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Rediff.com  » Business » Insurers not hopeful of banks entering broking business

Insurers not hopeful of banks entering broking business

December 03, 2013 15:21 IST

BrokersThe Reserve Bank of India has issued draft guidelines for banks to become insurance brokers, but insurers say there may not be too many takers because of the stringent capital requirements.

According to RBI’s draft guidelines, only banks with a strong capital base can become brokers.

Plus, the banks’ non-performing assets should be below three per cent.

“The industry was not too hopeful of large private and public sector banks entering the insurance broking segment, but we had thought smaller public and private sector banks would see a business opportunity here.

“But with RBI putting stringent norms, these banks, too, will be dissuaded,” said the CEO of a new-age life insurance company.

He added insurers would now have to tap into other areas of distribution such as agency and, online segment.

Another official with a general insurance firm said: “Though some smaller banks had expressed interest in exploring the broking channel, RBI norms will make it tougher for them.”

In its draft norms released on Friday, the central bank had also said the lenders must have a capital adequacy ratio of at least 10 per cent, compared to the regulatory mandate of nine per cent.

Also, these banks should have recorded profits for three consecutive years.

The net worth of such banks should be at least Rs 500 crore (Rs 5 billion), RBI said.

Even otherwise, industry players said it might not be viable for the large private and public sector banks to become insurance brokers, since they were promoters of insurance companies.

Officials noted RBI had made it clear that the banks should focus primarily on their core businesses.

“While RBI has not said anything against banks promoting insurance companies to become brokers, their boards may not give a nod to this arrangement. This clearly accounts for conflict of interest,” said a senior official of a non-bank- promoted private life insurance company.

RBI’s norms follow the regulation by Insurance Regulatory and Development Authority on banks becoming insurance brokers.

In its regulations on licensing banks as insurance brokers, Irda said each applicant (scheduled bank) should have obtained prior approval of RBI before applying for a licence to act as an insurance broker.

The licence, once granted, would be valid for three years after which it will have to be renewed.

The banking regulator has also said that banks will be allowed to conduct insurance broking departmentally; there is no need to form a subsidiary or a joint venture.

According to a senior executive of a mid-size bank-promoted private life insurer, a large part of their business comes from the bancassurance channel.

“If this is opened up to other companies when a bank becomes a broker, this would mean serious competition from others.

Hence, insurers with large bank partners may not favour it, but the final decision will have to be taken by the bank,” the official added.

While RBI’s approval is required for banks to become brokers, Irda has maintained in any dispute arising out of insurance transactions, the jurisdiction of the authority shall prevail.

The finance ministry has been in favour of banks becoming insurance brokers. In his Budget speech this year, Finance Minister P Chidambaram said banks would be so permitted.

According to data for FY13, as much as 65-70 per cent of new premium of bank-led life insurers was generated from their bank partners.

For the life insurance sector as a whole, the bancassurance (corporate agency-bank) channel accounts for 30 per cent of total new business premium collection.

M Saraswathy in Mumbai
Source: