bancassurance

dhoks

New member
BANCASSURANCE

Introduction

Bancassurance is the selling of insurance and banking products through the same channel, most commonly though bank branches selling insurance. The sales synergies available have been sufficient to be used to justify mergers and acquisitions.

Some of the sale synergies come through the extensive customer base that banks have, the rest from opportunities to sell insurance together with some banking products. For example, banks generally insist on life insurance for mortgage borrowers. Although borrowers are not obliged to buy insurance from the lender, many do (despite it often being very over-priced) as it is an easy option.

Credit cards and personal loans create opportunities for banks to sell protection insurance (again a high margin business) and the knowledge a bank has of its customer’s finance creates opportunities to sell other products.

Bancassurance has become significant with banks now a major distribution channel insurers, and insurance sales a significant source of profits for banks. The latter partly being because banks can often sell insurance at better prices (i.e. higher premiums) than many other channels and they have low costs as they use the infrastructure (i.e. branches and system) that they use for banking.

Bancassurance provides various benefits to stakeholders such as banks, insurance companies, shareholders and consumers. In this era of globalization and liberalization, in most of the ancient countries, the distribution channel of insurance companies leveraging bancassurance has a wider scope. It discusses the status of bancassurance in various Asian countries and evaluates the possibilities of banks and insurance working together for better distribution channel, which serves mutually beneficial purposes. The distribution channel today for insurance products is widening. Increase in distribution channels among others has also seen the concept of bancassurance taking roots in India, which is emerging to be a viable solution to mass selling of insurance products.
A popular concept in the West, Bancassurance put in simple terms means selling insurance products through banks.




What is Bancassurance

Bancassurance is a word coined in the western world, when banks began to get involved in the marketing of insurance business. The involvement took different forms in different countries. In some countries, the same institutions would offer both banking and insurance products, separately or together, as the customers may need, managing both the business themselves. This was possible when the institution is allowed to transact both insurance and banking businesses. This was permitted in certain countries. The product or service offered to the customer was the product of the bank and had in it some elements of insurance. This strictly is bancassurance.

In practice, however, there are variations:

One variation was that the bank may offer both services combined, but having done the business, pass on the insurance part of the funds to an insurance company, with whom it had an alliance or a business arrangement. Both of them may be under the same industrial group. For example, when the Unit Trust of India offered Unit Linked Life Insurance Policies, it had an arrangement with Life Insurance Corporation to the extent of the term insurance component. The ‘Peerless’ used to offer its account holders insurance cover an accidental death. This was done by arrangement with a general insurance company. Although marketed as one product, the business remained separate. The funds were accounted for and managed separately by separate institutions.

Corporate bancassurance

Bancassurance provides more ways to earn fee income for the bank. As we discussed earlier that every relationship provides an opportunity to cross sell bancassurance products whether it is retail or corporate. Corporate relationships provide an opportunity for corporate bancassurance, which is taking shape slowly but steadily. All commercial enterprises need insurance for their buildings; factory or warehouses and banks can capitalize on this existing need for insurance cover. There is more fee income on distributing commercial property or liability insurance to corporate houses, as volume and turnover are high. It is easy to cross-sell commercial insurance art the time of term lending or providing Letter of Credit since it will be value addition from the customer’s point of view. Further, lending is an asset creation process for the bank and it makes sense even from the credit risk management perspective to have an insurance security of your choice.
Fire insurance, workers compensation insurance, group medical insurance and contractors’ insurance are just some of the commercial property and liability insurance which can be sold to the corporate customers of the banks thereby generating additional source of fee income. Similarly, Trade finance or operations division within bank provide opportunity to cross-sell marine insurance. The importance of corporate bancassurance lies in further cross-selling opportunity to the individuals within those companies.

Bancassurance in India

Bancassurance commonly means selling insurance products under the same roof of a bank. Though bancassurance had roots in France in the 1980s, and spread across different parts of Continental Europe since, it has spread its wings in Asia – in particular, in India.

In India, there are a number of reasons why bancassurance could play a natural role in the insurance market. First, banks have a huge network across the country. Second, banks can offer fee-based income for the employees for insurance sales. Third, banks are culturally more acceptable than insurance companies. Dealing with (life) insurance, in many parts of India, conjure up an image of a bad omen. Some bank products have natural complementary insurance products. For example, if a bank gives out a home loan, it might insist on a life insurance cover so that in case of death of the borrower, there is no problem in paying off the home loan.

