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S.K SOMAIYA COLLEGE OF ARTS, SCIENCE & COMMERCEVIDYAVIHAR (EAST), MUMBAI - 400077
PROJECT ON:STUDY OF BANCASSURANCE WITH REFERENCE TO SBI BANK
MASTERS OF COMMERCE(BANKING & FINANCE)
PART 1 (SEM)(2015-2016)
Submitted:In Partial Fulfillment of the requirementsFor the Award of the Degree of MASTERS OF COMMERCE(BANKING & FINANCE) BY RIDDHI J SANGOIROLL NO :45
I RIDDHI J SANGOI student of class in Mcom (BANKING & FINANCE) PART 1 (SEM-1), ROLL NO 45, academic year 2015-2016 Studying at S.K. SOMAIYA COLLEGE OF ARTS, SCIENCE AND COMMERCE, hereby declare that the work done on the project Entitled STUDY OF BANCASSURANCE WITH REFERENCE TO SBI BANK is true and original and any Reference used in this project is duly acknowledged.
DATE:PLACE: MUMBAI ----------------------------- SIGNATURE OF STUDENT (RIDDHI J SANGOI)
This is to certify that MISS RIDDHI J SANGOI, studying in Mcom (BANKING & FINANCE) PART 1 (SEM-1), ROLL NO. 45, academic year 2015-2016 at S.K.SOMAIYA COLLEGE OF ARTS, SCIENCE & COMMERCE has completed the project on STUDY OF BANCASSURANCE WITH REFERENCE TO SBI BANK under the guidance of Proff. GIRISH The information submitted herein is true and original to the best of my knowledge.
____________________ ___________________ Proff. GIRISH DR. SANGEETA KOHLI [PROJECT GUIDE] [PRINCIPAL]
____________________ ___________________ EXTERNAL EXAMINER [CO-ORDINATOR]
DECLARATION BY GUIDE
I, the undersigned Prof. GIRISH has guided MISS RIDDHI J SANGOI, ROLL NO.45 for his project. He has completed the project on STUDY OF BANCASSURANCE WITH REFERENCE TO SBI BANK successfully.I, hereby declare that information provided in this project is true as per the best of my knowledge.
(Prof. ________) Project Guide
It gives me immense pleasure to present a project on STUDY OF BANCASSURANCE WITH REFERENCE TO SBI BANK As a Mcom student it is a great honour to undergo a project work at an graduate level and I would like to thank the University of Mumbai for giving me such a golden opportunity.
I am eternally grateful to almighty god for giving me the spirit to put in my best effort towards my project. I owe my sincere gratitude to DR. SANGEETA KOHLI, the principal of our college. I am also thankful to my project guide GIRISH for her valuable guidance and for providing an insight to the subject.
I am also obliged to the library staff of S.K..Somaiya College for the numerous books made me available for the handy reference.
Although, I have taken every care to check mistake and misprint yet it is difficult to claim perfection. Any error, omission and suggestion brought to my notice, will be thankfully acknowledged by me.
INDEXSR NOCHAPTER NAMEPAGE NO
1OVERVIEW OF BANKING & INSURANCE IN INDIA7
1.1 INTRODUCTION TO BANKING8
1.2 OVERVIEW OF INSURANCE11
2.1 WHAT IS BANCASSURANCE16
2.2 BIRTH OF BANCASSURANCE IN INDIA17
2.3 WAYS OF ENETERING INTO BANCASSURANCE19
2.4 BANCASSURANCE MODELS21
3REGULATIONS FOR BANCASSURANCE IN INDIA24
3.1 RBI GUIDELINES25
4BENEFITS OF BANCASSURANCE27
4.1 BENEFITS OF BANCASSURANCE28
4.2 BENEFITS TO BANKS28
4.3 BENEFITS TO INSURANCE COMPANY29
4.4 BENEFITS TO CUSTOMERS30
5SBI LIFE INSURANCE PROFILE & PRODUCTS31
5.1 SBI LIFE INSURANCE PROFILE32
5.2 SBI COMPANY PERSPESTIVE32
5.3 PRODUCTS OFFERED BY SBI34
6VARIOUS TRENDS & CHALLENGES38
7SWOT ANALYSIS & SOME TIE UPS OF BANCASSURANCE41
7.1 SWOT ANALYSIS OF BANCASSURANCE42
7.2 SOME IMPORTANT TIE UPS IN INDIA44
OVERVIEW OF BANKING & INSURANCE
1.1INTRODUCTION TO BANKING:-Banking has become a part and parcel of our day-to-day life. Today, banks offer an easy access to a common man. They carryout variety of functions apart from their main functions of accepting deposits and lending. Banking is a service industry. Banks provide financial services to the people, business and industries. Merchant banking, money transfer, credit cards, ATM's are some of theimportant financial services provided by the modern banks.Indian banking system, over the years has gone through various phrases after establishment of RBI in 1935 according to RBI Act,1934 , duringBritish rule, to function as Central Bank of the country. Earlier CentralBank's functions were being looked after by the Imperial Bank ofIndia.The development of 'Banking is evolutionary innature. There is no single answer to the question of what is Banking.Because a bank performs a multitude of functions and services whichcannot be comprehended into a single definition. For a common man,a bank is a storehouse of money, for a businessman it is an institutionof finance and for a worker it may be a depository for his saving.It may be explained in brief as "Banking is what a bankdoes". But it is not clear enough to understand the subject in full TheOxford dictionary defines a bank as "an establishment for the custodyof money which it pays out on a customer's order'. But this definitionis also not enough, because it considers the deposit lending andrepayment functions only. The meaning of a bank can be understood only by its functions just as a tree is known by its fruits, As any othersubjects, it has its own origin, growth and development.
It is interesting to trace the origin of the word Bank in the modern sense to the German word "Banck" which means,heap or mound or joint stock fund. From this, the Italian word "Banco" meaning heap of money was coined.
Some people have the opinion that the words "bankis derived from the French words, "bancus" or "banque" which means a "bench". Initially the bankers, the Jews in Lombardy, transacted their business on benches in the market place and bench resembled the banking counter.
