The regulatory confusion over banks as insurance brokers

DeepaMookerjee.jpgBy and large, commercial banks operate in the insurance sector either as joint venture partners or as corporate agents. Historically, the Reserve Bank of India (“RBI”) has encouraged banks to enter the business (whether as a joint venture participant or as a corporate agent) provided they followed some guidelines and maintained some standards. However, to ensure that a bank maintains its solvency requirements and continues to function as an effective bank, the RBI insists on banks obtaining its prior approval before entering into the sector as a joint venture participant. The RBI does not perceive a similar risk in a bank acting as a corporate agent because there is no equity participation by the bank and the corporate agency is only a subsidiary business. Prior approval therefore, is not required.

Since foreign investment up to twenty-six per cent is permitted in the insurance sector, banks are highly sought after joint venture partners. Banks offer their huge database and distribution network to foreign partners who bring in specialised expertise. An insurer’s success depends on how deeply it penetrates the market and a bank’s readymade distribution network is very useful. ICICI Prudential Life Insurance Company and ICICI Lombard General Insurance Company are examples of this structure.ADV-Banking-And-Finance-PL

A corporate agent is an insurance intermediary appointed by an insurer to sell its products. Its principal duty is owed to the insurer. Again, an established distribution network and the availability of a large database are advantages and insurance companies that have banks within their group benefit from having them as corporate agents.

Regulations make it difficult for new insurers stitch together a distribution network

According to Regulation 3(2) of the IRDA (Licensing of Corporate Agents) Regulations, 2002(“CA Regulations”) and subsequent circulars issued by the IRDA, a corporate agent (such as a bank) can only sell the products of one life insurer, one general insurer, and one health insurer.

New entrants face a distinct disadvantage. This is because most banks (who are ideal corporate agents) are either already in joint venture partnerships or have corporate agency tie-ups. Without an efficient distribution network, an insurer invariably meets its downfall.

Keeping this in mind, the Insurance Regulatory and Development Authority (“IRDA”) in 2011, notified draft regulations – the (draft) IRDA (Licensing of Bancassurance Agents) Regulations, 2011. Amongst other changes, this regulation divided the country into zones and permitted banks to act as corporate agents for a specified number of insurers within the same zone. In short, it proposed that the prevailing limit for acting on behalf of only one life insurer, one general insurer, and one health insurer in the whole country, apply instead to a zone. This tried to balance the playing field for new insurers who could also now appoint banks as corporate agents.

These regulations however, were never notified and there has been no statement from the IRDA explaining the delay.

There was strong opposition from industry — mainly, a strong lobby of insurers who already have banks as joint venture partners or corporate agents. Other insurers also felt that though this move may help insurers, it would not help consumers who would have to deal with different corporate agents as they moved across zones.

Banks to become insurance brokers

Interestingly, this was not the direction issued by the Finance Minster to the insurance industry on October 1, 2011. He had clearly indicated that if banks wanted to sell the products of more than one insurer, they should opt to become insurance brokers.


An insurance broker is an insurance intermediary who, in return for a consideration, arranges insurance or reinsurance cover for its clients (the prospective insured). For instance, if a person wanted to insure his life, he will approach an insurance broker. The broker will then look at all the life insurance covers available in the market (from different insurers) and advise the client as to the cover that is most suited for him. The broker does not recommend the product of only one insurer. It recommends the product of the insurer who is best suited to the needs of its client. In short, an insurance broker owes a primary duty to its client. While a corporate agent works solely for one insurer and sells the products of only that insurer, an insurance broker works for the customer rather than the insurer.

As brokers, the Finance Minister felt, banks would also become responsible sellers and be able to sell the products of different insurers. Accordingly, the IRDA notified the IRDA (Licensing of Banks as Insurance Brokers) Regulations, 2013 and the Reserve Bank of India notified certain requirements through its circular dated November 29, 2013. In short, banks were permitted to be insurance brokers with the prior approval of the IRDA and the RBI. This seemed to be good for banks, which could now choose between operating as insurance brokers or as corporate agents.

InsuranceBrokervCorporateAgentOn December 20, 2013 however, a letter from the Finance Ministry to the chief executives of public sector banks advised public sector banks to become insurance brokers and leverage their branch network for insurance penetration. They should no longer act as corporate agents.  A circular by the Department of Financial Services asked public sector banks to implement the spirit of the 2013- 2014 Budget speech by January 15, 2014.This took the insurance industry by surprise because now, banks could no longer be corporate agents, a decision that had not been discussed with the industry.

