bancassurance
TRANSCRIPT
EXECUTIVE SUMMARY
The Banking and Insurance industries have changed rapidly in the changing and
challenging economic environment throughout the world. In this competitive and liberalized
environment everyone is trying to do better than others and consequently survival of the fittest
has come into effect.
This has given rise to a new form of business wherein two big financial institutions
have come together and have integrated all their strength and efforts and have created a new
means of marketing and promoting their products and services. On one hand it is the Banking
sector which is very competitive and on the other hand is Insurance sector which has a lot of
potential for growth. When these two join together, it gives birth to BANCASSURANCE.
Bancassurance is nothing but the collaboration between a bank and an insurance
company wherein the bank promises to sell insurance products to its customers in exchange of
fees. It is a mutual relationship between the banks and insurers. A relationship which amazingly
complements each other’s strengths and weaknesses.
It is a new buzz word in India but it is taking roots slowly and gradually. It has been
accepted by banks, insurance companies as well as the customers. It is basically an international
concept which is spreading all around the world and is favored by all.
Taking all these things into consideration I would like to present my project
“BANCASSURANCE (an emerging concept in India). The project flashes some light on
Bancassurance and how it is perceived by people in India. It deals with the conceptual part of
Bancassurance as well as its practical applications in India.
The main focus of this project is on benefits and importance of Bancassurance in
India. The regulations governing Bancassurance are also dealt with in this project. SWOT
analysis is also done so as to identify the various opportunities and threats for Bancassurance in
India.
The Indian as well as Global contexts both are taken into account. The project
also revolves around data, facts and figures that are necessary to prove the importance of
Bancassurance.
Further the project also includes the case study of SBI Life Insurance Company, its
various products, the growth they have experienced since the opening up of a wholly owned
subsidiary of SBI Bank that sells insurance products.
A survey analysis has also been done so as to know the popularity and the
growth perspectives of Bancassurance. The survey tries to identify whether the conditions are
favourable for it India or not. At the end some suggestions are also given to fill the potholes that
still exist in this system.
This project is just a gist about how the Globalization, Liberalization and tough
Competition have brought the Banking as well as the Insurance Industries together to help each
other and to provide excellent services to the customers.
INTRODUCTION TO BANKING
Banking as per the Banking Regulation Act, Banking is defined as: -
“accepting for the purpose of lending of deposits of money from the public for
the purpose of lending or investment, repayable on demand through cheques, drafts or order.”
A sound and effective banking system is necessary for a healthy economy. The banking
system of India should not only be hassle free but it should be able to meet new challenges posed
by the technology and any other external and internal factors. Many new things have come up in
the banking sector in the recent years. Banks have adopted the new technology because banking
has not remained up to accepting and lending but now it is all about satisfying the needs of the
customers.
The development of the Indian banking sector has been accompanied by the
introduction of new norms. New services are the order of the day, in order to stay ahead in the rat
race. Banks are now foraying into net banking, securities, and consumer finance, housing
finance, treasury market, merchant banking etc. They are trying to provide every kind of service
which can satisfy or rather we should say that it can delight the customers.
Entry of private and foreign banks in the segment has provided healthy competition and is likely
to bring more operational efficiency into the sector. Banks are also coping and adapting with
time and are trying to
become one-stop financial supermarkets. The market focus is shifting from mass banking
products to class banking with the introduction of value added and customized products.
Brief review of scenario – Banking
Emphasis on banking was first witnessed when in 1949 banking regulation ACT was
passed.
The nationalization of all commercial Banks has affected in regularizing Banking policies
and monetary policies. RBI is made the policy making body for banking services.
Nationalization of Banks has resulted in spectacular progress in Banking services.
Entry of private investment in banking
INTRODUCTION TO INSURANCE SECTOR
Insurance may be defined as: -
“It is a contract between two parties where by one party undertakes to compensate
the another party for the loss arising due to an uncertain events for which the another party
agrees to pay a certain amount regularly.”
In India, insurance has a deep-rooted history. Insurance in India has evolved over time
heavily drawing from other countries, England in particular. The insurance sector in India has
come a full circle from being an open competitive market to nationalization and back to a
liberalized market again. The business of life insurance in India in its existing form started in
India in the year 1818 with the establishment of the Oriental Life Insurance Company in
Calcutta.
The Insurance Act, 1938 was the first legislation governing all forms of insurance to
provide strict state control over insurance business. Today there are 14 general insurance
companies and 14 life insurance companies operating in the country. But today also the
insurance companies are trying to capture Indian markets as not many people are aware of it.
The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with
banking services, insurance services add about 7% to the country’s GDP. A well-developed and
evolved insurance sector is a boon for economic development as it provides long- term funds for
infrastructure development at the same time strengthening the risk taking ability of the country.
Brief Review of Scenario - Insurance
Insurance in India started without any Regulation in Nineteenth century.
It was story of a typical colonial era .A few British companies dominated the market
mostly in large urban centers.
Insurance was nationalized mainly on 3 counts First, Indian lives were not insured.
Second, even if they were insured, they were treated as substandard lives and extra
premium was charged. Third, there were gross irregularities in the functioning of
insurance companies. 25 companies were already bankrupt and another 25 companies
were filed for bankruptcy.
Life insurance was nationalized in the year 1956,and then general insurance was
nationalized in the year 1972.
In 1999, the private insurance companies were allowed back again into insurance sector
with maximum cap of 26 percent foreign holding.
WHAT IS BANCASSURANCE?
With the opening up of the insurance sector and with so many players entering
the Indian insurance industry, it is required by the insurance companies to come up with
innovative products, create more consumer awareness about their products and offer them at a
competitive price. Since the banking services, insurance and fund management are all
interrelated activities and have inherent synergies, selling of insurance by banks would be
mutually beneficial for banks and insurance companies. With these developments and increased
pressures in combating competition, companies are forced to come up with innovative
techniques to market their products and services. At this juncture, banking sector with it's far and
wide reach, was thought of as a potential distribution channel, useful for the insurance
companies. This union of the two sectors is what is known as Bancassurance.
Meaning
Bancassurance is the distribution of insurance products through the
bank's distribution channel. It is a phenomenon wherein insurance products are offered through
the distribution channels of the banking services along with a complete range of banking and
investment products and services. To put it simply, Bancassurance, tries to exploit synergies
between both the insurance companies and banks.
Bancassurance can be important source of revenue. With the increased competition and
squeezing of interest rates spread, profits are likely to be under pressure. Fee based income can
be increased through hawking of risk products like insurance.
Bancassurance if taken in right spirit and implemented properly can be win-win situation for the
all the participants' viz., banks, insurers and the customer.
Origin
The banks taking over insurance is particularly well-documented with reference to the
experience in Europe. Across Europe in countries like Spain and UK, banks started the process
of selling life insurance decades ago and customers found the concept appealing for various
reasons.
Germany took the lead and it was called “ALLFINANZ”. The system of bancassurance was well
received in Europe. France taking the lead, followed by Germany, UK, Spain etc. In USA the
practice was late to start (in 90s). It is also developing in Canada, Mexico, and Australia.
In India, the concept of Bancassurance is very new. With the liberalization and deregulation of
the insurance industry, Bancassurance evolved in India around 2002.
There are many definitions of Bancassurance and in essence depends upon the type of model and
the stage of development that insurance companies are already into.
However the most commonly used definition is:
Production and distribution of Insurance, Banking and other financial products to a
common customer base.
Bancassurance does not mean just selling insurance products through banks but in full holistic
form tries to exploit synergies between insurance companies and banks and thus realizes the full
potential of customer database of banks to develop excellent customer centric service and
generate highest quality returns for insurance companies and banks.
The Birth of Bancassurance
Bancassurance began in the European Continent in second half of the 20th century, when banks
sought to capture the manufacturing income from insurance products as well to supplement the
commission income earned from their sales. By doing so, they sought to leverage their customer
list and the related customer information that would enhance their ability to sell insurance
products to their largely mid-market customers. These early efforts were based on the advantages
that are still recognized as accruing to banks in the insurance business:
The banks' brand name and reputation
The productivity levels of branch staff and in-house agents, which can reach three to four
times that of the traditional agency force.
Bancassurance is also known as the Bank Insurance Model or BIM. Bancassurance is an
organizational strategy that allows a bank to offer various types of insurance. The model is
created by establishing ongoing relationships with one or more insurance providers. Those
providers are then able to utilize the bank’s staff and resources to sell the policies.
Reasons for growing phenomena of Bancassurance
The opening up of the insurance industry to private sector participation in December 1999 has
led to the entry of 20 new players, with 12 in the life insurance sector and eight in the non-life
insurance sector. Almost without exception these companies are seeking to utilize multiple
distribution channels such as traditional agency, bancassurance, brokers and direct marketing.
Bancassurance is seen by many to be a significant or even the primary channel (the latter being
the case for at least SBI Life).
In other Asian markets we have seen bancassurance make significant headway in recent times.
For example, bancassurance accounted for 24% of new life insurance sales by weighted premium
income* in Singapore in 2002. This is a significant increase on the equivalent 2001 statistic of
15% and is as a result of growth in significant bank-centric bancassurance operations. In Hong
Kong the figure for 2002 is expected to be at the 20% level for the same basic reasons.
