Indian Economy News

RBI allows banks to offer insurance broking services

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  • January 16, 2015

Mumbai: The Reserve Bank of India (RBI) on Thursday allowed banks to become insurance brokers, permitting them to sell policies of different insurance firms subject to certain conditions.

Banks have been allowed to sell multiple insurance policies by setting up an insurance broking business or an insurance agency, either departmentally or through a subsidiary, RBI said in a notification on its website. In other words, banks have been given the freedom to choose the model via which they want to sell insurance and how they want to do it.

However, RBI has added that only one entity per banking group can sell insurance and the sale of policies can either be through the broking model or the corporate agency model. Under the broking model, a bank can choose to sell different insurance policies of different companies, whereas if a bank chooses the corporate agency model, it has to sell the policies of only a single insurance firm.

Many banks today sell the policies of their own subsidiary insurance firms and the RBI notification will now force them to think about what strategy they want to apply, said Shashwat Sharma, partner (banking and insurance) at consulting and accounting firm KPMG.

“Banks will now have to think through their strategy on insurance. Whether they want to restrict themselves and concentrate on the fees earned through the agency model or be more client centric and give their customers a choice of the different policies,” Sharma said.

RBI’s go-ahead comes almost two years after former finance minister P. Chidambaram, in his February 2013 budget speech, announced that banks would be permitted to act as insurance brokers. To be sure, the insurance regulator, Insurance Regulatory and Development Authority of India, has no restrictions on banks selling more than one policy. However, the latest notification by RBI confirms the new order. RBI has imposed some conditions on lenders that want to get into insurance broking.

In its notification, RBI said that to start a new insurance broking business, a bank’s net worth should not be less than Rs.1,000 crore with capital adequacy at a minimum 10%.

The bank’s net non-performing assets should also not be more than 3% and it should have made a net profit for the last three continuous years, with an added condition that the track record of its subsidiaries should be “satisfactory”.

Sharma said the new norms would also mean that banks must formulate internal strategies to ensure they sell the right product to the right customer.

“Banks have to ensure that there is no misselling. But for the customer it means that there is now a wider choice and a bigger product suite to choose from. For insurance companies, specially for those that do not have a tie-up with any bank, it means that the road is now open to sell policies, just like mutual funds today are sold through banks,” he said.

RBI said banks have to ensure that risks involved in insurance business do not get transferred to the bank and that the banking business does not get contaminated by any risks which may arise from insurance business.

“There should be an ‘arms length’ relationship between the bank and the insurance outfit,” the central bank said.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.