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7/27/2019 Copy of Bancassurance-Final

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INTRODUCTION TO BANCASSURANCE

Banc assurance is defined as Selling Insurance products through

Banks. The word is a combination of two words Banc and

assurance signifying that both Banking and Insurance products

and service are provided by one common corporate entity or by

Banking Company with collaboration with any particular

Insurance company. In concrete terms, banc assurance, which is

also known as Allianz - describes a package of financial services

that can fulfill both Banking and Insurance needs at the same

time.

Bancassurance symbolizes the convergence of Banking and

Insurance companies in to a new venture. While bancassurance

has developed into a tremendous success story in Europe, it is a

relatively new concept in Australia and Asia.

This stream of market has just been opened very recently for the

Indian market and there is lot of development left to be done by

the government and the regulatory authority. But this has

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BANCASSURANCE

BANK INSURANCE

FINANCIAL SERVICES


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proved to be a boom for the Insurance and Banking companies

together and both the sectors of the industries have shown better

results and improvement in their own field due coming of the

whole new concept of BANCASSURANCE.

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NEED FOR BANCASSURANCE

Banks are one of the key players in providing financial services.Traditionally, the main business of banks is acceptance of

deposits and lending. However, banks world over have realized

that offering value-added services helps to meet client

expectations.

The banks have now spread its wings far and wide into many

financial activities. Banks today render simple to sophisticated

financial services. Section 6 of the Banking Regulations Act 1949

provides wide scope for the banks to move from the traditional

business.

This has proved a major advantage for the banks because:

Competition in the Personal Financial Services area is

getting `hotin India.

Banks seek to retain customer loyalty by offering them avastly expanded and more sophisticated range of products.

Customers also want a one-stop shop for all their financial

needs. Therefore banks are trying to provide more services and

integrate them into their business model. Bancassurance is one

such initiative. Further the risks involved in doing this business is

very low.

Insurance companies also have a wide range of insurance

products catering to a wide range of needs. For more than a

century, insurance business had been sold through insurance

agents and their supervisors. The functioning of the system was

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not very satisfactory. The LIC inherited this system. Despite

incentives and training programmes, the efforts to make the

agents professional, had not yielded the desired results. Many of

them continued to treat the agency business casually as just a

source of additional income. The banks have skilled staff and the

procurement of insurance can be assigned as a duty to these

staff. This was an opportunity made available after the

regulations of the IRDA.

Bancassurance is beneficial for insurance companies as they

would be helpful in cutting costs and cross-selling apart from the

wider reach of their insurance products.

In a country like India, where the need of insurance is not felt by

customers, insurance companies should try to exploit every

opportunity of selling their insurance products, which

Bancassurance promises.

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EMERGENCE OF BANCASSURANCE - MERGING OF

BANKING AND INSURANCE SECTOR

For many years, in all parts of the world, insurance and banking

businesses were considered to be separate and so, were

regulated separately. The principles of managing the funds were

different in the two businesses. The risk profiles and the capital

needs were different. They had different time horizons while

making investment decisions. Even within the banking business,

development banking was different from merchant banking,

which was again different from commercial retail banking.

The 1970s and 80s saw the barrier (insurance and banking

businesses were seen as being separate) crumbling. The

financial sector was becoming one. There was need for a one-

stop delivery for all financial services. Financial institutions

transacting different businesses began to work together in

strategic alliances or merged into one entity. Banks could offer

insurance policies and insurers could offer banking services.

Thus, with the advent of bancassurance, the long-standing

barriers between the main financial service industries began to

fall and opportunities opened up for banks in cross-selling

insurance and investment products.

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WHY SHOULD BANKS ENTER INSURANCE?

There are several reasons why banks should seriously consider

Bancassurance, the most important of which is increased return

on assets (ROA). One of the best ways to increase ROA,

assuming a constant asset base, is through fee income. Banks

that build fee income can cover more of their operating

expenses, and one way to build fee income is through the sale of

insurance products. Those banks that effectively cross-sell

financial products can leverage their distribution and processing

capabilities for profitable operating expense ratios.

By leveraging their strengths and finding ways to overcome their

weaknesses, banks could change the face of insurance

distribution. Sale of personal line insurance products through

banks meets an important set of consumer needs. Most large

retail banks engender a great deal of trust in broad segments of

consumers, which they can leverage in selling them personal line

insurance products. In addition, a banks branch network allows

the face to face contact that is so important in the sale of

personal insurance.

Another advantage banks have over traditional insurance

distributors is the lower cost per sales lead made possible by

their sizeable, loyal customer base. Banks also enjoy significant

brand awareness within their geographic regions, again providing

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for a lower per-lead cost when advertising through print, radio

and/or television. Banks that make the most of these advantages

are able to penetrate their customer base and markets for above-

average market share.

Other bank strengths are their marketing and processing

capabilities. Banks have extensive experience in marketing to

both existing customers (for retention and cross selling) and non-

customers (for acquisition and awareness). They also have access

to multiple communications channels, such as statement inserts,

direct mail, ATMs, telemarketing, etc. Banks' proficiency in using

technology has resulted in improvements in transaction

processing and customer service.

There is no risk in the business. The only risk is when the chosen

insurer gets into trouble or is poor in service; the customer is

likely to blame the bank for the problem. However, this is a

remote risk.

The benefits of Bancassurance to banks include:

Better customer retention and stronger relationships.

Clear competitive advantage in the rural areas.

Possibility of the insurer's and the applicant's accounts

remaining with the bank is high.

Insurance products can improve the value of the banking

products and services.

Banks are in a better position to offer complete and

integrated financial solutions.

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WHY DO INSURERS TURN TO BANKS?

The insurers turn to banks because of the following main benefits

that the insurer would enjoy:

The market for insurance is very heterogeneous with

customers of different profiles and needs. Therefore, they

have to use multiple channels for distribution so as to

match the different segments. As an additional channel, the

banks have a good match with certain segments of the

market.