1. Life insurance premium represents 55% of the world insurance premium, and as the life
insurance is basically a saving market. So it is one of the methods to increase deposits of
banks.
2. In non-life insurance business banks are looking to provide additional flow of revenues from
the same customers through the same channel of distribution and with the same people.
3. Insurers have been turning in ever-greater numbers to alternative modes of distribution
because of the high costs they have paid for agent services. These costs became too much of
a burden for many insurers compared to the returns they generated.
4. Insurers operate through bancassurance own and control relationships with customers.
Insurers found that direct relationships with customers gave them greater control of their
business at a lower cost. Insurers who operate through the agency relationship are hardly
having any control on their relationship with their clients.
5. The ratio of expenses to premiums, an important efficiency factor, it is noticed very well that
expenses ratio in insurance activities through bancassurance is extremely low. This is
because the bank and the insurance company is benefiting from the same distribution
channels and people.
6. It is believed that the prospects for increased consolidation between banking and insurance is
more likely dominated and derived by the marketing innovations that are likely to follow
from financial service modernization. Such innovations would include cross selling of
banking, insurance, and brokerage products and services; the increased use of the Internet by
consumers; and a melding of insurance and banking corporate cultures.
7. One of the most important reason of considering Bancassurance by Banks is increased
return on assets (ROA). One of the best ways to increase ROA, assuming a constant asset
base, is through fee income. Banks that build fee income can cover more of their operating
expenses, and one way to build fee income is through the sale of insurance products. Banks
that effectively cross-sell financial products can leverage their distribution and processing
capabilities for profitable operating expense ratios.
8. By leveraging their strengths and finding ways to overcome their weaknesses, banks could
change the face of insurance distribution. Sale of personal line insurance products through
banks meets an important set of consumer needs. Most large retail banks engender a great
deal of trust in broad segments of consumers, which they can leverage in selling them
personal line insurance products. In addition, a bankís branch network allows the face-to-
face contact that is so important in the sale of personal insurance.
9. Another advantage banks have over traditional insurance distributors is the lower cost per
sales lead made possible by their sizable, loyal customer base. Banks also enjoy significant
brand awareness within their geographic regions, again providing for a lower per-lead cost
when advertising through print, radio and/or television. Banks that make the most of these
advantages are able to penetrate their customer base and markets for above-average market
share.
10. Other bank strengths are their marketing and processing capabilities. Banks have extensive
experience in marketing to both existing customers (for retention and cross selling) and non-
customers (for acquisition and awareness). They also have access to multiple
communications channels, such as statement inserts, direct mail, ATMs, telemarketing, etc.
Banks' proficiency in using technology has resulted in improvements in transaction
processing and customer service.
11. By successfully mining their customer databases, leveraging their reputation and 'distribution
systemsí (branch, phone, and mail) to make appointments, and utilizing 'sales techniquesí
and products tailored to the middle market, European banks have more than doubled the
conversion rates of insurance leads into sales and have increased sales productivity to a ratio
which is more than enough to make bancassurance a highly profitable proposition.
12. Insurers have much to gain from marketing through banks. Personal-lines carriers have
found it difficult to grow using traditional agency systems because price competition has
driven down margins and increased the compensation demands of successful agents. Over
the last decade, life agents have sold fewer and larger policies to a more upscale client base.
Middle-income consumers, who comprise the bulk of bank customers, get little attention
from most life agents. By capitalizing on bank relationships, insurers will recapture much of
this under served market.
13. Most insurers that have tried to penetrate middle-income markets through alternative
channels such as direct mail have not done well. Clearly, a change in approach is necessary.
As with any initiative, success requires a clear understanding of what must be done, how it
will be done and by whom. The place to begin is to segment the strengths that the bank and
insurer bring to the business opportunity.
MODELS OF BANCASSURANCE
1. STRUCTURAL CLASSIFICATION
a) Referral Mode - Banks intending not to take risk could adopt ‘referral model’ wherein they
merely part with their client data base for business lead of commission. The actual transaction
with the prospective client in referral model is done by the staff of the insurance company either
at the premises of the ban0k or elsewhere. Referral model is nothing but a simple arrangement,
wherein the bank, while controlling access to the clients data base, parts with only the business
leads to the agents/ sales staff of insurance company for a ‘referral fee’ or commission for every
business lead that was passed on. In fact a number of banks in India have already resorted to this
strategy to begin with. This model would be suitable for almost all types of banks including the
RRBs /cooperative banks and even cooperative societies both in rural and urban. There is greater
scope in the medium term for this model. For, banks to begin with can resort to this model and
then move on to the other models.
b) Corporate Agency - The other form of non-sick participatory distribution channel is that of
‘Corporate Agency’, wherein the bank staff as an institution acts as corporate agent for the
insurance product for a fee/commission. This seems to be more viable and appropriate for most
of the mid-sized banks in India as also the rate of commission would be relatively higher than the
referral arrangement. This, however, is prone to reputational risk of the marketing bank. There
are also practical difficulties in the form of professional knowledge about the insurance products.
This could, however, be overcome by intensive training to chosen staff, packaged with proper
incentives in the banks coupled with selling of simple insurance products in the initial stage. This
model is best suited for majority of banks including some major urban cooperative banks
because neither there is sharing of risk nor does it require huge investment in the form of
infrastructure and yet could be a good source of income. This model of bancassurance worked
well in the US, because consumers generally prefer to purchase policies through broker banks
that offer a wide range of products from competing insurers.
c) Insurance as fully integrated financial service/ Joint Ventures - Apart from the
above two, the fully integrated financial service involves much more comprehensive and
intricate relationship between insurer and bank, where the bank functions as fully universal in its
operation and selling of insurance products is just one more function within. This includes banks
having wholly owned insurance subsidiaries with or without foreign participation. The great
advantage of this strategy being that the bank could make use of its full potential to reap the
benefit of synergy and therefore the economies of scope. This may be suitable to relatively larger
banks with sound financials and has better infrastructure
As per the extant regulation of insurance sector the foreign insurance company could enter the
Indian insurance market only in the form of joint venture, therefore, this type of bancassurance
seems to have emerged out of necessity in India to an extent. There is great scope for further
growth both in life and non-life insurance segments as GOI is reported have been actively
considering to increase the FDI’s participation up to 49 per cent.
2. PRODUCT BASED CLASSIFICATION
a) Stand-alone Insurance products -.In this case bancassurance involves marketing of
the insurance products through either referral arrangement or corporate agency without
mixing the insurance products with any of the banks’ own products/ services. Insurance is
sold as one more item in the menu of products offered to the bank’s customer, however,
the products of banks and insurance will have their respective brands too
b) Blend of insurance with bank products - This method aims at blending of insurance
products as a ‘value addition’ while promoting the bank’s own products. Thus, banks could sell
the insurance products without any additional efforts. In most times, giving insurance cover at a
nominal premium/ fee or sometimes without explicit premium does act as an added attraction to
sell the bank’s own products, e.g., credit card, housing loans, education loans, etc. Many banks
in India, in recent years, has been aggressively marketing credit and debit card business, whereas
the cardholders get the ‘insurance cover’ for a nominal fee or (implicitly included in the annual
fee) free from explicit charges/ premium. Similarly the home loans / vehicle loans, etc., have also
been packaged with the insurance cover as an additional incentive.
3. BANK REFERRALS
There is also another method called 'Bank Referral'. Here the banks do not issue the
policies; they only give the database to the insurance companies. The companies issue the
policies and pay the commission to them. That is called referral basis. In this method also there is
a win-win situation every where as the banks get commission, the insurance companies get
databases of the customers and the customers get the benefits.
Utilities of Bancassurance
FOR BANKS
1. As a source of fee income - Banks’ traditional sources of fee income have been the
fixed charges levied on loans and advances, credit cards, merchant fee on point of sale
transactions for debit and credit cards, letter of credits and other operations. This kind of
revenue stream has been more or less steady over a period of time and growth has been
fairly predictable. However shrinking interest rate, growing competition and increased
horizontal mobility of customers have forced bankers to look else where to compensate
for the declining profit margins and Bancassurance has come in handy for them. Fee
income from the distribution of insurance products has opened new horizons for the
banks and they seem to love it.
From the banks’ point of view, opportunities and possibilities to earn
fee income via Bancassurance route are endless. Atypical commercial bank has the potential of
maximizing fee income from Bancassurance up to 50% of their total fee income from all sources
combined. Fee Income from Bancassurance also reduces the overall customer acquisition cost
from the bank’s point of view. At the end of the
day, it is easy money for the banks as there are no risks and only gains.
2 . Product Diversification - In terms of products, there are endless opportunities
for the banks. Simple term life insurance, endowment policies, annuities, education plans,
depositors’ insurance and credit shield are the policies conventionally sold through the
Bancassurance channels. Medical insurance, car insurance, home and contents insurance
and travel insurance are also the products which are being distributed by the banks.
However, quite a lot of innovations have taken place in the insurance market recently to
provide more and more Bancassurance-centric products to satisfy the increasing appetite
of the banks for such products.
