The Insurance Regulatory & Development Authority (Irda)
has come down heavily on insurance companies for the way they are
conducting referral arrangements with banks, leading to a higher
premium being charged to the policyholder.
Typically, under the referral arrangement, a bank provides an
insurance company with physical infrastructure at certain branches to
generate leads for sale of the latter’s products.
The bank gets compensated depending on the amount of premium
the insurance company is able to connect, though it does not close the
sale itself, but merely generates the lead. The sale has to be closed
by a qualified insurance agent from the company.
The insurance regulator is putting in place draft guidelines
on streamlining the referral fee structures, which have escalated the
already rising costs of insurers.
“It was noticed during the market inspection that some of the
life insurers are also entering into referral arrangements with a
variety of non-banking referral entities. Many insurers had in fact
entered into referral arrangements with individuals,” A K Giridhar,
executive director Irda said.
“So far as referral fee is concerned, it is observed that
several different practices are being followed by the insurers, which
are resulting in high cost of acquisition, thereby pushing up the
premiums for the policyholders,” he said.
“In view of a lack of guidelines on the fee limits in case of
non-banking entities and individuals, the insurers at the moment enjoy
unfettered freedom. In their over-enthusiasm to rope in banks as
referrals, some insurers are seen to pay upfront fees/ advances
amounting to crores of rupees. It has been noticed on some occasions
that the parties have included extraneous clauses in their agreements.
In the absence of standardization, each of the agreements is at present
being scrutinized to check for any unacceptable clauses,” Irda noted.
In certain cases, the regulator noticed that though the fee
paid was within limits, it was “being staggered over a few years rather
than being paid in lump sum after the sale. Insurers claim that they
are linking the payment of fee in subsequent years to the receipt of
renewal premiums. This is questionable in view of the limited role
envisaged for the referrals,” the regulator said.
For starters, the institution of referral providers is
widespread in the insurance sector across regimes and has a crucial
role in distribution of insurance products. Referral providers
facilitate the expansion of insurers among segments that otherwise may
not be readily accessible to them through their own channels of
distribution.
While in certain cases the referral activity is limited to
provision of data of their clients, in many cases it includes
introduction of clients, provision of office space for the employees of
insurer, display of publicity material, etc... basically, everything
except the final sale. Since the activities of a referral provider stop
short of selling, they normally do not require a regulatory licence.
Banks are much sought after by insurers since they are not
only in possession of data of a large number of clients, but also
generally in know of their personal details such as their financial
status, which is of crucial importance to the insurers.
Once the recommendations from various stakeholders in the
insurance industry is complete, it would be placed before the Insurance
Advisory Committee and the Irda board.
source: DNA
