Gopal Sharma lives in Ranchi and banks with a popular bank. He is keen to invest in a long-term child plan for his kid's education and, therefore, turns to his bank to seek advice on products that suit his requirement as the bank, in its capacity as a corporate agent, also offers insurance plans. However, the bank's branch is not able to help him or provide quality advice as it is too small in the larger scheme of things and insurance is not a focus area for it. Hence, he cannot access the right product as the bank has neither the information nor trained staff to guide him.

The wide prevalence of such cases has driven the Irda (Insurance Regulatory and Development Authority) to lay down guidelines for an open architecture, a concept which address the problems of customers in search of appropriate insurance options and, thereby, brings about their financial inclusion.

So what is an open architecture and how will it help customers? Let us first look at the various distribution channels of insurance products we have today. Currently, an insurance policy can be bought in three ways: through an agent; from a bank where one holds an account; or directly from the insurance company. Buying insurance from a bank, called Bancassurance, has gained popularity since the opening of the insurance sector. Under the current structure, banks can only offer products of a single life insurer with which they have entered into a corporate agency tie-up.

The structure leaves banks and customers with little choice but to bundle available products with current services, which, in some cases, may not be in the best interest of the customer. The structure prevents banks from offering unique and powerful packages that are flexible and versatile to meet a range of needs. This has hampered the ability of banks to effectively differentiate themselves through their financial advice and solutions that are useful to customers.

With their sound infrastructure, experienced and trained staffs, and intricate network, banks are ideally placed to reach out to a vast clientele across the country with a wide range of offerings. And, yet, bigger banks have been unable to capitalise on the insurance opportunity in all their branches, especially in smaller towns and cities. The open architecture aims at increasing insurance penetration through optimal utilisation of banks' infrastructure and experienced workforce. However, for it to be successful, the regulator should allow the banks to tie up with at least two non-life and two life insurers in each state. This will promote healthy competition and allow the banks to offer a choice to their customers.

The open architecture could enable an insurance company to offer its products at any branch of any bank across the country through multiple tie-ups. This will enlarge the range of options available to potential insurance buyers by increasing insurance penetration into geographies left untapped so far.

The potential of Bancassurance is estimated at 80,000 bank branches but barely 10% of bank account holders buy life insurance through this channel. The open architecture makes this is a huge scalable opportunity for the insurance business. Insurance products ranging from traditional plans to Ulips are designed to give customers long-term savings and security.

Moreover, Ulips are now more customer-friendly products with a transparent charge structure. Allowing banks to enter into multiple tie-ups will enable insurance companies to diversify, reduce the cost of distribution and provide a sustainable model for delivering insurance products to semi-urban and rural areas. Customers benefit from this as they get world-class products at a lower cost.

To check any potential unethical practice under the open architecture, Irda has set in place a compliance structure, disclosure levels and monitoring mechanism, for banks acting as a corporate agent. At the point of sale, banks are required to inform the prospective customer about the commission and other fee that it will receive from the insurer for sale of an insurance product.

Banks are required to disclose income from insurance distribution in their annual accounts. Irda has also stipulated that insurers will conduct audit of corporate agents in relation to compliance of its regulations and submit a report to the board of directors of the corporate agent, the insurer and Irda. These steps would greatly enhance the quality of advice and sales through Bancassurance.

The open architecture has been operational in Korea since 2003 and it has been a success. The open architecture has worked well in the UK, Europe and China, too. Hence, we can expect the concept to gain a stronghold in India also. By offering a wider range of insurance products, the open architecture promises to become an important instrument of financial inclusion of large, underserved sections of our population.