Insurers who are generally accused of being inflexible in the pricing and
structuring of the products have been responding too well to the challenges (say opportunities)
thrown open by the spread of Bancassurance. They are ready to innovate and experiment and
have setup specialized Bancassurance units within their fold. Examples of some new and
innovative Bancassurance products are income builder plan, critical illness cover, return of
premium and Takaful products which are doing well in the market.
3. Building close relations with the customers - Increased competition also makes it
difficult for banks to retain their customers. Banassurance comes as a help in this
direction also. Providing multiple services at one place to the customers means enhanced
customer satisfaction. For example, through bancassurance a customer gets home loans
along with insurance at one single place as a combined product. Another important
advantage that Bancassurance brings about in banks is development of sales culture in
their employees. Also, banking in India is mainly done in the 'brick and mortar' model,
which means that most of the customers still walk into the bank branches. This enables
the bank staff to have a personal contact with their customers. In a typical Bancassurance
model, the consumer will have access to a wider product mix - a rather comprehensive
financial services package, encompassing banking and insurance products
FOR INSURANCE COMPANIES
1 . Stiff Competition - At present there are 15 life insurance companies and 14general
insurance companies in India. Because of the Liberalization of the economy it
became easy for the private insurance companies to enter into the battle field which
resulted in an urgent need to outwit one another. Even the oldest public insurance
companies started facing the tough competition. Hence in order to compete with each
other and to stay a step ahead there was a need for a new strategy in the form of
Bancassurance. It would also benefit the customers in terms of wide product
diversification.
2 . High cost of agents - Insurers have been tuning into different modes of distribution
because of the high cost of the agencies services provided by the insurance companies. These
costs became too much of a burden for many insurers compared to the returns they generate from
the business. Hence there was a need felt for a Cost-Effective Distribution channel. This gave
rise to Bancassurance as a channel for distribution of the insurance products.
3 . Rural Penetration - Insurance industry has not been much successful in rural
penetration of insurance so far. People there are still unaware about the insurance as a tool to
insure their life. However this gap can be bridged with the help of Bancassurance. The branch
network of banks can help make the rural people aware about insurance and there is also a wide
scope of business for the insurers. In order to fulfill all the needs bancassurance is needed.
4 . Multi channel Distribution - Now a days the insurance companies are trying to
exploit each and every way to sell the insurance products. For this they are using various
distribution channels. The insurance is sold through agents, brokers through subsidiaries etc. In
order to make the most out of India’s large population base and reach out to a worthwhile
number of customers there was a need for Bancassurance as a distribution model.
5 . Targeting Middle income Customers - In previous there was lack of awareness
about insurance. The agents sold insurance policies to a more upscale client base. The middle
income group people got very less attention from the agents. So through the venture with banks,
the insurance companies can recapture much of the under served market. So in order to utilize
the database of the bank’s middle income customers, there was a need felt for Bancassurance.
REGULATIONS FOR BANCASSURANCE IN INDIA
RBI NORMS FOR BANKS
RBI Guidelines for the Banks to enter into Insurance Business
Following the issuance of Government of India Notification dated August 3, 2000, specifying
‘Insurance’ as a permissible form of business that could be undertaken by banks under Section
6(1)(o)of The Banking Regulation Act, 1949, RBI issued the guidelines on Insurance business for
banks.
1. Any scheduled commercial bank would be permitted to undertake insurance business as agent
of insurance companies on fee basis. Without any risk participation
2. Banks which satisfy the eligibility criteria given below will be permitted to set up a joint
venture company for undertaking insurance business with risk participation, subject to
safeguards. The maximum equity contribution such a bank can hold in the Joint Venture
Company will normally be50% of the paid up capital of the insurance company.
The eligibility criteria for joint venture participant are as under:
i. The net worth of the bank should not be less than Rs.500 crore;
ii. The CRAR of the bank should not be less than 10 per cent;
iii. The level of non-performing assets should be reasonable;
iv. The bank should have net profit for the last three consecutive years;
v. The track record of the performance of the subsidiaries, if any, of the concerned bank should
be satisfactory.
3. In cases where a foreign partner contributes26% of the equity with the approval of Insurance
Regulatory and Development Authority/Foreign Investment Promotion Board, more than one
public sector bank or private sector bank may be allowed to participate in the equity of the
insurance joint venture. As such participants will also assume insurance risk, only those banks
which satisfy the criteria given in paragraph 2 above, would be eligible.
4. A subsidiary of a bank or of another bank will not normally be allowed to join the insurance
company on risk participation basis.
5. Banks which are not eligible for ‘joint venture’ participant as above, can make investments up
to10% of the net worth of the bank orRs.50crore, whichever is lower, in the insurance company
for providing
infrastructure and services support. Such participation shall be treated as an investment and
should be without any contingent liability for the bank.
The eligibility criteria for these banks will be as under:
i. The CRAR of the bank should not be less than 10%;
ii. The level of NPAs should be reasonable;
iii. The bank should have net profit for the last three consecutive years.
6. All banks entering into insurance business will be required to obtain prior approval of the
Reserve Bank. The Reserve Bank will give permission to banks on case to case basis keeping in
view all relevant factors including the position in regard to the level of non-performing assets of
the applicant bank so as to ensure that non-performing assets do not pose any future threat to the
bank in its present or the proposed line of activity, viz., insurance business. It should be ensured
that risks involved in insurance business do not get transferred to the bank. There should be
‘arms length’ relationship between the bank and the insurance outfit.
7. Holding of equity by a promoter bank in an insurance company or participation in any form in
insurance business will be subject to compliance with any rules and regulations laid down by the
IRDA/Central Government. This will include compliance with Section6AA of the Insurance Act
as amended by the IRDA Act,1999, for divestment of equity in excess of 26 per cent of the paid
up capital within a prescribed period of time.
8. Latest audited balance sheet will be considered for reckoning the
eligibility criteria.
IRDA NORMS FOR INSURANCE COMPANIES
The Insurance regulatory development & Authority has given certain guidelines for the
Bancassurance they are as follows: -
1) Chief Insurance Executive: Each bank that sells insurance must have a chief Insurance
Executive to handle all the insurance matters & activities.
2) Mandatory Training: All the people involved in selling the insurance should under-go
mandatory training at an institute determined(authorized) by IRDA & pass the examination
conducted by the authority
3) Corporate agents: Commercial banks, including co-operative banks and RRBs may become
corporate agents for one insurance company.
4) Banks cannot become insurance: brokers.
Issues for regulation: Certain regulatory barriers have slowed the development of
Bancassurance in India down. Which have only recently been cleared with the passage of the
insurance (amendment) Act 2002.Prior it was clearly an impractical necessity and had held up
the implementation of Bancassurance in the country. As the current legislation places the
following:-
1) Training and examination requirements: upon the corporate insurance executive within the
corporate agency, this barrier has effectively been removed. Another regulatory change is
published in recent publication of IRDA regulation relating to the (2) Licensing of Corporate
agents
(2) Specified person to satisfy the training & examination: According to new regulation of
IRDA only the specific persons have to satisfy the training & examination requirement as
insurance agent.
BENEFITS OF BANCASSURANCE
TO BANKS
From the banks point of view:
(A) By selling the insurance product by their own channel the banker can increase their income.
(B) Banks have face-to-face contract with their customers. They can directly ask them to take a
policy. And the banks need not to go anywhere for customers.
(C) The Bankers have extensive experience in marketing. They can easily attract customers &
non-customers because the customer &non-customers also bank on banks.
(D) Banks are using different value added services life-E. Banking tele banking, direct mail &
so on they can also use all the above-mentioned facility for Bankassurance purpose with
customers & non-customers.
(E) Productivity of the employees increases.
(F) By providing customers with both the services under one roof, they can improve overall
customer satisfaction resulting in higher customer retention levels.
(G) Increase in return on assets by building fee income through the sale of insurance products.
(H) Can leverage on face-to-face contacts and awareness about the financial conditions of
customers to sell insurance products.
(I) Banks can cross sell insurance products E.g.: Term insurance products with loans.
TO INSURERS
From the Insurer Point of view:
(A) The Insurance Company can increase their business through the banking distribution
channels because the banks have so many customers.
(B) By cutting cost Insurers can serve better to customers in terms lower premium rate and better
risk coverage through product diversification.
(C)Insurers can exploit the banks' wide network of branches for distribution of products. The
penetration of banks' branches into the rural areas can be utilized to sell products in those areas.
(D)Customer database like customers' financial standing, spending habits, investment and
purchase capability can be used to customize products and sell accordingly.
(E)Since banks have already established relationship with customers, conversion ratio of leads to
sales is likely to be high. Further service aspect can also be tackled easily.
(F)The insurance companies can also get access to ATM’s and other technology being used by
the banks.
(G)The selling can be structured properly by selling insurance products through banks.
(H) The product can be customized as per the needs of the customers.
TO CUSTOMERS
From the customers' point of view:
(A)Product innovation and distribution activities are directed towards the satisfaction of needs of
the customer.
(B) Bancassurance model assists customers in terms of reduction price, diversified product
quality in time and at their doorstep service by banks.
(C)Comprehensive financial advisory services under one roof. i.e. ,insurance services along with
other financial services such as banking ,mutual funds, personal loans etc.
