Banking on Insurance for all

By TCA Srinivasa Raghavan
Editorial Adviser to the CEO
The Hindu Group

The Insurance Regulatory and Development Authority (IRDA)

recently allowed commercial banks to sell insurance policies of several insurance companies, instead of just one as is now the case. In short, they need no longer be ‘sole stockists’.

Banks that opt for this will not have to start a separate entity to apply for a broking licence. Instead, they will need to put aside a deposit of Rs 50 lakh. It is not compulsory for them to become a seller of insurance, at least not yet. In due course, the public sector banks could be forced to do so because it is the finance ministry which has been pushing this idea.

Basically, in the short term, the new policy is intended to lower the cost of sales to insurance companies by passing these costs on to banks in return for a commission. The idea is also to promote long term savings.

If more people buy insurance, especially life insurance, the pool of long term savings goes up and this will speed up the growth of the long term bond market. At present this market is underdeveloped because enough long term funds are not available. A thriving market for long term bonds is a must for the development of infrastructure finance.

It does not seem likely, however, that the banks will immediately see a very useful business opportunity here. The degree of responsibility and costs associated with the sale of insurance products will almost certainly not to be their liking. Besides, banks may prefer to remain on the agency model, which is still allowed. Nor is the Reserve Bank of India likely to be well disposed towards the idea. Its approval is needed for a bank to enter the insurance broking business. It also regards banks in insurance as a threat to financial stability.

ICICI Bank, HDFC Bank, SBI, IDBI Bank, Bank of Baroda, Canara Bank, Bank of India, and Punjab National Bank have their own insurance companies, and the potential for conflict of interest is always there. It should be noted though that to limit the damage from such potential conflicts not more than 25 per cent of all insurance business can be placed with a bank’s own insurance company. IRDA Chairman TS Vijayan, has been quoted as saying as follows:

“There have been informal discussions with RBI. People have reservations with the word broker’. Broker regulations are more in tune with larger risks like reinsurance. But we are not expecting banks to sell huge risk. It is a personal line of business for them. This idea will get acceptance widely, among both companies and banks. Today, a bank is the corporate agent of one insurance company (Life and General). While an agent represents the company, a broker represents the customer. As such, banks utilise own customer base and hence represent the customer.”

That said it is important to understand the legal difference between an agent and a broker. Thus, whereas an agent represents the interests of the seller, namely, the insurance company, a broker represents the interests of the client, namely, the buyer of the insurance. This subtle change alters the redressal options for aggrieved customers and could lay banks open to a host of court cases.

In the end, though, whether an idea is good or not must be judged by seeing what it means for the common man. On balance, when everything has been considered, it does seem as if the ordinary people will benefit, because of two reasons: better access to insurance products and the altered relationship between buyer and seller.

This alone is a powerful reason for persuading banks to add the sale of multiple insurance products to their portfolios.