China; The Rough Guide

The much-awaited Insurance Brokers Regulations (Regulations) is scheduled to come into force in the near future. Until now, only agents were allowed to operate in the direct insurance business and the role of brokers was limited only to reinsurance.

Now, with the entry of brokers into the insurance industry, it is poised to change the way insurance products will be sold. This article examines what it takes to become an insurance broker.

Role of an insurance broker: An insurance agent represents an insurance company and offers only the products of that company. An insurance broker, on the other hand, is independent and can represent a number of insurers.

Since he does not represent any insurance company, he can compare the benefits of different policies and premiums from a broad range of companies to find the best coverage for the customer.

An insurance broker acts as an intermediary between the insurance customer and the insurance company. Brokers not only ascertain a clients insurance needs but also offer a range of consultancy services.

They interact with the insurers and re-insurers to get a better rate and the most appropriate risk protection cover suited to the needs of a particular client.

According to proposed Regulations, their functions would also include provision of technical advice, advice on developments in the insurance market and the law, providing written acknowledgements and progress reports, assisting in the negotiation of claims et al.

Licensing requirements: Under the proposed Regulations, only licensed brokers would be permitted to operate in the Indian market. The application of license would need to specify the category for which a license is sought, that is, direct general insurance broker or direct life insurance broker, reinsurance broker, composite broker (one who carries on direct as well as reinsurance business) or insurance consultant or risk management consultant.

Any individual, firm of partners or company would be entitled to apply for such a license. However, in case of a company, the equity shareholding by a foreign company cannot exceed the percentage of capital as notified by the Reserve Bank of India (RBI).

An applicant would need to have to be qualified as an associate with the Insurance Institute of India or should have professional qualification in the field of finance, law, engineering or business management.

Further, he would be required to undergo training with the National Insurance Academy, Pune. However, an exemption may be made in the case of persons having sufficient experience for ten years. On the grant of the license, the applicant would have to pay the appropriate fees depending on the category of license.

Capital adequacy and solvency margin requirements: A person making an application for a brokers license would be required, as per the prposed Regulations, to have a minimum networth of Rs25 lakh, in case of direct brokers, Rs100 lakh for reinsurance brokers, Rs125 lakh for composite brokers and Rs10 lakh for insurance consultant or risk management consultant.

Every direct insurance broker would be required, during the period of license, to maintain a solvency margin (excess of the value of his assets over liabilities) of not less than greater of monetary value of Rs 50,000 or 10% of net retained brokerage and fees a year.

In the case of reinsurance and composite brokers, the monetary value is increased to Rs 2 lakh and Rs2.5 lakh respectively. An insurance broker who does not comply with these provisions may be deemed to be insolvent and may be wound up by the court.

As a further security measure, every insurance broker would have to take a professional indemnity insurance cover with an insurer in India, to indemnify him against breach of duty, libel, slander, loss of money or other property for which he is legally liable in consequence of any financial or fraudulent act, legal liability incurred by reason of loss of documents and costs and expenses incurred in replacing such documents or any financial penalty imposed on him. However, the proposed rules prescribe the limit of indemnity for each category of insurance to any one claim.

Remuneration: The Regulations provide that the Insurance Regulatory and Development Authority (IDRA) would regulate the remuneration payable to brokers.

The market forces would determine the remuneration of reinsurance and composite brokers. In the case of direct brokers, whether life or general, the proposed Regulations state that the amount of brokerage cannot exceed 17.5% of the premium payable on the policy.

This would make it lucrative to obtain a broker license as currently the effective rates for commissions payable to life and general insurance agents are capped at 8% and 15% respectively.

With the entry of insurance brokers, clients are all set to benefit from the ability of the insurance brokers to obtain competitive rates from several insurance companies. This would, in effect, further increase the competition amongst insurance companies.