Development of Banking in India:-
Banking in India is indeed as old as Himalayas, but the banking functions became an effective force only after the first decades of 20thcentury. To understand of the history of modem banking in India. One has to refer to the English "Agency Houses" established by the East India Company, These Agency Houses, were basically trading firms and carrying on banking business as part of their main business. Because of this dual functions and lack of their own capital they failed and vanished from the scene during the third decade of 18thcentury.
Meaning and Definition of banks:-A bank is an institution which deals in money and credit.Thus, bank is an intermediary which handles other people's money both for their advantage and to its own profit. But banks are not merely a trader in money but also an important manufacturer of money. In other words, a bank is a factory of credit.According to 5(b) defines banking as "accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawals by cheque, draft and order or otherwise". Section 5 (1) (c) defines banking company as "Any company which transacts the business of banking in India".The Oxford Dictionary defines a bank as "an establishment for the custody of money, which it pays out on a customer's order".Section 5(c) of Banking Regulation Act,1949 has been defined banking as,"One which transacts the business of banking which means the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.
Features of banking:-
The following are the essential features of banking,
(1)Dealing inmoney :-The banks accept deposit from the public and advance them as loans to the needy people. The deposits may be of different type -current, fixed and savings accounts. The deposits are accepted on various terms and conditions.
(2)Withdrawals Deposits:-The deposits (other than fixed deposits) made by the public can be withdrawals by cheques, draft or otherwise i.e. the bank issue and pays cheques. The deposits are usually withdrawal on demand,
(3)Dealing with credit:-The banks are the institutions that can create credit i.e. creation of additional money for lending. Thus, creation of credit is the unique feature of Banking
(4)Commercial in Nature:-Since all the banking functions are carried on with the aim of making profit, it is regarded as a commercial institution.
(5)Nature of an agent:-Besides the basic functions of accepting deposits and lending money as loans, banks possess the character of an agent because of its various agency services.
MainFunctions of Banks:-The following are the main functions of banksI. Accepting Deposits:-Tapping the savings of the public by means of deposits in one of the major functions of a bank. When a bank accepts deposits, it is said to borrow money, as a borrower, the bank has to safeguard its position. Therefore before opening an account a bank has to observe certain general precautions. Every deposit is the property of the bank. The bank is responsible for the safety of the deposit. A bank may its discretion in allowing or not allowing a person to deposit and it cannot be questioned.II. Lending Money:Banking is essentially a business dealing with money. A bank has to invest funds in different was to earn income. The bulk of income is derived from lending funds, Banks provide loans and advances to traders, industrialists against the security of some assets, They also advance loans to the people on personal security. In both the cases the banks run the risk of default in repayment. Therefore, the banks have to follow a sound lending policy. Banks in India have responsibility of fulfilling social obligations. Therefore, in order to protect their own interest as well as national interest the following principles should be followed by the banks.
1.2 OVERVIEW OF INSURANCE
Introduction:-Risk is there at every walk of life, risk also endangers life itself. In the same way all financial deals, as well as possession of money & property goods etc are fraught with the element of risk. For an example, money may be stolen, or goods robbed or destroyed or an employee may misappropriate. A man may be killed in an accident or may die of a fatal disease. The loss arising out of these risks may be quite substantial and in extreme cases, it may be so heavy that business may be crippled. The businessman and the owners of the property discovered that if they got together and contributed a relatively small amount to a common pool, the total amount so contributed would be sufficient to compensate any of them for the loss arising due to such causes.All risks do not actually occur at all times and hence it imposable to calculate probable chances of any particular risk materializing. It is quite that all the people do not face risks at the same time, thus, the transfer of risk to another i.e. the insurer is in fact a pooling of risks. If insurance did not exist, each individual would have to bear the losses on his own. Insurance in effect means that each one in the pool undertakes to bear a portion of the loss. Such an agreement has proved to be advantageous to everyone as it is uncertain as to who suffer the loss.Insurance is a financial service for collecting the saving of the public and proving them with risk coverage. The main function of Insurance is to provide protection against the possible chances of generating loss. It eliminates worries and miseries of losses by destruction of property and death. It also provides capital to the society as the funds accumulated are invested Principles of Insurance:-An insurance contract made without due consideration to these principles is treated as void, not enforceable by law these principles are as follows:-
Principles of Utmost Good Faith:-One of the basic & primary principles of insurance is utmost good faith. It states that insurance contract must be made in absolute good faith on the part of both the parties. The insured must give to the insurer complete, true & correct information about the subject matter of the insurance.Material fact should not be hidden on any ground. This principle is applicable to all types of insurance contracts. Insurance is for protection & not for profit & hence correct information must be given to the insurance company.
Principle of Insurable Interest:-This principle suggests that the insured must have insurable interest in the object of insurable. A person is said to have such interest when the physical existence of the object of insurance gives him some gain but which he is likely to lose by its non-existence.In other words, the insured must suffer some kind of financial loss by the damage to the subject matter of insurance. Ownership is the most important test of insurance interest.Everyindividualhasinsurable inhisownlife. Insurance contracts without insurable interest are void, Insurable interest is not a sentimental concepts but a pecuniary interest.
Principle of Indemnity:-This is one important principle of insurance, This principle suggests that insurance contract is a contract for affording protection and not for profit making. The purpose of insurance is to secure compensation in care of loss or damage. Indemnity means security against loss, The compensation will be paid in proportion to the loss actually occurred. This amount of compensation in the insurance contract is limited to the amount assured or the actual loss whichever is less. The compensation will not be more or less than the actual loss.
Principle of Subrogation:-This principle is an extension and a corollary of the principle of indemnity. It is applicable to all the contracts of indemnity, It is applicable to all rights and remedies which the assured would have enjoyed regarding the said loss. When the compensation is paid for the total loss, all the rights of the insured in respect of the subject matter of insurance are transferred to the insurer. The assured will not realize more than the actual loss suffered.
Principle of Contribution:-There is no restriction as to the number of times the property can be insured. But on the occurrence of the loss can be realized from one insurer or all the insurers together, This principle is, however, not applicable to life insurance contract.
