimum of 10 states/Union territories."

So, in other words, a bank will need to tie up with the same insurer for at least 10 states, up to a maximum of 20. Considering that the guidelines have divided the country into 40 regions (including states/Union territories and major cities), this would mean that a bank can have a tie up with a maximum of four insurers from one sector.

“Essentially, banks have three options now: first is to tie up with one insurer across the country, second have a limited tie-up across states and third become an insurance broker," said G.V. Nageswara Rao, managing director and CEO, IDBI Federal Life Insurance Co. Ltd.

The insurance industry has voiced concerns about this model. “It benefits a few insurers to some extent, but it does not benefit the customer. He does not get more choice. Instead, if he moves from one city to another, he will need to talk to a new bank altogether," said P. Nandagopal, managing director and CEO, IndiaFirst Life Insurance Co. Ltd.

The draft guidelines, however, have allowed insurers to pay banks other administrative and service costs. Current rules forbid any payment other than commissions, subject to a maximum of 2.5% of the annualized premium. However, the draft has reduced the commissions payable to the banks. According to the circular, a bancassurance agent can get commissions only up to 85% of the commissions allowed under the Insurance Act, 1938.

The draft guidelines have also looked at some of the equity deals between the insurance company and the bank where the insurer either sold a stake for free or at a huge discount.

According to the draft guidelines, if an insurance company issues equity shares to a bancassurance agent or a proposed bancassurance agent at a price which is below the Market Consistent Embedded Value (MCEV) of the equity, the difference of MCEV and the issue price shall amortized over a period of five years or during the tenor of the agency, whichever is earlier, from the date of sale and such amortized amount shall be part of the remuneration to the bancassurance agent.

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