(D) Easy access for claims, as banks are a regular visiting place for customers.
(E) Innovative and better product ranges and products designed as per the needs of customers.
(F)Any new insurance product routed through the Bancassurance Channel would be well
received by customers.
(G) Customers could also get a share in the cost savings in the form of reduced premium rate
because of economies of scope, besides getting better financial counseling at single point.
DISTRIBUTION CHANNELS
Traditionally, insurance products were promoted and sold principally through agency
systems only. The reliance of insurance industry was totally on the agents. Moreover with the
monopoly of public sector insurance companies there was very slow growth in the insurance
sector because of lack of competition. The need for innovative distribution channels was not felt
because all the companies relied only upon the agents and aggressive marketing of the products
was also not done. But with new developments in consumers’ behaviours, evolution of
technology and deregulation, new distribution channels have been developed successfully and
rapidly in recent years. Recently Bancassurers have been making use of various distribution
channels, they are:
Career Agents:
Career Agents are full-time commissioned sales personnel holding an agency
contract. They are generally considered to be independent contractors. Consequently an
insurance company can exercise control only over the activities of the agent which are specified
in the contract. Many bancassurers, however avoid this channel, believing that agents might
oversell out of their interest in quantity and not quality. Such problems with career agents usually
arise, not due to the nature of this channel, but rather due to the use of improperly designed
remuneration and incentive packages.
Special Advisers:
Special Advisers are highly trained employees usually belonging to the insurance
partner, who distribute insurance products to the bank's corporate clients. The Clients mostly
include affluent population who require personalised and high quality service. Usually Special
advisors are paid on a salary basis and they receive incentive compensation based on their sales.
Salaried Agents:
Salaried Agents are an advantage for the bancassurers because they are under the
control and supervision of bancassurers. These agents share the mission and objectives of the
bancassurers. These are similar to career agents, the only difference is in terms of their
remuneration is that they are paid on a salary basis and career agents receive incentive
compensation based on their sales.
Bank Employees / Platform Banking:
Platform Bankers are bank employees who spot the leads in the banks and gently
suggest the customer to walk over and speak with appropriate representative within the bank.
The platform banker may be a teller or a personal loan assistant. A restriction on the
effectiveness of bank employees in generating insurance business is that they have a limited
target market, i.e. those customers who actually visit the branch during the opening hours.
Corporate Agencies and Brokerage Firms:
There are a number of banks who cooperate with independent agencies or brokerage
firms while some other banks have found corporate agencies. The advantage of such
arrangements is the availability of specialists needed for complex insurance matters and through
these arrangements the customers get good quality of services.
Direct Response:
In this channel no salesperson visits the customer to induce a sale and no face-to-face
contact between consumer and seller occurs. The consumer purchases products directly from the
bancassurer by responding to the company's advertisement, mailing or telephone offers. This
channel can be used for simple packaged products which can be easily understood by the
consumer without explanation
Internet :
Internet banking is already securely established as an effective and profitable basis for
conducting banking operations. Bancassurers can feel confident that Internet banking will also
prove an efficient vehicle for cross selling of insurance savings and protection products.
Functions requiring user input (check ordering, what-if calculations, credit and account
applications) should be immediately added with links to the insurer. Such an arrangement can
also provide a vehicle for insurance sales, service and leads.
E-Brokerage:
Banks can open or acquire an e-Brokerage arm and sell insurance products from
multiple insurers. The changed legislative climate across the world should help migration of
bancassurance in this direction. The advantage of this medium is scale of operation, strong
brands, easy distribution and excellent synergy with the internet capabilities.
Outside Lead Generating Techniques:
One last method for developing bancassurance eyes involves "outside" lead
generating techniques, such as seminars, direct mail and statement inserts. Great opportunities
await Bancassurance partners today and, in most cases, success or failure depends on precisely
how the process is developed and managed inside each financial institution.
VARIOUS TRENDS
Though bancassurance has traditionally targeted the mass market, but bancassurers have
begun to finely segment the market, which has resulted in tailor-made products for each
segment.
Some bancassurers are also beginning to focus exclusively on distribution. In some markets,
face-to-face contact is preferred, which tends to favour bancassurance development.
Nevertheless, banks are starting to embrace direct marketing and Internet banking as tools to
distribute insurance products. New and emerging channels are becoming increasingly
competitive, due to the tangible cost benefits embedded in product pricing or through the appeal
of convenience and innovation.
Bancassurance proper is still evolving in Asia and this is still in infancy in India and it is too
early to assess the exact position. However, a quick survey revealed that a large number of banks
cutting across public and private and including foreign banks have made use of the
bancassurance channel in one form or the other in India.
Banks by and large are resorting to either ‘referral models’ or ‘Corporate agency model’ to
begin with.
Banks even offer space in their own premises to accommodate the insurance staff for selling
the insurance products or giving access to their client’s database for the use of the insurance
companies.
As number of banks in India have begun to act as ‘corporate agents’ to one or the other
insurance company, it is a common sight that banks canvassing and marketing the insurance
products across the counters.
CHALLENGES
Increasing sales of non-life products, to the extent those risks are retained by the banks,
require sophisticated products and risk management. The sale of non-life products should be
weighted against the higher cost of servicing those policies.
Bank employees are traditionally low on motivation. Lack of sales culture itself is bigger
roadblock than the lack of sales skills in the employees. Banks are generally used to only product
packaged selling and hence selling insurance products do not seem to fit naturally in their
system.
Human Resource Management has experienced some difficulty due to such alliances in
financial industry. Poaching for employees, increased work-load, additional training, maintaining
the motivation level are some issues that has cropped up quite occasionally. So, before entering
into a bancassurance alliance, just like any merger, cultural due diligence should be done and
human resource issues should be adequately prioritized.
Private sector insurance firms are finding ‘change management’ in the public sector, a major
challenge. State-owned banks get a new chairman, often from another bank, almost every two
years, resulting in the distribution strategy undergoing a complete change. So because of this
there is distinction created between public and private sector banks.
The banks also have fear that at some point of time the insurance partner may end up cross-
selling banking products to their policyholders. If the insurer is selling the products by agents as
well as banks, there is a possibility of conflict if both the banks and the agent target the same
customers.
SWOT ANALYSIS:
Banking and Insurance are very different businesses. Banks have less risk but the
insurance has a greater risk. Even though, banks and insurance companies in India are yet to
exchange their wedding rings, Bancassurance as a means of distribution of insurance products is
already in force in some form or the other.
Banks are selling Personal Accident and Baggage Insurance directly to their
Credit Card members as a value addition to their products. Banks can straightaway leverage their
existing capabilities in terms of database and face-to face contact to market insurance products to
generate some income for themselves, which previously was not thought of.
The sale of insurance products can earn banks very significant
commissions (particularly for regular premium products). Inaddition, one of the major strategic
gains from implementingbancassurance successfully is the development of a sales culture
withinthe bank. This can be used by the bank to promote traditional bankingproducts and other
financial services as well. Bancassurance enablesbanks and insurance companies to complement
each other’s strengths aswell.
It is therefore essential to have a SWOT analysis done in the
context of bancassurance experiment in India. A SWOT analysis of Bancassurance is given
below:
STRENGTHS:
In a country like India of one billion people where sky is the limitthere is a vast untapped
potential waiting for life insuranceproducts. Our other strength lies in a huge pool of
skilledprofessionals whether it is banks or insurance companies who maybe easily relocated for
any bancassurance venture.
Banks have the credibility established with their constituentsbecause of a variety of services
and schemes provided by them.They also enjoy pride of place in the hearts of people because of
their long presence and sustained image.
Banks also enjoy a wide network of branches, even in the remotestareas that can facilitate
taking up the task on a large and massivescale, simultaneously.
Banks are very well aware with the psychology of the customersbecause of their interaction
with the customers on regular basis.Because of this the bankers can guess the attitude and
diverseneeds of the customers and could change the face of insurancedistribution to personal line
insurance.
People rely more upon LIC and GIC for taking insurance. If theproducts of LIC and GIC are
provided through bancassurance itwould be an added advantage to the insurance companies.
With the help of banks trained staff, its brand name and theconfidence and reliability of
people on the banks, the selling ofinsurance products can be done in a more proper way.
Other than all these things there is a huge potential for insurancesector, as the population of
India is high and a large part of it hasremained untapped till now. So this can create an added
advantagefor both banks and insurers.
WEAKNESSES:
In spite of growing emphasis on total branch mechanism and fullcomputerization of bank
branches, the rural and semi-urban bankshave still to see information technology as an
enabler. The ITculture is unfortunately missing completely in all of the futurecollaborations. The
internet connections are also not properlyprovided to the staff.To undertake the distribution of
the insurance products, the bank
employees have to undergo certain minimum period of training,followed by a test and then get
themselves licensed. Moreover thestandards of the examination have been raised in the recent
pastmaking it difficult for many examinees to clear the same.
There is lack of personalized services because the traditionalinsurance agent is considered a
member of the family and hence isable to render a personalized service during and after the
salesprocess. However that may not be the case in regards to a bankemployee.