Mitigation Loss:-According to this principle every insured should all the necessary steps to minimize the loss. E.g. if a trader takes out a marine policy for the goods being shipped from Goa to Mumbai and if the storm takes place due to which there takes might be risk of ship sinking. According to this principle, the ship can be saved by throwing away some of the goods in order to reduce the weight on the ship.
Risk must Attach:-The subject matter should be exposed to risk, e.g. for goods placed in godown marine, insurance policy cannot be taken. However, goods may be insured against fire or theft.
Causa Proxima:-The principle of causa proxima means that when a loss has been caused by the series of causes, the proximate or the nearest cause should be taken into consideration to determine the liability of the insurer. The principle states that to ascertain whether the insurer is liable for the loss or not, the proximate and not the remote cause must be looked into. For an example, a cargo ship got a hole, due to negligence of the master and as a result sea water entered and cargo was damaged.
CHAPTER 2 ABOUT BANCASSURANCE
2.1 What is Bancassurance? Bancassurance,i.e., banc + assurance, refers to banks sellingthe insurance products.Official definition of Bancassurance: According to IRDA, Bancassurancerefers to banks acting as corporate agents for insurers to distributeinsuranceproducts. Insurance Products include Life or Non-Life productsBancassurance in India is defined as those banks which are dealing in insuranceproducts of both life and non-life type in any forms.The term "bancassurance" was coined in the 1980"s in France. Bancassurance is defined as the distribution of insurance products through banks. In addition to the branches of banks, this medium of distribution also includes new distribution systems. Such as electric banking operation, ATM's etc. Although the term bancassurance may also be used for distribution of banking products through insurance companies, this is sometimes termed "assurbanking" in some countries. Bancassurance has been most successful in Europe, mainly due to the regulatory and tax environment.
In France alone, banks conduct more than 60% of the insurance business. In the rest of Europe, business through bancassurance amounts to 45% of the total insurance business while, in the US where bancassurance began only a decade back, it amounts 5% of the total insurance transactions.
Both insurers as well as bankers view the cross selling relationship involved in bancassurance as part of a long term strategy. Accordingly, they are adapting themselves organizationally. So, as achieve the long term bancassurance goals in the best possible manner. In some countries, banks have either acquired or set up their own insurance product manufacturing capacity. In some cases, insurance companies have acquired smaller banks.
Bancassurance in its simplest form is the distribution of insurance products through a banks distribution channels. It is the provision of insurance and services through a common distribution channel or through a common base.
Banks with their geographical spreading penetration in terms of customer reach of all segments, have emerged as viable sources for the distribution of insurance products, It takes various forms in various countries depending upon the demography and economic and legislative climate of that country. This concept gained importance in the growing global insurance industry and its search for new channels of distribution
2.2 Birth of Bancassurance in India:As per March 2008, the number of Insurance companies in India,Life Insurance Companies15 Private Insurance Companies
1 Public Insurance Company (LIC)
Non- life Insurance Companies9 Private Insurance Companies
4 Public Insurance Company
As regarding the present size of the insurance market in India, it isstated that India accounts not even one per cent of the globalinsurance market. However, studies have pointed out that Indiasinsurance market is expected to grow rapidly in the next 10 years.Insurance industry in India for fairly a longer period reliedheavily on traditional agency (individual agents) distribution network,Therefore, the zeal for discovering new channelsof distribution and the aggressive marketing strategies were totally absentand to an extent it was not felt necessary.As the insurance sector is poised for arapid growth, in terms of business as well as number of new entrantstough competition has become inevitable. Consequently, addition of newand number of distribution channels would become necessary.
The banks taking over insurance is particularly well-documented with reference to the experience in Europe. Across Europe in countries like Spain and UK, banks started the process of selling life insurance decades ago and customers found the concept appealing for various reasons. Germany took the lead and it was called ALLFINANZ. The system of bancassurance was well received in Europe. France taking the lead, followed by Germany, UK, Spain etc. In USA the practice was late to start (in 90s). It is also developing in Canada, Mexico, and Australia. In India, the concept of Bancassurance is very new. With the liberalization and deregulation of the insurance industry, bancassurance evolved in India around 2002.
Bancassurance in its simplest form is the distribution of insurance products through the banks distribution channels. In concrete terms, bancassurance which is known as All finance constitutes a package of financial services that can fulfill both banking and insurance needs, at the same time. The motives behind bancassurance also vary. For banks, it is the means of product diversification and source of additional fee income while Insurance companies see it, 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 the doorsteps.
Objectives:-Banking and insurance have more commonality in the basic nature of their business. Banking and insurance relay on pulling on resources to protect financial security (Banking) or to protect against adverse events (Insurance), Banking and Insurance are often complimentary, as it the case of mortgages, that require both finance and property insurance.
In Insurance, the initial expenses because of distribution costs are high and regulatory disclosure requirements are applying additional pressure, on the insurers to reduce the costs. Distribution expenses being a major of initial expense, insurers are focused to think on alternate channels of distribution and banks have a lot of common practices to integrate to achieve economies of scale,
2.3 WAYS OF ENTERING INTO BANCASSURANCE
There is no single way of entering into bancassurance which is best for every insurer and every bank. As in all business situations, a proper strategic plan drafted according to the companys internal and external environmental analysis and the objectives of the organization is necessary before any decision is taken.