Insurance companies get the advantage of the existing

infrastructure of the bank. In India, the public banks have

sixty six thousand branches. Out of these more than thirty

three thousand are in the rural areas and fourteen

thousand are in the semi-urban areas. After nearly forty six

years of existence, the LIC, the biggest life insurer in the

country had, less than two thousand five hundred branchesall over the country including the metro cities. The four

general insurance companies also had a similar number of

branches.

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Access is easily available to a huge client base. The

customers of the banks are similar to the customers for life

or general insurance. Banks have eighteen crores of

accounts which are also a large pool of potential customersfor insurers.

There is a relationship of loyalty and trust between the

bank and its customers which can become a valuable base

for selling insurance. Banks have much more intimate

contacts with their customers than insurers because

o The frequency of contact is more and

o They meet under more pleasant circumstances.

Customers tend to have more trust in banks than in

insurers, with whom their contacts are comparatively

lesser.

There is a complimentary relation between insurance and

banking. Loans are given by banks on security and credit

of persons and assets. Insurance ensures that the security

is not lost.

Banks constitute a readily available, competent, trusted,

educated distribution channel for the insurer.

Particularly for new insurers, the associations with the

banks help them penetrate the markets much faster and italso helps in giving some credibility. They can get some

leverage from the bank's brand image. Banks can leverage

their contacts with commercial clients for developing

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personal lines of insurance which is relatively neglected

particularly in non-life business.

Premium can be paid by debit to the account with the bank.

In comparison with independent agents, employees bound

by the discipline of the banks are easier to monitor and

control.

Over the last decade, life agents have sold fewer and larger

policies to a more upscale client base. Middle-income consumers,

who comprise the bulk of bank customers, get little attention

from most life agents. Most insurers that have tried to penetrate

middle-income markets through alternative channels such as

direct mail, have not done well. Clearly, a change in approach is

necessary. Bancassurance is the answer.

WHAT IS IN STORE FOR THE CUSTOMERS?

The most immediate advantage for customers is that, in

insurance business the question of trust plays a greater role,

especially due to the inbuilt requirement of a long term

relationship between the insurer and the insured. In India, for

decades, customers were used to the monopolistic attitude of

public sector insurance companies and despite there were many

drawbacks in their dealing, they enjoyed customer confidence.

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This trend continues even now mainly due to their Government

ownership. For the customers to move over to private insurance

companies that are collaborated with foreign companies, which

are less known to the Indian public would take little more time.

The void between the less known newer private insurance

companies and the prospective insured could be comfortably

filled by the banks because of their well established and long

cherished relationship. Under these circumstances, any new

insurance products routed through financial super market , the

bancassurance channel would be well received by the customers.

Above all, in the emerging scenario, customers prefer to have a

consolidation and delivery of all financial services at a single

window, because such availability of wide range of financial/

banking services and products relieves the customers from the

painstaking efforts of scouting for a separate dealer for each

service/ product. Even internationally, the trend is towards

the one-stop-shop.

Customers also get a share in the cost savings in the form of

reduced premium rate because of economies of scope, besides

getting better financial counseling at single point.

In the case of developed as well as underdeveloped countries, the

financial literacy and financial counseling has been increasingly

stressed in recent years. These become essential especially when

decision involves long term investments. In India too, there hasbeen emphasis on the importance and necessity for financial

counseling and financial literature. In that context too, the

bankers are better placed in extending such counseling or

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financial advises to the customer because of their well

established long cherished relationship.

The relationship between insurer and insured and bank and its

client are different. Direct dealing by customers with banks

rather than insurance companies bestows them with the following

benefits:

Full range of financial services under one roof

Trading with banks gives a secured feeling to customers

Low transaction costs

More convenience, less hassles

Economies of scale are passed on to customers in the form

of lower costs

Customers can avail of personal counseling and undivided

attention

BASIC BANCASSURANCE MODELS

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b) Corporate Agency

The other form of non-risk participatory distribution channel is

that of corporate agency, wherein the bank staff is trained to

appraise and sell the products to the customers. Here the bankas an institution acts as corporate agent for the insurance

products for a fee/ commission. This seems to be more viable

and appropriate for most of the mid-sized banks in India as also

the rate of commission would be relatively higher than the

referral arrangement. This, however, is prone to reputational risk

of the marketing bank. There are also practical difficulties in the

form of professional knowledge about the insurance products.

Besides, resistance from staff to handle totally new

service/product could not be ruled out. This could, however, be

overcome by intensive training to chosen staff packaged with

proper incentives in the banks coupled with selling of simple

insurance products in the initial stage. This model is best suited

for majority of banks including some major urban cooperative

banks because neither there is sharing of risk nor does it require

huge investment in the form of infrastructure and yet could be a

good source of income. Bajaj Allianz stated to have established a

growth of 325 per cent during April-September 2004, mainly due

to bancassurance strategy and around 40% of its new premiums.

c) Insurance as Fully Integrated Financial Service/ Joint

ventures

Apart from the above two, the fully integrated financial service

involves much more comprehensive and intricate relationship

between insurer and bank, where the bank functions as fully

universal in its operation and selling of insurance products is just

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one more function within. Banks will have a counter within to

sell/market the insurance products as an internal part of its rest

of the activities. This includes banks having wholly owned

insurance subsidiaries 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. The great advantage of this

strategy being that the bank could make use of its full potential

to reap the benefit of synergy and therefore the economies of

scope. This may be suitable to relatively larger banks with

sound financials and has better infrastructure. Internationally,

the fully integrated bancassurance have demonstrated superior

performance. Even if the banking company forms as a subsidiary

and insurance company being a holding company, this could be

classified under this category, so long as the bank is selling the

insurance products along side the usual banking services. As per

the extant regulation of insurance sector the foreign insurance

company could enter the Indian insurance market only in the

form of joint venture, therefore, this type of bancassurance

seems to have emerged out of necessity in India to an extent.