Bancassurance is: “The provision of a complete range of banking, investment and insurance product and services, to meet the individual needs of the customers of the bank and its associates.”




Expansion of banks in India

India is witnessing major changes in the insurance market, One of these changes is the emergence of bancassurance. Commercial banks have large distribution networks compare with other financial service organization in India.

Penetration of commercial banks in India has been quite extensive. There are
around 66,000 branches of scheduled commercial banks. Each branch serves an average of 15,000 people. The only other national institution with a bigger reach is the postal service.2 Banks have not only been successful in the urban areas. It has also grown tremendously in the rural areas. Of the total number of branches of commercial banks, there are 32,600 branches in rural areas, and 14,400 semi-urban branches. In addition, there are 196 exclusive regional rural banks in deep hinterland. There is research evidence to show that the deliberate expansion policy of banks in rural areas has contributed to poverty reduction in India. Instead of simple headcounts, if we take other bank penetration measure like total value of deposits as a percent of GDP, it is also exhibiting an upward trend. This means bank deposits are growing at a rate much faster than the gross domestic product. Banks have become the main saving vehicle in the economy. Between 1985 and 1995, the growth of deposits in banks stalled at under 35% of the GDP (that itself is a high number by the standard of the developing economies). From 1995, the banking sector started growing again.

The deposits in banks grew another 10% of GDP by 2000. This level of growth in bank deposit has been totally unprecedented in India since independence.

Bancassurance in India - A SWOT Analysis

Banks are selling Personal Accident an Baggage Insurance directly to their Credit Card members as a value addition their products. Banks also participate in the distribution of mortgage linked insurance products like fire, motor or cattle insurance to their customers. 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 hitherto was not thought of.

Once bancassurance is embraced in India with full force, a lot will be at stake. 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, an R & D 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.


Strengths

In a country of one 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 travelling 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. LIC and GlC both 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, GlC 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.


Weaknesses

The IT culture is unfortunately missing completely in all of the future collaborators i.e., banks, GIC & LIC. A late awakening seems to have dawned upon but it is a case of too late and too little. Elementary IT requirement like networking (LAN) is not in place even in the headquarters of these institutions, when the need today is of Vide Area Network (WAN) and Vast Area Network (V AN). Internet connection is not available even to the managers of operating offices.

The middle class populations that we are eyeing at are today over burdened, first by inflationary pressures on their pockets and then by the tax net. Where is the money left to think of insurance? Fortunately, LIC schemes get IT exemptions but personal line products from GIC (mediclaim already has this benefit) like householder, travel, etc., also need to be given tax exemption to further the cause of insurance and to increase domestic revenue for the country.

Another drawback is the inflexibility of the products i.e., it can not 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 the customer.

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 dissected variously and various homogenous 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.

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 company or change from one work to a different kind of work will be resented with vehemence.

Another possible threat (non-response) may come 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 fierce competition in the market resulting in lower prices and the bancassurance venture may never break-even.

Looking Around

Hardly 20 percent of all US banks were selling insurance in 1998 against almost 70% to 90 % in many West European countries. Market penetration of bancassurance in new life businesses in Europe ranges between 30% in UK to nearly 70% in France. Almost 100 percent banks in France are selling insurance products. In 1991 Nationale Nederlanden of Netherlands merged with Post Bank, the banking subsidiary of the post office to create the ING Group - a new dimension to the bancassurance i.e., harnessing the databank of the post office as well. CNP, the largest independent insurance company in France has developed its product distribution through post offices. The merger of Winterthur, the largest Swiss insurance company with Credit Suisse and Citibank with Travellers Group have resulted in some of the largest financial conglomerates in the world

Despite the phenomenal success of bancassurance in Europe, property and casualty products have not made much inroads. In Spain, Belgium, Germany and France where more than 50 percent of all new life premiums are generated by bancassurance, only about 6% P&C business comes from banks in Spain, 5% in Belgium, 4% in France and Italy.