This move has the backing of the IRDA who have proposed that these guidelines will be the same for both state and private sector banks. There cannot be a distinction where state-run banks are selling all products while private banks continue to peddle the products of their own group companies.
It is becoming increasingly clear that the regulator is not going to change its stance. From a preliminary analysis, this will adversely affect banks that have promoted insurance companies. Most of these banks are corporate agents for life and general insurance companies within their group. Asking them to sell products of competing insurers does not make commercial sense. In fact, the executive directors of state run banks have clearly said that their foreign partners are already questioning their decision to enter India when the policy keeps changing arbitrarily. A joint venture is based on the premise that the insurer uses the Indian bank’s branch network for expansion. Taking this away, changes the game. Two foreign insurers — New York Life and ING — have already exited their Indian ventures.

Regulatory confusion

Perhaps, the regulators should analyse the adverse effect of this step on the insurance market, which is flooded with bank-promoted join ventures. An exit by foreign players does not help the market as it loses more sophisticated insurance practices.

This move also seems to have left the insurance industry in confusion, as there is no clarity on how the existing arrangements will be treated. Should they be terminated now or can they run their course? None of the banks have been asked to surrender their corporate agency licences. The CA Regulations have not been amended to exclude any reference to a ‘bank’. The IRDA has issued no circular, clarification, or direction to clarify matters at a time when clarity is much needed.

This position calls for better thought out and more regulated action by the IRDA and the Finance Ministry. There is much that needs to be clarified and one hopes that there will be more concerted thinking in the coming months before such a drastic step is taken.

(Deepa Mookerjee is part of the faculty on


Time to provide a regulatory framework for health insurance

DeepaMookerjee.jpgWe all know the importance of health insurance. With the advent of cashless health insurance policies, the insured do not need to dip into their own pockets to pay medical bills. The hospital is reimbursed directly by the insurance company. This protects the insured from incurring high expenses due to medical claims, treatment, and sudden surgery or hospitalisation. Having a sound health insurance policy acts as a boon for the elderly.

So given its importance, one would expect a well thought-out regulatory regime governing the manner of setting up and operating health insurance companies. That is not the case.

The term ‘health insurance business’ is not defined in the Insurance Act, 1938 (“Insurance Act”). It only defines general, life, and miscellaneous insurance. What is even more interesting is that the IRDA (Registration of Indian Insurance Companies) Regulations, 2000 (which sets out the manner in which insurance companies should be set up) only recognises two types of insurance companies — life insurers and general insurers. There is no mention of health insurance or insurers.

To cover this gap, as a matter of practice, the Insurance Regulatory and Development Authority (“IRDA”) considers health insurance a mixture of life and general insurance business. It currently permits both life insurers and general insurers and also stand-alone health insurance companies to sell health insurance products. Examples of stand-alone health insurance companies include Star Health Insurance and Apollo Munich Health Insurance. Recently, the IRDA has also issued the detailed IRDA (Health Insurance) Regulations, 2013, governing the terms and conditions of health insurance policies.

The term ‘health insurance’ has been defined for the first time in the IRDA (Health Insurance) Regulations, 2013 as the means of effecting insurance contracts which provide for sickness, medical, surgical, or hospital expense benefits including assured benefits, long-term care, travel insurance, and personal accident cover. These regulations however, only provide clarity on how a health insurance policy should be structured, and not on how an insurer should be set up or regulated.

While the IRDA has been notifying circulars and regulations to bring health insurance within the fore of its regulations, there is still some way to go before we can say there is a clear regualtory framework.

For instance, the Insurance Act states specifically that the minimum paid-up capital for a life and general insurer is Rupees 100 crore. Health insurers are also forced to comply with this requirement since health insurance is considered a sub-set of either life or general insurance. There is no separate limit specified for health insurance.

Perhaps the way to go, is to look at the changes proposed in the Insurance Laws (Amendment Bill), 2008 (“Bill”) which seeks to bring sweeping amendments to the Insurance Act. This Bill seeks to define health insurance and also insert a new provision for capital requirements for health insurance companies. As part of the considerable debate on this area, the Ministry of Finance has prescribed a reduced minimum paid-up capital requirement of Rs. 50 crore for health insurance companies, in order to facilitate the growth of health insurance in the country and reduce any entry barriers to a priority sector in the insurance space.

The views of the Ministry of Finance have not been accepted by everyone. Existing insurers such as Bharti AXA General Insurance Company and ICICI Lombard have for instance, stated that given the infrastructure and the service parameters required to reach the rural masses, the minimum capital requirement for heath insurance companies should remain at Rupees 100 crore. The success of the health insurance business depends to a lager extent on its credibility amongst the customer groups, which would entail substantially large startup costs. Coupled with large infrastructure and claim servicing requirements, a higher minimum paid up capital is required. In fact, the Standing Committee of Finance in its report recommended a minimum limit of Rupees 100 crore.

While it appears from public reports that this recommendation has not been incorporated in the current draft of the Bill, it is encouraging that such discussions are taking place. Unfortunately, the Bill is yet to see the light of day, though the Government has been keen to push it ahead in Parliament. It is time the indsutry woke up to the fact that health insurance is very specialised and requires deeper thought. Discussions such as the one above are few and far between and need to be expedited to provide a regaultory framework for health insurance.