There is great scope for further growth both in life and non-life

insurance segments as GOI is reported have been actively

considering to increase the FDIs participation to upto 49 per

cent.

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Traditionally, insurance products have been promoted and sold

principally through agency systems in most countries. With new

developments in consumers behaviours, evolution of technology

and deregulation, new distribution channels have been developed

successfully and rapidly in recent years. Bancassurers make use

of various distribution channels:

- Career Agents

- Special Advisers

- Salaried Agents

- Bank Employees / Platform Banking

- Corporate Agencies and Brokerage Firms

- Direct Response

- Internet

- E-Brokerage

- Outside Lead Generating Techniques

The main characteristics of each of these channels are:

Career Agents:

Career Agents are full-time commissioned sales personnelholding an agency contract. They are generally considered to be

independent contractors. Consequently an insurance company

can exercise control only over the activities of the agent which

are specified in his contract. Despite this limitation on control,

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career agents with suitable training, supervision and motivation

can be highly productive and cost effective. Moreover their level

of customer service is usually very high due to the renewal

commissions, policy persistency bonuses, or other customer

service-related awards paid to them.

Many bancassurers, however avoid this channel, believing that

agents might oversell out of their interest in quantity and not

quality. Such problems with career agents usually arise, not due

to the nature of this channel, but rather due to the use of

improperly designed remuneration and/or incentive packages.

Special Advisers:

Special Advisers are highly trained employees usually belonging

to the insurance partner, who distribute insurance products to the

bank's corporate clients. Banks refer complex insurance

requirements to these advisors. The clients mostly include

affluent population who require personalised and high quality

service. Usually Special advisors are paid on a salary basis and

they receive incentive compensation based on their sales.

Salaried Agents:

Having Salaried Agents has the advantages of them being fully

under the control and supervision of bancassurers. These agents

share the mission and objectives of the bancassurers. Salaried

Agents in bancassurance are similar to their counterparts in

traditional insurance companies and have the same

characteristics as career agents. The only difference in terms of

their remuneration is that they are paid on a salary basis and

career agents receive incentive compensation based on their

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sales. Some bancassurers, concerned at the bad publicity which

they have received as a result of their career agents

concentrating heavily on sales at the expense of customer

service, have changed their sales forces to salaried agent status.

Platform Bankers:

Platform Bankers are bank employees who spot the leads in the

banks and gently suggest the customer to walk over and speak

with appropriate representative within the bank. The platform

banker may be a teller or a personal loan assistant and the

representative being referred to may be a trained bank employee

or a representative from the partner insurance company.

Platform Bankers can usually sell simple products. However, the

time which they can devote to insurance sales is limited, e.g. due

to limited opening hours and to the need to perform other

banking duties. A further restriction on the effectiveness of bankemployees in generating insurance business is that they have a

limited target market, i.e. those customers who actually visit the

branch during the opening hours.

In many set-ups, the bank employees are assisted by the bank's

financial advisers. In both cases, the bank employee establishes

the contact to the client and usually sells the simple product

whilst the more affluent clients are attended by the financial

advisers of the bank which are in a position to sell the more

complex products. The financial advisers either sell in the branch

but some banks have also established mobile sales forces.

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If a banks employees only act as "passive" insurance sales staff

(or do not actively generate leads), then the bancassurers

potential can be severely impeded. However, if bank employees

are used as "active" centres of influence to refer warm leads to

salaried agents, career agents or special advisers, production

volumes can be very high and profitable to bancassurers.

Set-up / Acquisition of agencies or brokerage firms:

In the US, quite a number of banks cooperate with independent

agencies or brokerage firms whilst in Japan or South Korea banks

have founded corporate agencies. The advantage of such

arrangements is the availability of specialists needed for complex

insurance matters and -in the case of brokerage firms - the

opportunity for the bank clients to receive offers not only from

one insurance company but from a variety of companies. In

addition, these sales channels are more conceived to serve the

affluent bank client.

Direct Response:

In this channel no salesperson visits the customer to induce a

sale and no face-to-face contact between consumer and seller

occurs. The consumer purchases products directly from the

bancassurers by responding to the company's advertisement,

mailing or telephone offers. This channel can be used for simple

packaged products which can be easily understood by the

consumer without explanation.

Internet:

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Internet banking is already securely established as an effective

and profitable basis for conducting banking operations. The

reasonable expectation is that personal banking services will

increasingly be delivered by Internet banking. Bancassurers can

also feel confident that Internet banking will also prove an

efficient vehicle for cross selling of insurance savings and

protection products. It seems likely that a growing proportion of

the affluent population, everyone's target market, will find banks

with household name brands and proven skills in e-business a

very acceptable source of non-banking products.

There is now the Internet, which looms large as an effective

source of information for financial product sales. Banks are well

advised to make their new websites as interactive as possible,

providing more than mere standard bank data and current rates.

Functions requiring user input (check ordering, what-if

calculations, and credit and account applications) should be

immediately added with links to the insurer. Such an

arrangement can also provide a vehicle for insurance sales,service and leads.

E-Brokerage:

Banks can open or acquire an e-Brokerage arm and sell insurance

products from multiple insurers. The changed legislative climate

across the world should help migration of bancassurance in this

direction. The advantage of this medium is scale of operation,strong brands, easy distribution and excellent synergy with the

internet capabilities.

Outside Lead Generating Techniques:

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One last method for developing bancassurance eyes involves

"outside" lead generating techniques, such as seminars, direct

mail and statement inserts. Seminars in particular can be very

effective because in a non-threatening atmosphere the insurance

counsellor can make a presentation to a small group of business

people, field questions on the topic, then collect business cards.

Adding this technique to his/her lead generation repertoire, an

insurance counsellor often cannot help but be successful.

To make the overall sales effort pay anticipated benefits, insurers

need to also help their bank partners determine what the hot

buttons will be for attracting the attention of the reader of both

direct and e-mail. Great opportunities await bancassurance

partners today and, in most cases, success or failure depends on

precisely how the process is developed and managed inside each

financial institution. This includes the large regional bank and the

small one-unit community bank.

