Last year, Cred launched Cred Garage, which can be used to renew car insurance by Cred customers. Similarly, you must have seen Paytm, PhonePe, your bank apps like SBI YONO, iMobile offering you an option to buy or renew insurance.
These Fintech/Banks are able to offer insurance policies through an arrangement with one or multiple insurance companies. I am breaking down India’s regulatory aspects of these arrangements below, taking example of India’s two leading insurtech/fintech Acko & PhonePe Payment Gateway
Acko tied up with PhonePe, enabling PhonePe to offer Acko’s insurance solutions to PhonePe’s users. How does this arrangement work? Let’s break it down:
Type of Entity:
- Acko is an insurtech, but under IRDAI regulatory framework, the term insurtech is not defined yet. In regulatory terms, Acko is a registered General Insurer in India – it is permitted to underwrite, and distribute insurance. Acko can also enter into arrangements with insurance intermediaries to distribute insurance. However, as per IRDAI’s regulatory framework, the power to “write” insurance will remain with the Insurer, ie, Acko.
- Note: As an insurtech if you want to under”write” insurance, you need to register as an Insurer with the IRDAI. I will do another explainer on Insurance Licensing to dig deeper on the requirements.
- PhonePe is a fintech, but the term fintech is not defined under the RBI framework. PhonePe is registered as a payment system (payment gateways/PGs) and has an in-principle approval to operate as a payment aggregator. The sale of insurance is not a permitted activity for PhonePe as a default of its registered status with the RBI. PhonePe first obtained a registration as a corporate agent (2020) and later a direct broking license (2021) from the IRDAI to enable it selling insurance (both are explained below)
- Note: As a fintech registered under the RBI framework, you will need an additional license from the IRDAI to be able to sell insurance on behalf of the issuing insurer.
Type of Arrangement
Acko and PhonePe would have executed a brokers agreement for the said arrangement. As a fintech, you can choose from three kinds of agreement/arrangements that can be signed with the Insurance company:
- Brokers license, a breakdown is provided here – the licensing requirements make it a little onerous and time-taking to obtain as a first-go for entities. Also, please note that brokers license requires you to exclusively carry on business of insurance broking, meaning as a fintech with any kind of RBI registration (banks, NBFCs, PGs), you will not be able to get a broking registration for the same entityPhonePe has incorporated a separate entity for the broking business. However, the different businesses of PhonePe group will be conducted on arms length basis – RBI & IRDAI – both require it strictly
- Web Aggregators license, requirements are similar to that of brokers license, however the distribution of insurance is restricted to online mode only. (Policybazaar was a web aggregator before it obtained a license for broking business)
- Corporate agency (CA) license, every bank/NBFC selling insurance has a CA license. Its easier to obtain as the regulations permit you to carry on distribution of insurance as an ancillary activity to your principal business (that is banking, payment gateways etc).However, the license is restrictive in case you want to grow bigger as a distributor:
- majority of revenue has to be from the non-insurance activities
- you can only enter into agreements with 3 (9 in case of a composite license) insurers at a time.
- you can only solicit 50% of the business from 1 insurer. PhonePe as noted above started with a CA license but later got brokers license to expand its offerings. Other examples, clubbing of term insurance with home loan product by NBFCs (Bajaj Finserv)
- Group policyholder model is also widely used (example Onsurity’s plans) but these are not available for a wide variety of products.
Additional Compliances
There are a lot of additional compliance measures for fintechs re: website/app, qualification of personnel etc as well. The IRDAI & RBI regulations both require an agreement for distribution of insurance between the Insurer and fintech. The specific clauses and restrictions as laid down under the framework are required to be incorporated in the agreement, and complied with.
IRDAI periodically reviews sale of insurance in the market and conducts audit of entities to ensure that compliance is in place. In absence of adequate license, and terms of agreement, the Insurer and the fintech can be banned from the market.
To sum it up
Fintechs have a growing customer base, with a need for financial products including insurance. The footprint of fintechs can be used by Insurers to ensure that adequate insurance coverage reaches everyone. The above is just an explainer on how fintechs can structure such arrangements.
The opportunities for synergies are endless and it will be interesting to see how fintechs use the insurance products for customer retention and Insurers using distribution of fintechs for increasing the overall penetration!
