I. Objective:
This paper seeks to discuss issues relating to tying and bundling insurance
policies with other services and goods and how conflicts of interest that arise
need to be dealt with. In particular, conflicts of interest that may arise in
respect of manufacturers/agencies of automobiles and other goods and
services in their role as Corporate Agents or where their group entities are
Insurance Brokers need attention.
II. Introduction:
The insurance industry is an important component of the financial sector and
insurance intermediaries play a vital role in that component of the industry.
Insurance is, however, a very complex product often hard for ordinary people
to understand. Insurance has to be sold the world over, and the Indian
Market is no exception. The touch point with the ultimate customer is the
distributor and the role played by them in insurance markets is critical. Given
the product complexity, it is particularly important in the public interest that
the sellers of insurance be both knowledgeable and trustworthy.
It is the distributor who makes the difference in terms of the quality of advice
for choice of product, and servicing of policy post sale. In the Indian market,
given its distinct cultural and social ethos of trust and long term relationships,
these factors play a major role in shaping the distribution channels and their
delivery.
The power of an agent or broker to influence the prospective buyer of
insurance, for good or bad, is enormous. Therefore, it is important to have
upfront disclosure in intermediation. Agents and Brokers should identify,
manage and mitigate any potential conflict of interest in an appropriate and
manner. They should provide clear and fair information on the nature of
their services and the capacity in which they operate, including any
administrative powers and delegated authorities they may hold from insurers,
so that clients can make informed decisions on the purchase of insurance
products.
The Code of Conduct laid down for Agents and Brokers in the respective
Regulations require them to disclose the amount of remuneration they
receive from the insurance company, on request from the client. Agents and
Brokers play an important role in the development, placement and servicing
of insurance contracts. In this process, conflicts of interests can arise from
time to time.
III. Manufacturers/Agencies of Automobiles and other goods and
services as Corporate Agents or where their group entities are
Brokers
The distribution channel is the touch point for sales and is the face that is
seen by the prospect or policyholder. When a product is sold through a
distribution channel, the insurer becomes invisible. It is therefore important
to understand how the visage of the distribution channel is seen. In this
paper, the discussions are limited to (i). Corporate Agents whose primary
business is manufacturing of automobile or other consumer goods or
providing various services travel, financial etc as a dealer or agency and (ii).
Insurance Brokers whose group entities are involved in manufacture or
dealership or other services as mentioned above.
In the model of distribution under discussion, the insurance company or its
representative is not the entity marketing the products. The insurance cover
is sold by the concerned manufacturer or retail agency as an add-on product
leveraging the brand of the manufacturer or retailer/dealer where the
manufacturer or agency is a Corporate Agent or it is sold by a broking entity
that is a group company of the manufacturer or retail agency. The risk is
carried by the insurance company which underwrites it. Products like motor
third party and package insurance, travel insurance, credit card related
insurance including group accident and health covers, lost card insurance etc
could be distributed using this channel. Infact this model could be adopted in
all market segments where the lines of business fit manufacturing and
marketing of a good or service.
What makes these arrangements attractive is the low distribution cost and
captive customer base. However, repeat business or renewal of business
cannot be assured. New distribution channels have emerged not only with
the development of new technologies, but also with the use of other
distribution networks such as supermarkets etc. Thus bancassurance is no
longer the new channel, concepts such as mallassurance are catching up.
These distributors often have close, long-standing relationships with clients,
which allows them to gather detailed information on the risks faced by
clients at a much lower cost than would be the case for an insurer. This
makes it attractive for the insurer to use such channels, especially for mass
distribution.
It must be borne in mind that customers suffer due to asymmetric
information with respect to the insurance market or a particular product or
category of product (customer vis a vis insurer) and largely rely on the
services of the distritbutor. This is the potential area of danger that gives
scope mis-selling, mainly due to conflicts of interest at the distributor's end.
IV. Conflicts of interest:
There could be several situations giving rise to conflicts of interest :
(a). The relationship between the distribution channel or a group entity
and the targeted market segment. The relationship could be long standing
involving trust and blind faith such as with travel agencies tempting the
distributor to push a product to its customer involving a bias to not only sell
without considering whether the customer requires the product but sell it
with a provider (insurer) bias and/or a product ( a particular insurance policy)
bias.
(b). The contractual relationship between the distribution channel and the
insurance company could also lead to a push factor, such as whether it is a
corporate agent ( no choice of provider and perhaps product) that is involved
or a broker( involving choice of product and broker).
(c). Impact of the cost of the distribution channel on the contracting terms
between the insurers and policyholders. Critical mass as a result of volumes
involved makes it cheaper for the insurance company to engage a particular
channel to mass sell thereby diluting the quality of disclosures and giving
information or providing clarification.
(d). Marketing methodology that may lead to client confusion regarding the
role of the distributor vis a vis the insurer. Bundling the insurance product
with the particular product or service that is the primary business of the
channel leaves the customer with no choice but to take the insurance
product offered.