There are many differences in the way of thinking and businessapproaches of bankers and the
managers of insurance companies.Banks are traditionally “demand-driven” organizations with
areactive selling philosophy. Insurance organizations are usually“need-driven” and have an
aggressive selling philosophy.
The visit of a customer to the bank is to have a simple transactionlike deposit or withdrawal.
Busy customers will have no time tohave a discussion on a long-term durable purchase like
insuranceacross the counter. Also, the visits in urban or metro branches aregoing to be fewer
because of ATM’s and e-banking.
Another drawback is the inflexibility of the products i.e. it cannotbe tailor made to the
requirements of the customer. For abancassurance venture to succeed it is extremely essential to
havein-built flexibility so as to make the product attractive to thecustomers.
OPPORTUNITIES:
There is a vast untapped potential waiting to be mined particularlyfor lifeinsurance products.
There are more than 900 millionlives waiting to be given a life cover (total number of
individuallife policies sold in 1998-99 was just 91.73 million).
There are many people in many areas that are still unaware aboutthe insurance and its various
products and are waiting thatsomebody should come and give them the information about it.
In urban and metro areas, where the customers are willing to getmany services like lockers
and safe deposit systems and otherproducts and services from banks, there is a good opportunity
tomarket many property related general insurance policies like fireinsurance, burglary insurance
and medi-claim insurance etc.
Banks' database is enormous even though the goodwill may not be
the same. This database has to be dissected and varioushomogeneous groups are to be churned
out in order to position theBancassurance products. With a good IT infrastructure, this canreally
do wonders.
Banks in their normal course of functions lend finance in the formof loans for cars, or for
buying a house to clients etc. They can takeadvantage of this by cross-selling the insurance
products andcombine it as a package.
Another area that could be of interest to bankers to sell insurance isexploiting the corporate
customers and tying up for insurance ofthe employees of corporate clients, which would be an
avenue witheasy access. In most cases banks provide salary disbursement andloan facilities but
here they can provide insurance cover as well.
THREAT:
Success of a Bancassurance venture requires change in approach,thinking and work culture
on the part of everybody involved. Thework force at every level are so well entrenched in their
classicalway of working that there is a definite threat of resistance to anychange that
Bancassurance may set in. Any relocation to a newcompany or subsidiary or change from one
work to a different kindof work will not be easily acceptable by the employees.
Another possible threat may come from non-response from thetargeted customers. If many
joint ventures took place betweenbanks and insurance companies then it may happen that
thecustomers may not respond to such ventures as happened in U.S.
Insurance in India is perceived more as a saving option thanproviding risk cover. So this may
create an adverse feeling in theminds of the bankers that such products may lessen the sales
ofregular bank saving products. Also selling of investment and goodreturn products may affect
the FD Portfolio of the banks.
There would be a problem of “Reputational Contagion” i.e. loss ofmarket confidence towards
one in a venture leading to loss ofconfidence on the other because of identical brand
recognition,similar management and consolidated financial reporting etc.
If no strict norms are there for such ventures then many unholyventures may take place
which may give rise to tough competitionbetween bancassurers resulting in lower prices and
theBancassurance venture may never break because of such situations.
The most common obstacles to success of Bancassurance are poormanpower management,
lack of a sales culture within the bank, noinvolvement by the branch manager, insufficient
productpromotions, failure to integrate marketing plans, marginal databaseexpertise, poor sales
channel linkages, inadequate incentives,resistance to change, negative attitudes toward insurance
andunwieldy marketing strategy.
REASONS FOR BANKS TO ENTER INTO BANCASSURANCE
There are many reasons for a bank to enter Bancassurance business. Some of the important ones
are -
• Limitations on profit margins of traditional banking products: The profit margin in the
traditional products is under tremendous pressure and banks are always looking out for other
sources of non interest income
generation.
• Regulatory Changes: Earlier RBI had not permitted the banks to enter into insurance
distribution business. Now that the regulator has permitted on non-risk participating basis more
and more banks are looking at this activity with a view of offering more products to its
customers and also to earn more non-interest income.
• Better use of Banks’ network and infrastructure: Most banks have invested heavily in creating a
huge network of branches and also the infrastructure in terms of the IT base which can be very
effectively used in Bancassurance business. Separate infrastructure need not be created for this
activity. In fact this can be a very good activity taken by the bank for an effective improvement
in the branch Cost-Income ratio.
• Customer Loyalty: The loyalty factor which the customer has in an institution like banking is
far from any other institution. This is also one of the factors which is leveraged in Bancassurance
business. It has also
been proved by research that if the bank customers are offered investment products by their
bankers the trust factor is very high and also the The relationship would be that of the bank being
a pure distributor while that of the insurer being a pure manufacturer of the insurance products.
• Customer’s information as marketing tool: This is a very important aspect why banks must do
Bancassurance. If we logically look at the scenario, a banker is the one who knows the entire
financial transaction of the customer. What money comes in, where the customer issues the
cheques and what is the Net Investible Surplus is all known to the banker. The banker is bound
by the Secrecy Act and cannot disclose the details of the transactions to outside public but the
information available at his finger tips can be made use of for the benefit of the customer. On a
proper analysis of the transactions, the banker can understand the “Investment psychology” of
the customer and accordingly offer the insurance
products to them.
All this with the stability of the organization, brand equity, loyalty and trust factor makes the
bank and the banker a perfect person/unit to suggest investment and insurance products to its
customers. When all these products are offered to the customer from the same bank branch, it
automatically makes the bank’s branch a “One stop financial services provider” or a “Super
market of financial services” to its customer.
INDIAN SENARIO
The business of banking around the globe is changing due to integration of global financial
markets, development of new technologies, universalization of banking operations and
diversification in non-banking activities. Due to all these movements, the boundaries that have
kept various financial services separate from each other have vanished. The coming together of
different financial services has provided synergies in operations and development of new
concepts. One of these is bancassurance.
Bancassurance is a new buzzword in India. It originated in India in the year
2000 when the Government issued notification under Banking Regulation Act which allowed
Indian Banks to do insurance distribution. It started picking up after Insurance Regulatory and
Development Authority (IRDA) passed a notification in October 2002 on 'Corporate Agency'
regulations. As per the concept of Corporate Agency, banks can act as an agent of one life and
one non-life insurer. Currently bancassurance accounts for a share of almost 25-30% of the
premium income amongst the private players in India.
Bancassurance provides various advantages to banks, insurers and the
customers. For the banks, income from bancassurance is the only non interest based income.
Interest is market driven and fluctuating and quite narrowing these days. Banks do not get great
margins because of the competition This is why more and more banks are getting into
bancassurance so as to improve their incomes. Increased competition also makes it difficult for
banks to retain their customers. Banassurance comes as a help in this direction also. Providing
multiple services at one place to the customers means enhanced customer satisfaction. As for the
insurance company the advantage that bancassurance provides is evident. The insurance
company gets improved geographical reach without additional costs. In India around
67,000branches are there for PSU banks alone. If all 67,000 branches sell the insurance products
one can see the reach. This is one method of penetrating the market.
India's rural market has huge potential that is still untapped by the insurance
companies. Setting up their own networks entails such a huge cost, that no company would be
interested in doing so.
Bancassurance again comes as an answer. It helps the insurance companies to tap
the market at a much lower cost. As for the customer the competitive nature of the Indian market
ensures that the reduction in costs would result in benefits in terms of lower premium rates being
passed onto him. The penetration level of life insurance in the Indian market is considerably low
at 2.3% of GDP with only 8% of the total population currently insured.
Thus, bancassurance provide an apparently viable model for product
diversification by banks and a cost-effective distribution channel for insurers. The success of the
partnership between the two entities depends on the ‘right model’ partnership. Given these
changes, bancassurance and collaboration between banks and insurers has a long way to go in
India. With almost half of the population likely to be in the 'wage earner' bracket by 2010, there
is every reason to be optimistic that bancassurance in India will play a long inning.
GLOBAL SCENARIO
Bancassurance has grown at different pace and taken different shapes and forms in
different countries depending on the demography, economic and legislations in that country.
During the last two decades, bancassurance has taken deep roots in various countries, especially
in Europe. Bnacassurance, so far, has been basically European.
Bancassurance has seen tremendous acceptance and growth across nations.
Although it enjoys a penetration rate in excess of 50% in France, Spain, Italy and Belgium, other
countries have opted for more traditional networks. The Life insurance market in the UK is
largely in the hands of the brokers. With advent of bancassurance, their market share has
increased from 40% in 1992 to 54% in 1999. Sales agents also play an important role on a
market entirely regulated by the Financial Services & Markets Act (FSMA) which imposes very
strict marketing conditions. In Germany, the market continues to be dominated by general sales
agents, even if their market share has declined from 85% in 1992 to54% in 1999.
Bancassurance recorded huge growth in Europe but not in USA and Canada. In
the US, there were hurdles till recently banks were not allowed to do insurance business and vice
versa. In several countries in Latin America, banks have benefited from recent reforms –
financial deregulation, among others – by selling insurance products across the counter. In
China, banks are limited to playing the role of tide agents to insurance companies, which can still
provide a good platform for bancassurance to develop.
