Banks violate Irdai norms, sell insurance policies above Rs 5 crore, claim brokers

Banks, which work as corporate agents of insurance companies, are allowed to solicit insurance cover only for policies where sum assured is not more than Rs 5 crore per policy as per the Insurance Regulatory and Development Authority of India’s (Irdai’s) corporate agent regulations. “However, we observe that banks are not following these regulations of the Irdai and sell policies for Rs 100 crore and Rs 1,000 crore… even Rs 2,000 crore,” said Sohanlal Kadel, managing director, Kadel Insurance Brokers.

Banks are clandestinely selling high-value policies without taking the broking licence from the Irdai, said an insurance broker.

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

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

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

Banks often arrange for insurance that only addresses their loan exposure on an account.

For example, the loan exposure of a bank may be Rs 10 crore whereas the total asset size at risk may be Rs 20 crore. Insurance is arranged by the bank for only Rs 10 crore, which leads to under-insurance of 50 per cent and leaves the customer not fully protected when a calamity happens. This defeats the very purpose of insurance protection for both the bank as well as the customer, said a broker.

“Banks are not geared to understand the various coverage options available under commercial policies as they lack the necessary in-house expertise. They are not in a position to explain to the customers the terms, conditions and obligations the customers are expected to fulfil as part of the policy,” the IBAI said. This results in customers getting the wrong coverage, leading to non-payment for under-payment of claims.
The RBI and the Irdai did not respond to queries from The Indian Express.

“If there is a violation of Irdai regulations, the regulator should certainly examine it and take action. Maybe the regulations require modification if Irdai is convinced that it is in policyholders’ interests to modify the regulations. Ultimately it is the policyholders’ interests and convenience that matter more than that of insurance intermediaries like brokers or corporate agents,” said K K Srinivasan, former member, Irdai.

“But banks cannot stand in the way of policyholders’ option of choosing their own intermediaries and compel them to use the banking channels only for insurance. Or compel policy holders to use only insurance companies promoted by them,” Srinivasan added.

“In many cases we observe that banks are buying the policies themselves without involving the customers and the premium is debited to the customer’s account. The policy copies are never shared with the customers so they don’t understand or are aware of what is covered and what is not,” insurance brokers said. This non-participative and opaque insurance buying process results in poor risk transfer outcomes for the customer when there are claims.

If asked for proof, the same will not be available as the banks do not book the same in the code to bypass the guidelines of Irdai, thereby raising a very pertinent question that if banks are not getting any commission, then why do they solicit the business? It means some wrong practices are being adopted by the insurance and the banks for mutual benefits, they alleged.