A recent study by Boston Consulting Group and Bank Administration Institute in USA claims that if banks made a major commitment to insurance and a more narrowly targeted commitment to investors, within five years they could increase retail revenues by nearly 50 percent.

It further states that:

 Banks could capture 10 percent to 15 percent of the total US insurance and investment market by selling products to 20 percent of their existing customers.

 Banks' existing infrastructure enables them to operate at expense levels that are 30 percent to 50 percent lower than those of traditional insurers.
 Bancassurance's bank-branch based sales system sells three to five times as many insurance policies as a conventional as a conventional insurance sales and distribution force.

 By simplifying bancassurance products each back office bank employee can quintuple managing policies compared to traditional insurers.

Obstacles and Success Factors

Even insurers and banks that seem ideally suited for a bancassurance partnership can run into problems during implementation. The most common obstacles to success are poor manpower management, lack of a sales culture within the bank, no involvement by the branch manager, insufficient product promotions, failure to integrate marketing plans, marginal database expertise, poor sales channel linkages, inadequate incentives, resistance to change, negative attitudes toward insurance and unwieldy marketing strategy.

Conversely, bancassurance ventures that succeed tend to have certain things in common. Factors that appear to be critical to success include 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.


Long Term Drivers of Bancassurance in India

The staffing problem has redirected some banks to bancassurance and so has the reduction of bad loan problem. But, they are not the long-term drivers of bancassurance in India. The long-term drivers in India are going to be the following:

(1) The culturally more acceptable banking transactions. Banking does not
have the same stigma that (life) insurance carries. This factor will
diminish in importance over time as people become more educated.

(2) Banks can offer fee-based income for insurance sales. This can be
attractive under current rigid structure of wage benefits. At present, banks are prohibited from offering commission to the bank employees for
selling insurance products. Banks have found ways to circumvent the
problem. For example, they offer "car allowance" for the employees
selling insurance.

(3) Narrowing bank margins over time with more competition.

(4) Banks have complementary products with insurance products such as the
auto insurance, home insurance or annuities.

(5) When the pension reform is undertaken (and it is in the works), banks
can become natural institutional vehicles for private pension products. In some countries, banks are explicitly prohibited from selling pension products (e.g., Australia). In some other countries, banks are the leading private pension providers (e.g., Mexico).

(6) Healthcare insurance sector can also benefit from bancassurance.
In India, only 2.5 million people have access to healthcare facilities.
On the other hand, 5% of personal income is spent on healthcare.
Banks can distribute and facilitate administration of healthcare insurance.

(7) In many countries, the absence of banks from selling insurance seems to be stem from regulatory reasons. In India, privatization of the insurance sector signaled an accommodating approach from both the insurance regulator and the banking regulator for banks entertaining the thoughts of selling insurance.

Why banks should enter into insurance business in India

Indian Insurance market is hidden goldmine-and estimated Rs.180,000 crore in terms of annual insurance premium. Sale of insurance through banks will meet and important set of consumer needs. Banks branch network allows face to face contact i.e. so important is the sale of life insurance. Bank channel can also boost sales productivity. Banks can provide integrated financial services under one roof to their customer.

Valid reasons why banks should allow insurance salesman to sell insurance products in their premises:

Bank gets a royalty or a commission for every insurance policy sold.
The bank gets an investment management fee for managing the insurer’s investments. Insurance products, like retirement and pension plans, are growth areas for banks.

Entry of Banks in Insurance Business

On December 28, 2000, the State Bank of India (SBI) announced a joint venture partnership with Cardiff SA (the insurance arm of BNP Paribas Bank). This partnership won over several others. Many experts in the industry have awaited the entry of the SBI. It was well known that the SBI has long harbored plans to become a universal bank (a universal bank has business in banking, insurance and in security). For a bank with more than 13,000 branches all over India, this would be a natural expansion. The SBI was seeking a foreign partner to help with new product design. It did not want the partner to become dominant in the long run. It wanted to retain its own brand name. It wanted a partner that is well versed in the universal banking business. This criterion ruled out an American partner where underwriting insurance business by banks has been strictly forbidden by law. Cardiff is the third largest insurance company in France. More than 60% of life insurance policies in France are sold through the banks. The Reserve Bank of India (RBI) needed to clear participation by the SBI because in India banks are allowed to enter other businesses on a “case by case” basis.

