Open Architecture – Indian insurance is moving towards that; and it is good

The CEO of SBI Life recently commented that the company was perfectly prepared to handle the new open architecture shift that SBI Life was planning to get into. They are also expecting regulations along these lines.

What exactly is open architecture in life insurance?

Open architecture is all about choice. For instance, currently only corporate agents work on open architecture wherein they can distribute life insurance policies of multiple life insurers. Individual agents are only allowed to distribute products of a single insurer. Under open architecture, even individual agents will be allowed to distribute products of multiple insurers. This has not really been welcomed by the traditional agent-based life insurers like LIC. For instance, LIC gets about 90% of its policy flows through its exclusive agents. If they fall under open architecture, then LIC will have less incentive to train and invest in these agents. There is a bigger implication for bancassurance plays.

How open architecture will impact bancassurance

Today, if you look at the private life insurers, the dominance is of life insurers that have group banking license. So, you have SBI Life, HDFC Life, and ICICI Pru Life at the top. Then Axis Max Life and Kotak Life are quickly growing. In a bancassurance model, the banking network and customer base is used to push insurance products. Banks are happy because they are earning a lot more of fee income from selling insurance and these are normally pull-customers who are already banking clients. Life insurance is just an add-on product to sell and leverage the existing relationship. That bancassurance model has helped the private life insurers and the private sector mutual funds grow at a rapid pace.

Why is government keen on open architecture?

There are two broad reasons why the government is pushing for open architecture in life insurance, especially where the bancassurance model is being used. The separation of businesses like banks, insurance, mutual funds etc is done to keep arm’s length distance between the various businesses of the same group. However, in a bancassurance that is not happening as there is clear preference shown to group insurance companies. The second reason is that, the RBI feels banks are ignoring the core deposit mobilization activity of banks. That is evident in the falling credit deposit ratio. RBI clearly wants banks to focus again on core banking, rather than merely pushing financial products.

What it means for life insurance companies?

Actually, the impact may not be too high. For the big guns like SBI Life, HDFC Life, and ICICI Pru Life; bancassurance has given them the much-needed thrust in the early days. They have now achieved economies of scale and can afford to invest in developing their own distribution network. It will have to be a mix of agency, institutional, and digital; but that should not pose a problem. Most of the bancassurance plays already have a strong distribution network, even independent of the bancassurance model. The big challenge will be how these life insurers take on the might of LIC in the open architecture model. After all, LIC has its own battles to fight in the new open architecture paradigm!