final project of 100 marks

BANCASSURANCE—PATHWAY TO SUCCESS

INTRODUCTION

The term ‘bancassurance’ refers to selling of insurance products by banks. Here,

insurance companies tie-up with the banks and through them sells insurance products to

the customers. Under this system, banks act as corporate agents to insurance companies

in selling their insurance plans. As a result, banks earn additional revenue besides

regular interest income from banking business, known as fee-based income. It is purely

a risk free income for the banks, since they act as corporate agents between the

insurance company and the client. Bancassurance is at a nascent stage in India. It

originated in 2000 when the government issued notification under the Banking

Regulation Act which allowed Indian banks to conduct insurance business. It gained

momentum after the Insurance Regulatory and Development Authority (IRDA) passed

a notification on ‘Corporate Agency’ regulations in October 2002.

The French termed it ‘Bancassurance’, the Germans termed it ‘Allfinanz’ and

some familiarize it with the terms ‘Integrated Financial Services’ or ‘Assurebanking’.

Bancassurance in simple words is ‘Distribution by Convergence’.

Definition :

The Bancassurance is the distribution of insurance products through the bank's

distribution channels. It is a phenomenon where in insurance products are offered

through the distribution channels of the banking services along with a complete range

of banking & investment products & services. In simple term we can say bancassurance

tries to exploit synergies between both the insurance companies & banks.

There are only three parties required for the provision of the products:

The bank

The insurer and

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The customer

Features of Bancassurance:

The features of bancassurance states as follows:

Features of

Bancassurance

Bank Act as

Corporate Agents

Win-WinModel

Additional revenue

Reduced costs

Valuable Inputs from

Bankers

Banks Act as Corporate Agents:

Instead of running after individual agents for business, insurance companies

invented the concept of bancassurance. Bancassurance helped them in motivating their

customers to buy insurance products with the help of banks. Here, bankers act as a

corporate agent for the insurance companies. The agent banker gets high commission

on the first premium paid by the customer and later a marginal commission on renewal

premium till the maturity of the policy for regular premium plans. A one time

commission is also paid in case of single premium policies.

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Win-Win Model:

Under bancassurance, banks can develop strong relationships with their customers

and sell insurance products. Insurance companies affirm that marketing ‘risk products’

through banks is a cost effective proposition. Bancassurance is a successful model for

both insurance companies and banks. Currently, insurance companies are tying up with

various commercial banks to sell their products and lure more customers. At the same

time, banks without any additional investments on infrastructure are able to earn

service-based income (commission) to augment their core lending activities.

Additional Revenue:

There are various advantages of bancassurance. For the banks, income from

bancassurance is only non-interest-based income. Interest is market driven and its

movement depends on market conditions. At present, banks are unable to get margins

as a result of acute competition and this is making it difficult for them to retain their

customers. Hence, to meet the overhead costs and to improve their incomes, more

banks are getting into bancassurance with existing infrastructure. Bancassurance helps

in generating additional revenue for the banks. By providing multiple services at one

place, the satisfaction level of customers can be increased. For example, through

bancassurance, a customer gets home loans, along with insurance as a combined

product. In the current global financial crisis many banks are looking at bancassurance

as it generates additional income in the form of fees. Financial experts say that since

interest rates have been falling and profits are declining, making survival difficult in the

current financial markets, banks must opt for bancassurance to leverage their income

levels and keep abreast with the changes and latest developments in the financial

markets.

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Valuable Inputs from Bankers:

Another advantage of bancassurance is that the employees of banks can learn

marketing techniques. It provides the insurance companies with valuable inputs. They

can analyze the insurance markets and recommended suitable plans to meet the

requirements of customers.

Reduced Costs:

Banks play a significant role in building up a feasible healthcare program in India.

Only 2.5 million people have access to healthcare facilities. The demand for healthcare

products, which banks can distribute, is growing. Bancassurance helps in lowering

distribution costs of the insurers. It is imperative to discuss with financial advisers

before an insurance product is introduced in the market.

Hence, acquisition cost of insurance through banks is low. Selling insurance to

existing mass market of banking is less expensive than selling it to a group of unknown

customers. Experience in Europe has shown that bancassurance firms have a lower

expense ratio. This benefit could go to the insured public, by way of lower premiums.

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CONVERGENCE STRATEGIES

Having embraced Bancassurance, insurers and banks have a demanding task of

developing suitable strategies for the successful execution of their collaborative plans.

The project enumerates the critical success factors that bancassurers need to

consider as they move ahead to meet their strategic objectives.

The strategies to be adopted should be primarily revolved around the customer and be

directed towards enhancing the value to the customer. It implies that strategy execution

should lead to customer attraction and retention.

Technology adoption is one strategy that is gaining significant coverage

for varied reasons. As the level of technology is enhanced in the banks, they are able to

develop new operating capabilities, thereby offering extraordinary service to customers.

For customer attraction and retention, Insurers will also have to evolve strategies for

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technology adoption. Data management systems enable maintenance of seamless data

in an integrated fashion. The enormous customer data existing with the banks can be

effectively data mined to obtain information on customer profiling, demographic

preferences, etc. this data intelligence can be proactively used in product innovation

and services modeling. Apart from data mining, data that is maintained in timely and in

error-free manner will enable smooth execution of the business processes. Tailor-made

technological applications can then be used to touch the business processes in the

collaboration process thereby ensuring faster execution through automated services.

Not surprisingly, the reduced costs and enhanced revenues will confer competitive

advantage to the technology adopters.

TRADITIONAL BANCASSURANCE DIRECT

ING VYSYA 0 20 80

MET LIFE 10 10 80

TATA AIG 15 5 80

ALLIANZ 25 5 70

HDFC 10 15 75

ICICI PRUDENTIAL 5 20 75

BIRLA 20 25 55

AVIVA 0 85 15

SBI LIFE 0 20 80

DISTRIBUTION THROUGH DIFFERENT DISTRIBUTION

CHANNELS:

0%20%40%60%80%

100%

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IFE

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AIG

ALLIA

NZ

HD

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ICIC

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SB

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DIRECT

BANCASSURANCE

TRADITIONAL

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GROWTH OF BANCASSURANCE

Since its emergence in 1980s in France, Bancassurance traversed to the global

arena and gained currency as a new distribution channel for the insurance products.

Bancassurance has witnessed a rapid growth in almost all the countries across the

globe. It has been more successful in Europe than any other country of the world. Its

growth primarily depends on a country’s demography, economic and legislative

prescriptions. The concept of bancassurance is relatively new in the US. The Glass

Steagall Act of 1933 prevented banks in the USW from entering into alliance with

different financial services providers, thereby putting a barrier on bancassurance. As a

result, life insurance was primarily sold through individual agents, who obviously

targeted rich people, leaving a majority of the American middle class households

underinsured. With the US Government repealing the Act in 1999, the concept of

bancassurance stated making headway in the US also. In the Asian context, it has been

estimated that bancassurance would contribute almost 16% of the life premium in the

Asian markets in the coming years, primarily with the growth that is expected in India

and China.

This concept gained currency in the growing global insurance industry and its

search for new channels of distribution. Banks, with their geographical spread and

penetration in terms of customer reach of all segments, have emerged as viable sources

for the distribution of insurance products. Presently, there is more activity here than

anywhere else. And every one wants to jump onto the bandwagon for a piece of the

action cake.

Concept evolution is essentially the result of certain driving forces. In the case of

bancassurance, understanding the needs of the two financial intermediaries – banks and

insurance companies that aim to develop the synergy can lead to the identification of

the driving forces. It implies that there has to be an upward thrust in the bank’s bottom

line, while the insurer gets a wider penetration into the market in a cost effective

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manner. As in the case of most coalitions, attaining a win-win is much easier in theory

than in practice. It assures a win-win concept for banks and insurers.

The insurance industry has finally woken up from its long slumber to an

altogether new awakening. It is the rise of a new dawn that has brought with it

opportunities in abundance. From innumerable insurers, to affordable and quality

covers for the consumer, from increase in distribution channels to incorporating

information technology measures, from net selling to bringing about increased

transparency - its all there. The omnipresent agent is no more the only distribution

channel today for insurance products. Increase in distribution channels has among

others also seen the concept of Bancassurance taking roots in India, and it is emerging

to be a viable solution to mass selling of insurance products.