In Hong Kong, when a Swiss bank introduced bancassurance, the life insurance
sales went up by 240%. Japan has to make a remarkable headway in bancassurance. In the
Philippines, banks are permitted to own100% of the insurance company. Bancassurance is yet to
be exploited in Singapore. There is a huge market potential out there in many countries and
especially in India when compared to the global benchmark. It is a good news to bancassurers
that only about 25% of the global insurable population is insured, and even among them most are
underinsured.
WHY IS BANCASSURANCE MORE SUITED FOR LIFE INSURANCE PRODUCTS?
Traditionally, much fewer non-life insurance products are distributed through
bancassurance than life insurance products. There are several reasons for this:
1. The main reason may be the complementary nature of life insurance and banking
products. Bank employees are already familiar with financial products and quickly adapt
to selling insurance - based savings or pension products.
2. On the other hand, the non-life market requires special management and selling skills,
which are not necessarily prevalent in bancassurance. In addition, such competencies
require significant investment in training and motivation, and therefore additional costs.
3. Life insurance products are generally long-term products, which require customers to
have complete confidence in the institution that invests their money. And we now know
that, in many countries, banks have a better image and are more trusted than insurance
companies
4. Bank advisers can use their knowledge of their customers’ finances to target their advice
towards specific needs. This is a major advantage in life insurance and less important in
personal injury insurance
OTHER TIE-UPS
Life Insurance tie-ups:
Private Sector Companies:
1. Bajaj Allianz Life Insurance Co. Ltd.
2. Birla Sun Life Insurance Co. Ltd.
3. HDFC Standard Life Insurance Co. Ltd.
4. ICICI Prudential Life Insurance Co. Ltd.
5. ING Vysya Life Insurance Co. Pvt. Ltd.
6. SBI Life Insurance Company Limited
7. TATA-AIG Life Insurance Company Ltd.
8. Sahara India Life Insurance Co. Ltd.
9. Aviva Life Insurance Co India Pvt. Ltd.
10. Kotak Mahindra OU Mutual Life Insurance Co. Ltd.
11. Max New York Life Insurance Co. Ltd.
12. MetLife India Insurance Co. Pvt. Ltd.
13. Reliance Life Insurance Co. Ltd.
14. Shriram Life Insurance Co. Ltd.
15. Bharti Axa Life Insurance Co. Ltd.
Public Sector Company:
16. Life Insurance Corporation of India
Non-Life Insurance tie-ups:
Private Sector Companies:
1. Royal Sundaram Allianz Insurance Co. Ltd.
2. TATA-AIG General Insurance Co. Ltd.
3. Reliance General Insurance Co. Ltd.
4. IFFCO-TOKIO General Insurance Co. Ltd.
5. ICICI Lombard General Insurance Co. Ltd.
6. Bajaj Allianz General Insurance Co. Ltd.
7. HDFC Chubb General Insurance Co. Ltd.
8. Cholamandalam MS General Insurance Co. Ltd.
9. Star Health and Alhed Insurance Co. Ltd.
Public Sector Companies:
10. The New India Assurance Co. Ltd.
11. National Insurance Co. Ltd.
12. United India Insurance Co. Ltd.
13. The Oriental Insurance Co. Ltd.
14. Export Credit Guarantee Corporation Ltd.
15. Agriculture Insurance Company Ltd
RELEVANCE OF BANCASSURANCE IN THE INDIAN FINANCIAL SECTOR
1. Integration of the financial service industry in terms of banking, securities business and
insurance is a growing worldwide phenomenon. The Universal Banking concept is evolving on
these lines in India.
2. Banks are the key pillars of India’s financial system. The public has immense faith in banks.
3. Share of bank deposits in the total financial assets of households has been steadily rising.
4. Indian Banks have immense outreach to the households. Total of 66000branches (as of 2007)
of commercial banks, each branch serving an average of 15,000 people.
5. Banks enjoy considerable goodwill and access in the rural regions. There are more than 33000
branches in rural India (about 50% of total), and approximately 14,500 semi-urban branches,
where insurance growth has been most buoyant. 200 exclusive Regional Rural Banks in deep
hinterland.
6. Banks have enormous retail customer base. Share of ‘individuals’ as a category in bank
accounts is steadily increasing. Rural and semi urban bank accounts constitiute close to 60% in
terms of number of accounts, indicating the number of potential lives that could be covered by
insurance with the upfront involvement of banks.
7. Banks world over have realized that offering value-added services such as insurance, helps to
meet client expectations. Competition in the Personal Financial Services area is getting `hot’
in India and that Banks can retain customer loyalty by offering them a vastly expanded and more
sophisticated range of products. Insurance distribution can also help the bank to increase the fee-
based earnings to a large extent.
8. Fee-based selling helps to enhance the levels of staff productivity in banks. This is vitally
important to bring higher motivation levels in banks in India.
9. Banks can put their energies into the small-commission customers that insurance agents would
tend to avoid. Banks’ entry in distribution can help to enlarge the insurance customer base
rapidly. This helps to popularize insurance as an important financial protection product.
10. Bancassurance helps to lower the distribution costs of insurers. Acquisition cost of insurance
customer through bank is low. Selling insurance to existing mass market banking customers is
far less expensive than selling to a group of unknown customers. Experience in Europe has
shown that bancassurance firm shave a lower expense ratio. This benefit could go to the insured
public by way of lower premiums.
11. Banks have an important role to play in the pension sector when deregulated. Low cost of
collecting pension contributions is the key element in the success of developing the pension
sector. Money transfer costs in Indian banking is low by international standards. Portability of
pension accounts is a vital requirement which banks can fulfill, in a credible framework.
Bancassurance as a Catalyst for insurance industry
Existing low penetration of insurance coupled with the high per capita income gives Middle East
and gulf countries an unusually strong platform to launch and grow the industry into the future.
Recent economic strides and infrastructural boom in the countries like UAE, Qatar and Bahrain
are working as catalyst and pushing the insurance industry to new horizons. Market opportunities
for banks offering Bancassurance products are endless.
Conventional Bancassurance products like deposit insurance, unit linked products and
investment cum protection products are likely to continue to be sold to its customer base.
However, the asset creation process in most gulf countries through equity markets and
infrastructural investments have created a new generation of High Net Worth Individuals
(HNWIs) and banks would do well to take note of it. In addition, non-conventional products like
Takaful and commercial insurance products can also be sold to individuals and corporate houses
through banks.
In order to assess the potential for the insurance market growth in the region, we need to look at
the following indicators:
Per Capita Premium:
Average per capita premium in the Gulf countries is $155 compared to $3266 in US, $920 in
Europe, $4343 in Switzerland and $3394 in UK. Amongst the Gulf countries, UAE’s per capita
premium is $302, Bahrain-$220, Kuwait-$259, Oman-$77 and Saudi-$47. (Source: Swiss
RE/Sigma)
Insurance penetration:
Another indicator is insurance penetration in terms of premium as % to GDP. Here again, most
Gulf countries have insurance penetration below 1% compared to 9% in US and 14% in UK.
Within the Gulf, UAE has a figure of 1.25%, Oman-0.96%, Kuwait-0.79% and Saudi-0.53%.
All this goes on to prove that this market is still undeveloped or underdeveloped as far as the
realization of the full potential of insurance market is concerned. The situation is even more
contrasting if we are considering the life insurance market. Here, compared to 10.5% life
insurance penetration in UK, UAE has a penetration of 0.23%, Oman-0.17%, Kuwait-0.18% and
Saudi-0.1%.
From Bankers point of view, the potential lies in tapping not only the existing premium turnover
in the market which was around US$12,000 million in the year 2003 but also the likely increase
in Turnover due to the entry of banks in the insurance market.
Identifying successful strategy for entering the market.
Collaboration with an insurance company - This could take multiple forms as below:
Buying an insurance company out rightly
Acquiring shares in an existing insurance company
Cross share holding between the bank and insurance company
Sign exclusive agreement with one insurance company
Sign non-exclusive agreement with more than one insurance company
All the above have their own merits and demerits and has to be used for entering the market
based on the market conditions and practicality. For example, if a bank owns an insurance
company which is not an established player in the market, starting Bancassurance with them
alone is not an attractive proposition. However, if the insurance company has a strong standing
and a reputation in the market, it makes sense to sign an exclusive agreement with them.
Vertical integration of insurance activities
This actually means manufacturing of insurance products in-house which may involve risk
taking on the part of the banks. In fact, this is not a good idea as the job should be left to be done
by somebody who is best at that. In the past, many European banks had taken to this kind of
strategy but most of them have discarded vertical integration of insurance after some beatings in
the form of losses suffered. Banks can still get the benefit of vertical integration by properly
coordinating with the insurance company and getting the products done or developed exclusively
for them.
Overcoming the Regulatory challenges
Middle East and Gulf countries are more suitable to perpetuate Bancassurance from Regulatory
point of view. No Regulator in any country in the Middle East prohibits the distribution of
insurance products by the banks to its customers. In most of the countries in Asia and Far East
like Singapore, Thailand, Hong Kong, Indonesia, Philippines, Japan, China, India, they are still
struggling with the Regulation as the Regulators are opening the window very slowly. Further,
there is no ban or express regulation in the Middle East regarding owning or buying shares or
even cross share holding between banks and insurance companies. All these factors together
make this region a perfect platform for the banks to start Bancassurance.
