IRDA issues draft guidelines on bancassurance

The new draft guidelines have added a ceiling on number of tie-ups on bancassurance agent

October 10, 2012 4:19 IST | India Infoline News Service
The Insurance Regulatory and Development Authority (IRDA) published fresh draft guidelines on bancassurance on Tuesday. Bancassurance refers to banks acting as corporate agents for insurers to distribute insurance products.

Every bancassurance agent shall before end of 15th of November of each year furnish to IRDA a half-yearly unaudited statement with a declaration confirming the fulfillment of the requirement of the Specified Person in each and every branch, said IRDA draft.

The fresh draft guidelines don’t seem to be in consonance with directions issued by finance ministry on 1 October to the insurance industry.

In a statement, finance minister P. Chidambaram had clearly indicated that banks wanting to sell products of more than one insurance company should opt to become brokers, according to media reports.

The statement said, “At present, the policy on Bancassurance is “one bank one insurance company (one life and one non-life)”. In this arrangement, the Bank acts as the agent of the insurance company. It is desirable that banks may act as “Brokers” where the fiduciary responsibility of the bank will be to the policy-holder.” 

“As insurance broker, the bank may sell the products of more than one insurance company. This will provide the intended policy-holder a bouquet of products from which he/she may chose the appropriate product based on his/her needs and will also prevent mis-selling,” the statement further said.

However, the new draft guidelines have done little to further in this regard, instead lending more flexibility to the previous draft guidelines on bancassurance issued in November 2011, the reports said.

The new draft guidelines have added a ceiling on number of tie-ups on bancassurance agent. It mentions, “A bancassurance agent desirous of tie up with more than one class of insurer shall be allowed to do so under these regulations to a maximum of 20 states/Union territories and a minimum of 10 states/Union territories.”

Thus, a bank will need to tie up with the same insurer for at least 10 states, up to a maximum of 20. Given that the draft guidelines have divided the country into 40 regions (including states/Union territories and major cities), then a bank can have a tie up with a maximum of four insurers from one sector.

The draft guidelines, however, have allowed insurers to pay banks other admin and service costs. Current rules forbid any payment other than commissions, subject to a maximum of 2.5% of the annualized premium. However, the draft has reduced the commissions payable to the banks. According to the circular, “No bancassurance agent shall be paid or contracted to be paid by way of commission an amount exceeding the 85% of the limit specified in Section 40A of the Insurance Act, 1938.”

In case of Sale of Equity Shares of Insurance Company, if an insurer issues equity shares to a bancassurance agent or a proposed bancassurance agent at a price which is below the Market Consistent Embedded Value (MCEV) of the equity, the difference of MCEV and the issue price shall amortized over a period of five years or during the tenor of the agency, whichever is earlier, from the date of sale and such amortized amount shall be part of the remuneration to the bancassurance agent.

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