Insurance policies

Banks violate Irdai standards, sell insurance policies over Rs 5 crore, claim brokers

Insurance brokers have spoken out against the practice of banks soliciting insurance policies for sums insured above Rs 5 crore, in breach of guidelines issued by the insurance regulator.

Banks, who work as corporate agents of insurance companies, are permitted to solicit insurance cover only for policies where the sum insured does not exceed Rs 5 crore per policy as per the regulations of corporate agents of the Insurance Regulatory and Development Authority of India (Irdai). “However, we are observing that banks are not complying with these Irdai regulations and are selling policies for Rs 100 crore and Rs 1,000 crore… even Rs 2,000 crore,” said Sohanlal Kadel, managing director of Kadel Insurance Brokers.

Banks are smuggling high-value policies without obtaining Irdai’s brokerage license, an insurance broker has said.

According to the Insurance Brokers Association of India (IBAI), banks, as lenders and sellers of insurance, should ideally be kept at arm’s length. This is necessary to ensure that the assets which are mortgaged to the bank are properly insured with optimum cover, relying on the advice of full-time insurance professionals.

In the event of a loss, if assets are not properly insured, the bank may lose, insurance officials said.

Mixing the two banking functions can create avoidable conflicts of interest and lead to poor risk management, they said. The quality of insurance covers may be compromised due to commercial pressure from customers, IBAI said in a letter to RBI and Irdai, objecting to the practice of banks selling high value policies .

Banks often carry insurance that only covers their lending exposure on an account.

For example, a bank’s loan exposure may be Rs 10 crore while the total size of risky asset may be Rs 20 crore. The insurance is arranged by the bank for just Rs 10 crore which leads to 50% underinsurance and leaves the customer not fully protected in the event of a disaster. This defeats the very purpose of insurance protection for both the bank and the customer, a broker said.

“Banks are not designed to understand the different coverage options available under commercial policies because they don’t have the necessary in-house expertise. They are unable to explain to customers the terms, conditions and obligations that customers are expected to fulfill under the policy,” the IBAI said. This results in customers getting the wrong coverage, resulting in nonpayment for underpayment of claims.
The RBI and Irdai did not respond to questions from the Indian Express.

“If there is a breach of the Irdai regulations, the regulator should definitely look into it and take action. Perhaps the regulations need to be changed if the Irdai is convinced that it is in the interest of the policyholders to change the regulations. At the end of the day, it is the interests and convenience of policyholders that matter more than those of insurance intermediaries like brokers or corporate agents,” said KK Srinivasan, a former member of the Irdai.

“But banks cannot oppose the possibility for policyholders to choose their own intermediaries and force them to use banking channels only for insurance purposes. Or require policyholders to only use insurance companies promoted by them,” Srinivasan added.

“In many cases, we observe that the banks buy the policies themselves without involving the customers and the premium is debited from the customer’s account. Copies of the policy are never shared with customers so they do not understand or be aware of what is covered and what is not,” the insurance brokers said. This non-participatory and opaque insurance buying process results in poor risk transfer outcomes for the customer in the event of a claim.

If asked for proof the same will not be available as the banks do not reserve the same in the code to circumvent Irdai guidelines thus raising a very valid question that if the banks do not receive any commission , so why are they soliciting business? This means that some bad practices are adopted by insurance and banks for mutual benefit, they alleged.