Bancassurance is a long-standing dream of offering a seamless service of banking,

life & non-life products. India, being the one of the most populous country in the world

with a huge potential for insurance companies, has an envious chain of bank branches

as the lifeline of its financial system. Banks with over 65,000 branches & 65% of

household investments are the backbone of the Indian financial market. In India, there

are 75 branches per million inhabitants. Clearly, that's something insurance companies -

both private and state-owned - would find nearly impossible to achieve on their own.

Considering it as a channel for insurance, it gives insurance an unlimited exposure to

Indian consumers.

Banks have expertise on the financial needs, saving patterns and life stages of the

customers they serve. Banks also have much lower distribution costs than insurance

companies and thus are the fastest emerging distribution channel. For insurers, tying up

with banks provides extensive geographical spread and countrywide customer access; it

is the logical route for insurers to take.

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However, the evolution of bancassurance as a concept and its practical

implementation in various parts of the world, have thrown up a number of opportunities

and challenges. Aspects such as the most suited model for a given country with its

economic, social and cultural effect interacting on each other, legislative hurdles, and

the mindset of persons involved in this activity, have dominated the study and literature

on bancassurance.

The motives behind bancassurance also vary. For banks it is a means of product

diversification and a source of additional fee income. Insurance companies see

bancassurance as a tool for increasing their market penetration and premium turnover.

The customer sees bancassurance as a bonanza in terms of reduced price, high quality

product and delivery at doorsteps. Actually, everybody can be a winner here.

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BANCASSURANCE – A WIN WIN SITUATION

Bancassurance is a win win situation for both the banks as well as the insurance

companies. Banks and insurance companies are the entities which are linked to each

and every individual in today’s era. Banks have been improving and progressing from

the traditional till the modern age. Insurance too provide an assurance to the every

common individual. A win win situation for banks and insurance companies is that

banks provide bancassurance to retain their existing customers as well as to attract new

customers. And for insurance companies is that to earn revenue and create a channel for

diversification.

Banks aims to provide satisfaction of more financial needs to their customers

under one roof i.e. if a customer comes to a bank to deposit a cheque he can at the same

time interact with the bank personnel about the new insurance products coming in so

van the bank personnel can do if the customer approaches to him. While for an

insurance company is to provide quality customer access.

The banks can diversify the revenue by providing both the bank products as well

as the insurance products to their customers while insurance companies can have a

quicker geographical reach to the end customers.

It is more profitable resource utilization for the banks as the banks profits can be

increased by selling the insurance products. Whereas if a bank sells insurance products

to their customers in creates a brand equity for the insurance companies.

Bancassurance enriches the work environment for the banks whereas insurance

companies leverage service synergies with the banks.

The last but not the least bancassurance establishes sales orientated culture for the

banks while for the insurance companies it establishes a low cost acquisition channel.

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BANCASSURANCE – WILL THE CUSTOMER REALLY

BENEFIT?

The opening up of the insurance sector is a reality, and the Insurance Regulatory

and Development Authority (IRDA) has licensed three players.

It is natural that banks, which deal with the public on a day-to-day basis, think of

entering this sector. In fact, in April, the RBI approved, and issued guidelines for, the

entry of banks into the insurance sector. The guidelines permit any scheduled c

commercial bank to undertake insurance business as an agent of insurance companies,

on a fee basis, without any risk participation, while banks wishing to set up joint

ventures to undertake insurance business with risk-participation have to satisfy the

eligibility criteria.

Normally, the maximum equity a bank can hold in a joint venture is 50 per cent of

the insurance company's paid-up capital. The RBI may, however, selectively permit an

initial higher equity contribution by a promoter bank, pending divestment of equity

within the prescribed period. Thus, the SBI has been allowed equity participation of 74

per cent in its joint venture.

The eligibility criteria also stipulate that as on March 31, 2000 the bank's net

worth should be not less than Rs 500 crore, the CRAR not less than 10 per cent, and the

level of NPAs reasonable. Vysya Bank has entered an agreement with the Netherlands

major ING Insurance, while Centurion Bank has tied up with Canada Life.

Financial majors such as the UTI, ICICI, IDBI, and HDFC extended the scope of

their services by opening up banks, and their performance is encouraging enough to

extend activity on similar lines. Thus, banks and insurance companies can together

create an integrated financial services group, providing customers one-stop financial

shopping.

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The LIC and the GIC have reportedly approached the Centre for licenses to offer

their customers banking and allied services. When banks, insurers and financial

conglomerates come together, as is increasingly happening, exploiting the cross-selling

potent ail of the enlarged group is usually stated as the primary goal. This, the emerging

bank-insurer claims, will create lucrative revenue synergies and generate increased

profits for the stakeholders.

To achieve success, the bank-insurance entity needs to focus on a multi-brand,

multi-distribution channel. The optimum synergy is to have an overall umbrella brand

for the group that endorses the various product and distribution channel brands

throughout the organization.

This strategy encourages the provision of individualized services with the back-up

of the large financial group, and makes it easier to sell different products through

different channels. For instance, a complex unit-linked life insurance product is better

sold through brokers or agents, while a standard term product can be handled by bank

branches; bancassurance can, at best, sell such simple products as auto insurance, home

loan and accident insurance cover.

On the critical question of cross-selling, the aspirations of banks and insurers

cannot be over-ambitious, as experience in other countries indicates that, in general,

financial institutions have not achieved great success in cross-selling to their own

customer base. The key to success in this area is to have a customer overview and, thus,

a common database designed along customer, rather than product, lines.

The future trends point towards the banks (say, the SBI) grappling with the task of

bringing together the businesses of banking and insurance. What will be crucial is the

handling of the most important component -- the customer. As customers become more

aware, demanding and sophisticated, with fast-changing life-styles, they want greater

convenience in financial services. The emergence of remote distribution channels, such

as PC-banking and Internet-banking, was a response to just such a demand for quick k

service.

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In India, the main channel for insurance distribution is directly through an agent.

The dependence on direct-agent selling may continue as life and pension products have

long-term commitment and require advice. However, possible fallout of bank-insurance

synergy could be the emergence of newer distribution channels seeking a market share

in the network.

A quick glance at the global scene indicates that more banks are expanding into

non-life business, and that insurance companies are seeking banking networks. The

formation of the huge European financial conglomerates Credit Suisse and Winterthur

could be the first of a long line of new conglomerates.

In other countries, the all-finance concept is already at work. Instances are:

Caisses Desjardins in Quebec; Bradesco in Brazil; a very large financial group, Lippo,

in Indonesia and Malaysia; and the Bank of Bangkok group in Thailand. Is all-finance

the only possible avenue for insurance development? While it is certainly one of the

major ones, there are also new developments in distribution channels, such as the

Internet and telemarketing.

Recently, major American banks have again turned their attention to insurance for

a variety of reasons:

Lure of high commissions.

Presence of a large under-served market, and an inefficient distribution system.

Hype about success of bancassurance in Europe.

Many of the banks understand that they are really in a `share-of-wallet' business.

They need to get more out of their customers' financial services business before

somebody else does.

Thus far, the renewed efforts of bank-insurance access on the life side have not

been too successful. Only a paltry 3 per cent of all new life insurance premiums are

generated through banks and savings institutions, though the banks have achieved

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varying success rates so far in marketing non-life business. Substantial gains have been

achieved in home-owner's insurance, while the auto insurance business is encountering

roadblocks.

Regulatory concerns

In India, insurance, banking and securities are regulated by different entities. And

with sound reason too. They are fundamentally different businesses with varying

regulatory requirements though with one common denominator -- the consumer. This

could be the main reason why several countries are moving towards establishing some

sort of integrated approach. Each industry provides personal financial services for

millions of customers who put their trust in the regulator. The regulators need to equip

themselves to handle the emerging situation.

The IRDA regulations provide for the emergence of newer distribution channels,

such as bancassurance, the Internet, direct marketing and through corporate bodies

(non-insurance players). The expansion may be advantageous to customers, but proper

checks and balances must be in place. Insurance, even when sold by banks or combined

with other products, is still insurance and needs to be regulated as such. There is a

definite need to preserve IRDA's authority over all insurance-related products.

Modernization of financial services' is an intriguing phrase. It has been heard

repeatedly in Europe and the US over the last 10 years. Obviously, India is also going

through this phase. Countries are trying suitably worded laws. Several amendments and

guidelines have been made in the Insurance Act, 1938 and in banking regulations to

accomplish a smooth change-over to the new situation. It seems clear that barriers

which have long separated the businesses of insurance, banking and securities are

penetrable, though it is still hard to tell how much the customers will benefit.

