With the opening up of the insurance sector and with so many players entering the Indian insurance industry, it is required by the insurance companies to come up with innovative products, create more consumer awareness about their products and offer them at a competitive price. New entrants in the insurance sector had no difficulty in matching their products with the customers’ needs and offering them at a price acceptable to the customer. But, insurance not being an off the shelf product and one which requiring personal counseling and persuasion, distribution posed a major challenge for the insurance companies. Further insurable population of over one billion spread all over the country has made the traditional channels of the insurance companies costlier. Also due to heavy competition, insurers do not enjoy the flexibility of incurring heavy distribution expenses and passing them to the customer in the form of high prices. With these developments and increased pressures in combating competition, companies are forced to come up with innovative techniques to market their products and services. At this juncture, banking sector with it’s far and wide reach, was thought of as a potential distribution channel, useful for the insurance companies. This union of the two sectors is what is known as Bancassurance.
Bancassurance is a new concept in financial services sector means using the bank’s distribution channels to sell insurance products. The philosophy behind Bancassurance is to combine the manufacturing capability sand selling culture of insurance companies with the distribution network and large receptive client base of banks. It is a phenomenon wherein insurance products are offered through the distribution channels of the banking services along with a complete range of banking and investment products and services. To put it simply, Bancassurance tries to exploit synergies between both the insurance companies and banks. Bancassurance if taken in right spirit and implemented properly can be win-win situation for the all the participants’ viz., banks, insurers and the customer.
Need for Bancassurance
The growth of Bancassurance as a distribution channel can be ascribed to the following:
- Conducive environment: Progressive dismantling of laws relating to undertaking of insurance businesses by banks, increasing use of electronic channels and automation, growing needs for private retirement plans to complement public pensions, the concern for providing total financial services to customers, etc. have paved the way for Bancassurance.
- Cost effectiveness: Insurers look to Bancassurance as an alternative cost effective mode of distribution as against the costly agency services. It is estimated that 50% of the insurers cost structure is directly or indirectly related to distribution
- Fee-based income: A bank expects to increase its fee-based income and overall productivity by leveraging its branch network, brand image and client base by optimally using its assets/infrastructure and by positioning itself as an one-stop-shop with value-added service for its customers, thereby increasing customer loyalty and retention. Bancassurance enables a bank to satisfy the risk protection needs of its clients without assuming underwriting risk.
- Fund Management: Life insurance (where premium is about 55% of the insurance premium worldwide) is a savings market. It is one of the methods to increase the deposits of banks. Both life and non-life insurance business provide additional flow of float funds besides fee based income to banks, through the same channel of distribution and with the same people.
- Innovations and efficiency: Increased convergence of banking and insurance would lead of melding of their corporate cultures, skill and synergising/innovating the marketing of financial services.
Models of Bancassurance
Different Bancassurance business models as given below are prevalent in different countries:
- Distribution agreements: In simplest form called ‘tied agent’, the bank’s personnel sell the products of one insurer exclusively, either in stand-alone basis or bundled with bank products.
- Strategic alliance: This is a higher degree of intervention in product development, service provision and channel management by way of bank investing sizably in insurance business without any contingent liability.
- Joint venture: Here a large bank with a well developed customer database partners with a large insurer with strong product and channel experience, to develop a powerful new distribution model. Alternatively, a bank and insurance company may agree to have cross holdings between them to share the profits.
- Financial service group: Under further integration between a bank and insurer, an insurance company may build/buy a bank or a bank may build/buy an insurance company.
Thus banks could associate themselves with insurance companies by becoming a distributor or by being a strategic investor or developing a joint venture or by becoming a promoter. Most of the bancassurance operations fall in the first model.
Advantages of Bancassurance
Advantages to Banks
- Productivity of the employees increases.
- By providing customers with both the services under one roof, they can improve overall customer satisfaction resulting in higher customer retention levels.
- Increase in return on assets by building fee income through the sale of insurance products. (Minimum investment and “No” risks)
- Can leverage on face-to-face contacts and awareness about the financial conditions of customers to sell insurance products.
- Generation of additional profits.
- Staff will be motivated through financial and other incentives.
- The “Tough” effective and efficient sales and marketing culture will have a favorable impact on the banks marketing function.
- Retention of “existing” and acquisition of “new” customers.
- Certain life insurance products will protect or minimize their risk exposure – mortgage or other loans, key man etc.
- Ability to sell bank products to life insurer’s clients.
Advantages to Insurers
- Generation of additional sales.
- Increase in profits.
- Additional funds for investment.
- Ability to sell bank products to client base – generating additional profits.
- Sales force will be motivated through additional income and ability to offer more products to their clients and prospects.
- Retention of “Existing” and acquisition of “New” customers.
- The “Good” culture of the bank will have a favorable impact on the life insurer.
- Insurers can exploit the banks’ wide network of branches for distribution of products. The penetration of banks’ branches into the rural areas can be utilized to sell products in those areas.
- Customer database like customers’ financial standing, spending habits, investment and purchase capability can be used to customize products and sell accordingly.
- This channel allows an insurer to effectively tap the rural sector. Selling insurance through traditional methods in rural area is an expensive proposition.
- Since banks have already established relationship with customers, conversion ratio of leads to sales is likely to be high. Further service aspect can also be tackled easily.
Advantages to Consumers
- Comprehensive financial advisory services under one roof. i.e., insurance services along with other financial services such as banking, mutual funds, personal loans etc.
- Enhanced convenience on the part of the insured.
- Easy access for claims, as customers visit banks regularly.
- Innovative and better product ranges.
Factors Critical to the Success of Bancassurance
Factors that appear to be critical for the success of bancassurance are:
- Commitment of senior management: Senior management of the bank must be committed to bancassurance as a core strategy that should be integrated with other core strategies.