There are many ways of entering into bancassurance. The main scenarios are the following:
One partys distribution channels gain access to the client base of the otherparty. This is the simplest form of bancassurance, but can be a missed opportunity. If the two parties do not work together to make the most of the deal, Then there will be at best only minimum results and low protability for both parties.If, however, the bank and the insurance company enter into a distribution agreement, according to which the bank automatically passes on to a friendly insurance company all warm leads emanating from the banks client base, this can generate very protable income for both partners. The insurance company sales force, in particular usually only the most competent members of the sales force, sells its normal products to the banks clients. The cooperation has to be close to have a chance of success. For the bank the costs involved besides those for basic training of branch employees are relatively low.A bank signs a distribution agreement with an insurance company, under which the bank will act as their appointed representative. With proper implementation this arrangement can lead to satisfactory results for both partners, while the nancial investment required by the bank is relatively low. The products offered by the bank can be branded. A bank and an insurance company agree to have cross shareholdings between them. A member from each company might join the board of directors of the other company. The amount of interest aroused at board level and senior management level in each organization can inuence substantially the success of a bancassurance venture, especially under distribution agreements using multidistribution channels. A joint venture: this is the creation of a new insurance company by an existing bank and an existing insurance company. A bank wholly or partially acquires an insurance company. This is a major undertaking. The bank must carefully dene in detail the ideal prole of the targeted insurance company and make sure that the added benet it seeks will materialize. A bank starts from scratch by establishing a new insurance company wholly owned by the bank. For a bank to create an insurance subsidiary from scratch is a major undertaking as it involves a whole range of knowledge and skills which will need to be acquired. This approach can however be very protable for the bank, if it makes underwriting prots. A group owns a bank and an insurance company which agree to cooperate in a bancassurance venture. A key ingredient of the success of the bancassurance operation here is that the group management demonstrate strong commitment to achieving the benet. The acquisition (establishment) of a bank that is wholly or partially owned by an insurance company is also possible. In this case the main objective is usually to open the way for the insurance company to use the banks retail banking branches and gain access to valuable client information as well as to corporate clients, allowing the insurance company to tap into the lucrative market for company pension plans. Finally, it offers the insurance companys sales force bank product diversication (and vice versa). This form is used in many cases as a strategy by insurance companies in their effort not to lose their market share to bancassurers.
The best way of entering bancassurance depends on the strengths and weaknesses of the organization and on the availability of a suitable partner if the organization decides to involve a partner. Whatever the form of ownership, a very important factor for the success of a bancassurance venture is the inuence that one partys management has on that of the other. An empowered liaison between respective managements, with regular senior management contacts, as well as sufficient authority to take operational and marketing decisions, is vital. Regular senior management meetings are also a vital element for a successful operation. There must be a strong commitment from the top management to achieving the aims in the business plan.
2.4 Bancassurance Models
I. Structural Classification:
a) Referral Model:
Banks intending not to take risk could adopt referral model wherein they merely part with their client data base for business lead for commission. The actual transaction with the prospective client in referral model is done by the staff of the insurance company either at the premise of the bank or elsewhere. Referral model is nothing but a simple arrangement, wherein the bank, while controlling access to the clients data base, parts with only the business leads to the agents/ sales staff insurance company for a referral fee or commission for every business lead that was passed on. In fact a number of banks in India have already resorted to this strategy to begin with. This model would be suitable for almost all types of banks including the RRBs /cooperative banks and even cooperative societies both in rural and urban. There is greater scope in the medium term for this model. For, banks to begin with resorts to this model and then move on to the other models.
b) Corporate Agency;The other form of non-risk participatory distribution channelis that of corporate agency, wherein the bank staff is trained toappraise and sell the products to the customers. Here the bank as aninstitution acts as corporate agent for the insurance products for afee/ commission. This seems to be more viable and appropriate formost of the mid-sized banks in India as also the rate of commissionwould be relatively higher than the referral arrangement. This, 144 RESERVE BANK OF INDIA OCCASIONAL PAPERShowever, is prone to reputational risk of the marketing bank.Thereare also practical difficulties in the form of professional knowledgeabout the insurance products. Besides, resistance from staff tohandle totally new service/product could not be ruled out. Thiscould, however, be overcome by intensive training to chosen staffpackaged with proper incentives in the banks coupled with sellingof simple insurance products in the initial stage. This model is bestsuited for majority of banks including some major urban cooperativebanks because neither there is sharing of risk nor does it requirehuge investment in the form of infrastructure and yet could be agood source of income.Bajaj Allianz stated to have established agrowth of 325 per cent during April September 2004, mainly dueto bancassurance strategy and around 40% of its new premiumsbusiness (Economic Times, October 8, 2004). Interestingly, evenin a developed country like US, banks stated to have preferred tofocus on the distribution channel akin to corporate agency ratherthan underwriting business. Several major US banks including WellsFargo, Wachovia and BB &T built a large distribution network byacquiring insurance brokerage business. This model ofbancassurance worked well in the US, because consumers generallyprefer to purchase policies through broker banks that offer a widerange of products from competing insurers (Sigma, 2006).
c) Insurance as Fully Integrated Financial Service/ Joint ventures:Apart from the above two, the fully integrated financial serviceinvolves much more comprehensive and intricate relationship betweeninsurer and bank, where the bank functions as fully universal in itsoperation and selling of insurance products is just one more functionwithin. Where banks will have a counter within sell/market theinsurance products as an internal part of its rest of the activities. Thisincludes banks having a wholly owned insurance subsidiary With or without foreign participation. In Indian case, ICICI bank and HDFC banks in private sector and State Bank of India in the public sector, have already taken a lead in resorting to this type of bancassurance model and have acquired sizeable share in the insurance market, also made a big stride within a short span of time.
II. Product-based ClassificationA) Stand-alone Insurance Products:In this case bancassurance involves marketing of the insurance products through either referral arrangement or corporate agency without mixing the insurance products with any of the banks own products/ services. Insurance is sold as one more item in the menu of products offered to the banks customer, however, the products of banks and insurance will have their respective brands too, e.g., Karur Vysya Bank Ltd selling of life insurance products of Birla Sun Insurance or non-life insurance products of Bajaj Allianz General Insurance company.
B) Blend of Insurance with Bank Products:With the financial integration both within the country andglobally, insurance is increasingly being viewed not just as a standalone product but as an important item on a menu of financialproducts that helps consumers to blend and create a portfolio offinancial assets, manage their financial risks and plan for theirfinancial security and well being (Olson 2004). This strategy aims atblending of insurance products as a value addition while promoting its own products. Thus, banks could sell the insurance products without any additional efforts. In most times, giving insurance cover at a nominal premium/ fee or sometimes without explicit premium does act as an added attraction to sell the banks own products, e.g., credit card, housing loans, education loans, etc. Many banks in India, in recent years, has been aggressively marketing credit and debit card business, whereas the cardholders get the insurance cover for a nominal fee or (implicitly included in the annual fee) free from explicit charges/ premium. Similarly the home loans / vehicle loans, etc., have also been packaged with the insurance cover as an additional incentive.