The SBI entry is groundbreaking for several reasons. This was the first for an Indian bank to enter the insurance market. Second, even though the regulators have said that banks would not (generally) be allowed to hold more than 50% of an insurance company, the SBI was allowed to do so (with a promise that its share would be eventually diluted).Ever since the entry of the SBI, a number of other insurance companies have declared their desired banking partners. In this process, both life and non life companies have tied up with banks.. Note that some of the partnerships listed here are simply at the Memorandum of Understanding (Mo U) stage. They are yet to take any concrete form. Specifically, HDFC Life Insurance is tied with HDFC Bank, ICICI Prudential with ICICI Bank and so on.
The second feature is the proliferation of banks partnering with single insurance companies. Given that there are only two dozen insurance companies and hundreds of banks, this outcome is to be expected.
Moreover, insurance companies are targeting different market segments by affiliating with banks. Take the example of Aviva. Aviva has evolved a three-layered strategy. The first layer is a tie up with Amro and American Express. It caters to high net worth urban customers. The second layer is a tie up with Canara Bank. Through this nationalized bank with 2,400 branches, it reaches customers across the length and breadth of the country. The third layer, at a regional level, a tie-up with Lakshmi Vilas bank focuses on the region specific customers. This tie-up helps them reach customers in rural and semi-urban centers in Tamil Nadu and Andhra Pradesh.
The third feature is best illustrated by an example: Allianz Bajaj does not have the same banking partners for the life sector as in the non-life sector.

Fourth, some banks appear to have tied up with several insurance companies. For example, Citibank appears in the list of a number of lives as well as in the non-life insurance company lists. This fact will become important as the warning of the RBI that banks “should not adopt any restrictive practice of forcing its customers to go in only for a particular insurance company” become an issue in the future.

Fifth, the most recent addition to the list is the Oriental Insurance Company. In January 2004, it declared that it would distribute insurance policies through the post offices after it announced a joint venture with the
 
BANCASSURANCE

Introduction

Bancassurance is the selling of insurance and banking products through the same channel, most commonly though bank branches selling insurance. The sales synergies available have been sufficient to be used to justify mergers and acquisitions.

Some of the sale synergies come through the extensive customer base that banks have, the rest from opportunities to sell insurance together with some banking products. For example, banks generally insist on life insurance for mortgage borrowers. Although borrowers are not obliged to buy insurance from the lender, many do (despite it often being very over-priced) as it is an easy option.

Credit cards and personal loans create opportunities for banks to sell protection insurance (again a high margin business) and the knowledge a bank has of its customer’s finance creates opportunities to sell other products.

Bancassurance has become significant with banks now a major distribution channel insurers, and insurance sales a significant source of profits for banks. The latter partly being because banks can often sell insurance at better prices (i.e. higher premiums) than many other channels and they have low costs as they use the infrastructure (i.e. branches and system) that they use for banking.

Bancassurance provides various benefits to stakeholders such as banks, insurance companies, shareholders and consumers. In this era of globalization and liberalization, in most of the ancient countries, the distribution channel of insurance companies leveraging bancassurance has a wider scope. It discusses the status of bancassurance in various Asian countries and evaluates the possibilities of banks and insurance working together for better distribution channel, which serves mutually beneficial purposes. The distribution channel today for insurance products is widening. Increase in distribution channels among others has also seen the concept of bancassurance taking roots in India, which is emerging to be a viable solution to mass selling of insurance products.
A popular concept in the West, Bancassurance put in simple terms means selling insurance products through banks.




What is Bancassurance

Bancassurance is a word coined in the western world, when banks began to get involved in the marketing of insurance business. The involvement took different forms in different countries. In some countries, the same institutions would offer both banking and insurance products, separately or together, as the customers may need, managing both the business themselves. This was possible when the institution is allowed to transact both insurance and banking businesses. This was permitted in certain countries. The product or service offered to the customer was the product of the bank and had in it some elements of insurance. This strictly is bancassurance.

