Current bancassurance model ‘doesn't permit competition'

Few regulatory changes have caused as much heartburn as the IRDA's draft on open architecture model for bancassurance announced a few months ago. In short, it proposes that insurance companies will have to tie up with different banks in different geographical zones. At present, insurance companies tie up with one bank (in many cases, the bank is their own promoter) across the country.

The industry is vertically divided — the new entrants are happy because it gives them a foot in the door that was otherwise shut; while the established players are distraught that their existing investments in this model are in jeopardy.

The IRDA Chairman, Mr J. Hari Narayan, was at his combative best as Business Line tried to probe his thinking on this issue. Using sarcasm, metaphors, anecdotes et al , he brought in the full weight of his experience and formidable debating skills to hammer home his viewpoint. This is the second of a three-part interview. Read on:

What is wrong with the current bancassurance model? Why change it?

It doesn't permit competition. In the present system, we have already weighted the scales against newer entrants. There are these insurance companies which started five or ten years ago and they have already tied up with banks.

So the guy who enters now finds that all banks are already married. Unless you are a giant like LIC which couldn't care about banks, you'll never stand a chance if you are a new entrant.

To say, ‘leave the present system unchanged' is a cop-out. You are really saying that this is my zone of comfort, so let me be. This is alright for the people who had the foresight or the good fortune to tie up with somebody earlier. Not for others.

Isn't there a first-mover advantage in every industry?

First-mover advantage is certainly there every where — but should it be underpinned by a regulatory requirement? Suppose I tell you that there should be only one newspaper in one town — that is not a first-mover advantage. That is a monopoly advantage. This is not first-mover advantage. You have gamed the system.

What stops banks or insurance companies from tying up with new partners even now? If things don't work, they are free to do that…

What you are saying (if you take my newspaper example) is let one newspaper close down, and then you can enter! That's okay. May be it is one solution. But it is not an attractive solution.

Your recent guidelines on open architecture for bancassurance in life insurance industry have come in for mixed reviews…

If we survey the bancassurance regulations in various jurisdictions of the world, it is evident that there seems to be as many systems as there are jurisdictions. You have certain jurisdictions where insurance products can be sold by dedicated and constituted joint ventures, as between the insurance companies and banks.

There are jurisdictions where the number of tie-ups which a bank can market is unrestricted and it is purely a bank management's decision.

There are jurisdictions where multiple tie-ups with insurance companies are permissible but not more than a specified percentage of the total sales must be those of a given company.

The point that I am trying to make is that there is no ‘single' best system available and systems must evolve in parallel with the situation obtaining in any given country having regard to the practices, traditions, strengths and weaknesses of that country. In India, what is evident is that the distribution of insurance products through banks occurs only in a very small proportion of the total bank branches in the country.

Should the fact that only a small proportion of branches sell insurance be held against them? Doesn't the 80/20 rule apply everywhere?

That may be true. But don't forget that what really spurs efficiency in any field is an element of competition. It is a good idea that banks deal with more than one insurance company.

But we have to temper where that competition can be. I don't want that competition to be at the branch level — because all kinds of unsavoury practices may develop in the quest for business.

One of the regulators in another country actually told me that allowing more than one insurer with a bank at the branch level was the worst thing it did. It affected the insurance companies very badly and some of them collapsed.

To prevent this kind of a situation, some regulators prescribe that you can tie up with many insurers as you want, but you can't sell more than some specified percentage of the product of a given insurance company.

Now suppose there are five players, what do you think they would do? And suppose I fix 25 per cent? If you are an insurance company, you'll immediately tell the branch manager of the bank, ‘Look boss, I don't care what you do, but ensure that my product sells 25 per cent. So they'll game it! I don't want to give scope for that gaming.

Can't that be tackled by surveillance?

You can say, “Let them game it and you can address it by regulatory policing”. That is one way. My approach is a more straightforward one. I won't allow you to sell it in the same branch. Then you could say, why not restrict the sales branch-wise? But that would have become administratively complicated. Therefore, I said, let's do it State-wise. What I hope will happen, in time, is that the bank management may turnaround and say, ‘We find that this product with these features is selling well in this area. Do you have something similar?'

There will be an element of cross comparison within banks and some type of competitive spirit can be engendered — without the destructive aspect of a wide-open system which I can't pretend I am not aware of.

In the nation's drive towards greater financial inclusion, it is vital to consider this feature of the Indian insurance industry.

In some jurisdictions, the adverse effects of permitting more than one insurance company to operate at the branch level are becoming increasingly apparent and it would be imprudent not to take cognisance of the risks involved in such an approach.

Hence a complete adoption of an open architecture where banks are at liberty to tie up with any number of insurers as per their choice may lead to unintended adverse consequences which may not be easy to reverse.

It is therefore advisable to widen the scope of sales through banking network in a gradual and phased manner and it is this approach which the exposure draft of bancassurance has adopted.

A number of players are unhappy with the geographical and zoning regulations in the bancassurance draft.

They say that these ideas were not there in the two committees set up on bancassurance earlier. What is the idea behind this regulation? Isn't it causing great difficulty for the insurance industry?

I am not persuaded that the approach suggested would cause difficulty to the insurance sector.

First, because at present the sales and geography concentration which perhaps reflects different levels of income and savings across the country has led to a situation where most insurance companies derive bulk of their business from only eight or nine geographies.

So I do not expect that this measure by itself causes any significant disturbance in their cash flows.

Second, most banks have implemented the Core Banking Solutions and hence the processing, payments, etc., should not really cause any insuperable problem.

Perhaps, the anxieties which you report from different quarters are more to do with the fear of the unknown or the comfort of the present which might encourage people to remain within their zone of comfort, and it is perfectly understandable.

In any case, the IRDA would not seek to impose any approach which is not consistent with its prime objective of ensuring the healthy growth of the insurance industry in India, with the prime focus on policyholder protection.

When are the final guidelines expected? Will there be some changes?

The IRDA is in the process of evaluating responses and suggestions received from different stakeholders and would finalise its approach with an appropriate regulation after such examination is completed.

>vageesh@thehindu.co.in

>nagsridhu@thehindu.co.in

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