III) Banks ReferralsThere is also another method called 'Bank Referral'. Here the banks do not issue the policies; they only give the database to the insurance companies. The companies issue the policies and pay the commission to them. That is called referral basis. In this method also there is a win-win situation everywhere as the banks get commission, the insurance companies get databases of the customers and the customers get the benefits.
As already discussed, warm leads can provide a strong competitive advantage for a bancassurance operation. An efficient system for managing referrals of warm leads is therefore vital. This section describes a process for managing referrals.
REGULATIONS FOR BANCASSURANCE
3.1 RBI GUIDELINES FOR THE BANKS TO ENTER INTO INSURANCE BUSINESS:
Following the issuance of Government of India Notification datedAugust 3, 2000, specifying Insurance as a permissible form of business that could be undertaken by banks under Section 6(1)(o) of the Banking Regulation Act, 1949, RBI issued the guidelines on Insurance business for banks.
1. Any scheduled commercial bank would be permitted to undertake insurance business as agent of insurance companies on fee basis, without any risk participation. The subsidiaries of banks will also be allowed to undertake distribution of insurance product on agency basis.
2. Banks which satisfy the eligibility criteria given below will be permitted to set up a joint venture company for undertaking insurance business with risk participation, subject to safeguards. The maximum equity contribution such a bank can hold in the joint venture company will normally be 50 per cent of the paidup capital of the insurance company. On a selective basis the Reserve Bank of India may permit a higher equity contribution by a promoter bank initially, pending divestment of equity within the prescribed period (see Note 1 below).
The eligibility criteria for joint venture participant are as under:i. The net worth of the bank should not be less than Rs.500 crore;ii. The CRAR of the bank should not be less than 10 per cent;iii. The level of non-performing assets should be reasonable;iv. The bank should have net profit for the last threeconsecutive years;v. The track record of the performance of the subsidiaries, ifany, of the concerned bank should be satisfactory.3. In cases where a foreign partner contributes 26 per cent of the equitywith the approval of Insurance Regulatory and DevelopmentAuthority/Foreign Investment Promotion Board, more than onepublic sector bank or private sector bank may be allowed toparticipate in the equity of the insurance joint venture. As suchparticipants will also assume insurance risk, only those banks whichsatisfy the criteria given in paragraph 2 above, would be eligible.
4. A subsidiary of a bank or of another bank will not normally be allowed to join the insurance company on risk participation basis. Subsidiaries would include bank subsidiaries undertaking merchant banking, securities, mutual fund, leasing finance, housing finance business, etc.
5. Banks which are not eligible for joint venture participant as above, can make investments up to 10% of the net worth of the bank or Rs.50 crore, whichever is lower, in the insurance company for providing infrastructure and services support. Such participation shall be treated as an investment and should be without any contingent liability for the bank.The eligibility criteria for these banks will be as under :i. The CRAR of the bank should not be less than 10%;ii. The level of NPAs should be reasonable;iii. The bank should have net profit for the last three consecutiveyears.
6. All banks entering into insurance business will be required toobtain prior approval of the Reserve Bank. The Reserve Bankwill give permission to banks on case to case basis keeping inview all relevant factors including the position in regard to thelevel of non-performing assets of the applicant bank so as toensure that non-performing assets do not pose any future threatto the bank in its present or the proposed line of activity, viz.,insurance business. It should be ensured that risks involved ininsurance business do not get transferred to the bank and thatthe banking business does not get contaminated by any riskswhich may arise from insurance business. There should be armslength relationship between the bank and the insurance outfit.
BENEFITS OF BANCASSURANCE
4.1 Benefits of BancassuranceThecompany is targeting around 10%of the business during its startup phase. Bancassurance makes use of various distribution channels like salaried agents, bank employees, brokerage firms. Direct response, Interest etc. Insurance Companies have complementary strengths. In their natural and traditional roles Bancassurance if of great benefit to the customer. It leads to the creation of one- stop where a customer can apply for mortgages, pensions, savings and insurance products. The customer gains from both sides as costs get reduced. Bancassurance for the customer is abonanzain terms of reducing charges, a high quality product and delivery at the doorstep.Both insurance companies and banks have certain competitive advantages.
4.2 BENEFITS TO BANKS:
Banks enjoy the following advantages over insurance companies.
1) Most banks have strong brand name. The Bank's physical presence in the public areas is an added reassurance to the people. In an old - fashioned way, people like to see that the insurer remains within sight, over the years.2) Their relationship with their customer is based on trust.3) Banks have a wide network of branches which constitute an excellent distribution channel.4) Banks own the financial transaction history of their customer. This allows them to build detailed profiles of every single customer using data management techniques. They can then devise individually tailored products to meet the specific needs of each customer, SBI Life, for example, is planning to go in for bancassurance. It has access to same 117 million Term Deposit holders, through 14,000 branches of the State Bank of India.5) Banks are also known for proving a complete range of services. A research study conducted among insurers revealed that around 33% of the respondents felt that retail customers were likely to buy multiple financial service product from Banks compared to this, less than 20% of the respondents felt that retail customer would approach insurers or brokers for purchasing such products. Banks like Stan Chart have consolidated its retail services under a super Mail, which takes care of personal service finance needs like mutual funds, demat services and loans against shares. For the bank, offering insurance products would just be another way of extending the relationship with the retail consumer.
4.3 BENEFITS TO INSURANCE COMPANY
Insurance Companies enjoy the following advantages over insurance companies.The benefits to the insurers are equally convincing. The ability to tap into banks huge customer bases is a major incentive. The extensive customer base possessed by banks is considered to be ideal for the distribution of mass-market products. On the other hand, insurers can make use of the wide reach of bank customers to categorise potential clients in detail according to their needs and values. With increasing sophistication on bancassurance operations, some insurers can focus on the high-net-worth segment, which offers greater potential for wealth management business.Apart from the ability to tap into new customers groups, escaping from the high cost of captive agents is another reason prompting insurers to look into alternative channels. In some cases, teaming up with a strong bank can help to fund new business development and boster public confidence in the insurer.