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BENEFITS OF BANCASSURANCE

Bancassurance is an important tool in the hands of Bankers, Insurers and

Customers to maximize their benefits at the same time, as everybody is a winner in this

system.

The bancassurance concept is so well designed that, if you go for a toss, the

results you will get are HEADS: BANK WINS

TAILS: INSURER WINS

And If The Coin Had A Third Side Truly We Can Say That The Customer Also Wins.

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Following are the benefits of bancassurance to the banks:

Fee- based income:

For banks, bancassurance would mean a major gain. Since interest rates

have been falling and profit on off take of credit has been low, all banks have been able

to do is sustain themselves but not profit much. Hence the banks today have shifted

their focus from fund-based revenue (loans & advances) to fee-based income. Enter

bancassurance and fee based income through hawking of risk products would be

guaranteed, thus giving an additional boost to the banks bottom line.

Example:

There are about 18 crore bank accounts. Let’s assume a bank sells one insurance policy

to each of these account holders over a period of five years. Take a highly conservative

average first year premium per policy of Rs.5000 and an average commission of 15%

that banks would gain.

Banks can earn a total commission of Rs.13500 crore (going by a simple back-of-the-

envelope calculation: Rs.5000 x 15% x 18 crore accounts = Rs.13500 crore in

commission)

Increased Return on assets (ROA):

One of the 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. The sale of insurance products builds fee income. Banks those effectively

cross-sell financial products can leverage their distribution and processing capabilities

for profitable operating expenses ratios.

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Increase staff productivity:

Bancassurance gives an opportunity to the bank staff to harness their sales

skills and adapt to the changing business environment. Selling of insurance products

provides bank employees with new challenges and enhanced skills thus improving their

productivity and efficiency.

Profitability:

Bancassurance provides financial benefits in the form of commission,

profits from new business, bank’s fixed cost reduction, and increases the staff

productivity. There by resulting into profits.

Enhances customer relationship:

Bancassurance results in high customer relationship with the bank by

providing more services. It seeks Customer Loyalty by offering satisfactory and

expanded base for services. Selling whose range of financial services to clients

increases Customer Retention.

Creating a universal banking platform:

Bancassurance offers a good opportunity to increase the bank’s share of

the customer requirements through the cross-selling of insurance products. All financial

products are available under one roof, thereby facilitating convergence. Bancassurance

helps banks to become one step closer to be “One-stop financial supermarket”.

Increasing the customer base:

Banks can garner fresh business by using insurance as a selling hook.

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Following are the benefits of bancassurance to the Insurers:

Cheaper than agents:

Bancassurance may work out to be cheaper compared to companies

appointing agents for selling insurance products. This is particularly considering the

bank’s wide network and the reach they have compared to the agents.

Rural penetration:

The existing wide network of banks in rural areas can be utilized for

selling insurance products. Penetration into the rural areas too becomes easier for

banks. This channel allows an insurer to effectively tap the rural sector. Selling

insurance through traditional methods in rural area is an expensive proposition. A tie up

with a bank allows an insurance company to access large customer base at a low cost.

Cost – reduction:

Studies reveal that 50% of an insurance company’s cost is directly or

indirectly related to distribution. Expenses ratio in insurance activities through

bancassurance is very low. They can solve the difficulties arising out of price

competition which has driven down the margins and increased the compensation

demand of successful agents.

Example: SBI Life finds that this channel saves as much as 40% of their operating cost

when compared to business procured through their own regular agents.

Greater control of their business:

Insurers who 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 hardly have any control on their relationship with their clients.

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Market penetration:

Wide network of branches form the ideal distribution channel. Urban as well

as rural both markets are tapped simultaneously. Banks have an established distribution

network of more than 68,000 branches spread throughout the country.

Targeting middle-income customers:

Through agents the insurer can only sell fewer and large policies to a more

up scale client. The middleclass income holders who comprise the bulk of bank

customers get very little attention. By using bancassurance channel the insurer can

capture much of its underserved market.

Facilities Growth:

Reduced costs and high premium turnover results in profitability, thereby

facilitating growth.

Example: Bajaj Allianz has witnessed a 350% growth due to bancassurance.

Provides Competitive advantage:

Provides competitive advantage over the non-bancassurers. Having been

accustomed to the customer’s choices, banks are in a better position to understand the

needs of the customers and sell trailor made policies. Customers too, considering their

long-standing relationship with banks, find them more trustworthy.

Bancassurance acts as a source of new business to reach wider customer base with the

help of a bank.

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Following are the benefits of bancassurance to the

Customers:

Availability of a complete package:

Combined bank and insurance products will find complete solution to the

customers. Banks and insurance companies are converging towards a model of global

retail financial institution offering a wide array of products. It leads to the creation of

“One-Stop Shop” where a customer can apply for mortgages, pensions, savings and

insurance products.

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.

Reduced costs:

Bancassurance gives the insurance company the benefit of cost-effective

distribution channel, the benefit ultimately passing on to the customers in way of

reduced premiums. The customer gains as the costs are reduced.

Good quality product:

Product innovation and distribution activities are directed towards the satisfaction

of the needs of the customer. Since banks can understand the needs of the customers in

a better way, the customer gets a good quality product. Also, customer gets the

advantage of a customized product as per his need and requirements.

Time savings & convenience:

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The customers can get risk coverage at bank itself which saves time and adds to

the customer’s convenience. The ease of renewals adds to the customer’s comfort. The

customer can obtain a basket of products under one roof.

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BENEFITS OF SELLING INSURANCE PRODUCTS

THROUGH BANKS

As the banks understand customers’ needs, deliver

trusted advice and create lasting value, they are

strategically positioned to cross-sell various products to

their customers because of their extensive branch network, use of their long-standing

relationship with both corporate and retail customers, huge customer database of raw

information on the customers spending patterns and investment purchase, degree of

ownership of customer bases, lower cost bases personalized service, rural penetration,

cheaper mode vis-à-vis agents, product control and brand image. Information is the

capital that earns high returns. Banks that use information as a competitive asset can

transform even the toughest challenge into growth opportunities. The offer of a

repertoire of financial products helps to sustain and even enhance the product-loyalty

factor. The attempt to develop relevant services and proactive development of customer

relationship requires maximizing Customer Relationships and minimizing business risk.

Bancassurance, apart from generating higher non-interest income, has other spin-

off benefits. Capturing of huge captive business readily available in branches by assets

financed brought under the Corporative Agency and the likelihood of branches bringing

in incremental business by insuring other insurable assets of the borrower.

Hence, it provides an option for banks to seek more stable, less volat6ile fee-

based income and to add value to their existing operations by surmounting debilitating

constraints on growth and enhanced Return on Assets (RoA). No wonder, then

bancassurance as a potent instrument of catalyzing business transformation to meet the

onslaughts of progressive liberalization is widely considered both appropriate and

warranted.

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FACTORS FOR THE SUCCESS OF BANCASSURANCE

Banks and insurance companies are very different in both in value and culture. In

India, the selling of insurance through banks is yet to emerge as regular activity and,

therefore, using traditional products and systems may not be appropriate.

The bitter experience of banks in bancassurance even with innovative products in the

previous years was mainly due to poor marketing, poor publicity, monthly payments

during times of inflation and declining value of money, lack of product promotion

initiated by the branch staff to avoid manual strain in mobilizing and maintaining

accounts for bancassurance products under different heads and conventional way of

dealing with the customer in explaining with the merits of taken bancassurance

products.

Fundamental to bancassurance is the convenience and accessibility to the

customer.

Lower cost of distribution due to sales productivity:

The potential to be tapped is ample and increasing the clientele base for

the insurance products will reduce the cost of distribution. Banks can leverage their

existing strengths to develop additional mass.

Mining data base:

Banks have huge database of clients. Bank should ensure relevant and

flexible database system.

Bank customer relationship:

Dealing with high net-worth customers MAY REQUIRE INSURANCE

Specialists to address complex sales issues. Banks officials need to be very clear about

service standards, policy issues, processing issues and sales and marketing support.

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The trust and esteem in which customer hold on banks:

Banks enjoy pride of place in the heart of people because of their

experience.

The existing bank branch network/infrastructure:

Branch network should be utilized in with much more ambience for

selling insurance products.

Life insurance products based on the insurers desires (sales driven): rather than

the consumer’s need (market oriented), in rural and semi-urban area also, similar

policies can be canvassed for sale. However, in these branches, the bank should be

proactive and innovative to suggest a proper planning for payment of premiums.

