Chennai: At a time when Indian insurers and policyholders are questioning their utility, insurance brokers have come up with a new demand: insurance on credit.

In support of their demand, the brokers say insurance penetration will go up drastically if insurance cover is provided on credit. To substantiate their claim they cite the growth in vehicle population, consumer durable purchases and the housing sector due to easy credit availability.

"This is a ludicrous demand," says a public sector industry official. "The insurance sector is one of the very few financial services industries that has not been embroiled in any scam till date. And measures like risk cover on credit or credit period to brokers are sure invitation for trouble."

Under the Insurance Act, a risk cover could be provided only upon receipt of the premium. In some cases insurers accept bank guarantee to provide a risk cover. Housing and consumer durable loans could not be equated with a non-life insurance policy. In the case of a loan, the lender's maximum risk is fixed and he has also the lien on the financed property.

Further, malpractice by brokers could not be ruled out. For instance, a broker may pocket the transit insurance premium once he comes to know that the goods have reached the destination safely. And, the insurer has no lien on the property insured.

Private insurers who otherwise support broking firms are not in favour of insurance on credit. Says Anthony Jacob, deputy managing director, Royal Sundaram Alliance Insurance: "Abroad, insurance brokers enjoy credit period. But the Indian market is not yet ready for such a practice and I do not support the idea."

Concurs K Bharathan, regional head (south), ICICI Lombard General Insurance: "If there is a delay in the premium receipt, our investment income will come down and, in turn, the overall profitability." In a sliding interest rate regime immediate hard cash is required for investments. Normally, insurers offset their underwriting losses with their investment income.

According to an industry expert, in the markets where brokers are given credit, the insurance premium is not an administered one. Insurance brokers advice the client on the kinds of risk covers he should opt for and hunt for an insurer who will underwrite that risk at a particular rate.

Untangling the spaghetti
Now, the issue of remunerating the general insurance intermediaries is akin to a plate of spaghetti with several inter-linked issues to be settled. All the stakeholders in the insurance chain - individual and corporate agents, insurers, brokers, and policyholders - are parties to the dispute.

The three-member expert committee (chairman A C Mukherjee and members K N Bhandari and G V Rao) constituted by the Insurance Regulatory and Development Authority (IRDA) will be submitting its first report soon (See: ).

The issue is not just about the rates of commission or brokerage that is being paid to the insurance intermediaries; inter-linked issues that need to be addressed are:
1. The dichotomy of a liberated sector running on administered price mechanism;
2. Whether differential remuneration is warranted for the different channels;
3. How to effect a smooth transition to the new environment from what has been practised for the past three decades; and
4. The way out for the existing institutions.

On the firing line are the insurance brokers, their brokerage and their market conduct. Established insurers complain of increasing costs owing to high brokerage without any benefit in return. As per the IRDA, depending on the kind of business and the capital of the corporate client, the brokers could be remunerated to the maximum extent of 17.5 per cent.

But should the IRDA specify the maximum commission / brokerage rates when the Insurance Act put a ceiling on the management expenses of an insurer at 19.5 per cent of the premium income? Moreover, the maximum rate by default is always the minimum rate.

"If you do not have a ceiling on procurement cost, companies will spend on presales and forget the post-sales service. Eighty per cent of the premium income goes for the payment of claim and only 20 per cent is available as surplus. And the insurers should manage their expenses within that," says an industry expert.

The individual agents complain that the brokers are tapping their business by unethical practices like premium rebating and other allurements. The insuring public fear premium rates to climb up as the insurers will ultimately pass on the cost to them.

The private insurers welcome the brokers with open hands since they can save on administrative costs. Says Royal Sundaram managing director Micky Brigg: "We strongly support the intermediary channel and emphasise that both the brokers and agents will play a major role in penetrating the insurance market in India."

The government insurers who oppose the brokers, as they "do not deliver value" for the brokerage they receive, are supported by the corporate sector. Industry bodies have started demanding reduction in premium rates citing the beefy margins enjoyed by insurers in certain classes of business. Their contention is that if the insurers are able to pay heavy brokerage and also make profits, then is it not the time for reduction in premium rates so that the consumers are benefited?

According to industry officials the broker genie has been let out without readying the market. "The regulator should have first addressed the issue of giving the pricing freedom to the insurers before allowing new intermediaries like the brokers and third party administrators."

Though the IRDA has announced dismantling of price controls in a phased manner, policyholders have a valid grouse. That is, price decontrol is happening only in respect of business lines where the loss ratio is high. This has resulted in an increase in premium. But the premium rates of profitable business lines like fire and engineering insurance policies are not being touched.

"If the fire premium rates are detariffed competition will bring down the rates. The consequence will be the firming up of premium rates for personal lines of business as cross-subsidisation will not be possible," says Bharathan.

While the consensus is there - at least outwardly - that the interests of consumers and insurers are to be blended properly, how this could be achieved smoothly is the question doing the rounds.

"There should be a sequence of events and new measures have to be implemented in a structured form. Institutions that have evolved over three score years require time to wither away for a new set-up to thrive. Everything cannot happen overnight," sums up an industry expert.