Articles

Gopal Sharma lives in Ranchi. He is keen to invest in a longterm child plan for his kid's future education and approaches his bank for advice. However, the bank is not able to help him or provide quality advice as it is too small a branch, and insurance is not a focus area for it in the larger scheme of things.

In short, the bank has neither information nor trained staff to guide him. The prevalence of such cases has driven the Insurance Regulatory and Development Authority (Irda) to lay down guidelines for Open Architecture, a concept which addresses the problems of customers in search of appropriate insurance options and thereby brings about their financial inclusion. One may wonder what open architecture is and how it helps the customer.

Let me take a step back and talk about the various distribution channels of insurance products that we have today and how open architecture will improve them. Currently, there are three options for buying an insurance policy - from an agent, bank or directly from the insurance company. Of these, buying insurance from a bank, called bancassurance, has gained popularity since the opening of the insurance sector. Under the current structure, a bank can only offer products of a single life insurer with which it entered into a corporate agency tie-up.

The current structure leaves the banks and the customers with little choice but to bundle available products with current services, which in some cases may not be in the best interest of the customer. Open architecture could enable an insurance company to offer its products at any branch of any bank across the country, through multiple tie-ups.

This dramatically enlarges the range of options available to potential buyers of insurance products by increasing insurance penetration into geographies left untapped so far. If a particular life insurer has not launched business in all the branches of a bank, another insurer can launch insurance business in those branches. The potential of bancassurance is estimated at 80,000 bank branches but barely 10% of bank account holders buy life insurance from this channel.

Open architecture makes this is a huge scalable opportunity for the insurance business. Insurance products ranging from traditional to unit-linked insurance plans (Ulips) are designed to give customers longterm savings and security. Moreover, with the recent regulations, Ulips are now more customer friendly products with a transparent charge structure.

Allowing banks to enter into multiple tie-ups will enable insurance companies to diversify, reduce the cost of distribution and provide a sustainable model for delivering insurance products to semi-urban and rural areas. The customers benefit from this as they get world-class products at lower cost. To check any potential unethical practice under open architecture, Irda has enhanced the compliance structure, disclosure levels and monitoring mechanism for banks acting as a corporate agent.

At the point of sale, banks are required to inform the prospective customer about the commission and other fees that it will receive from the insurer for sale of an insurance product. Banks are required to disclose income from insurance distribution in their annual accounts.

Irda has also stipulated that insurers will conduct audit of corporate agents in relation to compliance of its regulations and submit a report to the board of directors of the corporate agent, the insurer and Irda. These steps would greatly enhance the quality of advice and sales that a customer would experience in a bancassurance sales process. Open architecture has been operational in South Korea since 2003.

The S Korean regulator requires large banks to have distribution agreements with at least three insurance companies, none of which is licensed to capture more than 25% of the insurance business generated by the bank. This promotes competition, independence and optimum product offering to customers.

From the international success of open architecture in S Korea as well as the UK, Europe and China, we can expect that in India too it will gain a stronghold soon. Through the offer of wider range of insurance products, open architecture promises to become an important instrument of financial inclusion of the large, underserved sections of our population.