Information technology:

The banks are technology- know-how now and competing with each other

on the service front. Technology up gradation can ensure more effective utilization of

the synergies the banks posses in bancassurance. Banks should train and equip their

staff with backing of technology, to deliver the requirements. Utilization of ATMs and

debit cards act as payment mechanism.

The banks culture must be transformed to sell insurance and it must be ensured

that shelf space is adequately provided in a banks retail delivery system. It is important

to note though, that if the bank’s sales culture is not compatible with selling insurance,

then specialist insurance salesmen may be needed.

The decision on what types of insurance products to be sold and methods of

distribution of these products are symbiotically related. The effort and expertise

required to sell a product must be in connection with skills available and cost base of

the chosen distribution method.

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KEY SUCCESS FACTORS FOR BANCASSURANCE

Integration at an operational level is the success of bancassurance

relationships.

DISTRIBUTION SYSTEM:

Performance peaks if insurance products are sold exclusively through bank agent.

SUCCESSFUL PARTNERSHIP OF BANKS AND INSURANCE COMPANIES

BRANDING STRATEGY:

A positioning close to the bank brand increases customer and employee acceptance.

IT SYSTEMS:

Integrating IT system is necessary to fully realize cross-selling potentials.

PRODUCT DESIGN:

Tailoring insurance products to the banks need enhance the sales efficiency.

SALES APPROACH:

A proactive sales approach fuels revenue growth.

SOURCE: Monitor - J.P. Morgan Study on Bancassurance

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The key policy challenge, at this stage, is to ensure the financial stability of the

new insurers, while at the same time encouraging entrepreneurship, product innovation

and increasing insurance penetration especially in rural and semi-urban areas.

There is, therefore, a case for gradually replacing across-the-board capital

requirements with capital stipulations inked to the risk and claims characteristics of a

particular line of business as in practice in some advanced countries as recommended

by the Advisory Group on Insurance Regulation [2001]. This would increase the

number of players and product innovation. Also, while the present statutory stipulations

are adequate, there is a need to explore the possibilities of linking prudential norms to

the size of the balance sheet, especially when the terms of adequacy norms (IRDA,

2002). Presently, insurers are mainly offering insurance schemes, which are based on

assured returns. This is fraught with serious risks, especially with interest rate

scenario/market condition changes. In order to stave off the risks, associated with

assured return schemes, insurers need to shift to unit-linked insurance schemes based

on the market rates of return. While the joint ventures formed by new insurers with

entities, including banks and NBFCs, having a large branch/ dealer network, minimize

establishment costs, the contagion risks also get amplified in the process. This would

require close co-ordination among the regulating agencies.

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BANCASSURANCE CHANNEL AS AN ALTERNATIVE

Bancassurance has been proposed as an attractive alternative to the traditional

agency model. It has the potential to offer manpower, customer database, and

relationship banking of the bank but it has its challenges in terms of defining

partnership terms, learning and unlearning. Bancassurance is a format where the

insurance companies offer their insurance products through the distribution channels of

bank along with a complete

range of banking and investment products and services to a common customer database

purports to serve the interests of the bank in leveraging its infrastructure and the

insurance company in quick entry and growth.

Potential of the banking channel:

Banks have played a significant role in mobilizing the savings in India and

forming the backbone of the Indian financial system. They have penetrated the interiors

through their branches. Over the years, the share of bank deposits in the total financial

assets of households has risen to about 40per cent. This is indicative of their immense

reach to households and their savings. It is estimated that out of a total of 65,700

branches of commercial banks, each branch serves, on an average, 15,000 people.

There are a total of 406 million accounts with aggregate deposits of more than Rs10

trillion. Rural and semi-urban bank accounts constituted close to 60per cent in terms of

number of accounts indicating the number of potential lives that could be covered by

insurance with the frontal involvement of banks.

27


RBI GUIDELINES AND BANCASSURANCE MODELS

The RBI guidelines for banks will lead to the emergence of three

Different bancassurance models:

1) A bank can act as a corporate agent (as distinguished from a corporate broker) for

distributing insurance products of an insurer. Risk participation in this model is nil.

2) A bank can form a joint venture with an insurance company for doing bancassurance

business. There will be risk participation in this model, i.e.; through joint venture the

bank can underwrite or perform the principal function of insurance.

3) A bank which is not eligible to form a joint venture, can invest in the insurance

company to provide infrastructure and service support.

(1) Up to 10% of the net worth of the bank or

(2) Rs. 50 crore. Whichever is lower is available.

Setting up of a separate joint venture insurance company with risk participation

and subject to strict entry norms. Further, the bank must clearly distinguish its banking

and insurance business and insurance business. Rural cooperative credit institution

could, as suggested by The Task Force to Study the Cooperative Credit System

(Chairman: J Capoor), also distribute insurance products in under-served rural areas.

While increasing outreach and penetration of insurance products, this innovative

modality could help to expand portfolio of these institutions.

Following this, the RBI received 39 applications from commercial banks and RBI

has accorded approval to three banks for joint ventures on risk participation basis. Two

banks, which were given approval for strategic investment in insurance joint ventures

and investment in a distribution and service company, submitted revised application for

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joint venture in risk participation basis, while 18 banks and a subsidiary of one bank

were conveyed in principle approval for agency business. Out of the three banks, which

has received RBI approval for joint venture on risk participation basis, two banks,

namely State Bank of India and Vysya Bank have started their insurance

operations under the registered names of SBI life and ING Vysya respectively. The

third bank, Punjab National Bank is the second amongst PSBs to have received RBIs go

ahead for both life and non life business.

Traditionally, insurance products have been promoted and sold principally

through agency systems in most countries. With new developments in the customers’

behaviors, evolution of technology and deregulation, new distribution channels have

been developed successfully and rapidly in recent years. Bancassurers have developed

three basic distribution models: Integrative, Specialist, Financial Planning model.

The ‘Integrative Model’ distributes products to customers through existing bank

channels. So, bank staff requires extensive training to know the details of the

insurance products on offer. Telemarketing and direct mail are examples of

integrative approaches.

The ‘Specialist Model’ normally distributes complex insurance products through

their product experts who are generally representatives of the insurance company.

So, it requires less training but higher compensation to support the referral process.

The ‘Financial Planning Model’ offers each customer with a prospect of full

financial planning package addressing all the individual’s financial concerns, risk

tolerance and location in the cycle of life. This process is beneficial to the customer,

bank and the insurer.

To move a bank in the direction of an effective user of the financial planning

model, the bank’s sales force has to be taught how to handle prospects and make

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referrals and properly approach the customer/prospect. The effective business model is

the one which helps in pushing sales as well as satisfying customer needs and helping

to become a ‘one-stop shop’.

Listed below are various patterns of Distribution Alliances for Bancassurance

when it first started in India:

• Banks selling products of their insurance subsidiary exclusively.

• Banks selling products of an insurance associate (partner) on an exclusive

basis.

• Banks offering products of several insurance companies as `super market’.

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BANCASSURANCE — A SWOT ANALYSIS

A SWOT analysis of bancassurance in India indicates a clear growth prospect.

The strength of the huge pool of skilled banking and insurance professionals coupled

with the very low level of insurance density offers great opportunities. The penetration

level that the Indian banking sector attained over the years of its operation in the sub-

continent provides a huge database and a wide reach for the successful implementation

of bancassurance.

Added to these positive aspects, bancassurance has also gained the requisite

regulatory support. However, the absence of the necessary technological infrastructure

and the inflexibility in product innovation can hamper the growth prospects of

bancassurance in India.

Bancassurance as a means of distribution of insurance products is already in

force. 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 up till now was not thought of.

Huge capital investment will be required to create infrastructure particularly in IT

and Telecommunications, a call center will have to be created, top professionals of both

industries will have to be hired, a Research and Development cell will need to be

created to generate new ideas and products. It is therefore essential to have a SWOT

analysis done in the context of bancassurance experiment in India.

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1.1. Strengths:

In a country of 1 Billion people, sky is the limit for personal lines

insurance products. There is a vast untapped potential waiting to be mined particularly

for life insurance products. There are more than 900 Million lives waiting to be given a

life cover (total number of individual life policies sold in 1998-99 was just 91.73

Million).

