Explained | Open architecture in insurance: Push for choice, debate on impact, and industry's stance

Under the Insurance Amendment Bill 2024, the Department of Financial Services has put forward a proposal to introduce an open architecture model by eliminating the existing restriction that binds individual insurance agents to work exclusively with one insurer per category (life, health, and non-life).

The Insurance Amendment Bill 2024 aims to revise the Insurance Act of 1938, proposing various reforms including composite licensing, differential capital requirements, the adoption of an open architecture model, a reduction in GST on insurance products, and an increase in Foreign Direct Investment (FDI).

However, while the Union Budget 2025, presented on February 1, did address changes in FDI, it left other proposed reforms unaddressed.

This practice already exists among corporate agents, insurance marketing firms (IMFs), and brokers, and the amendment is a move towards extending it to individual agents, as well.

Currently, agents are restricted to one insurer per category. While corporate agents have operated under open architecture since 2015, this model has not yet been extended to individual agents.

What was the need for the implementation of open architecture?

The traditional insurance model, where agents are tied to a single insurer, restricts consumer choices and limits access to a diverse range of products.

By introducing an open architecture framework, as proposed in the Insurance Amendment Bill 2024, the government aims to empower agents to represent multiple insurers, thereby significantly expanding the variety of insurance products available to the public.

The government, through such a framework, expects to enhance financial inclusion, drive innovation and increase competition that can result in improved pricing.

Moreover, with a broader array of options easily accessible through agents, the government envisions a substantial boost in insurance penetration, aligning with its ambitious goal of 'Insurance for All by 2047'.

In a country where insurance uptake remains relatively low, this approach is designed to encourage more individuals to secure coverage across the nation.

So, why are market leaders opposing it?

Siddharth Mohanty, CEO of LIC, suggested that companies might reduce investment in agent recruitment if agents are not exclusive. He added that LIC may have to recalibrate its current model if the open architecture is allowed to be implemented.

Nilesh Sathe, Independent Director of TATA AIA and a former member of IRDAI, had also said that this could lead to issues like mis-selling, dilute agent loyalty, and affect employment practices.

He raised concerns about its potential impact on unemployment and self-employment generation, particularly in the agency model.

He also highlighted the importance of loyalty in the insurance industry, suggesting that "open architecture could lead to unethical practices, such as agents shifting insurers for higher commissions."

What has been the impact of open architecture on insurance companies so far?

According to an earlier Moneycontrol report, companies have not seen much success with the open architecture model.

LIC, which generates 95 percent of its business through its 14.4 lakh agents, could see its market dominance challenged as agents would be free to sell competitor policies.

While private insurers have diversified their distribution channels since 2018, with bancassurance's share dropping significantly, the agency channel still shows strength, as seen with ICICI Prudential's growth in APE in Q3 FY25.

However, the corporate agency and broker channels, already under open architecture, have not performed as well, indicating that this model might not be universally beneficial due to increased competition and higher commissions.