Insurance broking — leave it to banks to decide

There is a para in the Nachiket Mor committee report that must be made compulsory reading for all regulators in India as well as Finance Ministry mandarins.

It goes thus, “While there is no question that there is a continuing need to explore new ideas, learn from the experiences of other nations, and benefit from new technologies, perhaps it is not the best regulatory strategy to centrally pick one approach, no matter how convincing it may seem, and to push the entire system in that particular direction to the exclusion of all others.

“A better approach may instead be to articulate a clear vision, establish a set of design principles, and then permit all strategies, new and old, to flourish or to die out based on their inherent strengths and weaknesses. India is a very large and a very diverse country and no one strategy, however well designed, can ever hope to serve the entire country.”

As Nachiket explained during the course of a few media interviews, he wanted the RBI to be a referee, not the captain.

Let the market figure out the right answer. And this ought to hold true not only for the central bank, but also for other regulators and the Finance Ministry as well — that have hitherto been used to having things their way, by fiat.

The change won’t be easy, as it involves a huge change in mindset, but that’s the way to go.

This argument is of particular relevance now to the insurance and banking industries in the backdrop of a proposed change in their business model. Banks are expected to wind up their corporate agency (where they represent one insurance company) and turn into insurance brokers.

The Financial Services Secretary and the Insurance Regulatory and Development Authority (IRDA) have said there will be no rethink on the subject.

The issue is simple. If one were to draw inspiration from the Nachiket Mor committee, then neither the IRDA nor the Finance Ministry ought to make decisions about which model to follow.

Leave it to banks and insurance companies to sort it out among themselves. Why should the Finance Ministry prescribe the medicine and force it on banks? The feeble protests that have come their way have been waved off. They have not stopped to think about the incongruity of the whole affair. Does any other industry seek a mandate on distribution?

A Maruti Suzuki showroom will sell only that company’s cars. A bank will sell only its own products. Why not extend this logic to banks and insurance companies? And, if broking was such a compelling business proposition, banks would have done it themselves anyway.

Besides, what happens to old contracts between banks and insurance companies? Simple, they will not be renewed when they end and new ones will take the place of old, said the Financial Services Secretary.

A blithe explanation that you cannot quarrel with. But isn’t there something called spirit of the law and sanctity of contract? What will foreign insurance companies, which paid a premium for securing banks as agents, do now?

If you treat them in so cavalier a fashion, why will they or any other foreign company come to India in future? Wasn’t the red carpet rolled out earlier for these companies?

Yes, you could argue they came to India because the insurance market has potential and holds promise. Nevertheless, foreign investment comes when there is stability of policy, when there is a basic integrity of approach and when you stick to your given word.

Changing policies on a sudden whim after inviting foreign investment and after it has taken root, is sure to have detrimental effects on the industry, and erode the country’s credibility.

A senior banker, while condemning the move to compel banks to turn insurance brokers as an instance of micro-management, said bureaucrats and politicians often think they own banks and forget they are just custodians.

So, what’s the way out? The banker expressed the hope that for once our famed ‘policy paralysis’ and execution lethargies will take over for the next few months. In other words, the system will cripple the initiative on its own. What after that?

Well, elections are round the corner — and there is every chance of a U-turn then. Should we await the vagaries of the ballot box to do what is right? Is it not simpler for the ministry to see reason even at this late hour?

To use a Cromwellism, the Finance Ministry and regulators are beseeched that they think it possible that they may be mistaken.