There are about 200 Million households waiting to be approached for a

householder's insurance policy. Millions of people traveling in and out of India can be

tapped for Overseas Mediclaim and Travel Insurance policies. After discounting the

population below poverty line the middle market segment is the second largest in the

world after China. The insurance companies worldwide are eyeing on this, why not we

pre-empt this move by doing it ourselves?

Our other strength lies in a huge pool of skilled professionals whether it is banks

or insurance companies who may be easily relocated for any bancassurance venture.

SBI LIFE have a good range of personal line products already lined up; therefore R &

D efforts to create new products will be minimal in the beginning. Additionally, GIC

with

4,200 operating offices and LIC with 2,048 branch offices are almost already

omnipresent, which is so essential for the development of any bancassurance project.

1.2. Weaknesses:

The IT culture is unfortunately missing completely in all of the future

collaborators i.e. banks as well as insurance companies. A late awakening seems to

have dawned upon but it is a case of too late and too little. Basic IT requirement like

networking (LAN) is not in place even in the headquarters of some institutions, when

the need today is of Wide Area Network (WAN) and Vast Area Network (VAN).

Internet connection is not available even to the managers of operating offices.

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The middle class population that we are eyeing at is today overburdened, first by

inflationary pressures on their pockets and then by the tax net. Where is the money

left to think of insurance? Fortunately, banks are now a days coming out with

some schemes that get IT exemptions but their also a need to be given tax exemption to

the customers further. Another drawback is the inflexibility of the products i.e. it cannot

be tailor made to the requirements of the customer. For a bancassurance venture to

succeed, it is extremely essential to have in-built flexibility so as to make the product

attractive to the customer.

1.3. Opportunities:

Banks' database is enormous even though the goodwill may not be the

same as in case of their European counterparts. This database has to be divided

variously and various homogeneous groups are to be churned out in order to position

the bancassurance products. With a good IT infrastructure, this can really do wonders.

Other developing economies like Malaysia, Thailand and Singapore have already

taken a leap in this direction and they are not doing badly. There is already an

atmosphere created in the country for liberalization and there appears to be a political

consensus also on the subject. Therefore, RBI or IRDA should have no hesitation in

allowing the marriage of the two to take place. This can take the form of merger or

acquisition or setting up a joint venture or creating a subsidiary by either party or just

the working collaboration between banks and insurance companies.

1.4. Threats:

Success of a bancassurance venture requires change in approach, thinking

and work culture on the part of everybody involved. Our work force at every level are

so well entrenched in their classical way of working that there is a definite threat of

resistance to any change that bancassurance may set in. Any relocation to a new

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company or subsidiary or change from one work to a different kind of work will be

dislike with forcefulness.

Another possible threat may come from non-response from the target customers.

This happened in USA in 1980s after the enactment of Garn - St Germaine Act. A rush

of joint ventures took place between banks and insurance companies and all these failed

due to the non-response from the target customers. US banks have now again (since late

1990s) turned their attention to insurance mainly life insurance.

The investors in the capital may turn their face off in case the rate of return on

capital falls short of the existing rate of return on capital. Since banks and insurance

companies have major portion of their income coming from the investments, the return

from bancassurance must at least match those returns. Also if the unholy alliances are

allowed to take place there will be severe competition in the market resulting in lower

prices and the bancassurance venture may never break-even.

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BANCASSURANCE OPPORTUNITIES

Globalization of markets advances in technology, changing demographic and

socio-economic pattern are some trends that will result in new or changing needs for

insurance protection and financial planning. Banks and insurance companies should

sharpen in their skills and potential in these areas and take advantages of emerging

opportunities. In addition to traditional products, banks need to develop special

insurance products in order to fulfill creating needs come from banking transaction or

improving certain products to make lucrative and helpful to the customers.

The motives behind banks selling bancassurance are the product diversification

and a source of additional fee-based income. In turn, return on asset can be increased

with more fee-based income. In addition, they can leverage their name, recognition and

reputation at both local and regional levels. Insurance companies see bancassurance as

a tool for increasing their market penetration and premium turnover. The customer sees

bancassurance as bonanza in terms of reduced price, high quality product and delivery

at doorsteps.

Bancassurance in India is in very early stages of development, it’s new and

untried but the potential is undoubtedly large. While many forms of bancassurance van

contribute to improving cross selling, only much closer forms of integration are likely

to yield benefits in operation efficiency.

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INDUSTRY PERSPECTIVE

‘Bancassurance’ is identified as an alternative distribution channel to improve the

non-interest income of banks. The distribution of insurance products through banks has

been beneficial not only to the insurance and banking companies, but also to the

customers. The growth of bancassurance depends on how well the bank and the

insurance companies are able to overcome the operational challenges that are being

constantly thrown at them. The need of the hour for bancassurance venture is to

inculcate new ideas, new approach and work culture.

Concept of Bancassurance

Bancassurance as a concept first began in India, when the insurance industry opened up

to private participation in December 1999. It is the concept used to describe the sale of

insurance products in a bank. Bancassurance, which is also known as Allfinanz –

describes a package of financial services that can fulfill both banking and insurance

needs at the same time. The features like distribution, legal, fiscal, cultural and

behavioral aspects for an integral part of the concept. Distribution is the key issue in

bancassurance and is closely linked to the regulatory climate of the country.

Bancassurance is one-stop financial service to meet the requirements of banking

services and also provide reliable protection to customers.

Relevance of Bancassurance:

The banking sector reforms are aimed at making the banks sound and competitive.

Banks are the key pillars of India’s financial system. Public has immense faith in banks.

Banks enjoy considerable goodwill and access in the rural regions. The bank network

established in India is vast and has expertise about the financial needs and saving

patterns of the customers. Apart from this, banks has enormous retail customer base.

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The world over, banks have realized that offering value added services such as

insurance helps to meet customer’s expectations. Bank’s entry into the distribution

helps to popularize insurance as an important financial protection product. Banks

consider bancassurance for the following reasons:

Falling interest rates coupled with declining deposits are a major source of

concern banks.

Increased competitiveness has led to increased credit risk resulting in a telling

effect on the balance sheet.

Experts feel that sustaining similar growth rate is not possible in the coming years

unless there is a change in the strategy.

The margins of the banks in the banks in their core lending business are declining

sharply.

So, opportunities like bancassurance augment their income. Bancassurance

develops sales culture within the bank. It helps to change the traditional mindsets of

banking companies. Insurance distribution helps to increase the fee-based earnings of

banks to a considerable extent. Again fee-based selling helps to enhance the levels of

staff productivity in the banks. The insurance sector offers ample helps to enhance the

levels of staff productivity in the banks. The insurance sector offers ample opportunity

for the banks to widen their horizon of financial intermediation.

Apart from this, insurance companies are also equally eager to enhance their

geographical reach within minimum time and cost, establishing brand equity in the new

market, ensuring higher probability of success in the sales process. A tie-up with a bank

having an appropriate customer base can give an insurer a cheap access to these areas.

Selling insurance through traditional methods in rural sectors is very expensive.

Further, selling insurance to existing mass market banking customers is far less

expensive then selling to a group of unknown customers. The banks can bring

insurance service to the poor people at minimum cost. The distribution of insurance

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products through banks has been beneficial to insurance and banking companies and

also to the customers.

INDIA’S PERSPECTIVE

Coming to India, 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.

After the Narsimham committee report, the Indian banking system had undergone

reforms in merchant banking, lease and term finance, capital markets, hire purchase,

real estate finance, etc. A few years ago, banks in India entered into the insurance

market to augment their income from insurance business. Indian rural market, which

had a massive potential, was still untapped by the insurance companies. No insurance

company dared to establish its own network in rural areas due to the requirement of

huge capital outlay. Hence, insurance companies planned to capture potential markets.

Eventually, they came out with ‘bancassurance’ as this network helped the insurers to

tap those markets that were left untapped at a much lower cost with the help of the

banks. The competitive nature of the Indian market ensures that the reduction in costs

would result in benefits, in the form of lower premium rates to the clients.

The Indian insurance market comprises 20 private players and the public sector

giant, LIC. Out of these, companies that entered first into the market benefited by

associating themselves with various other banks exclusively for bancassurance

agreements. Under this agreement, banks are appointed as corporate agents, empanelled

with one insurance company, to sell the products. Banks, with their reputation and

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market share, can convert their customers into policyholders. Bancassurance is a

creative marketing approach that helps in converting bank customers into insurance

policyholders. Many private players started venturing into this new field to expand

their market operations. SBI Life Insurance Company plays a predominant role in

bancassurance. This certainly indicates a positive trend for bancassurance in the Indian

banking sector. The company plans to explore insurance business with the potential of

State Bank of India’s 9000 plus branches spread across the country and also the 4000

branches of its associate banks.