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India. Banks by and large are resorting to either referral models

or corporate agency to begin with. Banks even offer space in

their own premises to accommodate the insurance staff for

selling the insurance products or giving access to their clients

database for the use of the insurance companies. As number of

banks in India have begun to act as corporate agents to one or

the other insurance company, it is a common sight that banks

canvassing and marketing the insurance products across the

counters. The present IRDAs regulation, however, restricts

bankers to act as a corporate agent on behalf of only one life and

non-life insurance company.

In the case of ICICI-Prudential Life Insurance Company, within

two years of its operations, it could reach more than 25 major

cities in India and as much as 20 per cent of the life insurance

sales are through the bancassurance channel. In the case of ICICI

bank, SBI and HDFC bank insurance companies are subscribers of

their respective holding companies. ICICI bank sells its insurance

products practically at all its major branches, besides it has

bancassurance partnership arrangements with 19 other banks as

also as many as 200 corporate tie-up arrangements. Thus,

among the private insurance companies, ICICI Prudential seems

to exploit the bancassurance potential to the maximum. ICICI

stated that Bank of India has steadily grown the life insurance

segment of its business since its inception. ICICI prudential had

also reported to have entered into similar tie-ups with a number

of RRBs, to reap the potential of rural and semi-urban. In fact, it

is a step in the right direction to tap the vast potential of rural

and semi-urban market. It will not be surprising if other insurance

companies too follow this direction.

Aviva Insurance had reported that it has tie-ups with as many

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as 22 banking companies, which includes private, public sector

and foreign banks to market its products. Similarly, Birla Sun Life

Insurer reported to have tie-up arrangements with 10 leading

banks in the country. A distinct feature of the recent trend in tie-

up arrangements was that a number of cooperative banks have

roped in with bancassurance arrangement. This has added

advantage for insurer as well as the cooperative banks, such as

the banks can increase the non-fund based income without the

risk participation and for the insurers the vast rural and semi-

urban market could be tapped without its own presence.

Bancassurance alone has contributed richly to as much as 45 per

cent of the premium income in individual life segment of Birla

Sun Life Insurer.

Incidentally even the public sector major LIC reported to have

tie-up with 34 banks in the country, it is likely that this could be

the largest number of banks selling single insurance companys

products. Ironically, LIC also has the distinction of being the

oldest and the largest presence of its own in the country. SBI Life

Insurance for instance, is uniquely placed as a pioneer to usher

bancassurance into India. The company has been extensively

utilising the SBI Group as a platform for cross-selling insurance

products along with its numerous banking product packages such

as housing loans, personal loans and credit cards. SBI has

distinct advantage of having access to over 100 million accounts

and which provides it a vibrant and largest customer base to

build insurance selling across every region and economic strata in

the country. In 2004, the company reported to have become

the first company amongst private insurance players to cover 30

lakh lives.

Interestingly, in respect of new (life) business bancassurance

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business channel is even greater than the size of direct business

by the insurers at 2.17 per cent. Even in respect of LIC around

1.25 per cent of the new business is through bancassurance.

Considering the large base, even this constitutes quite sizeable to

begin with in the case of LIC. This speaks for itself the rate at

which the bancassurance becoming an important channel of

distribution of insurance products in India. It is significant to note

that the public sector giant LIC which has branches all over India,

too moving towards making use of bancassurance channel.

It is significant to note that in the Indian case, all those

insurers and banks who have taken the lead in identifying thebancassurance channel, at the early stage, are now reaping the

maximum benefits of deeper existing customer relationship as

also wider coverage of newer customers besides enhancing fee

based income. During 2005-06, as much as 16.87 per cent of

new business were underwritten through banks as corporate

agent channel alone as compared with 6.61% through direct

business. However, banks as referrals taken together has

sizeable chunk of business. This growth was primarily due to the

aggressiveness witnessed in the private life insurance sector and

one of the drivers for this substantial growth is the contribution of

the banking industry.

Yet there is immense scope for further development of

bancassurance in the Indian Financial Market. This is because

only 8% of the total population is currently insured. There is avast untapped market which can be exploited only by

implementing concepts like bancassurance, which is of mutual

benefit to all parties involved.

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SOME IMPORTANT BANCASSURANCE TIEUPS

INSURANCE BANKS

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LIFE

INSURANCE CORPORATION (LIC)

Corporation Bank, Indian Overseas

Banks, Centurion Bank, Satara

District Bank, Cooperative Bank,

Janata Urban Cooperative Bank,

Yeotmal Mahila Sahkari Bank,

Oriental Bank of Commerce.

BIRLA SUN LIFE INSURANCE

Bank of Rajasthan, Andhra Bank,

Bank of Muscat, Development

Credit Bank, Deutsche Bank and

Catholic Syrian Bank.

ICICI PRUDENTIAL

Federal Bank, ICICI Bank, Bank of

India, Punjab & Maharashtra

Cooperative Bank, South India

Bank.

HDFC STANDARD LIFE INSURANCE

CO.

Union Bank of India, Indian Bank,

HDFC Bank.

NATIONAL INSURANCE CO. City Union Bank.

MET LIFE INDIA INSURANCE CO.Karnataka Bank, Dhanalaxmi Bank,

Jammu and Kashmir Bank.

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SBI INSURANCE CO. State Bank of India, BNP Paribas.

BAJAJ ALLIANZ GENERAL

INSURANCE

Karur Vysya Bank, Standard Chartered

Bank, Bank of Punjab.

ROYAL SUNDARAM GENERAL

INSURANCE CO.

Standard Chartered Bank, ABN Amro

Bank, Citibank.

UNITED INDIA INSURANCE CO.Punjab National Bank, Andhra Bank,

South India Bank.