The issue of conflict of interest needs to be studied and discussed from the
point of view of both the Regulations and other framework that exist today,
within which the distributor and the insurer operate, and the actual market
practices. The latter is a monitoring and enforcement issue which is already
being addressed adequately and which has infact given rise to the current
discussion. The former, namely revisiting the existing framework is what is
now being exposed to discussions across stakeholders in a bid to ensure that
there is no scope for conflict of interest to the detriment of the interests of
the policyholders.
V.Current provisions and practices:
It has been observed that insurers leverage multiple distribution channels for
cost effectiveness. The existing framework allows manufacturers and dealers or
retailers to become corporate agents or allows them to have group entities who
are insurance brokers. Except to the extent of the IRDA (Insurance Brokers)
Regulations, 2002 requiring , under Regulation 20(1) laying a ceiling on business
from a single client ( where the term “client” includes in the case of a firm or a
company, an associate or a subsidiary or a group concern under the same
management), there are no restrictions in terms of either group entities being
manufacturers or dealers or manufacturers or dealers being corporate agents
themselves. Infact it is not uncommon to see such a category of brokers and
corporate agents among those who currently exist.
Going further, outsourcing of certain activities by insurer, was till recently a grey
area and gave scope for delegation of certain not only administrative activities
but also underwriting and claims related activities to the distribution channels
under discussion. For example it is common for a motor dealer to tie up with an
insurance company and offer a single window facility to the customer. Under
the arrangement, a dealer selling motor vehicles would provide motor
insurance cover to customers through a group entity that is a broking firm for
which another group entity would provide the software, back office and call
centre support. Generally in the single window system, the insurance proposal
form would be automatically issued to the new customer by the administering
entity after receiving the database of the car and its owner from the dealer. The
insurance intermediary receives the remuneration for the business from the
insurer while the administering entity receives “remuneration” for
“infrastructure services”. Whether this “remuneration” only covers the cost of
“infrastructure services” or goes beyond is also a moot point. In addition, there
is remuneration paid by the insurer to the dealer as well for access to the
customer database. This would mean that there are three types of payments
being made in respect of the same business.
The above is only one example in the area of motor insurance and this might as
well be happening in other areas, including travel insurance, credit card
insurance etc.
On outsourcing, the recent guidelines issued by IRDA address the concerns
relating to conflicts as a result of outsourcing so far as the insurers are
concerned. However, policyholders could be vulnerable to unethical and unfair
practices when insurance products are thrust upon them as a result of their
being customers of a product or service because of the forced bundling that
takes place.
VI. Other issues relating to Tying and Bundling per se:
Going beyond the role of the Intermediaries and conflicts of interest that arise
due to intermediation, the issue of tying and bundling per se, especially with
other financial services, needs further discussion from the point of view of the
role of the other service provider (whether or not he is a corporate agent) and
the insurance company. Tying insurance products with Mutual Funds is a case in
point. Generally, group insurance covers are bundled with Mutual Fund
products. One of the concerns that arises here is the manner in which this is
advertised by the service provider. Providing information regarding the
insurance cover is okay but highlighting that more than the core service being
provided misleads the public. This violates the IRDA ( Insurance Advertisements)
Regulations, 2000. The other important concern is complying with the group
guidelines issued by IRDA. The insurance cover will have to be incidental to the
other financial product. There could be instances where the public is led to
believe that the insurance cover is the main feature of the product that is being
sold. “White labeling” of insurance products makes it difficult for them to
differentiate between the core product and the incidental one. This area,
therefore, needs attention consumer protection point of view.
VII. Issues to mull :
(1). Whilst on manufacturers of goods, should we take a view that
manufacturers or dealers of automobiles and other goods shall not be allowed
to sell insurance products to their customers? In other words, we do not allow
bundling of insurance products with goods.
(2). Or should we allow this activity with some checks built in? What kind of
checks can be built in? Perhaps the codes of conduct for agents and brokers
need to be revisited and made more elaborate and stringent from the point of
view of disclosure and transparency.
(3). What about bundling of insurance products with services including travel,
financial etc? We should lay down a framework that would prevent forced
selling and mis-selling
(4). “White labeling” of insurance products needs to be prevented. The onus of
ensuring that this does not happen by monitoring the market should lie with the
particular insurance company that has got into the tie-up arrangement.
(5). Is there a need to revisit the concept of professional training and skills pertaining
to corporate agency, especially where the touch point is a dealer or manufacturer
where quite often complex policies such as Extended Warranty policies may be sold or
a bank or a credit card company where a Lost Card Liability Insurance policy may be
sold?
(6). Else, should we have a restriction on the type of insurance product that may be
sold through such channels? Perhaps we should restrict it to only a few simple products.
(7). Should we not ban brokers from distributing products belonging to their group
entities?
(8). Does not tying an insurance policy with a product or service and offering discounts
of any sort on the tied product or offering freebies along with it for taking the
insurance cover construe “rebating”?