In a nutshell, insurers are attracted to bancassurance because they can:- Tap into a huge customer base of banks;- Reduce their reliance on traditional agents by making use of the various channels owned by banks;- Share services with banks;- Develop new financial products more efficiently in collaboration with their bank partners;- Establish market presence rapidly without the need to build up a network of agents;- Obtain additional capital from banks to improve their solvency and expand business.There are different organizational structures under which banks can work together with insurers, including distribution agreements, joint ventures ore some integrated operations. It is then only logical to presume that different motivations will drive the choice of different organizational models
4.4 BENEFITS TO CUSTOMERS
Unlike with banks and insurers, where benefits of bancassurance will have to be weighted against business risk, the positive impacts on consumers are unequivocal. Part of the lowering of distribution costs will be passed on to clients in the form of lower premium rates. In addition, it is likely that new products will be developed to better suit client needs, which otherwise may not be available if banks and insurers worked independently. Examples are overdraft insurance, depositors insurance and other insurance covers sold in conjunction with existing bank services. The convenience offered by bancassurance should also increase customer satisfaction, for instance, when it is possible to pay premium as well as to withdraw and repaycash loans backed by life insurance policies through banks ATM s. Just as important, is more than often astrategic step of financial service providers to shift from being product-oriented and to focus on distributionand customer relations.
Bancassurance poses major challenges to regulators. The ability of financial institutions to diversify into others sectors should help to lower the level of latent systemic risk. Banks will benefit from lower income volatility while insurers could potentially obtain additional capital to bolster their solvency levels.
SBI LIFE INSURANCE PROFILE & PRODUCTS
5.1 STATE BANK OF INDIA LIFE INSURANCE PROFILE
SBI Life Insurance is a joint venture between theState Bank ofIndiaandCardif SAof France. SBI Life Insurance is registered with anauthorized capital of Rs 1000 crore and a paid up capital of Rs 500crores. SBI owns 74% of the total capital and Cardif the remaining 26%.State Bank of India enjoys the largest banking franchise in India.Along with its 7 Associate Banks, SBI Group has the unrivalled strengthof over 14,500 branches across the country, arguably the largest in theworld. Cardif is a wholly owned subsidiary of BNP Paribas, which is theEuro Zones leading Bank. BNP Paribas is one of the oldest foreign bankswith a presence in India dating back to 1860. Cardif is ranked 2ndworldwide in creditors insurance offering protection to over 35 million policyholders and net income in excess of Euro 1 billion. Cardif has also been a pioneer in the art of selling insurance products throughcommercial banks in France and in 35 more countries.SBI Life Insurances mission is to emerge as the leading companyoffering a comprehensive range of Life Insurance and pension products atcompetitive prices, ensuring high standards of customer service andworld class operating efficiency.SBI Life has a unique multi-distributionmodel encompassing Bancassurance, Agency and Group Corporate.SBI Life extensively leverages the SBI Group as a platform for cross-selling insurance products along with its numerous banking product packages such as housing loans and personal loans. SBIs access to over 100 million accounts across the country provides a vibrant base for insurance penetration across every region and economic strata in the country ensuring true financial inclusion.Agency Channel, comprising of the most productive force of morethan 25,000 Insurance Advisors, offers door to door insurance solutions tocustomers.
5.2 SBI Life Insurance Company (perspective)
SBI Life insurance, a joint venture between State Bank of India,the largest bank in the country and bancassurance major Cardiff of France. SBIs stake in the venture is 74% whereas Cardiff has 26% share.They have launched many products so far incorporating certain featuresthat are introduced for the first time in the country. SBI -Life is bankingon the bancassurance model on the strength of the SBI Groups 10000 plus bank branches and its vast customer base. In addition it is alsotapping other. banks corporate agents and the traditional agency route to penetrate the insurance market SBI Life is planning to introduce morenovel and user friendly products to cater to the requirements of theconsumers in different segments.
SBI has the largest banking network in the county. The bank islooking for business from every customer segment of the bank rural andurban segments, upper, middle and lower income segments /groups andcorporate segment. Besides their own channels they are planning todistribute products through other interested banking channels also. It isexpected that 2/3 rd of the premium income in expected to come by way of bancassurance and the rest from the traditional agency channel as wellas ties up with corporate agents (Sundaram Finance). SBI has alsointroduced group insurance to some well managed corporate staffs.
Technology is an integral part of this operation. Cardiffprovided the technology required. The project was initiated in April 2004,and the initial roll-out was completed by August 2004.SBI Life hasimplemented an Internet-centric IT system with browser-based front-office and back-office systems, channel management, policy productdetails, online premium calculator and facility for group insurancecustomers to view their individual savings status on the Web. Theorganization has the facility to pay premiums through credit cards, Net banking, standing instructions, etc. This is fully integrated with the coresystems through industry standards such as XML, EDI, etc.Even as it plans to scale up operations shortly, SBI LifeInsurance Company Ltd is looking at tripling its gross premium incomein the new financial year.In 2007-08, SBI Life earned a total premiumincome of Rs 5,622 crore, of which income from new policy sales was Rs4,800 crore. For the current financial year, their target is to achieve a total premium income of Rs 10,500 crore and a first year premium income of Rs 8,500 crore. The SBI Life ranks second in terms of market shareamong private life insurers in the country.SBI Life Insurance Company is the first among the 14 lifeinsurance companies in the private sector to post a net profit in 2005-06.There are life insurance players much more aggressive than SBI and theyhave still not been able to break the record of SBI. Their success islargely on the channel strategy and product strategy. The another aspect istheir superior investment performance. They have consistently, over thelast two years, generated 11-12 per cent earnings from the investments.SBI Life Insurance is uniquely placed as a pioneer to usherbancassurance into India. The company hopes to extensively utilize theSBI Group as a platform for cross-selling insurance products along withits numerous banking product packages such as housing loans, personal loans and credit cards. SBIs access to over 100 million accounts providesa vibrant base to build insurance selling across every regionandeconomic strata in the country
5.3 Products Offered by SBI
A)Unit Linked products:
1)SBI Life - Horizon II :
SBI Life-Horizon II is a unique, non participating UnitLinked Insurance Plan in Indian Insurance Industry, where you need to bea financial market expert. This plan offers the flexibility of Unit LinkedPlan along with Automatic Asset Allocation which provides relativelyhigher returns on your money where as increasing death benefits provide higher security to your family
2)SBI Life - Unit Plus II :
This is a non participating individual unit linked product. It provides unmatched flexibility to match the changingrequirements. It provides choice of 5 investments funds in a single policy
3)SBI life- unit plus child plan:
SBI LIFE understand you better and hence have developedSBI Life - Unit Plus Child Plan to suit you and your needs best. ThisPlan is meant for parents in the age group of 18-57 having a child between the age group of 0-15 years.