BANCASSURANCE IN INDIA - A SWOT ANALYSIS

In India, as elsewhere, banks are seeing margins decline sharply

in their core lending business. Consequently, banks are looking at

other avenues, including the sale of insurance products, to

augment their income. The sale of insurance products can earn

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banks very significant commissions (particularly for regular

premium products). In addition, one of the major strategic gains

from implementing bancassurance successfully is the

development of a sales culture within the bank. This can be used

by the bank to promote traditional banking products and other

financial services as well. The following exhibit details the

comparative figures of bancassurance deals taken up by various

Indian Insurance companies.

Strengths Huge number of people without life

insurance (91.73 million out of 1 billionhad life insurance in 1999)

Millions of people travelling in and out of

India can be tapped for Overseas

Mediclaim and Travel Insurance policies

200 million households waiting for

householders insurance

Good range of products from LIC/GIC

Good amount of R&D into insurance

Weaknesse

s

Not much IT initiative from leading

insurance players (LIC and GIC)

Higher tax nets for the middle class

No Tax exemptions for products like

householder, travel policies etc

Inflexibility of the productsOpportunit

ies

Banks database can help insurance

companies devise policies

Better IT infrastructure from the banks

side can help integrating

Threats Risks in integrating approach, thinking

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If bancassurance was termed as marriage between banks and

insurance, then the probability of divorces cant be ruled out.

Critics opine that bancassurance is a controversial idea, and it

gives banks too great a control over the financial industry. The

challenge to sustain such alliances could be immensely daunting.

The difference in regulation, not only across countries but

between banks and insurance industry as well, has been cited as

the primary reason. The difference in trade customs, work culture

in these industries is another impediment.

Poor image of public sector banks:

Insurance is a business of solicitation unlike a typical

banking service, it requires great drive to sell/ market the

insurance products. It should, however, be recognized that

bancassurance is not simply about selling insurance but about

changing the mindset of a bank. Moreover, in India since the

majority of the banking sector is in public sector and which has

been widely disparaged for the lethargic attitude and poor quality

of customer service, it needs to refurbish the blemished image.

Else, the bancassurance would be difficult to succeed in these

banks.

Conflict of interest:

There are also glitches in the system of bancassurance

strategy in the form of conflict of interests, as some of the

products offered by the banks, viz., term deposits and other

products which are mainly aimed at long term savings/

investments can be very similar to that of the insurance products.

Banks could as well feel apprehension about the possibility of

substitution effect between its own products and insurance

products and more so, as a number of insurance products in India

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come with an added attraction of tax incentives.

Resistance from bank staff:

As there is a great deal of difference in the approaches of

selling of insurance products and the usual banking services-

thorough understanding of the insurance products by the bank

staff coupled with extra devotion of time on each customer

explaining in detail of each products intricacies is a prerequisite.

Moreover, insurance products have become increasingly complex

over a period of time, due to improvisation over the existing

products as well as due to constant innovation of new products,

emanating from the excessive competition adding to even more

difficulties in comprehension of the products and marketing by

the bank staff. These can result in resistance to change and

leading to problems relating to industrial relations.

Effect on regular banking business:

Unlike, the banking service, there is no guarantee for

insurance products that all efforts that a bank staff spends in

explaining to a customer would clinch the deal due to the very

nature of the insurance products. This frustration of the bank staff

has the danger of spill over effect even on their regular banking

business.

Lack of experience and motivation:

Bankers in India are extremely nave in insurance products as

there were no occasions in the past for the bankers to deal in

insurance products; therefore they require strong motivation of

both monetary and non monetary incentives. This would be more

so in the emerging scenario due to complex innovations in the

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field of insurance / pension products at a rapid pace with the

entry of a number of foreign insurance companies with vast

experience in the developed countries framework.

In view of the above, reorientation of staff in the public sector

banks in particular, to be less bureaucratic and more customer-

friendly would indeed be a challenging task, albeit it is a

prerequisite for the success of bancassurance.

The above outlined problems need not, however, deter the

banking sector to embark on bancassurance as any form of

resistance from the bank employees could be tackled by devising

an appropriate incentive system commensurate with intensive

training to the frontline bank staff.

BANCASSURANCE FUTURE OUTLOOK AND

RECOMMENDATIONS

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The outlook for bancassurance remains positive. While

development in individual markets will continue to depend

heavily on each countrys regulatory and business environment,

bancassurers could profit from the tendency of governments to

privatize health care and pension liabilities. In emerging markets,

new entrants have successfully employed bancassurance to

compete with incumbent companies. Given the current relatively

low bancassurance penetration in emerging markets,

bancassurance will likely see further significant development in

the coming years. We recommend following for sustainable and

inclusive growth in bancassurance alliances.

a. Bancassurance to Banc-sec-urance: A step towards

Universal Banking

Securities business seems an automatic extension to banks and

insurance. This integration will be a step further towards

universal banking and would leverage the efficiencies developed

by alliance of banks and insurance companies. It will be for

customers who want to get a one-stop shop for all financial

products. So the banks should transform themselves to a

wholesome entity. This has to be integrated with the internet

banking and other IT infrastructure, for e.g. customers should be

able to pay insurance premium, margin money on security

transaction via the net-banking facility and the ATM network.

b. Involvement of Co-operative banks:

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Insurance industry has very low penetration rate in India. The

market and scope in rural India is immense and largely untapped.

The insurance companies should actively try to involve co-

operative and regional rural banks amongst their potential

alliances along with the big and multinational banks. These co-

operative banks will have greater reach in villages of rural India

and will also operate at economic cost.

c. Minimize conflicts of interest between the bank and

the insurer:

A formal and standard agreement between these banks and the

insurance companies should be taken up and drafted by a

national regulatory body. These agreements must have

necessary clauses of revenue sharing. In case of possible

conflicts, the bank management and the management of the

insurance company should be able to resolve conflicts amicably.

If they are not solved, there can be an apex body set up by IRDA

to solve these types of issues. This could be done by

Setting up distribution procedures consistent with the

manual systems in most banks.