(Deepa Mookerjee is part of the faculty on


Clarity long overdue in FDI limits for corporate agents in the insurance sector

DeepaMookerjee.jpgThe Insurance Laws (Amendment) Bill, 2008 proposes to increase the foreign direct investment (“FDI”) limit in the insurance sector to 49 per cent from the current limit of 26 per cent. Since there is no clear indication of when Parliament will pass it, we can focus on clearing some ambiguity about the current foreign investment regime.

The Department of Industrial Policy and Promotion (“DIPP”) in its Consolidated FDI Policy (effective from April 4, 2013) states that 26 per cent FDI is permitted in the insurance sector under the automatic route, provided the companies bringing in FDI obtain the necessary licenses from the Insurance Regulatory and Development Authority (“IRDA”), India’s insurance regulator of India. This means that provided a licence is obtained from the IRDA, there is no need to obtain approval from the Government, the Foreign Investment Promotion Board (“FIPB”), or the DIPP for any foreign investment up to 26 per cent.

Section 2(7A) of the Insurance Act, 1938 states that the 26 per cent limit applies to insurance companies. What about intermediaries or other players in the insurance sector, such as corporate agents, insurance brokers, third party administrators, and insurance surveyors? The Act does not mention whether such a limit applies to them.

The IRDA has notified rules and regulations in relation each intermediary. The IRDA (Insurance Brokers) Regulations, 2002 (at Regulation 10(2)) and the IRDA (Third Party Administrators-Health Services) Regulations, 2001 (at Regulation 3(6)) clearly specify that foreign investment up to 26 per cent is permitted. A recent amendment to the Insurance Surveyors and Loss Assessors (Licensing, Professional Requirement and Code of Conduct) Regulations, 2000 (regulating insurance surveyors) has also specifically inserted the 26 per cent limit. The position of these intermediaries is therefore clear, both under the FIPB policy and under the IRDA rules and regulations.

There is however, another key category of intermediaries about which the IRDA has not issued any clarifications — corporate agents. Corporate agents are intermediaries in the insurance sector who sell and solicit insurance products. Simply put, an insurer appoints a corporate agent (who is registered with the IRDA) to sell its insurance products to the public. Sale by an unregistered intermediary is prohibited.

Blog-Corporate-Law-BannersCorporate agents are governed by the IRDA (Licensing of Corporate Agents) Regulations, 2002 and the Guidelines on Licensing of Corporate Agents dated July 14, 2005. None of these regulations specify any FDI limit. In absence of any specific reference however, it can be argued that one should refer to the Consolidated FDI Policy since it is the one document that consolidates all instructions regarding FDI in India. If this interpretation is to be taken, corporate agents, being a part of the insurance sector will automatically be subject to the 26 per cent FDI cap. However, Berkshire India, a corporate insurance agent, is shown as a majority owned subsidiary of Berkshire Hathaway Inc., a foreign company. This would mean that there is 100 per cent foreign investment in Berkshire India. While news reports suggest that the FIPB is concerned about 100 per cent foreign investment in corporate agents, there is no clear circular or regulation issued by the IRDA in this regard.

In the absence of clarity, it can be argued that the amount of foreign investment permitted depends on the nature of the corporate agency.

Corporate agency is not meant to be the principal business of an entity. This is evident from the Guidelines on Licensing of Corporate Agents dated July 14, 2005, which states at Paragraph 1 that an applicant for corporate agency should normally be a company whose principal business is something other than the distribution of insurance products. Insurance distribution should be a subsidiary activity.

FDI limits for intermediaries in the insurance sector
FDI limits for intermediaries in the insurance sector

This means that corporate agents are normally entities that carry on other businesses as their principal activity. Commercial banks, for example, carry on banking business as their principal activity and corporate agency as their subsidiary activity. In such a situation, the foreign investment limit should be governed by the amount of foreign investment permitted in the principal activity. So, a bank will be governed by foreign direct investment of the banking sector rather than of the insurance sector. This is because the bank’s principle business is banking.

Some provisions on the other hand, permit stand-alone corporate agents. These are entities that solely carry out corporate agency business. In such a case, the 26 per cent cap should strictly govern these entities, as they are only engaged in the insurance sector.

This means that the amount of FDI in a corporate agent can differ depending upon the nature of the corporate agency business. If corporate agency is the principal activity, the 26 per cent cap will apply. If corporate agency is a subsidiary activity, the rules governing the principal business, will determine the FDI limit.

While there is no formal clarification, either from the FIPB or from the IRDA, given that entities such as commercial banks cannot be subject to two different FDI investment limits, this appears to be a likely explanation.

In any event, formal clarification from the IRDA to clear the air on FDI limits for corporate agents is long overdue.

(Deepa Mookerjee is part of the faculty on