Effective Bancassurance model
The effective Bancassurance model is the one which helps in pushing sales as well as satisfying
customer needs and helping banks to become a ‘One stop shop’. As a Bancassurance model, if
the bank is using distribution agreement model, it should, go in for an exclusive agreement with
an insurance company of repute. The reason being, while signing up with multiple insurers you
end up looking like a broker who is not committed to a ‘brand’ or a ‘product’ or a particular level
of ‘service’, which is so vital for the growth of Bancassurance. By signing an exclusive
agreement with the insurer, the bank can put the stamp of its own ‘Brand’ on the product without
actually taking any risk. The bank will thus be identified with the product it is selling and will be
able to convince the customer in a much better way. However, if the insurance market is not
mature and there is lack of creativity and innovation, even non-exclusive agreement is workable.
Bancassurance as a Diversification Strategy by Banks
Banks in GCC or Middle East have been growing at a very high rate compared to their peers in
the international market. Average ROE of GCC banks in 2001 was 15.3% compared to the
average ROE of 12.5% by top 10 international banks (GBC, UK report). Some of the banks like
Doha Bank in Qatar have been growing consistently at a rate of 70% for the last three years.
However, maintaining such a growth for a longer period is not sustainable since market has to
mature at one stage and economic conditions may also change. Bancassurance, therefore, comes
as an additional source of revenue to help maintain the growth momentum. This can also be used
to offset the declining deposits due to the declining interest rate.
Sale of insurance products by the banks offers the following benefits:
1) It adds to the portfolio of retail products already offered by the Banks.
2) It helps in bundling and packaging the existing core banking products like adding deposit life
insurance on a pure term deposit product.
3) Balances the less performing products
4) It is a risk management device, since the fee increase earned on the sale of insurance can be
used to offset the loss on account of bad loans.
5) It helps increase customer loyalty since they have more reason than just the banking to
continue their relationship with the bank.
6) It helps bank to become a ‘one stop shop’ or ‘Alfinanz’ for all the financial needs of the
customers while it is banking insurance investments or state planning.
It is a long journey before the Middle East insurance market reaches its mature stage in the cycle
of evolution. The time now is to innovate and harness the potential of insurance that this region
offers. The buffers of energy, shipping and construction industry is poised to offer more
opportunities as new technology and new pool of human resources shall be looking to the
insurance industry to provide protection. Banks are in a unique position to sell not only personal
lines insurance products but also commercial insurance by leveraging their relationship with their
loyal customer base
BANCASSURANCE IN INDIA – SOME ISSUES:
The difference in working style and culture of the banks and insurance sector
needs greater appreciation. Insurance is a ‘business of solicitation’ unlike a typical banking
service, it requires great drive to ‘sell/ market’ the insurance products. It should, however, be
recognized that ‘bancassurance’ is not simply about selling insurance but about changing the
mindset of a bank. Moreover, in India since the majority of the banking sector is in public sector
and which has been widely disparaged for the lethargic attitude and poor quality of customer
service, it needs to refurbish the blemished image. Else, the bancassurance would be difficult to
succeed in these banks. Studies have revealed that the basic attitudinal incompatibility on the
part of employees of banks and insurance companies and the perception of customers about the
poor quality of banks had led to failures of bancassurance even in some of the Latin American
countries. There are also hitches in the system of bancassurance strategy in the form of ‘conflict
of interests’, as some of the products offered by the banks, viz., ‘term deposits’ and other
products which are mainly aimed at long term savings/ investments can be very similar to that of
the insurance products. Banks could as well feel apprehension about the possibility of
substitution effect between its own products and insurance products and more so, as a number of
insurance products in India come with an added attraction of tax incentives.
In case the bancassurance is fully integrated with that of the banking institution,
it is suitable only for larger banks, however, it has other allied issues such as putting in place
‘proper risk management techniques’ relating to the insurance business, and the like. As there is
a great deal of difference in the approaches of ‘selling of insurance products’ and the usual
banking services- thorough understanding of the insurance products by the bank staff coupled
with extra devotion of time on each customer explaining in detail of each product’s intricacies is
a prerequisite.
Moreover, insurance products have become increasingly complex over a period
of time, due to improvisation over the existing products as well as due to constant innovation of
new products, emanating from the excessive competition adding to even more difficulties in
comprehension of the products and marketing by the bank staff. These can result in resistance to
change and leading to problems relating to industrial relations. Unlike, the banking service, there
is no guarantee for insurance products that all efforts that a bank staff spends in explaining to a
customer would clinch the deal due to the very nature of the insurance products. This frustration
of the bank staff has the danger of spill over effect even on their regular banking business.
Bankers in India are extremely naïve in insurance products as there were no occasions in the past
for the bankers to deal in insurance products, therefore they require strong motivation of both
monetary and non monetary incentives. This would be more so in the emerging scenario due to
complex innovations in the field of insurance / pension products at a rapid pace with the entry of
a number of foreign insurance companies with vast experience in the developed countries’
framework.
In view of the above, reorientation of staff in the public sector banks in
particular, to be less bureaucratic and more customer friendly would indeed be a challenging
task, albeit it is a prerequisite for the success of bancassurance. With the financial reforms and
technological revolution embracing the financial system, there has been a great deal of flexibility
in the mind set of people to accept change. The problems outlined above need not, however,
deter the banking sector to embark on bancassurance as any form of resistance from the bank
employees could be tackled by devising an appropriate incentive system commensurate with
intensive training to the frontline bank staff.
Scope for Bancassurance in India
By now, it has become clear that as economy grows it not only demands stronger and lively financial sector but also necessitates to provide with more sophisticated and variety of financial and banking products and services. Krueger (2004) pointed out that the history of the North America is a case in reference of one of financial growth and deepening in tandem with economic growth. As India is being considered one of the developing countries among the Emerging market economies, financial sector has also developed much vibrant with the financial reforms. In fact, in recent years, it is surmised that even the ‘global economic growth’ hinges on development prospects of the emerging economies like China and India to a greater extent.
Significantly, Indian financial system has recorded an average growth of over 8.5 per cent for the last four years, with macroeconomic and financial stability (RBI, 2006) and indications are that it may grow at even improved rate in the near future provided there is good monsoon. Experience also showed that economic growth had powerfully supported the expansion of middle income class in most of the Asian countries, and now it is the turn of India. Experience reveals that at the early growing stage of the economy the primary financial needs are met by the banking system and thereafter as the economy moves on to advanced pedestal, the need for the other non-banking financial products including insurance, derivatives, etc., were strongly felt. Moreover, as India has already more than 200 million middle class population coupled with vast banking network with largest depositors base, there is larger scope for use of bancassurance. For instance as at end March 2005, there were more than 466 lakh bank accounts with scheduled commercial banks. It is worth being noted that, Swiss Re (2002) in its study on Asia pointed out that bancassurance penetration is expected to tangibly increase in Asia over next 5 years and this has been greatly proved. In simple words, it is rightly put that bancassurance has promised to combine insurance companies’ viable edge in the “production”
of insurance products with banks’ edge in their distribution, through their vast retail networks (Knight, 2006).
Bankers’ Perspective
In the post reforms, the financial sector has more number of players of both domestic and foreign and the dividing line between the banks and non-banking financial institutions’ activities had considerably thinned down. Overlapping in one another’s functions/ areas have become more common than exception. The direct upshot of these developments led to intensive competition in the banking sector and which in turn had a strong bearing on the banks’ net interest margin (spread). In fact the emerging scenario is likely to bring down the banks’ spread even thinner.
ii. Insurers’ Perspective
Contemporaneously, with the extensive financial reforms in the insurance sector and the subsequent opening up of this sector, all the private entities plunged almost simultaneously with a very little spacing of time and the entire insurance sector has been revealed to stiff competition. A number of foreign insurance companies in both life and non-life segment have entered by means of joint ventures with an equity stake of upto 26 per cent in the local companies. IRDA had reported that as much as Rs. 8.7 billion was brought in by these companies by way of foreign investments, with the extant provision of 26 per cent foreign capital. In the context of Indian insurance market being growing at an annual rate of 21.9 per cent (IRDA, 2005), increase in the foreign participation in the capital would only strengthen the competition with more number of fresh entrants, given the better growth prospects.
Bancassurance Strategy – The Concept
Bancassurance, i.e., banc + assurance, refers to banks selling the insurance products.
