Bancassurance in India

Name:- Sahil Singla Roll No.- 14105

INDEX

Topic What is Bancassurance. Why this Combination is Good. Benefits to banks Benefits to Insurance Companies Bancassurance Models Regulations regarding Bancassurance Important Bancassurance tie-up in India 3 4 5 6 7 9

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SWOT Analysis Future Scope for Bancassurance

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What is Bancassurance?
The Bank Insurance Model also sometimes known as 'Bancassurance', is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products. According to IRDA, Bancassurance refers to banks acting as corporate agents for insurers to distribute insurance products.

Since the banking services, insurance and fund management are all interrelated activities and have inherent synergies, selling of insurance by banks would be mutually beneficial for banks and insurance companies. Banking sector has a far and wide reach, was thought of as a potential distribution channel, useful for the insurance companies. This union of the two sectors is what is known as Bancassurance. This system is very prominent in US, Europe etc. Germany took the lead and it was called ALLFINANZ. France taking the lead, followed by Germany, UK, Spain etc. It is also developing in Canada, Mexico, and Australia. It originated in India in the year 2000 when the Government issued notification under Banking Regulation Act which allowed Indian Banks to do insurance distribution. It started picking up after Insurance Regulatory and Development Authority (IRDA) passed a notification in October 2002 on 'Corporate Agency' regulations. As per the concept of Corporate Agency, banks can act as an agent of one life and one non-life insurer.
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Why this combination is good?

1.) Banks with over 65,000 branches out of which 32,600 branches in rural areas, and 14,400 semi-urban branches. In India, there are 75 branches per million inhabitants. It will be very difficult for insurance companies to create such a branch network. Considering it as a channel for insurance gives insurance an unlimited exposure to Indian consumers. 2.) 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 the Bancassurance channel would be well received by the customers.

3.) Customers prefer to have a consolidation and delivery of all financial services at a single window. 4.) Customers could also get a share in the cost savings in the form of reduced premium rate because of economies of scope, besides getting better financial counselling at single point.

Benefits to Banks
1.) Source of Fee Income/ Increased ROA From the banks point of view, opportunities and possibilities to earn fee income via Bancassurance route are endless. Banks that earn fee income can cover more of their operating expenses, and one way to build fee income is through the sale of insurance products. Banks those effectively cross-sell financial products can leverage their distribution and processing capabilities for profitable operating expense ratios. 2.) Product Diversification In terms of products, there are endless opportunities for the banks. Simple term life insurance, endowment policies, annuities, education plans, depositors insurance and credit shield are the policies conventionally sold through the Bancassurance channels. Medical insurance, car insurance, home and contents insurance and travel insurance are also the products which are being distributed by the banks. However, quite a lot of innovations have taken place in the insurance market recently to provide more and more Bancassurance-centric products to satisfy the increasing appetite of the banks for such products. 3.) Building relationship with customers Increased competition also makes it difficult for banks to retain their customers. Banassurance comes as a help in this direction also. Providing multiple services at one place to the customers means enhanced customer satisfaction. For example, through bancassurance a customer gets home loans along with insurance at one single place as a combined product. Another important advantage that bancassurance brings about in banks is development of sales culture in their employees. Also, banking in India is mainly done in the 'brick and mortar' model, which means that most of the customers still walk into the bank branches. This enables the bank staff to have a personal contact with their customers. In a typical Bancassurance model, the consumer will have access to a wider product mix - a rather comprehensive financial services package, encompassing banking and insurance products.

Benefits to Insurance Companies

1.) Stiff Competition Due to liberalization of the economy it became easy for the private insurance companies to enter into the battle field which resulted in an urgent need to outwit one another. Even the oldest public insurance companies started facing the tough competition. Hence in order to compete with each other and to stay a step ahead there was a need for a new strategy in the form of Bancassurance. It would also benefit the customers in terms of wide product diversification. 2.) High Cost of Agents Insurers have been tuning into different modes of distribution because of the high cost of the agencies services provided by the insurance companies. These costs became too much of a burden for many insurers compared to the returns they generate from the business. Hence there was a need felt for a Cost-Effective Distribution channel. This gave rise to Bancassurance as a channel for distribution of the insurance products. 3.) Rural Penetration Insurance industry has not been much successful in rural penetration of insurance so far. People there are still unaware about the insurance as a tool to insure their life. However this gap can be bridged with the help of Bancassurance. The branch network of banks can help make the rural people aware about insurance and there is also a wide scope of business for the insurers. In order to fulfill all the needs bancassurance is needed. 4.) Multi Channel Distribution Now-a-days the insurance companies are trying to exploit each and every way to sell the insurance products. For this they are using various distribution channels. The insurance is sold through agents, brokers through subsidiaries etc. In order to make the most out of Indias large population base and reach out to a worthwhile number of customers there was a need for Bancassurance as a distribution model.

Bancassurance Models

Structural Based Models

Product Based Models

Stand-Alone Plans Referral Model Corporate Agency Fully Integrated Financial Service

Blended with Bank Products

1.)

Structural Classification Models

a. Referral Model- Referral model is a simple arrangement, wherein the bank, while controlling access to the clients data base, parts with only the business leads to the agents or sales staff of insurance company for a referral fee or commission for every business lead that was passed on. b. Corporate Agency- The bank as an institution acts as corporate agent for the insurance products for a fee or 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. c. Fully Integrated Financial service- 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 one more function within. Banks are equipped with a counter within to sell the insurance products as an internal part of its activities.