In practice, however, there are variations:

One variation was that the bank may offer both services combined, but having done the business, pass on the insurance part of the funds to an insurance company, with whom it had an alliance or a business arrangement. Both of them may be under the same industrial group. For example, when the Unit Trust of India offered Unit Linked Life Insurance Policies, it had an arrangement with Life Insurance Corporation to the extent of the term insurance component. The ‘Peerless’ used to offer its account holders insurance cover an accidental death. This was done by arrangement with a general insurance company. Although marketed as one product, the business remained separate. The funds were accounted for and managed separately by separate institutions.

Corporate bancassurance

Bancassurance provides more ways to earn fee income for the bank. As we discussed earlier that every relationship provides an opportunity to cross sell bancassurance products whether it is retail or corporate. Corporate relationships provide an opportunity for corporate bancassurance, which is taking shape slowly but steadily. All commercial enterprises need insurance for their buildings; factory or warehouses and banks can capitalize on this existing need for insurance cover. There is more fee income on distributing commercial property or liability insurance to corporate houses, as volume and turnover are high. It is easy to cross-sell commercial insurance art the time of term lending or providing Letter of Credit since it will be value addition from the customer’s point of view. Further, lending is an asset creation process for the bank and it makes sense even from the credit risk management perspective to have an insurance security of your choice.
Fire insurance, workers compensation insurance, group medical insurance and contractors’ insurance are just some of the commercial property and liability insurance which can be sold to the corporate customers of the banks thereby generating additional source of fee income. Similarly, Trade finance or operations division within bank provide opportunity to cross-sell marine insurance. The importance of corporate bancassurance lies in further cross-selling opportunity to the individuals within those companies.

Bancassurance in India

Bancassurance commonly means selling insurance products under the same roof of a bank. Though bancassurance had roots in France in the 1980s, and spread across different parts of Continental Europe since, it has spread its wings in Asia – in particular, in India.

In India, there are a number of reasons why bancassurance could play a natural role in the insurance market. First, banks have a huge network across the country. Second, banks can offer fee-based income for the employees for insurance sales. Third, banks are culturally more acceptable than insurance companies. Dealing with (life) insurance, in many parts of India, conjure up an image of a bad omen. Some bank products have natural complementary insurance products. For example, if a bank gives out a home loan, it might insist on a life insurance cover so that in case of death of the borrower, there is no problem in paying off the home loan.

Bancassurance is: “The provision of a complete range of banking, investment and insurance product and services, to meet the individual needs of the customers of the bank and its associates.”




Expansion of banks in India

India is witnessing major changes in the insurance market, One of these changes is the emergence of bancassurance. Commercial banks have large distribution networks compare with other financial service organization in India.

Penetration of commercial banks in India has been quite extensive. There are
around 66,000 branches of scheduled commercial banks. Each branch serves an average of 15,000 people. The only other national institution with a bigger reach is the postal service.2 Banks have not only been successful in the urban areas. It has also grown tremendously in the rural areas. Of the total number of branches of commercial banks, there are 32,600 branches in rural areas, and 14,400 semi-urban branches. In addition, there are 196 exclusive regional rural banks in deep hinterland. There is research evidence to show that the deliberate expansion policy of banks in rural areas has contributed to poverty reduction in India. Instead of simple headcounts, if we take other bank penetration measure like total value of deposits as a percent of GDP, it is also exhibiting an upward trend. This means bank deposits are growing at a rate much faster than the gross domestic product. Banks have become the main saving vehicle in the economy. Between 1985 and 1995, the growth of deposits in banks stalled at under 35% of the GDP (that itself is a high number by the standard of the developing economies). From 1995, the banking sector started growing again.

The deposits in banks grew another 10% of GDP by 2000. This level of growth in bank deposit has been totally unprecedented in India since independence.

Bancassurance in India - A SWOT Analysis

Banks are selling Personal Accident an Baggage Insurance directly to their Credit Card members as a value addition their products. Banks also participate in the distribution of mortgage linked insurance products like fire, motor or cattle insurance to their customers. 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 hitherto was not thought of.

Once bancassurance is embraced in India with full force, a lot will be at stake. 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, an R & D 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.


Strengths

In a country of one 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 travelling 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. LIC and GlC both 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, GlC 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.


