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Bancassurance: An Indian Perspective

Bancassurance: An Indian Perspective

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04/19/2013

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Bancassurance: An Indian Perspective
The business of banking around the globe is changing due to integration of globalfinancial markets, development of new technologies, universalization of bankingoperations and diversification in non-banking activities. Due to all these movements,the boundaries that have kept various financial services separate from each otherhave vanished. The coming together of different financial services has providedsynergies in operations and development of new concepts. One of these isbancassurance.Bancassurance simply means selling of insurance products by banks. In thisarrangement, insurance companies and banks undergo a tie-up, thereby allowingbanks to sell the insurance products to its customers. This is a system in which abank has a corporate agency with one insurance company to sell its products. Byselling insurance policies bank earns a revenue stream apart from interest. It iscalled as fee-based income. This income is purely risk free for the bank since thebank simply plays the role of an intermediary for sourcing business to the insurancecompany.Bancassurance has grown at different places and taken shapes and forms in differentcountries depending upon demography, economic and legislative prescriptions in thatcountry. It is most successful in Europe, especially in France, from where it started,Italy, Belgium and Luxembourg. The concept of bancassurance is relatively new inthe USA. As mentioned above bancassurance growth differs due to various reasonsin different countries. The Glass-Steagall Act of 1933 prevented the banks of the USAfrom entering into alliance with different financial services providers, thereby puttinga barrier on bancassurance. As a result of this life insurance was primarily soldthrough individual agents, who focussed on wealthier individuals, leading to amajority of the American middle class households being under-insured. With the USGovernment repealing the Act in 1999, the concept of bancassurance started gaininggrounds in the USA also. Coming to Asia, it has been estimated that bancassurancewould contribute almost 16% of the life premium in the Asian markets in the year2006 primarily due to the growth expected in India and China.Coming to India, bancassurance is a new buzzword in India. It originated in India inthe year 2000 when the Government issued notification under Banking RegulationAct which allowed Indian Banks to do insurance distribution. It started picking upafter Insurance Regulatory and Development Authority (IRDA) passed a notificationin October 2002 on 'Corporate Agency' regulations. As per the concept of CorporateAgency, banks can act as an agent of one life and one non-life insurer. Currentlybancassurance accounts for a share of almost 25-30% of the premium incomeamongst the private players in India.Bancassurance provides various advantages to banks, insurers and the customers.For the banks, income from bancassurance is the only non interest based income.Interest is market driven and fluctuating and quite narrowing these days. Banks donot get great margins because of the competition This is why more and more banksare getting into bancassurance so as to improve their incomes. Increasedcompetition also makes it difficult for banks to retain their customers. Banassurancecomes as a help in this direction also. Providing multiple services at one place to thecustomers means enhanced customer satisfaction. For example, throughbancassurance a customer gets home loans along with insurance at one single place
 
as a combined product. Another important advantage that bancassurance bringsabout in banks is development of sales culture in their employees.As for the insurance company the advantage that bancassurance provides is evident.The insurance company gets improved geographical reach without additional costs.In India around 67,000 branches are there for PSU banks alone. If all 67,000branches sell the insurance products one can see the reach. This is one method of penetrating the market.There is also another method called 'Bank Referral'. Here the banks do not issue thepolicies, they only give the database to the insurance companies. The companiesissue the policies and pay the commission to them. That is called referral basis.India's rural market has huge potential that is still untapped by the insurancecompanies. Setting up their own networks entails such a huge cost, that no companywould be interested in doing so. Bancassurance again comes as an answer. It helpsthe insurance companies to tap the market at a much lower cost. As for thecustomer the competitive nature of the Indian market ensures that the reduction incosts would result in benefits in terms of lower premium rates being passed on tohim.The penetration level of life insurance in the Indian market is abysmally low at 2.3%of GDP with only 8% of the total population currently insured. With almost half of thepopulation likely to be in the 'wage earner' bracket by 2010, there is every reason tobe optimistic that bancassurance in India will play a long inning.
 
"Bancassurance" in French and "All Finanz" (Universal Banking) in German refers to a tie up arrangement of banks with insurance companies for selling the insurance products in life and non life segments as corporateagents for fee based income.This income is risk-free,as the bank plays a role of a intermediary for souringbusiness to insurance company. Bancassurance is a package of banking and insurance service at oneroof.The introduction of Bancassurance has broadened the scope of retail banking.Origin and Global Scenario:Bancassurance has grown in different places in different forms based on the demographic,economic andlegislative condition of the country.This concept has been successful in Europe,France (from where itoriginated),Italy,Belgium and Luxembourg.Bancassurance was not much popular in USA as SteagallAct,1933 prevented banks of USA from entering into alliance with financial service providers,thereforeputting a ban on bancassurance.As a result of this,Life insurance was primarily sold by insuranceagents,who focused mainly on wealthier class of people, which lead to majority of American middle classhouseholds uninsured.With US government repealing the act,and after the passage of Gramm-Leach BlileyAct,1999,the concept of Bancassurance started gaining momentum in USA also.Reasons of Banks to enter into Insurance Business:Banking industry has seen a long change since the era of Globalization, Liberalization and Finance sector Reforms.The following are some of the reasons of banks to enter into insurance business:1.Deregulation of banking industry has given each banking an opportunity to differentiate its products andservice and promote its strength and remove its weakness.2.Technology has enabled the banks to design the innovative products that need to be promoted andmarketed.3.Growing Competition has induced the banks to create niche for itself by giving importance and highlightingthe areas of their expertise and excellence.4.Growth of market segments which provide opportunities for the banks that need to be marketed.For example,banks are offering various financial services in addition to the normal banking services to attract thecustomers.5.Banks are expecting to increase its fee based income, overall productivity, customer satisfaction andloyalty by leveraging the branch network,the brand image and clientele base.They are aiming to obtainextensive experience in marketing by using value-added services like e-banking,tele-banking and direct mailin order to woo their customers. Bancassurance provides an opportunity to the banks to have face to facecontact with the customer and provide multiple services at one place which enhances customer satisfaction.For example,if a person gets home loan,he can insure it also at same place as a combineproduct.6.Life insurance is basically a savings market.It is one of the method to increase the deposits of the banks.7.Insurers look to the Bancassurance as an alternative and consider it as a cost-effective mode of distribution as against costly agency services.As for the Insurance Companies,they can increase their business through banking distribution channel as banks have large and extensive customer base.By cuttingthe cost of Insurance products,Insurance can serve the customers at over premium rates and have better risk coverage through diversification of their products.8.Customers need innovative products in terms of price,diversified product quality and doorstepservices.Bancassurance addresses the needs of portfolio diversification and integrates the marketingactivities.Bancassurance Business Models:The banks associate themselves with insurance companies by becoming a distributor or strategic investor or developing joint venture or becoming a promoter.

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