Insurance companies see no benefit from open architecture; Leaders cite unemployment, mis-selling concerns

Insurance

Open architecture is not going to be benefit the companies, said Nilesh Sathe, Independent Director at TATA AIA Life Insurance.

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

"Why restrict the scope when agency-driven self-employment is crucial?" he questioned.

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."

Speaking about the long-term commitment involved in insurance, he said, "unlike mutual funds, you cannot even exit easily."

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. The government's proposed 2024 amendments to the Insurance Act would allow individual agents to partner with multiple life, general, and health insurers, expanding options for consumers.

The current proposal, however, has sparked debate within the industry recently with CEOs from major insurance companies, including Life Insurance Corporation of India (LIC), ICICI Prudential Life Insurance, and SBI Life Insurance, opposing to the changes, citing concerns about unemployment, mis-selling, and poaching of agents by competing insurers.

Moreover, Sathe pointed out, companies have not seen much success with the open architecture model.

The country's biggest public sector life insurer, LIC, heavily relies on its agency network, which comprises around 14.4 lakh agents as of FY25. LIC generates over 95 percent of its business through agents. The open architecture system could potentially dilute LIC's dominance by allowing agents to promote products from competing insurers, thus offering customers more options, according to a ShareKhan report.

India's private life insurance players, on the other hand, have diversified their channel majorly mix since 2018.

Bancassurance, once a dominant distribution model, has seen a decline, accounting for just 33 percent of individual APE (Annual Premium Equivalent) as of December 2024, down from 71 percent in 2018.
Companies like ICICI Prudential and SBI Life derive 26 percent and 30 percent of their premiums from agency channels.

ICICI Prudential in Q3 FY25 saw significant growth in Annual Premium Equivalent (APE) across three major channels: Bancassurance (19 percent growth), agency (26 percent growth) and direct channels (23 percent growth).

The company's success in these channels is partly due to the fact that they are still somewhat insulated from the open architecture model, especially in the agency channel, where agents may still exhibit loyalty to specific insurers, said a JP Morgan report.

The company, on other hand, highlighted a muted performance in the corporate agency and broker channels, which follow the open architecture model. These channels showed growth rates of only 7 percent in Q3 FY25, -15 percent in Q2 FY25, and -1 percent in Q3 FY24.

This slowdown is attributed to heightened competition, particularly in bancassurance, where banks can now partner with up to nine insurers, a significant increase from the three insurers they were allowed to partner with before 2022. The intense competition has resulted in higher commission payouts, which could affect profitability as insurers compete aggressively for market share, the report said.

In contrast, the agency channel has experienced a decline in commission rates in FY25, compared to the previous fiscal year, indicating that loyalty and long-established relationships between agents and insurers may still influence the agency channel, making it less susceptible to disruption from open architecture, the report added.

The introduction of open architecture in the bancassurance model has increased competition for companies like HDFC Life. In response, insurers have diversified their distribution channels, with agency and direct channels becoming more prominent. HDFC Life currently derives 65 percent of its premiums from bancassurance, 18 percent from agency, and 6 percent from brokers.

However, a ShareKhan report suggested that open architecture may have limited impact on HDFC Life's agency channel. This is because core agents are likely to remain loyal to a single insurer, even with the option to work with multiple companies under open architecture.

This indicates that the shift to an open architecture model might not significantly disrupt the growth trajectory of well-established players like HDFC Life, which rely on strong brand loyalty and established agent networks.