Charterd Financial Analyst (Interview) Bancassurance Questionnaire:

Bancassurance, a recent addition to the distribution channels of insurance is gaining importance. What in your opinion are the reasons for the same? The business is changing its face from just produce to innovation, size and margin. This is giving an opportunity to market to have new arrangements of business. Fortunately, the business strategies are performing on the expectation as they find an advantage in the base of its creation. The prime reasons, in my opinion, for a company to consider a new model like Bancassurance are; to the banks- an additional fee based income as commission, improved resource utilization, protection umbrella against NPA, additional cash-flow through premium deposits, and potential for getting new customers by offering special deals, to insurance companies- greater geographical reach through banks network, financial gain through banks database, gaining credibility in customers, introduction of co-branded products, ease of operations etc. As this offers a low cost and high penetration probability, it is welcome strategy from both the parties.

What are the benefits banks derive from tie-ups with insurance players in addition to earning commission? As listed above, banks are in a comfort zone with less of efforts for a new product launch. The Banks know the financial health of every one of their customers. They can come up with a detailed profile and would be in a position to identify their financial needs housing, education, marriage, pension etc. Banks are able to convert more business from a customer and fetch more money into deposit, which has a direct influence in the balance sheet of the bank, high return on investment. With the knowledge sharing handshake with insurance company, banks may provide a range of products to the customers on their relationship and branding in both life and non-life areas. It increases the marketing force and strengthens as well, motivation to the employees due to incentive offerings. In the era of financial convergence, the Bancassurance model helps bank to achieve the status of universal banking service provider. We should not find this as surprise to find few new banking ratios like bancassurance ratio, bancassurance return on customers base, bancassurance net-worth etc.

Insurance companies are developing a strong customer base through the Bancassurance channel. What are the other paybacks through this route?

The economics of business is important if the market is in the developing stage. Insurance industry is growing and developing in India and thus such arrangements are very much welcome due to not only low cost reach to the customers but also the profiling of the customers. LIC has been the official representative of government of India, it has all its advantages in the brand acceptance. The new entrants have to gain the confidence and credibility of the customers, in the shorter run bancassurance provides a facility of such kind. The potential of up selling and cross selling, ease of renewals and lower lapse incidence are one of the motivating factors. In addition, this would reduce their acquisition cost considerably, increase margins on core business, give access to a warm customer base and a trusted brand and create an opportunity for cross selling.

What are the benefits customers derive from Bancassurance? With all such arrangements, it is no body but the customer who is going to benefit in the range of products, price of product, and cost of servicing. The benefits to customer range form one stop shop with single window service, quality of service, advice on financial planning, credibility, transparency dealing, ease of renewals, e-banking, to the demand of special product on the financial and personal relationship with the banker.

Has Bancassurance helped in improving the growth of insurance market in India? Indeed, newly deregulated market needs a channel of expansion with low cost. If we look back to the US or European market, we find a success model in these continents through bancassurance in both life and non-life area up to 70 percent of the business. The rapid growth potential, first mover opportunity, simple product portfolio, rapid agency expansion, mass customer acquisition are some of the targets a new organization or a new market, in expansion sense, would like to explore and establish. The total premium collected by the insurers both life and non-life in the year 2003-2004 is Rs.82,415 crores (Rs.66,288 crores in life and Rs.16,127 crores in non-life). The private sector accounts for nearly 13% of the first year premium market. The insurance penetration i.e. premia as percentage of GDP has increased from 2.32% in 2000 to 2.88% in 2003. The insurance density i.e. premium per capita has increased from USD 9.90 in 2000 to USD 16.40 in 2003. The said growth has contribution of Bancassurance in the product sales and services. Companies like AVIVA, LIC, Birla Sun Life, ICICI Prudential have contributed significantly in the business growth through bancassurance.

How does Bancassurance stand in comparison with other distribution channels and what is its future in India?

The direct comparative study may not present a right picture as the frames and structure are different for the various channels. However, bancassurance offering has proved to be a better capital efficiency model for organizations. The prime reason for the bancassurance is the safety of after sale service and financial advice. The agents, brokers and other associates are promised on the sharing of the information with full transparency, but it has a threat of competition which may lead to some malpractices in the industry. In fact, due to the pressure of unjust setting of breakeven and performance by the companies, it has already started harming the market and influencing the market factors. In the view of such happenings, bancassurance would have a better dependency and greater respect.

Contributed by: Prof. Rahul Singh Birla Institute of Management Technology Greater Noida Managing Editor- Journal of Insurance and Risk Management Editor- India Insurance Report, Series- I