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One of the most debated issues in the insurance sector is whether there should be regulatory reform of existing insurance distribution channels. Globally, there are precedents of insurance companies utilising multiple corporate agents, including banks, to distribute insurance products. However, certain jurisdictions had legislation which were, in effect, barriers to banks getting involved in insurance distribution. For example, the Glass-Steagall Act, 1933 prevented American banks from entering into arrangements with different providers of financial services (including insurance companies). However, with the replacement of the Glass-Steagall Act in 1999, the banking sector began to warm up to fee-based distribution arrangements.
In India, some of the existing Indian insurance joint ventures have been promoted by financial institutions such as banks. Most shareholders' agreements between such Indian banks and the foreign investors (as well as insurance joint ventures with Indian partners who are not banks) contain provisions which require the Indian banks to enter into distribution arrangements with the insurance joint venture they have invested in, thereby creating an exclusive distribution channel for the insurance products created by the Indian insurance joint venture. Given the value associated with having a reliable and broad-based distribution network, these exclusive distribution tie-ups are an essential contributor to the wealth of Indian insurance joint ventures. One of the significant impacts of such exclusive distribution arrangements in the insurance sector was that insurance companies could not use Indian banks which had investments in other insurance joint ventures as distribution channels for their products. There were associated concerns of conflict of interest and questions were raised as to whether such exclusive distribution arrangements were beneficial for consumers, given the lack of choice of products (of various insurance companies) available to them.
Accordingly, the idea of an open architecture of insurance distribution was mooted, pursuant to which it was proposed that banks and non-banking financial companies would act for more than one insurance company through the bancassurance model (i.e. by registering as either a bancassurance corporate agent or a bancassurance broker). The Insurance Regulatory and Development Authority of India (IRDA) published on 23 November 2011, the exposure draft of the IRDA (Licensing of Bancassurance Agents) Regulations, 2011; and on 9 October 2012, the exposure draft of the IRDA (Licensing of Bancassurance Entities) Regulations, 2012. These were perceived to be pursuant to significant policy movement encouraging Indian banks and non-banking financial companies to move from exclusive tie-ups with particular insurance companies to acting for various different insurers in different regions. However, given the market feedback at the time, these exposure drafts were not subsequently notified as final regulations and, therefore, failed to acquire the force of law.
The bancassurance movement received further impetus when, on 23 December 2013, the Ministry of Finance issued directions to all public sector banks to act as insurance brokers which, by its nature, would require public sector banks to act on behalf of their customers (i.e. clients) and provide them with product options from various insurers. This posed a dilemma for public sector banks who were shareholders of existing insurance joint ventures. However, after representations by public sector banks, it appears from lists of existing insurance brokers and insurance corporate agents on the IRDA website, that such public sector banks have not moved from a corporate agency model (with exclusive tie-ups with their insurance joint venture) to an insurance broker model. Since then, the IRDA has published the IRDA (Licensing of Banks as Insurance Brokers) Regulations, 2013 and the RBI has publish circular no. DBR.No.FSD.BC.62/24.01.018/2014-15 (dated 15 January 2015), pursuant to which a framework for registering banks as insurance brokers has been created, without mandating that banks move from their existing registrations as corporate agents to brokers.
A more recent, albeit temporary, concern was the inclusion of provisions requiring multiple insurance distribution tie-ups under the first exposure draft of the IRDA (Registration of Corporate Agents) Regulations 2015 ("Draft Regulations"). The Draft Regulations were published after the enactment of the Insurance Laws (Amendment) Act, 2015, pursuant to which 'corporate agent' were defined as an intermediary and insurance intermediary under Section 2(1)(f) of the Insurance Regulatory and Development Act, 1999, with the objective of replacing the erstwhile corporate agents regulations. Pursuant to Regulation 20 of the Draft Regulations, limitations on business generated from a single insurer have been imposed. Accordingly, corporate agents are prohibited from placing more than 90% of the premium solicited and procured either in life, general or health insurance with any one insurer of the same class in the first year of operation of a registered corporate agent. This cap is reduced in a phased manner such that it becomes 75% in the second year, 60% in the third year and remains at 50% per year from the fourth year onwards. Effectively, the Draft Regulations proposed to make it mandatory for corporate agents (including banks registered as corporate agents) to enter into insurance distribution arrangements with more than one insurance company in each sector of the insurance industry. This set many insurance joint venture partners' hearts fluttering, given that all Indian promoters (registered as corporate agents under the extant regulations) of insurance joint ventures were bound by exclusive tie-ups, and yet had to obtain registration under the new set of corporate agent regulations, once notified.
After several industry representations, the IRDA released a revised exposure draft of the Draft Regulations on 29 May 2015, pursuant to which corporate agents were allowed to choose up to three insurers in a particular line of insurance business (i.e. life, general, health) instead of a minimum of two insurers in this respect. Further, insurance business was no longer proposed to be capped as long as, at the time of the corporate agent's registration, a 'Board Approved Policy' addressing, inter alia, the manner of soliciting and servicing insurance products, and the process of adopting the open architecture policy going forward was put in place. While this comes as a relief for Indian banks which have promoted insurance companies, going forward, the Indian promoters and the foreign investor in such insurance joint venture would need to factor in the policy shift from exclusive distribution to the open architecture – a change which may arrive gradually, but appears certain to arrive in the near future.
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