Regulator's order to SBI Life puts focus on banks as brokers

The insurance regulator's direction to the SBI Life Insurance Company Ltd. to refund Rs.275.29 crore to policy holders for the absence of informed choice has turned the focus on allowing banks to continue as agents rather than brokers, said experts.

"The spotlight is now on banks being allowed as corporate agents. Banks should ideally be insurance brokers, technically representing the policy holders. Agents, on the other hand, represent the insurers," a senior life insurance official in Mumbai told IANS.

"Even the IRDA (Insurance Regulatory and Development Authority) in its order has said there was no informed choice by the policy holders in the SBI Life case," he said.

"IRDA's action lends credence to the belief that banks are in the forefront in mis-selling.

The SBI Life as the principal no doubt may be primarily responsible. At the same State Bank of India (SBI) as corporate insurance agent is equally responsible for any irregularity," K.K.Srinivasan, former member of the IRDA, told IANS.

On Wednesday, the IRDA ordered SBI Life to refund Rs.275.29 crore excess commission collected to holders of the Dhanaraksha Plus Limited Premium Paying Term policy.

According to the direction issued by IRDA Chairman T.S. Vijayan, SBI Life's policy in question has two premium payment options - single premium and two year premium paying plan.

In case of single premium policy, the premium for the entire policy period is collected upfront and it is lower. The commission paid on that cannot be more than two percent as per the Insurance Act.

On the other hand, the premium under the two-year premium paying plan is slightly higher and the commission rate is 40 percent on the first year premium and 7.5 percent on the second year premium.

According to the IRDA, SBI Life's corporate agents mostly SBI and its associate banks concealed to the policy holders the availability of single premium option.

The corporate agents sold the two-year premium payment plans. However, they collected the premium for two years in advance. This is done mainly to pocket 40 percent commission on the first year premium and 7.5 percent on the second year premium.

The IRDA found out this practice during its onsite inspection of SBI Life's books and after due process issued its refund direction.

The IRDA and the Reserve Bank of India (RBI) have come out with guidelines for banks to act as brokers, but there were not many takers due to stringent norms, said a senior official in a private life insurance company.

Now banks are corporate agents for insurers. A bank can act as an agent for only one insurer. Further many banks have floated their own insurance companies and distribute the products, example the SBI promoting SBI Life.

This has resulted in a situation where new insurers are not finding banks as one of their distribution channels.

Bancassurance (banks selling insurance policies) channel contribute nearly 50 percent of the business for major private life insurers.

According to industry officials, six insurers control around 80 percent of the bank branches and around 55,000 bank branches have not sold even a single insurance policy.

On the other hand, if banks turn into brokers selling products of more than one insurer then there will be more number of branches selling insurance policies which in turn would increase the insurance penetration and also enable policy holders to take an informed choice.

Currently the banks are in a cosy situation pocketing high commissions with no responsibility. In addition, they get huge sign-up incentives from insurers when they become their corporate agents.

Industry officials told IANS that there should be a carrot and stick approach to make banks to turn into brokers.

"The carrot will be increased remuneration to banks if they are brokers and the stick being penal action for mis-selling and other actions," a senior industry official said.
According to him a step is in the offing to provide higher compensation to banks who are insurance brokers.

Talking about the stick Srinivasan said: "The RBI in their exposure draft on permitting banks as insurance brokers have proposed stringent action against erring banks functioning as insurance brokers - like raising reserve requirements, withdrawal of refinance facilities, denial of access to money markets."

"The RBI should consider extending the provisions to banks functioning as corporate agents as well. Otherwise, there will be regulatory arbitrage between banks functioning as agents and banks functioning as brokers," he added.