Weaknesses

The IT culture is unfortunately missing completely in all of the future collaborators i.e., banks, GIC & LIC. A late awakening seems to have dawned upon but it is a case of too late and too little. Elementary IT requirement like networking (LAN) is not in place even in the headquarters of these institutions, when the need today is of Vide Area Network (WAN) and Vast Area Network (V AN). Internet connection is not available even to the managers of operating offices.

The middle class populations that we are eyeing at are today over burdened, first by inflationary pressures on their pockets and then by the tax net. Where is the money left to think of insurance? Fortunately, LIC schemes get IT exemptions but personal line products from GIC (mediclaim already has this benefit) like householder, travel, etc., also need to be given tax exemption to further the cause of insurance and to increase domestic revenue for the country.

Another drawback is the inflexibility of the products i.e., it can not 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 the customer.

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 dissected variously and various homogenous 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.

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 company or change from one work to a different kind of work will be resented with vehemence.

Another possible threat (non-response) may come 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 fierce competition in the market resulting in lower prices and the bancassurance venture may never break-even.

Looking Around

Hardly 20 percent of all US banks were selling insurance in 1998 against almost 70% to 90 % in many West European countries. Market penetration of bancassurance in new life businesses in Europe ranges between 30% in UK to nearly 70% in France. Almost 100 percent banks in France are selling insurance products. In 1991 Nationale Nederlanden of Netherlands merged with Post Bank, the banking subsidiary of the post office to create the ING Group - a new dimension to the bancassurance i.e., harnessing the databank of the post office as well. CNP, the largest independent insurance company in France has developed its product distribution through post offices. The merger of Winterthur, the largest Swiss insurance company with Credit Suisse and Citibank with Travellers Group have resulted in some of the largest financial conglomerates in the world

Despite the phenomenal success of bancassurance in Europe, property and casualty products have not made much inroads. In Spain, Belgium, Germany and France where more than 50 percent of all new life premiums are generated by bancassurance, only about 6% P&C business comes from banks in Spain, 5% in Belgium, 4% in France and Italy.

A recent study by Boston Consulting Group and Bank Administration Institute in USA claims that if banks made a major commitment to insurance and a more narrowly targeted commitment to investors, within five years they could increase retail revenues by nearly 50 percent.

It further states that:

 Banks could capture 10 percent to 15 percent of the total US insurance and investment market by selling products to 20 percent of their existing customers.

 Banks' existing infrastructure enables them to operate at expense levels that are 30 percent to 50 percent lower than those of traditional insurers.
 Bancassurance's bank-branch based sales system sells three to five times as many insurance policies as a conventional as a conventional insurance sales and distribution force.

 By simplifying bancassurance products each back office bank employee can quintuple managing policies compared to traditional insurers.

Obstacles and Success Factors

Even insurers and banks that seem ideally suited for a bancassurance partnership can run into problems during implementation. The most common obstacles to success are poor manpower management, lack of a sales culture within the bank, no involvement by the branch manager, insufficient product promotions, failure to integrate marketing plans, marginal database expertise, poor sales channel linkages, inadequate incentives, resistance to change, negative attitudes toward insurance and unwieldy marketing strategy.

Conversely, bancassurance ventures that succeed tend to have certain things in common. Factors that appear to be critical to success include 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.


Long Term Drivers of Bancassurance in India

The staffing problem has redirected some banks to bancassurance and so has the reduction of bad loan problem. But, they are not the long-term drivers of bancassurance in India. The long-term drivers in India are going to be the following:

(1) The culturally more acceptable banking transactions. Banking does not
have the same stigma that (life) insurance carries. This factor will
diminish in importance over time as people become more educated.

(2) Banks can offer fee-based income for insurance sales. This can be
attractive under current rigid structure of wage benefits. At present, banks are prohibited from offering commission to the bank employees for
selling insurance products. Banks have found ways to circumvent the
problem. For example, they offer "car allowance" for the employees
selling insurance.

(3) Narrowing bank margins over time with more competition.

(4) Banks have complementary products with insurance products such as the
auto insurance, home insurance or annuities.

(5) When the pension reform is undertaken (and it is in the works), banks
can become natural institutional vehicles for private pension products. In some countries, banks are explicitly prohibited from selling pension products (e.g., Australia). In some other countries, banks are the leading private pension providers (e.g., Mexico).