B. Pension Products;
SBI Life - Horizon II Pension:
A unique Unit Linked Pension Plan that will enable thecustomers to build a kitty good enough to enable them to spend a peaceful and financially sound, retired life.SBI Life - Horizon IIPension is a safe and hassle free way to get high returns. It comeswith the unique feature of Automatic Asset Allocation by means of which you truly, dont need to be an expert to grow your money.
1) SBI Life - Unit Plus II Pension:
SBI Life understands the basic needs for pension plan andgive the customers financial strength to maintain the life style evenafter the retirement.This is a unit linked pension plan wherein the policyholder chooses an investment period from 5 to 52 years for avesting age between 50 to 70 years. They can choose to pay either single premium or pay regular premium for the entire policy term.Their contributions are invested into 4 fund options as per their choice.
2)SBI Life - Lifelong Pensions:
It is a pension plan wherein the policyholder gets theflexibility to meet the post retirement financial needs. It also providestax benefits. The policyholder also has the option of withdrawing alump sum amount up to particular limit.
2) SBI Life - Immediate Annuity:
SBI Life - Immediate Annuity Plan is introduced for Pension Policyholders. This product provides annuity paymentsimmediately from payment of purchase price. It has been speciallydesigned to cater to the annuity needs of existing policyholders (SBILife - Lifelong Pensions, SBI Life - Horizon II Pension, SBI Life -Unit Plus II Pension) at the vesting age.
C) Pure Protection Products
1)SBI Life Swadhan;
This is a Traditional Term Assurance Policy with guaranteedrefund of basic premium .Life cover is provided at no cost. Tax benefitis also provided. There is also a rebate on high sum assured. There isalso flexible benefit premium paying mode.
2)SBI Life Shield:
It offers the customers with the life insurance cover at thelowest cost for a selected term. Tax benefit is also provided. There isalso rebate on modes of premium payment.
3)SBI Life Shield as a Keyman Insurance Policy:
A Keyman insurance policy is taken to protect the organizationagainst the reduction in profit resulting from the death of theKeyman. As per IRDA circular only Pure Term Assurance Productsmay be used as a Keyman Insurance. The SBI Life Insurance provides SBI Life Shield as a Keyman Insurance Policy.
D)Protection cum Savings Products
1) SBI Life Sudarshan:
SBI Life - Sudarshan is an Endowment Policy designed to provide savings and protection to the policyholder and their family.They can save regularly for the future. Thus at the end of the plan, hewill receive a substantial amount of savings along with theaccumulated bonuses declared. At the same time, his family will be protected for death risk for the full Sum Assured.
2)SBI Life - Scholar II;
Twin benefit of saving for the child's education and securing a bright future despite the uncertainties of life.Option to receive theinstallments in lump sum at the due date of first installment of Survival benefit.
E)Money back scheme products
1) SBI Life - Money Back :It is a Traditional Saving Plan with added advantage of lifecover and guaranteed cash inflow at regular intervals. The plan has anumber of money back options specially suited to the customersneeds. The cover is available at competitive premium rates.
2)SBI Life - Sanjeevan Supreme:
It is a Traditional Saving Plan which offers a life cover for the term of the customers choice at the same time does not burdenhim with liability to pay premiums for the entire term and also provides cash flows at regular intervals.
Though bancassurance has traditionally targeted the mass market, but bancassurers have begun to finely segment the market, whichhas resulted in tailor-made products for each segment. Some bancassurers are also beginning to focus exclusively ondistribution.In some markets, face-to-face contact is preferred,which tends to favour bancassurance development. Nevertheless, banks are starting to embrace direct marketing andInternet banking as tools to distribute insurance products. New andemerging channels are becoming increasingly competitive, due to the tangible cost benefits embedded in product pricing or throughthe appeal of convenience and innovation.Bancassurance proper is still evolving in Asia and this is still ininfancy in India and it is too early to assess the exact position.However, a quick survey revealed that a large number of bankscutting across public and private and including foreign banks havemade use of the bancassurance channel in one form or the other inIndia.Banks by and large are resorting to either referral models or Corporate agency model to begin with. Banks even offer space in their own premises to accommodate theinsurance staff for selling the insurance products or giving accessto their clients database for the use of the insurance companies.As number of banks in India have begun to act as corporateagents to one or the other insurance company, it is a common sightthat banks canvassing and marketing the insurance products acrossthe counter.
Increasing sales of non-life products, to the extent those risks areretained by the banks, require sophisticated products and risk management. The sale of non-life products should be weightedagainst the higher cost of servicing those policies.1)Bank employees are traditionally low on motivation. Lack of salesculture itself is bigger roadblock than the lack of sales skills in theemployees. Banks are generally used to only product packagedselling and hence selling insurance products do not seem to fitnaturally in their system.2)Human Resource Management has experienced some difficulty dueto such alliances in financial industry. Poaching for employees,increased work-load, additional training, maintaining themotivation level are some issues that has cropped up quiteoccasionally. So, before entering into a bancassurance alliance, justlike any merger, cultural due diligence should be done and humanresource issues should be adequately prioritized.
3)Private sector insurance firms are finding change management inthe public sector, a major challenge. State-owned banks get a newchairman, often from another bank, almost every two years,resulting in the distribution strategy undergoing a complete change.So because of this there is distinction created between public and private sector banks.