Bancassurance is expected to prosper in India because of the following reasons:

Indian economy is growing at 9% (in normal economic conditions and not during

the recession period).

Increasing purchasing power parity.

Huge inflow of FDI.

Expansion of middle income class Indians.

Huge banking infrastructure across urban, semi-urban and rural India.

By now, it has become clear that as economy grows it not only demands stronger and

vibrant financial sector but also necessitates provision of more sophisticated and variety

of financial and banking products and services. As India is being considered one of the

fast developing economies among the emerging market economies, financial sector has

also become more vibrant with the financial reforms. In fact, in recent years, it is

surmised that 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

39


met by the banking system and thereafter as the economy moves on to higher levels, the

need for the other non-banking financial products including insurance, derivatives, etc.,

are strongly felt. Moreover, as India has already more than 200 million middle class

population coupled with vast banking network with largest depositor’s 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. In simple words,

it is aptly put that bancassurance has promised to combine insurance companies’

competitive edge in the “production” of insurance products with banks’ edge in their

distribution, through their vast retail networks.

In 2007, India has 88 scheduled commercial banks (SCBs) - 28 public sector

banks (that is with the government of India holding a stake), 29 private banks (these do

not have government stake; they may be publicly listed and traded on stock exchanges )

and 31 foreign banks. Altogether they have a combined network of over 53,000

branches and reach in urban, semi urban & rural areas of nation. There are 70324 bank

offices in India and around 16000 people are served by each bank office. It’s a huge

banking infrastructure and among the best banking network in the world.

Bancassurance if taken in right spirit and implemented properly can be a win-win

situation for the all the participants, viz., banks, insurers and the customers.

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WORLDS PERSPECTIVE

Bancassurance has given grown ay a different shapes and forms in

different pace and taken different shapes and forms in different countries depending on

the demography, economic and legislation prescription in that country. During the past

two decades, bancassurance has taken deep roots in various countries, especially in

Europe.

In UK about a third of policies are sold through banks.

In Spain 72% of premium income comes through bancassurance, whereas in France it

is 55%.

France, Italy and Spain recorded a penetration of more than 60% due to large middle

class population and favorable tax treatment.

It had little success in Germany, even after the purchase of Dresdner Bank in 2001 by

Allianz, the country’s largest insurer.

Bancassurance recorded a huge growth in Europe but not in USA and Canada. In the

US, there were regulatory hurdles as till recently banks were not allowed to do

insurance business and vice versa.

The spread of diversified financial firms offering various services such as

insurance and securities underwriting, apart from traditional banking, received an

impetus by the Gramm-Leach-Bliley Act (GLBA), 1999 in the USA. The

Insurance Regulatory and Development authority (IRDA) established in

1999 progressively attempted to lay down the ground rules in India. Historically, there

are integrated organic and merger approaches to the growth of Bancassurance.

Even after Gramm-Leach Bliley Act of 1999, target customers have not

responded well. In china, banks are limited to playing the role of tied agents to

insurance companies, which can still provide a good platform for bancassurance to

develop. It is a relatively new concept in Australia and Asia.

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In the Asian markets, bancassurance has become a favorite choice of bankers and

insurers and as a result governments have been offering legislative support.

HARNESSING THE POTENTIAL

Bancassurance has already been in force in some form or the other. For example,

banks have already been selling personal accident and baggage insurance directly to

their credit card members as a value addition to their products. Banks have also been

distributing the mortgage-linked insurance products like fire and motor vehicle

insurance to their customers. Most of these have been a part of add-on with the existing

services and products. They, however, are yet to use their information and database on

saving habits of customers to generate the leads for insurance business. In order to

implement the bancassurance mechanism the banks require adequate networking

among the bank branches. This, in turn, requires a substantial investment in IT to

connect various branches effectively. Particularly, the branches in rural and semi-urban

areas remain unconnected. Complete integration of branch network involves huge

investments for creating IT and communication infrastructure. Due to the proliferation

of saving products and emerging investment opportunities in India, The bancassurance

faces the challenge of selling insurance through the banking channel. The competing

returns from other products such as mutual funds posed a major challenge to

bancassurance. Most of the life insurance products are highly structured and have less

flexibility in customizing them to the specific needs of the clients. However, unit-linked

products fit this bill well and the banks can meet this challenge. In bancassurance

system, there are also co-branding issues and the partnership needed to ensure that they

do not give inconsistent messages and destroy value in the process. Leveraging on both

brands is challenging. The implementation of bancassurance also assumes cultural

integration between the two partners. Implementing bancassurance requires different

competencies and skills. One of the important challenges in this is managing

involvement of the bank staff. This is a challenging task as the banks are not

approaching the customers for business but executing requests of customers. For

example, the insurance companies think that target-setting is important for business

42


growth and, for this purpose, the bank and the insurance company need to develop an

effective sales management and an organization strategy; there has to be a joint

ownership of targets. Banks have a lot of information and data on consumers’ saving

habits and these can be effectively used for lead generation. For this purpose, the

partners need to develop appropriate mechanisms which ensure better use of this

information. While implementing the bancassurance mechanism, insurance companies

may also experience the difference in pace with which targets are achieved and tasks

are executed. The partners may move at different pace. Capturing the market is

important as the competition is high. The style of working in two cultures can be

different. Incentive systems across various channels are different and these have

implications for each channel. The gaps can become visible and reducing these gaps

may require continuous interaction and training of bank staff. The integrated model

partnerships include a whole new range of challenges such as the challenge of scale,

integration of culture, and speed. The banks experience the challenge of working with

targets and developing new performance measurements. For this, the response time in

deploying adequate resources is critical. Since in bancassurance the partners are going

to use technology and database services, there is a concern about how systematically

the relevant information on consumers interacting with banks is captured. In order to

explore

this channel, insurance companies are required to establish a strong leadership, work

closely with the bank partner and develop this partnership, and develop innovative but

simple products. Data mining and CRM approaches need to be strengthened at the bank

level through appropriate use of technology. It is observed that a customer-focused

approach that fitted in with the bank culture is a critical factor in making bancassurance

a success. The bancassurance sales are radically different from agency-based sales.

Developing an appropriate strategy of sales management and selection, retention, and

training of people involved in the bancassurance programme is also important. These

are required to be strengthened to reinforce and institutionalize the bancassurance

processes.

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The incentives and rewards play a significant role to drive the behavior of people but

this has to be developed keeping in view the bank environment and sensitivities.

CHALLENGES TO BANCASSURANCE

LACK OF TRAINED MARKETING PEOPLE:

Selling an insurance plan is not an easy task. It requires

professionals with marketing skills for convincing people to buy plan.

But most insurance selling banks do not have trained sales force and there is also an

acute competition from other insurance intermediaries who have well trained financial

advisers (sales force). At present, even the consumers are demanding more as a result

of unprecedented changes in the financial markets.

LEGAL ISSUES:

Statutory restrictions have forced banks to provide their customers with

limited choices. The Insurance Regulatory Development Authority (IRDA) adopted a

cautious approach before flagging off bancassurance. While on the one hand, it is an

economical proposition to sell risk products through the numerous bank branches

spread across the country, the fact that claim settlement disputes take an unusually long

time in our country is a theory issue. In such a situation, banks must be protected to

safeguard their reputation. Otherwise, they may lose their prime banking business.

COMPETITION:

As mentioned earlier, most bancassurance ventures will be forced to

achieve optimum organization structures due to competition from independent agents.

This competition will devolve with the influx of insurance broking agencies who are

free to bargain for the most suitable products to satisfy the needs of customers.

These developments are expected to challenge traditional bancassurers in the

following ways:

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The shift away from manufacturing to pure distribution requires banks to better

align the incentives of different suppliers with their own.

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.

Banks will have to be prepared for possible disruptions to client relations arising

from more frequent non-life insurance claims.

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EMERGING TRENDS

Bancassurance, the provision of insurance services

by banks, is an established and growing channel for insurance distribution, though its

penetration varies across different markets. Europe has the highest bancassurance

penetration rate. In contrast, penetration is lower in North America, partly reflecting

regulatory restrictions. In Asia, however, bancassurance is gaining in popularity,

particularly in China, where restrictions have been eased. The research shows that

social and cultural factors, as well as regulatory considerations and product complexity,

play a significant role in determining how successful bancassurance is in a particular

market.