- Importance: Bancassurance should not be merely viewed as an add-on product but as an important aspect of the business
- Change in culture: Bank’s culture must be transformed to sell insurance and it must be ensured that “shelf space” is adequately provided in the bank’s retail delivery system.
- Handling of customers: With customer awareness levels increasing, they are demanding greater convenience in financial services.
- Emergence of remote distribution channels: The emergence of remote distribution channels, such as PC-banking and Internet-banking, would hamper the distribution of insurance products through banks.
- Emergence of newer distribution channels: The emergence of newer distribution channels seeking a market share in the network.
- Others: Strategies consistent with the bank’s vision, knowledge of target customers’ needs, defined sales process for introducing insurance services, simple yet complete product offerings, strong service delivery mechanism, quality administration, synchronized planning across all business lines and subsidiaries, complete integration of insurance with other bank products and services, extensive and high-quality training, sales management tracking system for reporting on agents’ time and results of bank referrals and relevant and flexible database systems.
Global Scenario of Bancassurance
Bancassurance is a subject of continuing interest to the financial services industry worldwide. Over the years, regulatory barriers between banking and insurance have diminished altogether, creating a climate increasing friendly to Bancassurance. The degree to which banks devote themselves to the sale and servicing of Insurance varies from country to country and among individual banks. Bancassurance so far has been principally European.
Bancassurance has transformed the Insurance industry in most of the developed world. Bancassurance represents over 65% of the premium income in life insurance in Spain, 60% in France, 50% in Belgium and Italy. By making use of existing legislation in Insurance, Bancassurance has provided them with a new source of profit, which served to diversify their banking activity and optimize their choice of products, thereby increasing customer loyalty.
Bancassurance in India
The Indian insurance industry is growing fast. Banks and insurance companies see bancassurance as the answer to the Indian retail financial industry’s future income. Non-life products have featured les prominently in such channel as compared to life products. The banks in India have a client base of close to 100 million and therefore are an ideal case for carrying bancassurance forward. A unique aspect will be predominance of rural bank branches in sales processes and the closeness of the bank staff with customers in general in the rural pockets.
Bancassurance in India is a very new concept, but is fast gaining ground. In India, the banking and insurance sectors are regulated by two different entities (banking by RBI and insurance by IRDA) and bancassurance being the combinations of two sectors comes under the purview of both the regulators. Each of the regulators has given out detailed guidelines for banks getting into insurance sector
As per the recommendations of the Malhotra Committee on Reforms in the Insurance Sector, Indian Parliament passed the Insurance Regulatory & Development Authority (IRDA) Act 1999. IRDA is constituted to regulate, promote and ensure orderly growth of insurance and reinsurance business. According to IRDA, a private sector participant has to fulfill the following criteria for entry into insurance sector:
- Minimum paid-up capital of Rs.100 crores
- Investment in policyholders’ funds only in India
- Restriction of international companies to minority equity holding of 49 %
Reserve Bank of India has prescribed entry guidelines under the following three options for banks wanting to diversify into insurance:
- Joint-venture on risk participation basis: Joint ventures (JV) for insurance business with risk participation is allowed for banks which have
- Net worth not less than Rs.500 crores,
- CRAR of not less than 10%,
- Reasonable level of NPA,
- Net profit continuously for the last three years,
- Satisfactory performance records of subsidiaries
- Strategic Investment: Banks which are not eligible for JV participation as above, can make investments up to 10% of the net worth of the bank or Rs.50 crores whichever is less in insurance company for providing infrastructure and service support without any contingent liability, provided they fulfill the requirements:
- CRAR of not less than 10%,
- Reasonable level of NPA
- Net profit continuously for the last three years
- Agency business on fee basis: Any commercial bank may undertake insurance business on fee basis, as an agent of insurance companies, with no risk participation IRDA has also notified regulations, interalia, on registration of insurers, their assets and liabilities, conduct of business, obligation to rural social sectors, protection of policy holders interest, licensing of insurance agents, agents’ training etc. A bank can act as a Corporate Agent of any one life and/or non-life insurer(s); but cannot act as a broker on behalf of many life/non-life insurers. Thus banks undertaking bancassurance will also be subject to IRDA Regulations
The Insurance Regulatory and Development Authority (IRDA) guidelines for the bancassurance are:
- Each bank that sells insurance must have a chief insurance executive to handle all the insurance activities.
- All the people involved in selling should under-go mandatory training at an institute accredited by IRDA and pass the examination conducted by the authority.
- Commercial banks, including cooperative banks and regional rural banks, may become corporate agents for one insurance company.
- Banks cannot become insurance brokers.
Future of Bancassurance in India
India is 23rd largest insurance market in the world but it compares poorly with other countries in respect of insurance penetration and density. During 2001-02, the total life insurance premium collection in India rose to about Rs.50, 000 crores. If the industry is to grow at a rate of 20% per annum (against LIC’s growth of 39% during 2001- 02), the life insurance market in India will be around Rs.1,71,500 crores in ten years time. Even if banks can manage to get 25% of the market, they will account for sales worth Rs.43,000 crores in premium. This is only a conservative figure as most of the private insurance companies bancassurance business is contributing in the range of 25 to up to 70 %(in case of Aviva). If the average commission is 10% of the total premium, banks can earn about Rs.4300 crores per year. Similarly they can earn another Rs.1000 crores as commission from non-life business (the annually renewable non-life market is above Rs.10,000 crores in premium per year).
This magnitude of potential fee based income by banks in India from bancassurance business is the attraction for banks to be preferred vendors of insurance products, in spite of possible challenges relating to choice of insurance business (life or non-life or both), cultural issues, compensation structure and capacity building.