Establishing credible service level agreements between the

bank and the insurer.

d. Involvement of senior bank management and skill

development at the operating level at bank

branches:

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The bancassurance alliances should be taken up at the top

management level. Such strategic actions require the senior

management support not only during the decision stage but also

at the time of implementation. Their active participation in the

process is very much necessary for the success of such

initiatives. The employee base that would be interacting with the

insurance customers should also be properly trained in order to

equip themselves with the skills required in selling insurance

products. The bank employees would not be aware of these

selling skills if proper training is not given.

e. Bancassurance and pension sector:

Pension sector is at the verge of being deregulated. Once this

sector is deregulated, banks would get the dual benefits of

managing these huge pension funds and the opportunity to sell

mainly health insurance products to these pension sector

customers. Low cost of collecting pension contributions is the

key element in the success of developing the pension sector.

Money transfer costs in Indian banking are low by international

standards. Portability of pension accounts is a vital requirement

which banks can fulfill in a credible framework.

f. Focus on Group insurance schemes:

Considering the behavior of the Indian customers, group

insurance is the way to go about. As joint accounts or individual

accounts of families are very prominent, we will have to sell theseinsurance products to these members of the family as a group.

This would be easier in terms of collection of premiums as 1 or 2

members of the family would be working and linking insurance

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premiums from these savings/ salary accounts would be easier

and hassle-free.

g. Targeting frequent travelers (travel insurance):

In India, though some of the airlines have travel insurance, there

is no income from these frequent travelers. As frequent travelers

are targeted by these airlines by giving concessional fares, banks

can sell them travel insurance at some concessional premiums.

This would be additional revenue to the insurance company as

well.

h. Tie-ups with residential complex builders(householders insurance):

House loans and householders insurance can be linked. Banks

have huge exposures to house loans. Now as far as the

customers are concerned, they would prefer householders

insurance also as a package along with the house loans. The

collection of premiums would also not be a problem. Normally

these customers give post-dated cheques. Therefore premiums

can also be collected in the similar fashion. Some concessions to

the customers can be given like extension of payment period etc.

Insurance in business activities can also be targeted as banks

have considerable exposure to corporate loans.

i. National level healthcare programme:

Banks can play a major role in developing a viable healthcare

programme in India. Only 2.5 million people have access to

healthcare facilities. There is a growing demand for healthcare

products which banks can distribute (and facilitate

administration). Banks would be the best medium to distribute

health insurance plans and create awareness amongst the

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people. The Government of India and its planning commission can

leverage this bancassurance concept to launch a nation wide

healthcare programme.

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LEGAL FRAME WORK OF BANCASSURANCE

Bancassurance in India is a very new concept; technically seeing

the concept if Bancassurance is only one year old to the Indian

Financial market. In India there are different regulatory bodies

for Banks and Insurance Company, for banking sector it is

Reserve Bank of India (RBI) and for insurance sector it is

Insurance Regulatory and Development Authority (IRDA) and

banc assurance is combination of both banking and insurance

sector therefore it comes under the preview of both the

regulatory bodies. Each Regulatory has given out detailed

guidelines and norms for banks getting into insurance sector and

banks have to compulsory follow it to get ahead with banc

assurance business.

Reserve Bank of India guidelines for banks entering intoinsurance sector provide the options for banks to enter in

bancassurance. They are:

1. Net Worth at least of Rs 500 crores.

2. Reasonably low non- performing assets.

3. Made profits continuously during the last three years.

4. Record of satisfactory performance by its subsidiaries, if any,

should be recorded.

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5. Capital to Risk Weighted Ratio of not less than 10%.

The maximum stake a bank can hold in such a joint venture is

50%. The subsidiaries or associates can pick up additional stakes.

Any schedule commercial bank will be permitted to undertake the

insurance business as agent of an insurance company. Such

agency can be established after obtaining prior permission from

the RBI.

The Insurance Regulatory and Development Authority(IRDA) issued guidelines and norms for Insurance companies,

which they have to mandatory follow to enter into

bancassurance business with any banks.

1. Each bank that sells insurance product must have a chief

insurance executive to handle all the insurance activities.

2. All the people involve in selling Insurance product in banks and

insurance companies must compulsory undertake undergo

training from Institution accredited by Insurance Regulatory

and Development Authority (IRDA) and pass examination

conducted by the authority to sell insurance products.

3. Commercial banks, including regional rural banks, co-operative

banks may become agents of just only one insurance

company.

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4.To float a joint venture the bank must comply with the

Reserve Bank of India regulations.

5. In cases where there is a joint venture with a foreign partner,

the contribution of the foreign partner should be restricted to

26%.

Implementing is a key challenge in the India because of many

government restriction and lengthy and complicated

regulatory guidelines to meet by Banks and Insurance

companies.

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FUTURE PROSPECTS

As on date, no major bank or insurance company has moved

away from banc assurance, the outlook remains good. Only a

matter of concern is how the existing players will adjust to the

changing developments ad increasing competition. Though no

model of bancassurance is static, players are adopting different

models suiting their geographies and regulation in place. The

competition in this field is also going to be immense with big

players from both banking and insurance sector eager to

embrace this new concept. Perhaps, the competition will be more

immense when the banking giants venture into insurance by

themselves and convert themselves into one-stop financial

supermarkets. Weather the traditional distribution channel with

the skills or the bancassurance with its reach and support of

trained staff that will be successful in India is difficult to predict.

Considering the global experience, bancassurance may have the

final say even in India.

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SURVEY

A general survey conducted among banks and insurance

companies has brought forth the following facts and figures:

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2009

Business from Bancassurance

-12%

Business from Other

Mediums -88%

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that 'Central Bank lives on people's faith and regards itself as the

people's own bank'.

During the past 95 years of history the Bank has weathered many

storms and faced many challenges. The Bank could successfully

transform every threat into business opportunity and excelled

over its peers in the Banking industry.

