Risk control is key for insurance players when dealing with brokers
May 04, 2011 | BY
Janice QuDraft regulation will allow more financial institutions to become insurance brokers
Insurance companies need to keep a tight rein on risks as their selection of available brokers widens, increasing costs and liabilities.
More financial institutions will be allowed to engage in the insurance brokering business by the end of this month. The China Insurance Regulatory Commission (CIRC) announced its planned revision on April 7 2011, which is open for public comment until April 27 2011. The draft regulation says that non-insurance institutions, including securities and trust companies, can participate in the sector, but that stricter regulatory scrutiny is required.
Insurance companies have to take responsibility for the brokering conduct of their partner financial institutions and are faced with the underlying risks. Because of this, they must be selective when deciding on a partner financial institution, advises Yanghui Cao, a Guangzhou-based partner at Wang Jing & Co. “The desirable choice should be the one that has a sound management system and an ample network of offices,” he said.
Tightened regulatory oversight means that insurance companies have to “increase their administrative costs in supervising the brokering business of the financial institutions and provide training for their personnel,” said Cao.
A potential risk facing insurance companies is the non-compliance conduct of financial institutions during the selling process. For example, the features and risks of banking or investment products could become concealed when they are tied into insurance products.
Another problem insurance companies must watch out for is the financial institution's possible failure to present clients with important clauses contained in the insurance contract, including those explaining the cancellation period, exceptions, insurance cancellation, the face value of the insurance policy, or exaggerating the profits of the insurance products.
“Therefore, the supervision and management of the conduct of the financial institutions is especially important for risk control purposes,” said Cao.
To help prevent these problems, the insurance regulator will clamp down on improper business conduct. It will conduct on-site compliance examinations and scrutinise whether insurers have reviewed the competency of financial institutions as insurance brokers, concluded an insurance brokerage contract with the financial institutions, trained relevant personnel of the financial institutions or taken actions to prevent money laundering.
Additionally, insurance companies will be liable for the insurance brokering conduct of the financial institutions within their scope of authorisation. In circumstances where financial institutions without proper agency conclude insurance contracts with clients, the insurance company will be bound by the insurance contract.
“When the insurance risk causes damage, the insurance companies will have to pay the insurance indemnity first,” explained Cao. “After however, they may have recourse against the financial institutions for acting beyond their brokering power.”
Small and medium-sized insurance companies might benefit from the influx of more participants joining the market, as the dominance of commercial banks in the insurance sector will likely be impaired.
“Banks usually favour large insurance companies as their business partners,” said Cao. “Insurance companies will have more options when choosing a broker and have more power during negotiations of commission.”
The intensified competition generated by more players joining the market will have a positive effect, pressuring insurance brokers to improve the quality of their services to maintain their competitiveness. -JQ
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