Undue advantage tilts the scale

Early discussions indicated that an insurance marketing firm would be a halfway house between an insurance broker and an insurance agent—it would be allowed to sell policies of multiple insurers like an insurance broker, but like an agent, it wouldn’t be responsible for the sales and the ultimate liability would rest upon the insurance company. The idea behind a new channel was to fill the gap between insurance agents who were tied to one company alone, and insurance brokers who could sell policies of multiple insurers but were more comfortable with corporate business. And to make it an attractive proposition, the channel had to have best of both worlds.

It was meant to work more like an agent with multiple tie-ups. And to give the firms an edge, it was proposed that they be allowed to sell other financial products as well; pretty much like an IFA, but with the most crucial element missing—fiduciary responsibility towards clients.

The draft guidelines released by the Insurance Regulatory and Development Authority (Irda) on 2 April, however, seem like a huge improvement over the earlier discussions because it is more in sync with the spirit of IFAs. The draft places fiduciary responsibility on the insurance sales persons (ISP), individuals entrusted with sale of insurance within the firm, which means they become directly liable for the products they sell. This is a huge step forward in customer protection and any distribution channel that is allowed such a free run should be equipped to handle the responsibility that comes with it. While ISPs will be entrusted with the sale of insurance policies alone, other financial products will be sold by financial sales executives (FSE). These individuals will have to be duly licenced by the regulators of the product they sell and will conform to the code of conduct set out by them. For instance, to sell National Pension System (NPS), they will need to be certified by the Pension Fund Regulatory and Development Authority, PFRDA.

There are, however, a few chinks in the draft guidelines. The draft restricts the area of operation of an insurance marketing firm to one district alone, and after three years, at the time of renewing the licence, to a state. The rationale is not mentioned but it seems that Irda wants to localize these firms so that they operate through social connections thus precluding chances of fraud. But in doing so it creates an artificial barrier. It makes it difficult for these firms to service policyholders who move cities. Instead, what Irda needs to do is make insurance marketing firms responsible and accountable for their sales, which it has already done in the draft, and align the remuneration to further consumer interest. On the latter, the draft has faltered.

It allows commissions for marketing firms but also allows for payments from insurance companies. The marketing firms can charge insurance companies for expenses like infrastructure and marketing. What’s absurd is that insurers can also pay them performance incentive. This is illogical for two reasons: first, agents and brokers are not allowed extra payments, so this generosity makes for an uneven playing field; and second, and more importantly, insurance marketing firms owe allegiance to policyholders. How is it then justified to accept extra payments, worse, performance incentive? Isn’t that a clear conflict of interest? How can a firm that works in a fiduciary capacity and holds the consumer interest above everything else be paid a performance incentive by insurers? Moreover, why would an insurer want to pay extra for infrastructure and marketing if it can’t stake a claim on the firm?

Compared to an insurance broker, insurance marketing firms have it easy in terms of net worth requirement. These firms need a net worth of at least 10 lakh whereas insurance brokers need 50 lakh. Irda is looking at senior and successful agents to occupy the new space, and hence, a lower net worth. But extra remuneration just doesn’t wash.

Also, these firms are not bound by any limits on the amount of business generated from one insurance company. Insurance brokers, for instance, can’t have more than 50% of business from a single insurance company, and if the company happens to be in the promoter group, then the limit is 25%. Insurance marketing firms can have all their business coming from just one insurance company, but their fiduciary responsibility will prevent them from doing so unless the monetary reward, by way of extra payouts, is too tempting.

Irda has done right to make insurance marketing firms accountable for their sales; this will also ensure that only serious entities enter the business. But it must alter the remuneration structure and cut out any extra payments to ensure a level playing field.

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