Among the Public Sector Banks, Central Bank of India can be truly

described as an All India Bank, due to distribution of its large

network in 27 out of 28 States as also in 4 out of 7 Union

Territories in India. Central Bank of India holds a very prominentplace among the Public Sector Banks on account of its network of

3356 branches and 237 extension counters at various

centers throughout the length and breadth of the country.

In view of its large network of branches as also number of savings

and other innovative services offered, the total customer base of

the Bank at over 25 million account holders is one of the largest

in the banking industry.

About The New India Assurance Company Ltd

Established by Sir Dorab Tata in 1919, New India is the first fully

Indian owned insurance company in India.

New India was a pioneer among the Indian Companies on

various fronts, right from insuring the first domestic airlines in

1946 to satellite insurance in 1980. The latest addition to the

list of firsts is the insurance of the INSAT-2E.

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With a wide range of policies New India has become one of the

largest non-life insurance companies, not only in India, but also

in the Afro-Asian region.

New India, with a Gross Domestic Premium Income of Rs. 4,040

Crores and worldwide premium income of nearly Rs. 5,000

Crores, for the financial year 2003-04 is the undisputed leader

in the Indian General Insurance market. The Company has been

reaffirmed 'A' (Excellent) rating for the 5th consecutive year by

A.M. Best (Europe).

After joining hands.

On 26th May 2004, the Central Bank of India and the New India

Assurance Company Ltd entered into a bancassurance tie-up

keeping with the recent bancassurance boom.

For New India, the tie up with Central Bank of India, one of the

leading commercial banks of the country with a branch network

of 3130 branches spread all over the country comes as a major

boost in increasing its reach. Bancassurance as a distribution

channel is assuming increasing importance for both life and

non-life insurers.

An interview with Mr. B. K. De, Chief Manager of the New

Initiatives Department, of the Central Bank of India

revealed the following:

Benefit to the bank due to bancassurance:

Customers want all services under one roof. Thus, by selling

insurance the bank is able to fulfill customer expectations.

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More customer acquisition. Customers transact with

institutions that render to all their needs rather than go to

different places for different products.

Fee based income of the bank increases by selling

insurance to its customers. That too, this is possible with

minimum efforts.

Commission from bancassurance:

For Long term policies

Initial premium is 25% & trail premium is 5-7.5%

For Short term policies

Initial premium is10% & trail premium is 5-7.5%

For Ulip linked policies

There is a one-time premium of approximately 2%

Role of bank in bancassurance tie-ups:

Banks act as the mediator between the customer and the

insurance company. Since customers know the bank better,

therefore they are more convinced when an insurance product is

recommended by the bank. In case of simple products, the bankstaff themselves do the marketing of insurance products. In case

of complex products, the insurance companys personnel

accompany the bank staff for selling the product.

Earnings through the bancassurance channel:

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In terms of %

2-3% of total income

10% of fee based income

Staff under bancassurance:

Dedicated sales force 400

Usage of Cross selling to boost sales of insuranceproducts:

Cross selling is done through counters. Eg: when a customer

opens an account, he is recommended to buy an insurance

policy. However, there is no compulsion. The motto is Come to

the bank, take all products

Benefit to Insurance company according to banks:

The insurance company is readily provided with a larger

market. This can in turn be converted to quick customers.

The insurance company does not need to find customers. It

gets ready customer base and greater reach to customers.

Customers reaction:

After initial reluctance, customers welcome the change. Bank is a

known establishment and a safe place for customers. Thus

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customers can avail of all services in a convenient and hassle-

free manner without additional transaction charges.

Anticipated future of bancassurance:

As of now multiple tie- ups are not allowed by IRDA. One bank

can enter into a bancassurance partnership with only one life

insurance company and one non-life insurance company. This

door should be opened to give way to more competition. Also,

banks should be enabled to own insurance business rather than

tie-up with third party. Increasing awareness about theimportance of insurance has had a positive influence on

bancassurance. Overall bancassurance has generated a positive

review.

This information familiarizes us with bancassurance aspects from

the perspective of the banking partner. But it is also important to

understand this concept from the point of view of the insurance

company.

An interview with Mr. Jyoti Kumar Garg, Chief Manager of the Indian

Business Department and Brokers Relationship, of The New India Assurance

Company Limited revealed the following:

Benefits of Bancassurance to Insurance Company:

Insurance company has to put in lesser efforts to procure premium. Banks provide

them with bulk quality premium. Also they acquire wide reach i.e. market

penetration, which is very important.

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Moreover, less manpower is required since banks handle a part of the business in

return of commission paid to them.

Percentage of commission paid to banks:

Percentage of commission paid to banks depends upon the insurance scheme.

However, it varies between 5- 15%.

Role of Banks in Bancassurance Tie-ups:

Banks pass on the business that emanates to insurance companies. They play the

role of facilitators, agents to the insurance companies. This in turn results in

convenience for both parties.

Percentage of business generated through Bancassurance channels:

About 7-8% of total insurance business

Profit generated through Bancassurance:

About 15-20% of the profit generated through insurance business

Customers' reaction:

Customers are happy. For them there is no need to search, select, and evaluate an

insurance provider as automatic insurance is made available to them on the banks

counter.

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Thus, they can avail of insurance facilities without any problems and hassles.

Anticipated future of Bancassurance:

Future of this concept is very good. Currently 30-40% European insurance

business is through bancassurance. In India this percentage is about 10%.

However, it is expected to rise to about 15-20% in the near future.

Bancassurance is a strong channel and is definitely come here to stay.

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CASE STUDY

Max New York Life Insurance Company Ltd Enters into

Bancassurance Partnership with New India Co-operative

Bank Ltd.

About New India Co-operative Bank Ltd

New India Co-Operative Bank Ltd was established in 1967 with a

share capital of Rs.100, 720 for serving the needs of self-

employed persons like taxi/transport operators, small business

persons and professionals. Over the years, it has carved a niche

for itself as Common Mans Bank. In 1990, it became a

scheduled bank and on in 1999 attained multi-state status. The

banks net-worth has increased over the years to reach Rs.