2.) Product-Based Classification

a. Standalone Plans- 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. 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. Blended with Banks Products- This strategy aims at blending of insurance products as a value addition while promoting its own products. Thus, banks could sell the insurance products without any additional efforts.

Regulations Regarding Bancassurance

As Banks are regulated by RBI and insurance company by IRDA. Each of the regulators has given out detailed guidelines for banks getting into insurance sector.

Guidelines given by RBI:The Reserve Bank of India has given certain guidelines for banks entering into the insurance sector. They are as follows: 1. Any commercial bank will be allowed to undertake insurance business as the agent of insurance companies & this will be on fee basis with no-risk participation 2. The second guideline given by the RBI is that the joint ventures will be allowed for financial strong banks wishing to undertake insurance business with risk participation. 3. The third guideline is for banks which are not eligible for this joint venture option, an investment option of (1) up to 10% of the net worth of the bank or (2) Rs. 50 crores. Whichever is lower is available. The bank that wants to enter in participates in the Insurance industry they have to follow the above guidelines given by the Reserve Bank of India.

Guidelines given by IRDA: The Insurance regulatory development & Authority has given certain guidelines for the Bancassurance they are as follows: 1) Chief Insurance Executive: Each bank that sells insurance must have a chief Insurance Executive to handle all the insurance matters & activities. 2) Mandatory Training: All the people involved in selling the insurance should undergo mandatory training at an institute determined (authorized) by IRDA & pass the examination conducted by the authority. 3) Corporate agents: Commercial banks, including co-operative banks and RRBs may become corporate agents for one insurance company. 4) Banks cannot become insurance brokers.

Important Bancassurance tie-up in India

(1) LIC: The insurance company LIC of India have tie up with the following bank for Bancassurance. They are: (A) Corporation Bank (B) Indian Overseas Bank (C) Centurion Bank (D) Sahara District Central Co-operative bank (E) Janta Urban Co-operative bank (F) Yeotmal Mahila Sahakari Bank (G) Vijaya Bank & (H) Oriental Bank of Commerce 2) SBI Life Insurance Co: The SBI life Insurance Co Ltd is running its Insurance business with the help of S.B.I. 3) Bajaj Allianz general Insurance Co. Ltd: In the field of general Insurance the Bajaj Allianz General Insurance Co Ltd., has tie-up with Karur Vysya Bank & Lord Krishna Bank. 4) Birla Sun life Insurance Co. Ltd: The Birla Sun life Insurance Company has a tie-up with the following bank for the insurance purpose :(a) Bank of Rajasthan (b) Andhra Bank (c) Bank of Muscat (d) Development Credit Bank (e) Dutch Bank & (f) Catholic Syrian Bank And Many More.

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SWOT Analysis

1.) Strengths
Large untapped persons willing to accept insurance products. There are more than 900 Million lives waiting to be given a life cover Banks have the credibility established with their constituents because of a variety of services and schemes provided by them. Banks enjoy a wide network of branches, even in the remotest areas that can facilitate taking up the task on a large and massive scale, simultaneously. Banks are very well aware with the psychology of the customers because of their interaction with the customers on regular basis. Because of this the bankers can guess the attitude and diverse needs of the customers.

2.) Weakness
Lack of IT in banks located in semi-urban and rural banks. To undertake the distribution of the insurance products, the bank employees have to undergo certain minimum period of training, followed by a test and then get them licensed. Moreover the standards of the examination have been raised in the recent past making it difficult for many examinees to clear the same. There is lack of personalized services because the traditional insurance agent is considered a member of the family and hence is able to render a personalized service during and after the sales process. However that may not be the case in regards to a bank employee. Another drawback is the inflexibility of the products i.e. it cannot be tailor made to the requirements of the customer. For a bancassurance venture to succeed it is extremely essential to have in-built flexibility so as to make the product attractive to the customers.

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3.) Opportunities
Large untapped persons willing to accept insurance products. There are more than 900 Million lives waiting to be given a life cover Banks' database is enormous even though the goodwill may not be the same. This database has to be dissected and various homogeneous groups are to be churned out in order to position the Bancassurance products. Huge opportunity of cross selling is there. For ex:- car loan with car insurance.

4.) Threats
Resistance to change by bankers to sell insurance products. This has to be overcome by proper counselling and training. Another possible threat may come from non-response from the targeted customers. Insurance in India is perceived more as a saving option than Providing risk cover. So this may create an adverse feeling in the minds of the bankers that such products may lessen the sales of regular bank saving products. Also selling of investment and good return products may affect the FD Portfolio of the banks. If the unholy alliances are allowed to take place there will be fierce competition in the market resulting in lower prices and the bancassurance venture may never break-even.

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Future scope for Bancassurance

The outlook for bancassurance remains positive. India has already more than 200 million middle class population coupled with vast banking network with largest depositors base, there is greater scope for use of bancassurance. Given the current relatively low bancassurance penetration in India, bancassurance will likely see further significant development in the coming years. In India the bancassurance model is still in its nascent stages, but the tremendous growth and acceptability in the last three years reflects green pasture in future. The deregulation of the insurance sector in India has resulted in a phase where innovative distribution channels are being explored. In this phase, bancassurance has simply outshined other alternate channels of distribution with a share of almost 25-30% of the premium income amongst the private players. To be fruitful, it is vital for bancassurance to ensure that banks remain fully committed to promoting and distributing insurance products. This commitment has to come from both senior management in terms of strategic inputs and the operations staff who would provide the front-end for these products. In India, the signs of initial success are already there despite the fact that it is a completely new phenomenon. There is no doubt that banks are set to become a significant distributor of insurance related products and services in the years to come.

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