India Opens Doors To Intermediaries

This is why there have been no brokers at all in the Indian insurance market. For two years India's regulator and the government tried to convince politicians that independent brokers are necessary to provide depth to the market and protect consumers from being swayed by high-pressure advertising by insurers, as brokers are capable of providing independent advice.

In addition, it is only recently that the Parliament has finally put its stamp of approval to the bill and thus opened up India's distribution market. The country's regulator has issued detailed rules on market operations based on the enabling legislation passed by Parliament. It has also invited applications for licenses for brokers, corporate agents and insurance advisers.

As in the case of insurers, foreign brokers also will need to pick an Indian partner to enter the market. They can have a maximum of a 26 percent stake in the partnership to form a brokerage firm in India.

Regulators recently issued a set of regulations that allow a generous level of commission that a broker can charge, and this is one reason foreign brokers are expected to enter the Indian market. The regulator has allowed non-life brokers to charge up to 30 percent of the premium amount as brokerage. Regulations for fixing brokerage commission for life insurance have not yet been announced.

Some foreign brokerages have had an indirect presence in India for some years because they operated in the reinsurance market liaison offices and alliances with local firms. These are the firms that will find it easy to pick Indian partners because they already have some knowledge of the situation on the ground.

Neil Mathews, chief of the Mumbai representative office of Aon Corp., has announced that it is setting up a local brokerage firm in partnership with a local firm, Global Insurance Services. He said he expected the new venture to be the first broker to obtain a license from the Insurance Regulatory and Development Authority, Indias regulator.

New York-based Marsh & McLennan is also looking for an Indian partner, market sources say. Sources said some of Marsh's European and U.S. clients have invested in India, and this would provide it with a good amount of local business after it sets up operations.

Mohamed Rayees, regional director of Willis, has announced that the brokerage has initiated the process of due diligence on a few short-listed Indian companies. HSBC bank had announced some time back that it would enter the brokerage business after the ground rules were formulated. Industry sources also indicated that Jardine Insurance, one of the most important reinsurance advisers in India, is also looking for a suitable Indian partner to set up a brokerage firm.

Several Indian firms including banks have indicated they wish to enter the distribution business after tying up with foreign players. They include the country's second largest bank, Mumbai-based Industrial Development Bank of India, and two other Mumbai companies, AV Group and Larsen & Tubaro.

Some Indian companies like the Kolkata-based Union Bank, Corporation Bank in Kolkata, Stock Holding Corp. of India in Mumbai, and Export Credit Guarantee Corp. of India, also based in Mumbai, have indicated their preference to become corporate agents representing specific insurance companies.

Cherian Varghese, chairman of Corporation Bank, has announced that the bank will be seeking a license to act as agent for two state-run insurers–the Life Insurance Corp. of India and the New India Assurance. New India has also signed up another bank, Union Bank of India, as its agent. Union Bank is already representing HDFC Standard Life Insurance Company in Mumbai.

Once they begin operations, brokers and corporate agents are expected to bring additional business to the new players that have both Indian and foreign partners.

IRDA has divided would-be brokers into three categories–direct, reinsurance and composite brokerages. Market sources said composite brokerages would provide the linkages between industrial customers, direct insurers and reinsurers, and would thus be able to influence both product quality and pricing in the market.

Entry restrictions fixed by IRDA are in terms of the net worth of the companies seeking licenses, which are not high for foreign brokers. It is 2.5 million rupees ($51,802) for life and non-life brokers, Rs 20 million ($414,422) for a reinsurance broker, and Rs 30 million ($621,633) for a composite broker.

The regulator has also said that the licensing process will include a check to see if the applicant firm has the necessary infrastructure to effectively discharge its duties. Solvency margins would be calculated at 10 percent of the premium and fees earned by the brokerage in the previous year or Rs 2.5 million, whichever is higher.

IRDA also said that brokers and insurance consultants will have to buy professional indemnity insurance cover that would indemnify them against any breach of duty by reason of any negligent act, error or omission, and also protect them from charges of libel or slander committed by the firm or by the firms employees in the course of doing business.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 18, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.