The outlook for bancassurance remains positive. While development in

individual markets will continue to depend heavily on each country’s regulatory and

business environment, bancassurers could profit from the tendency of governments to

privatize health care and pension liabilities. In emerging markets, new entrants have

successfully employed bancassurance to compete with incumbent companies. Given the

current relatively low bancassurance penetration in emerging markets, bancassurance

will likely see further significant development in the coming years.

Bancassurance has been designed to target the mass market. Bancassurers have

started segmenting the market and this has resulted in tailor-made products for specific

market place. The quest for additional growth and the desire to market specific clients

made some bancassurers to switch from using a standardized, single channel

distribution strategy. Some of the bancassurers have started focusing exclusively on

distribution. In some markets, face-to-face contact is preferred as it helps in improving

bancassurance business.

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Nevertheless, banks have started opting fro direct marketing and Internet Banking

as vehicles for disseminating insurance products. Emerging channels have become

increasingly competitive due to tangible cost benefits embedded in product pricing and

its convenience to market.

Though bancassurance has traditionally targeted the mass market, bancassurers

have begun to finely segment the market, which has resulted in tailor-made products for

each segment. The quest for additional growth and the desire to market to specific

client segments has in turn led some bancassurers to shift away from using a

standardized, single channel sales approach to adopting a multiple channel distribution

strategy. Some bancassurers are also beginning to focus exclusively on distribution.

In some markets, face-to-face contact is preferred, which tends to favor

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.

Finally, the marketing of more complex products has also gained ground in

some countries, alongside a more dedicated focus on niche client segments and the

distribution of non-life products. The drive for product diversification arises as

bancassurers realize that over-reliance on certain products may lead to undue volatility

in business income.

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ENSURING SUCCESS

Banks are now major distribution channels for selling insurance products.

Bancassurance plays a significant role in banking operations. It is a much discussed

concept in insurance markets at present. It was started by banks in France and other

European countries.

A number of insurers have tied up with banks and several banks have started

offering the service of bancassurance through selected risk products. According to

Ramachandran, CEO and MD of Aviva Life insurance, “Bancassurance constitutes to

be an important distribution channel and it currently contributes more than 50% their

business.

UNIQUE STRATEGIES

Bancassurers must do some groundwork and develop new strategies to sell

insurance products through this channel, especially in emerging markets. Through tie-

ups, some insurers plan to buy shelf space in banks and sell insurance products to

potential customers. Unless banks recruit a trained marketing force, it will be a tough

task to sell insurance products.

IDENTIFYING CUSTOMERS

Identifying the target customers is yet another important aspect. Banks

have a large depositor base of corporate, as well as retail clients, that they can tap.

Talking of retail clients, lower end and middle-income group customers constitute a

major chunk who have, over a period of time, built a good rapport with the bank staff

and as a result, hold a big potential for bancassurance. The success of bancassurers

depends on how effectively the necessary information regarding the products is

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imparted to the employees of respective branches of the bank. Bankers are not expected

to understand the intricacies of the operations of the insurance industry. They simply

have to identify customers with potential needs for insurances products.

REAP THE BENEFITS

Bancassurance has attracted the attention of both the bankers and the

insurers as it is a major step towards the creation of new ventures for selling insurance

products. The insurance company reaps the benefits of this synergy by tapping the

sources of new business made available by the branch network of the banks to

geographically distant clients.

The insurance company must aim at taking full advantage of the customer database

and, at the same time, realize that it can now benefit from this cheaper distribution

network. Bancassurance has become one of the fastest-growing revenue streams for

banks in India. Banking institutions are reaping benefits from the bancassurance. Fee-

based income from bancassurance is now generating significant revenues and is

expected to grow in the future.

LOWER DISTRIBUTION COSTS

Bancassurance helps in reducing the distribution costs for the insurers as

firms have a lower expense ratio. Obviously, when expenses are reduced the ultimate

benefit will go to the insured, by way of lower premium rates.

CUSTOMER RELATIONSHIPS

When compared to banks, insurance companies have ineffective customer

relationships. Customers usually trust banks and the banking system, than the insurance

companies. So, insurance companies can take help of banks in motivating the

customers to purchase products.

OPERATIONAL EFFICIENCY

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One of the most important reasons for considering bancassurance by banks

is: Increased return on assets. Banks with insurance fee income can cover more

operating expenses.

STATE BANK OF INDIA

India’s largest bank, state bank of India, which has a

presence in 28 countries, is eyeing acquisitions aboard especially on US, ASIA AND

Africa. The banks global strategy includes expanding its overseas offices to 71 in 38

countries by the end of the current fiscal, as against 52 offices in 28 countries now.

The bank registered a net profit of Rs.3105 crore in the 2002-2003 fiscal. SBI’s

international business accounts for 5% of its total business income.

SBI Life Insurance Company limited is a joint venture between State Bank of

India and Cardiff of France. SBI is the largest bank in India and Cardiff is a leading

insurance company in France operating in 28 countries. Cardiff is a wholly owned

subsidiary of BNP Paribas, one of the largest European banks.

SBI Life branch network will be expanded from 60 to 150 this year.

SBI aim to strengthen the bancassurance model through the branches of

State Bank of India and other associate banks we have tie-ups with. Currently, SBI Life

products are being sold in over 6,500 branches of the State Bank Group - around 1,500

branches are selling individual policies and another 5,000 group products.

Bancassurance is the company's key distribution channel, contributing over 43 per

cent to the total premium o, at Rs 470 crore for the financial year ended March 31,

2006. This year we hope to increase that to 50 per cent.

SBI Life now launches bancassurance online.

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SBI Life Insurance Ltd., India’s leading private life insurance company

announced the launch of ‘Bancassurance Online’ the first initiative of its kind with its

Bancassurance promoter, State Bank of India. Mr. O.P Bhatt, Chairman, State Bank of

India formally inaugurated the entrance.

While inaugurating the entry Chairman State Bank of India said, “‘Bancassurance

Online’ is a significant step towards integrating insurance with banking and it will

provide my staff member’s information as well as education on life insurance.”

Bancassurance Online’, an exclusive intranet facility, brings Life Insurance

solutions at par with SBI’s Banking products, thereby reducing turnaround time to meet

customer requirements delightfully.

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ANALYSIS

A survey was conducted of about 50 people who did regular banking transactions.

These included several housewives, businessmen, professionals, students, etc. The

following analysis was done on the basis of the survey conducted:

Are you aware of bancassurance?

Yes 80%

No 20%

Yes

No

Among those who surveyed, 80% of respondents were aware that their bank provided

bancassurance. They knew with which Insurance Company their bank has tie up with;

also they were aware about various policies provided by their banks. However, 20% of

the respondents were amused with the term bancassurance and didn’t know anything

about it and the services provided by their banks.

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On your choice which mode of insurance distribution channel would you prefer to

buy the policy from?

Banks23%

Brokers7%

Agents50%

Insurance companies

20%

50% people preferred agents because they provide personalized services. 20% took

insurance from companies because of their trust on the company. 23% said they would

buy insurance from banks because of the brand name and their trust on banks. Only 7%

said that they would buy insurance from brokers.

Which bank do you feel would excel in bancassurance? Rate them accordingly

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38%

90%

70%

0

10

20

30

40

50

60

70

80

90

100

Public Private Foreign banks

Sector Banks Sector Banks

90% people said that private sector banks would excel in this because of their

aggressive selling policies and they provide quality services to the customers. 70%

votes were given to foreign banks. Because foreign banks have proper management and

aggressive selling strategies. The public sector banks were given the least votes because

of their lazy approach to work.

Do you think bancassurance has a good future?

No,5%

Yes,95%

Yes

No

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95% people said that they believe that Bancassurance has a very bright future because

there is an immense potential for the insurance industry in India. But 5% believe that

because of the emergence of the new technology such as ATM’s, Internet banking etc

the banks will soon go virtual so there is not much scope for it.

Do you find any difference in the services provided by the banks and insurance

companies?

YES

NO

80% of the people did not find any difference between the services provided by banks

but the remaining 20% of them did find some difference in the services. As said by the

20% people they found that the bank was charging much for the services than the

insurance company.

Does you bank provide you with some incentives in kind of gifts or hampers?