Bancassurance term first appeared in France in 1980, to define the sale of insurance products
through banks’ distribution channels (SCOR 2003). This term is extremely familiar among the
European countries as banks selling insurance products in most of these countries are a common
feature. Banks are being used as an effective alternate channel to distribute insurance products
either as ‘stand-alone insurance products’ or ‘add-ons to the bank products’ by way of combining
the insurance with typical banking products/services. According to IRDA, ‘bancassurance’ refers
to banks acting as corporate agents for insurers to distribute i n s u r a n c e p r o d u c t s . L i t
e r a t u r e o n b a n c a s s u r a n c e d o e s n o t differentiate if the bancassurance refers to
selling of life insurance p r o d u c t s o r n o n - l i f e i n s u r a n c e p r o d u c t s . A c c o
r d i n g l y, h e r e ‘bancassurance’ is defined to mean banks dealing in insurance products of
both life and non-life type in any forms. Banks in Europe though predominantly deal with life
insurance products, they are also channeling the non-life insurance products. It is also important
to clarify that the term bancassurance does not just refer specifically to distribution alone. Other
features, such as legal, fiscal, cultural and/or behavioural aspects also form an integral part of the
concept of bancassurance (SCOR 2003). Quite reverse of the concept of bancassurance, there is
also a concept known as ‘assure banking’ which refers to the provision and distribution of
financial and banking services by insurance companies
Scope for Bancassurance in India
By now, it has become clear that as economy grows it not only demands stronger and vibrant
financial sector but also necessitates to provide with more sophisticated and variety of financial
and banking products and services. Krueger (2004) pointed out that the history of t h e No r t h
Ame r i c a i s a c a s e i n r e f e r e n c e o f o n e o f f i n a n c i a l strengthening and
deepening in tandem with economic growth. As India is being considered one of the fast
developing economy among the emerging market economies, financial sector has also grown
much vibrant with the financial reforms. In fact, in recent years, it is surmisedthat even the
‘global economic growth’ hinges on growth prospects of the emerging economies like China and
India to a greater extent. Significantly, Indian economy has recorded an average growth of over
8.5 per cent for the last four years, with macroeconomic and financial stability (RBI, 2006) and
indications are that it may grow at even better rate in the near future provided there is good
monsoon. Experience also showed that economic growth had strongly supported the expansion
of middle income class in most of the Asian countries, and now it is the turn of India. Experience
reveals that at the initial growing stage of the economy the primary financial needs are met by
the banking system and thereafter as the economy moves on to higher pedestal, the need for the
other non-banking financial products including insurance, derivatives, etc., were strongly felt.
Moreover, as India has already more than 200 million middle class population coupled with vast
banking network with largest depositors base, there is greater scope for use of bancassurance.
For instance as at end March 2005, there were more than 466 lakh bank accounts with scheduled
commercial banks. It is worth being noted that, Swiss Re (2002) in its study on Asia pointed out
that bancassurance penetration is expected to tangibly increase in Asia over next 5 years and this
has been greatly proved.
In simple words, it is aptly put that bancassurance has promised t o c o m b i n e i n s u r a n c
e c o m p a n i e s ’ c o m p e t i t i v e e d g e i n t h e “ p r o d u c t i o n ” o f i n s u r a n
c e p r o d u c t s wi t h b a n k s ’ e d g e i n t h e i r distribution, through their vast retail
networks (Knight, 2006). i)
Bankers’ Perspective
In the post reforms, the financial sector has more number of players of both domestic and foreign
and the dividing line between the banks and non-banking financial institutions’ activities had
considerably thinned down. Overlapping in one another’s functions/ areas have become more
common than exception. The direct upshot of these developments led to intensive competition in
the banking sector and which in turn had a strong bearing on the banks’ net interest margin
(spread). In fact the emerging scenario is likely to bring down the banks’ spread even thinner. As
it can be seen from the Table 3 that the spread ratio has considerably come down cutting across
allthe banking groups. For the banking system (scheduled commercial banks) the spread ratio
decelerated from 3.31 per cent at end-March 1991 to 2.78 per cent at end-March 2006. In the
case of Indian private sector banks it declined sharply from as high as 4.02 per cent at endMarch
1991 to 2.30 per cent at end-March 2006. Public sector banks are no exception, despite their
monstrous size, they registered a decline in spread ratio from 3.22 per cent to 2.72 per cent
during the same period. Foreign banks operating in India were always known for the higher
spread than the rest, even their spread had decelerated from 3.92 per cent to 3.51 per cent.
Therefore, banks were compelled to be constantly on the look out for a stable alternate sources of
earnings in the form of nontraditional and fee based sources of incomes.
Banks’ response to these developments has been to migrate towards newer and non-
traditional areas of operations especially relating to fee based activities / non-fund based
activities. This is reflected in the sharp increase of proportion of non-interest income to total
income in recent years (Chart 1). Further, banking system in India was prone to very high NPAs,
the net NPA ratio of banking sector was as high as 15.7 per cent at end-March 1997, which, with
concerted efforts declined sharply to around 1.20 per cent by end-March 2006. Although this
was an unprecedent achievement in the Indian banking industry, diversification towards new
areas such as bancassurance, promises greater scope for further enhancement in earnings with no
menace of increase in NPAs. In the ensuing paradigm, the banking sector irrespective of public
or private sector and foreign or domestic banks’, their increased reliance on the non-fund based
business activities would become inevitable. Persistent endeavor in scouting for new technology,
new products/ services/ new avenues, has become necessary for the growth as well as
sustainability of banking system. It is in this context possibly, bancassurance could well be an
appropriate choice for banks to increase their stable source of income with relatively less
investments in the form of new infrastructure.
As far as banking sector’s infrastructure is concerned, only a few countries could
match with India for having largest banking network in terms of bank branches spreading almost
throughout the length and breadth of the country. This is a direct outcome of the then prevailing
deliberate policy thrust towards branch expansion. At end-March 2006, we have as many as 284
scheduled banks, of which 88 are commercial banks and 196 are Regional Rural Banks (RRBs).
There are as many as 70,324 bank offices, of which, nearly 70% of the branches are located in
rural and semi urban areas and the remaining around 30% are in urban and metropolitan areas.
The population served by a bank office worked out to be around 16000 people at end-March
2006. Besides the commercial banking system, India has a large rural credit cooperatives as also
urban cooperative banking network. Taken together these institutional set up, the ratio of
population served by a bank branch would work out to be far lower. Thus, on the one hand we
have a very low insurance penetration andlow insurance density as compared with the
international standards, on the other hand, India has a widely stretched and well established
banking network infrastructure. It is this contrasting situations to assimilate the two systems by
way of ‘bancassurance strategy’ to reap the benefits of synergy. This is an opportune time for
both banking and the insurance sectors to come closer and forge an alliance for the mutual
benefit. For, both the regulators, i.e., RBI and IRDA have already proffered appropriate policy
guidelines and set in a c o n g e n i a l e n v i r o n m e n t f o r s u c h a n e n d e a v o r. B
e s i d e s , t h e Government of India’s unequivocal policy to provide insurance cover to the
low income households and the people at large at a minimum cost are also favourable.
Moreover, going by the present trend of mergers and acquisition a n d c o n s e q u
e n t c o n s o l i d a t i o n , t h e e m e r g e n c e o f f i n a n c i a l supermarkets and
financial conglomerates could not be ruled out in India, therefore bancassurance could as well be
one more financial activity of the banks. There is also one more dimension to this a c t i v i t i e
s , u n l i k e t h e n o rma l b a n k i n g a c t i v i t i e s , i n t e r n a t i o n a l experience
showed that bancassurance helped the banks to have a non-volatile source of income. Above all,
in India still vast majority of banking operations are conducted through the manual operations at
the banks’ branch level with relatively less automation such as ATMs, tele-banking, internet
banking, etc., unlike many developed countries. This stands out as an added advantage for the
banks to have direct interface with the customers, to understand their needs/ tastes and
preferences, etc., and accordingly customize insurance products. In fact there are also greater
scope for innovation of new insurance products in the process. Bancassurance would therefore be
uniquely suited to exploit the economies of scope for the banks in India. Bancassurance also
becomes a blessing in disguise from the point of view of CRAR. Significantly, even customers
stated to be preferring for banks entering into insurance. For instance, a survey conducted by
FICCI revealed that 93 per cent of the respondents h a v e p r e f e r r e d b a n k s s e l l i n g
i n s u r a n c e p r o d u c t s . T h e r e f o r e banc a s sur anc e c an be a f e a s ibl e a c t
ivi ty and vi abl e sour c e of additional revenue for the banks.
Studies have also portrayed that adding life insurance activities to banking operations
allowed banks to increase their assets under management substantially and to diversify their
earnings.
ii) Insurers’ Perspective
Contemporaneously, with the sweeping financial reforms in the insurance sector and the
consequent opening up of this sector, all the private entities plunged almost simultaneously with
a very little spacing of time and the entire insurance sector has been exposed to stiff competition.
A number of foreign insurance companies in both life and non-life segment have entered by way
of joint ventures with an equity stake of upto 26 per cent in the local companies IRDA had
reported that as much as Rs. 8.7 billion was brought in by these companies by way of foreign
investments, with the extant provision of 26 per cent foreign capital. In the context of Indian
insurance market being growing at an annual rate of 21.9 per cent (IRDA, 2005), any increase in
the foreign participation in the capital would only intensify the competition with more number of
fresh entrants, given the better growth prospects
OBJECTIVES
To study the various bancassurance strategy to capture and maintain new market.
To study the scope for bancassurance in India.
To study the various models through which bancassurance operates.
To study the various benefits that bancassurance provides to consumers, banks and
insurers.
To study the various marketing and distribution strategy in bancassurance.
To find the problems faced by the the financial institutions due to bancassurance