IRDA formulates new rules for banks to be insurance brokers

Banks will no longer have to restrict themselves to selling the insurance products of one insurance company. CNBC-TV18's Manasvi Ghelani reports on the new set of regulations insurance regulator IRDA has formulated to allow banks to act as insurance brokers.

Also read: IRDA eases premium payment mode for policyholders Finance minister P Chidambaram in his budget speech in February 2013 said that banks will be permitted to act as insurance brokers so that the entire network of bank branches will be utilised to increase penetration. It has been 5 months since the finance minister's Budget speech. And the insurance regulator IRDA has heeded his call to facilitate deeper penetration of the insurance market. Despite RBI's apprehensions that this could lead to a conflict of interest, IRDA has formulated a new set of rules. It will allow a bank to sell insurance products from multiple insurance companies, instead of the earlier rule restricting this to one insurance company. “It is a positive move from a customer stand point. Ultimately, in the long run, it will become more open architecture as banks will be able to sell more insurance products”, says Amitabh Chaudhuri, MD and CEO of HDFC Life. New IRDA rules • Banks will get a 3-year broker license only after they are cleared by RBI • Each bank will appoint a principal officer belonging to the general manager cadre or equivalent, who will exclusively look at insurance • One insurance company cannot account for more than 50 percent of the total premium collections • The onus of preventing wrong-doing or mis-selling lies entirely with the bank. However, some experts say these rules may deter many banks from applying for a license. Since applying for a broker license is not mandatory, the purpose of increasing insurance penetration in the country may be defeated. “It requires banks to develop their expertise because banks may have to study the products of different companies, make compartive analysis and put it across to the customer very clearly stating the pros and cons, which will be more suited for a customer. There are also pressures on the banks to study and help customer make more reasoned decision”, says KR Kamath, CMD, Punjab National Bank. While the RBI has final say on whether a bank is eligible for a broker license, any dispute with regard to insurance transactions will come under IRDA's jurisdiction.