4)The banks also have fear that at some point of time the insurance partner may end up cross-selling banking products to theirpolicyholders. If the insurer is selling the products by agents aswell as banks, there is a possibility of conflict if both the banks andthe agent target the same customers.
SWOT ANALYSIS & SOME TIE UPSOF BANCASSURANCE
7.1 Bancassurance in - A SWOT Analysis:-
Bancassurance can be a of fire way to reach a wider customer base, provide it is made use of sensibly. In India there is an extensive bank network established over the years. Insurance companies will have to take advantage of the customer's longstanding trust and relationship with banks. This is mutually beneficial situation as Banks can expand the range of their products on offer to customers and earn more, while the insurance company profits from the exposure at the bank branches, and the security of receiving timely payments.There are several untapped potential waiting to be mined particularly for life insurance products in rural areas. Banks with their network in rural areas, help to fulfill rural and social obligations as stipulated by the Insurance Regulatory and Development Authority.
There are several reasons why bank should seriously consider bancassurance., the most important of which is increase Return on Assets(ROA).It offers fee-based non -interest income to the bankswithout involvingin anyamountdoesnotrequireany additional capital.
The bancassurance calls for a paradigm shift in the behavior of the banks, which have to develop marketing skills. Most of the banks lack adequate marketing skills to perform these additional responsibilities. At the same time, there is a need for banks to be sensitive to customers of preferences.
Bancassurance could turn out be an example channel as it requires huge investments in Wide Area Network (WAN) and VastArea Network (VAN) to meet customer's needs on order to finalize a sale. Another drawback is the inflexibility of the products that is it cannot be tailor- made to the requirements of the customers. For bank assurance venture to success, it is extremely essential to have in -built flexibility of the products that is it cannot tailor-made to the requirements of the customers. For a bank assurance venture to succeed, it is extremely essential to have an in-built flexibility so as to make the product attractive to the customer.
Banks database is enormous and they have a wide branch network. Millions of customer become accessible to insurance companies through bank branches. This database has to be dissected variously and various homogeneous groups are to be churned in order to position the bank assurance products.New private sector insurance companies are yet to become popular. They are in existence for less than five years. In a short period, to appoint agents all over the country and effectively follow them would be an uphill task. They are in the process of building brand equity. Tie up with Bank will help them to boost their image and provide great opportunity for insurance as in as Bank, In this process is bank will also benefits.Customers have more faith in Banks and they view those Banks as more responsible than individual agents. Moreover, agents may not be available for further services, But customers can approach the bank at any time and paying the premium is easier with Bank because of standing instructions.
Threats:Even insurance and Bank that seem ideally suited for a bank assurance partnership can run into problems during implementation. Success of a bancassurance venture requires change in approach, thinking and work culture on the part of everybody involved.The most common obstacles to success are manpower management, lack of sales culture within the bank, non-involvement by managers, insufficient product promotions, failure to integrate marketing plans, marginal database expertise, inadequate incentives, a definite threat of resistance to change, negative attitudes towards insurance and unwieldy marketing strategy.
7.2 Some important Tie- ups:-
1) Life Insurance Corporation of India with:-Corporation Bank,Indian Overseas Bank, Centurion Bank, Satara District Central Cooperative Bank, Janata Urban Co operative Bank, Yeotmal Mahila Sahkari Bank, Vijaya Bank, Oriental Bank of Commerce.
2) Birla Sum Life Insurance Co Ltd With:The Bank of Rajasthan,Andhra Bank, Bank of Muscat, Development Credit Bank, Deutsche Bank and Catholic Syrian Bank.
3) Dabur CGU Life Insurance Company Private Ltd:-Canara Bank Lashmi Vilas Bank, American Express Bank, and ABN Amro Bank.
4) HDFC standerdLife Insurance Co. Ltd. With:-Union Bank of India.
5) ICICI Prudential Life Insurance Co Ltd. With:-Lord Krishna Bank, ICICI Bank, Bank of India, Citibank, Allahabad Bank, Federal Bank, South Indian Bank, and Punjab and Maharashtra Co-operative Bank.
6) Met Life India Co. Ltd. With:-Karnataka Bank, The Dhanalakshmi Bank and Jammu & Kashmir Bank.
7) SBI Insurance Co. Ltd. With:-State Bank of India and Associate Banks.
8) Bajaj Allianz General Insurance with:-Krur Vysya Bank and Lord Krishna Bank
9) National Insurance CoLtd With:-City Union Bank,
10) Royal Sundaram General Insurance Company with:-Standard Chartered Bank, ABN Amro Bank, Citibank Amex and Repco Bank.
11)United India insurance Co. Ltd. With:-South Indian Bank.
The life Insurance Industry in India has been progressing at a rapid growth since opening up of the sector. The size of country, adverse set of people combined with problems of connectivity in rural areas, makes insurance selling in India a very difficult task. Life Insurance Companies require good distribution strength and tremendous man power to reach out such a huge customer base.The concept of Bancassurance in India is still in its nascent stage, but the tremendous growth and the potential reflects a very bright future for bancassurance in India.With the coming up of various products and services tailored as per the customers needs there is every reason to be optimistic that bancassurance in India will play a longinning.But the proper implementation of bancassurance is still facing so many hurdles because of poor manpower management, lack of callcenters, no personal contact with customers, inadequate incentives toagents and unfullfilment of other essential requirements.
I have experienced a lot during the preparation of the project. I had just a simple idea about Bancassurance. But after a detailed research in this topic, I have found how important bancassurance can be for bankers,insurers as well as the customers. I am contented that all my objectives have been met to its fullest.I have also experienced that though Bancassurance is not being utilized to its fullest but it surely has a bright future ahead. India is at the threshold of a significant change in the way insurance is perceived in the country. Bancassurance will definitely play a defining role as alternative distribution channel and will change the way insurance is soldin India. The bridge has been reached and many are beginning to walk those cautious steps across it. Bancassurance in India has just taken a flyingstart. It has a long way to go .. after all The SKY IS THE LIMIT!
Theories and Practices in Insurance.