IRDA allows broker licenses to Banks – increased compliance risk for broker banks

IRDA has unveiled rules to allow Banks to act as Brokers rather than Corporate Agents subject to SBI approval. Finance minister P Chidambaram had mentioned in his February 2013 budget speech that banks will be permitted to act as insurance brokers to increase penetration. The broker license will allow a bank to sell insurance products from multiple insurance companies while a Corporate Agent restricts them to one insurance company each from life, non-life and health.

The highlights of IRDA’s new regulations are:
•Banks will get broker license only after approval by RBI
•Each bank will have to appoint a principal officer who will exclusively look at insurance
•banks will have a fiduciary responsibility to customers and the onus of preventing wrong-doing or mis-selling lies entirely with the bank.
•Banks will need to comply with IRDA’s requirements on insurance brokers

While this change has a potential to increase bank commission revenue and improve its customer delight by providing a bouquet of insurance services to its customers, there are additional requirements that Banks will be exposed to and therefore some of them may not opt for a broker license.

Broker license will expose banks to additional risks; some of the key ones are listed below.
•Additional compliance requirements – The IRDA’s compliance regime for Brokers is more onerous than Corporate Agency. Broker Banks will need to comply with IRDA for their broking business and not RBI. IRDA in the past has frequently taken actions against brokers for non-compliances.
o Complaint handling – Banks will need to set up complaint handling process including a complaint recording & monitoring system. Corporate Agents do not have these requirements.
o Code of Conduct- Broker banks will need to meet the code of conduct related to relationship with client, selling, renewal, claims, advertising, documentation, complaints & remuneration.
On the whole the broker bank will be exposed higher risk of non-compliance with insurance regulators. Most broker banks will need to hire additional compliance staff or retrain their compliance teams to fulfill compliance requirements.

•Liability for mis-selling – Brokers represent the interests of their clients while Corporate agents are insurance company’s agents. This shift in responsibilities will cause the onus for any deficiency in Broker Bank’s service to fall on the bank. A Broker Bank could be held responsible for any mis-selling that is done by Bank employees. Since mis-selling is very rampant and a key risk that is faced by all insurance companies, banks will need to train its employees in understanding multiple products as well as design its compensation structure so that mis-selling can be avoided. RBI has already cautioned banks against mis-selling of insurance products in its 2013 Financial Stability Report. Banks will also need to buy a professional liability insurance policy for protection in cases of misrepresentation.

•Training requirement – Bank will need to formally train its employees dealing with insurance products as per IRDA requirements. Additionally they will have to invest time and money in understand various policies of multiple insurance companies.

RBI is expected to consider each bank’s NOC on its merit and may end up rejecting some applications. RBI in its 2013 Financial Stability Report (FSR) had said that Banks taking the role of brokers could lead to conflict of interest. RBI further observed that some Banks did not have a clear segregation of duties of marketing personnel from other branch functions and Bank employees were directly receiving incentives from insurance companies for selling their products leading to the conflict of interest. Though this move will benefit customers, Banks may not want to pursue getting the Broker license and may continue as Corporate Agents.

Shriram Gokte -

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