124.30 crore at the end of March this year. The banks deposits

stand at Rs. 620.73 crore and advances at Rs. 225.62 crore. It

has 20 branches spread over in the states of Maharashtra and

Gujarat. The bank has strong financials with CRAR of 42.59% and

net NPA of zero.

About Max New York Life

Max New York Life, a joint venture between Max India Ltd. and

New York life, a Fortune 100 company, is one of Indias leading

private life insurance companies. The company offers both

individual and group life insurance solutions. It has established a

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wide distribution network with 48 offices and representatives

across 34 cities in India. Through its wide network of highly

competent life insurance Agent Advisors and flexible product

solutions, Max New York Life is creating partnership for life with

its customersin India.

After joining hands.

On, April 20, 2005, Max New York Life, one of Indias leading life

insurance companies and New India Cooperative Bank Ltd, which

prides itself in being a common mans bank, today entered into a

banc assurance partnership. The bank now offers Max New York

Lifes products across its 20 branches spread over Maharashtra

and Gujarat.

This alliance enables Max New York Life to reach its customized

life insurance solutions to more than 2,80,000 customers of New

India Cooperative Bank.

Max New York Life Insurance offers a suite of flexible products in

this banc assurance alliance. It has 14 base products and nine

riders that can be customized to over 400 combinations enabling

customers to choose the policy that best fits their needs. The

banc assurance alliance with New India Cooperative Bank further

strengthens the geographical reach of Max New York Life, which

has to date sold over 446,000 policies with over Rs 15,200 crore

in sum assured.

Speaking after signing the agreement, Mr. Ranjit Bhanu,

Chairman of the New India Cooperative Bank, said, In Max New

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York Life we have found a partner who shares our vision to

provide high quality service to customers. Today all cooperative

banks are facing competition and they need to look at their

strategies to stay competitive. They need to find new avenues of

income generation. Through this alliance with Max New York Life

we will be able to offer customized life insurance products, which

will help us, cater better to our customers and will therefore help

us grow and succeed.

Speaking on the alliance, Rajesh Sud, Director Agency, Banc

assurance and Direct Sales, Max New York Life said: This alliance

is in line with our commitment to bring the true value of life

insurance to a larger cross section of people. Life insurance is a

contract of trust and this trust-based relationship is strengthened

by the intermediary be it an agent or an institution, who plays a

key role in the sales process. Recognizing this customer need, we

have focused our strategy on collaborating with financial

institutions based on the strength of its customer relationships.

We believe that institutions such as cooperative banks, giventheir geographical focus, have very strong customer relationships

and provide an excellent opportunity for Max New York Life to

expand its presence in the states of Maharashtra and Gujarat.

Both the above case studies show the positive impact that

bancassurance has had on both the banks as well as on the

insurance companies returns. In both cases, implementation of

bancassurance has proved beneficial to both parties as well as

their clients.

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CONCLUDING REMARKS

The success of bancassurance greatly hinges on banks ensuring

excellent customers relationship; therefore banks need to strive

towards that direction. A changing mindset is cascading through

the banking sector in India and this would be a right time for

banks to resorting to bancassurance. The fact that the banking

operations in India, unlike in other developed countries, are still

branch oriented and manually operated vis--vis highly

mechanized and automated banking channels, viz., internet

banking, ATMs, etc. are all the more conducive for flourishing of

bancassurance. Regulators could explore the possibility of

allowing banks having tie-up arrangements with more than one

insurance company, giving wider choice for the customers. The

rural and socially disadvantaged sectors are very difficult to

service. They are scattered geographically in small indigenous

social groups. It is very difficult to identify their need and design

products that are viable as well as acceptable to these segments.

The coming together of banks and insurance can provide

substantial synergy here.

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Going by the present pace, bancassurance would turn out to be a

norm rather than an exception in future in India. Supervisory

concerns as pointed out earlier could best be tackled by way of

closer and systematized coordination between the respective

supervisory authorities. There needs to be a clear cut

identification of activities between banking and insurance at the

institutions level as also at the level of regulators. Adequate

training coupled with sufficient incentive system could avert the

banks staff resistance if any. In sum, bancassurance strategy

would be a win-win situation for all the parties involved - the

customer, the insurance companies and the banks.

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Thus, the selected hypothesis BANASSURANCE IS A BOON TO

BANKS AS WELL AS INSURANCE COMPANIES is completely

validated through the above information, interview and survey.

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BIBLIOGRAPHY & WIBLIOGRAPHY

Books:

Recent Trends in Insurance Sector in India

By K.Ravichandran

Bancassurance

By Nadege Gentay & Philip Molyneux

Indian Banking Emerging Issues

By Kasturi Rao & Yash Paul

Banking in New Millennium

By N. Rajashekhar

Life Insurance (Insurance Institute of India)

By S. Balachandran

Websites:

- www.banknetindia.com

- www.insuremagic.com

- www.insuranceprofessional.com

- www.worldinsurancebazar.com

- www.indiainfiline.com

- www.moneycontrol.com

- www.financialexpress.com

- www.icfai.org

- www.guruji.com

- www.watsonwyatt.com

- www.businessworld.com

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http://www.banknetindia.com/http://www.insuremagic.com/http://www.insuranceprofessional.com/http://www.worldinsurancebazar.com/http://www.indiainfiline.com/http://www.moneycontrol.com/http://www.financialexpress.com/http://www.icfai.org/http://www.guruji.com/http://www.watsonwyatt.com/http://www.businessworld.com/http://www.banknetindia.com/http://www.insuremagic.com/http://www.insuranceprofessional.com/http://www.worldinsurancebazar.com/http://www.indiainfiline.com/http://www.moneycontrol.com/http://www.financialexpress.com/http://www.icfai.org/http://www.guruji.com/http://www.watsonwyatt.com/http://www.businessworld.com/


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