(6) Healthcare insurance sector can also benefit from bancassurance.
In India, only 2.5 million people have access to healthcare facilities.
On the other hand, 5% of personal income is spent on healthcare.
Banks can distribute and facilitate administration of healthcare insurance.

(7) In many countries, the absence of banks from selling insurance seems to be stem from regulatory reasons. In India, privatization of the insurance sector signaled an accommodating approach from both the insurance regulator and the banking regulator for banks entertaining the thoughts of selling insurance.

Why banks should enter into insurance business in India

Indian Insurance market is hidden goldmine-and estimated Rs.180,000 crore in terms of annual insurance premium. Sale of insurance through banks will meet and important set of consumer needs. Banks branch network allows face to face contact i.e. so important is the sale of life insurance. Bank channel can also boost sales productivity. Banks can provide integrated financial services under one roof to their customer.

Valid reasons why banks should allow insurance salesman to sell insurance products in their premises:

Bank gets a royalty or a commission for every insurance policy sold.
The bank gets an investment management fee for managing the insurer’s investments. Insurance products, like retirement and pension plans, are growth areas for banks.

Entry of Banks in Insurance Business

On December 28, 2000, the State Bank of India (SBI) announced a joint venture partnership with Cardiff SA (the insurance arm of BNP Paribas Bank). This partnership won over several others. Many experts in the industry have awaited the entry of the SBI. It was well known that the SBI has long harbored plans to become a universal bank (a universal bank has business in banking, insurance and in security). For a bank with more than 13,000 branches all over India, this would be a natural expansion. The SBI was seeking a foreign partner to help with new product design. It did not want the partner to become dominant in the long run. It wanted to retain its own brand name. It wanted a partner that is well versed in the universal banking business. This criterion ruled out an American partner where underwriting insurance business by banks has been strictly forbidden by law. Cardiff is the third largest insurance company in France. More than 60% of life insurance policies in France are sold through the banks. The Reserve Bank of India (RBI) needed to clear participation by the SBI because in India banks are allowed to enter other businesses on a “case by case” basis.

The SBI entry is groundbreaking for several reasons. This was the first for an Indian bank to enter the insurance market. Second, even though the regulators have said that banks would not (generally) be allowed to hold more than 50% of an insurance company, the SBI was allowed to do so (with a promise that its share would be eventually diluted).Ever since the entry of the SBI, a number of other insurance companies have declared their desired banking partners. In this process, both life and non life companies have tied up with banks.. Note that some of the partnerships listed here are simply at the Memorandum of Understanding (Mo U) stage. They are yet to take any concrete form. Specifically, HDFC Life Insurance is tied with HDFC Bank, ICICI Prudential with ICICI Bank and so on.
The second feature is the proliferation of banks partnering with single insurance companies. Given that there are only two dozen insurance companies and hundreds of banks, this outcome is to be expected.
Moreover, insurance companies are targeting different market segments by affiliating with banks. Take the example of Aviva. Aviva has evolved a three-layered strategy. The first layer is a tie up with Amro and American Express. It caters to high net worth urban customers. The second layer is a tie up with Canara Bank. Through this nationalized bank with 2,400 branches, it reaches customers across the length and breadth of the country. The third layer, at a regional level, a tie-up with Lakshmi Vilas bank focuses on the region specific customers. This tie-up helps them reach customers in rural and semi-urban centers in Tamil Nadu and Andhra Pradesh.
The third feature is best illustrated by an example: Allianz Bajaj does not have the same banking partners for the life sector as in the non-life sector.

Fourth, some banks appear to have tied up with several insurance companies. For example, Citibank appears in the list of a number of lives as well as in the non-life insurance company lists. This fact will become important as the warning of the RBI that banks “should not adopt any restrictive practice of forcing its customers to go in only for a particular insurance company” become an issue in the future.

Fifth, the most recent addition to the list is the Oriental Insurance Company. In January 2004, it declared that it would distribute insurance policies through the post offices after it announced a joint venture with the

Hey friend, as we know that the selling of life assurance and other insurance plan products and solutions by banking institutions is called bancassurance. Well, you have shared a nice article and i am also sharing a document where you would find more detailed information.
 

Attachments

  • BANCASSURANCE.ppt
    973 KB · Views: 1
Top