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YES

NO

75% of the people were offered by gifts and hampers for the services taken by them.it

was also seen that the borrowers who had borrowed a large amount of loan were

provided with the gifts and hampers. Rest 25% who did not borrow large amount were

not given any incentives.

Reasons for taking bancassurance

Security Savings Brand Image of Bank Image of Bank Insurance

80% 28% 65% 40%

0

10

20

30

40

50

60

70

80

90

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There was a mixed response from the customers. 80% said that they took the

insurance policy because of security benefits. 65% said that since, they trusted their

bank, they took the policy. There were 40% who said that the brand image of the

company also mattered. Only 28% said that savings was a reason that encouraged them

to buy insurance policy.

THE FOLLOWING TABLE ILLUSTRATES THE BUSINESS GENERATED BY

SELECTED COMPANIES THROUGH THE BANCASSURANCE CHANNEL:

COMPANY 2002 2004 2006

ICICI Prudential 15% 30% 60%

SBI Life 15% 50% 62%

AVIVA 50% 70% 85%

Birla Sun Life 25% 25% 25%

ING Vysya 10% 15% 20%

Bajaj Allianz - 25% 56%

HDFC Standard 10% 40% 55%

Met Life 25% 20% 10%

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0%10%20%30%40%50%60%70%80%90%

2002

2004

2006

Thus we can have a look on the chart to see the services of bancassurance provided by the different banks to their customers.

FINDINGS

Although the concept is simple enough in theory, but in practice it has been found

to be far from straightforward.

Almost many people have a fair idea about Bancassurance and that their banks

sell various insurance products. But still few people don’t know about Bancassurance

as a concept.

It has been also found out that the banks have various opportunities to cross sell

insurance products. The insurance companies also have the opportunity to take

advantage of the bank’s network and other avenues.

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It is also seen that customers have a lot of trust on the banks, and because of that

trust the customers will take the insurance products from banks.

As the brand name of the banks is important so is the brand image of the

insurance companies. So the banks and the insurance companies must tie-up with the

right partners. This will help them to create a better image in the minds of the

customers.

It has also clear from the study that the private sector and the foreign banks have

better future in Bancassurance. But the public sector banks are also trying to give them

a tough competition e.g. SBI Life Insurance Co.

The banks fail to provide personalized services as are provided by the agents. So

banks will have to improve in that area. They should provide after sales services to the

customers.

RECOMMENDATIONS

The Insurance companies need to design products specifically for distributing

through banks. Trying to sell traditional products may not work so effectively.

The employees of the banks who are selling insurance products must be given

proper training so that they can answer to any queries of the customers and can provide

them products according to their needs.

Banks should also provide after sales services and they should be more aggressive

in selling the insurance products.

Banks should also do the settlement of claims which will increase the trust and

reliability of the customers on the banks.

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In India, since the majority of the banking sector is in public sector which has

been widely responsible for the lethargic attitude and poor quality of customer service,

it needs to rebuild the blemished image. Else, the bancassurance would be difficult to

succeed in these banks.

A formal and standard agreement between these banks and the insurance

companies should be taken up and drafted by a national regulatory body. These

agreements must have necessary clauses of revenue sharing. In case of possible

conflicts, the bank management and the management of the insurance company should

be able to resolve conflicts arising in future.

For bancassurance to succeed, products and processes will need to be tailored to

bank markets, rather than adjusted to insurer’s specifications.

Banks and Insurance companies should apply all the skills and potential in this

area and take advantage of the same and they should improve the products from time to

time according to the needs of the customers.

From the analysis it should be recommended that banks should constantly look

out to explore new avenue to supplement their non interest income so called as

BANCASSURANCE.

Bancassurance has become indispensable especially for those new insurance

companies which began their operation post reforms. Employees of banks should be

deployed and trained for the marketing of insurance products.

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.

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CONCLUSION

If insurance in India is to succeed, it can only be through the bancassurance

channel. Insurance carriers and banks can become part of the vision through strategic

partnerships. Now is the time to position their company for the new millennium of

insurance product distribution. The growth of bancassurance depends on how well the

bank and the insurance companies are able to overcome the operational challenges that

are constantly thrown at them.

In India, the signs of initial success are already there despite the fact that it is a

completely new phenomenon. The factors and principles of why it is a success

elsewhere exists in India, and there is no doubt that banks are set to become a

significant distributor of insurance related products and services in the years to come.

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With the opening up of insurance sector and with so many players entering the

Insurance industry it is required by Insurance Companies as well by the banks to come

up with well established infrastructure facilities with good call centre service to attract

and provide information to customer regarding different good policies & their premium

pay scheme.

Bancassurance thus by arranging for seminars and approaching to people and

provide brochures or rather visiting to the companies and colleges increase their

business and create awareness about their banks selling insurance products.

Bancassurance has less hassle as of customers today has hardly any time to visit the

insurance company. But when a bank carry on bancassurance it can easily raise their

profit i.e. as and when the customer comes to bank for any of their purposes like

depositing their cheque can always seek information from the bank about the new

insurance product which would suite their requirement and needs.

The success of the bancassurance business in India has been progressing at a rapid

growth since opening up of the sector. The size of country, a diverse set of people

combined with problems of connectivity in rural areas, makes insurance selling in India

is a very difficult task. But bank can make this simple as the banks have a good

distribution strength and tremendous man power to reach out such a huge customer

base.

Bancassurance is the new insurance marketing mantra for selling insurance plans

with the help of bankers by exploiting the synergies between them. Since

bancassurance is the combination of two sectors, each of the regulators has given out

detailed guidelines for banks getting into the insurance sector. Though initially,

bancassurance has targeted the mass market, of late, bancassurers have begun to finely

segment the market. This has resulted in tailor-made products for each segment.

Where legislation has allowed bancassurance had mostly been a phenomenal

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success and although slow to gain pace, is now taking of across Asia, especially now

that banks are starting to become more diverse financial institution and the concept of

universal banking is being adopted.

In the field of bancassurance banks will bring a customer database, leverage their

name, recognition & reputation of both local and regional levels. If they are using

personal contact with customers and non-customers then only they can success in the

field of bancassurance.

But the proper implementation of bancassurance is still facing so many hurdles

because of poor manpower management, lack of call centers, and no personal contact

with customers, inadequate incentives to agents and unfullfilment of other essential

requirements.

The bank network- especially the public sector and cooperative bank branches are

spread across the length and breadth of the country with 6500 branches. There is

immense potential in the Indian market with only 4500-5000 bank branches currently

distributing insurance.

From the banks perspective, such a model offers a great opportunity to improve

their profitability by enhancing a fee based income. This income is purely risk free for

the bank since the bank plays the role of an intermediary for sourcing business to the

insurance company.

Finally we can say that the bancassurance would mostly depend on how well

insurers and bankers understanding is with each other and how they are capturing the

opportunity and how better service they are providing to their, customers. Let us you all

pay more attention towards the policies and enjoy the service provide by banks and

Insurance Companies by the mode of Bancassurance.

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The bridge has been reached and many are beginning to walk those

cautious steps across it. Bancassurance in India has just taken a flying start. It has a

long way to go ……….. after all The SKY IS THE LIMIT!

QUESTIONNAIRE

1. Are you aware of bancassurance?

2. On your choice which mode of insurance distribution channel would you prefer to

buy the policy from?

3. Which bank do you feel would excel in bancassurance? Rate them accordingly

4. Do you think bancassurance has a good future?

5. Do you find any difference in the services provided by the banks and insurance

companies?

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6. Does you bank provide you with some incentives in kind of gifts and hampers?

7. Reasons for taking bancassurance.

65


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BIBLIOGRAPHY

New trends in banking – VV RAVI KUMAR

ICFAI – Kasturi Nageshwar Rao

PROFESSIONAL BANKER — The IcFai university press (June 2009)

FUTURE SCENARIO OF INDIAN BANKING — Dr. R.K. Uppal

Business World

Business Today

WEBLIOGRAPHY

http:// myicwai.com/knowledge bank/fm41.pdf.

http:// www.managementparadise.com

http:// sify.com/finance

http:// www.domain-b.com

http://www.moneycontrol.com

http://sbilife.co.in/sbilife/application

www.India Infoline.com

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http://sbilife.co.in/sbilife/application

http://www.moneycontrol.com/

http://www.domain-b.com/

http://www.managementparadise.com/

final project of 100 marks

Documents

insurance companies

banks act

insurance business

insurance markets

insurance plans

indian banks

employees of banks

help of banks