EXECUTIVE SUMMARY

The Banking and Insurance industries have changed rapidly in the changing and

challenging economic environment throughout the world. In this competitive and liberalized

environment everyone is trying to do better than others and consequently survival of the fittest

has come into effect.

This has given rise to a new form of business wherein two big financial institutions

have come together and have integrated all their strength and efforts and have created a new

means of marketing and promoting their products and services. On one hand it is the Banking

sector which is very competitive and on the other hand is Insurance sector which has a lot of

potential for growth. When these two join together, it gives birth to BANCASSURANCE.

Bancassurance is nothing but the collaboration between a bank and an insurance

company wherein the bank promises to sell insurance products to its customers in exchange of

fees. It is a mutual relationship between the banks and insurers. A relationship which amazingly

complements each other’s strengths and weaknesses.

It is a new buzz word in India but it is taking roots slowly and gradually. It has been

accepted by banks, insurance companies as well as the customers. It is basically an international

concept which is spreading all around the world and is favored by all.

Taking all these things into consideration I would like to present my project

“BANCASSURANCE (an emerging concept in India). The project flashes some light on

Bancassurance and how it is perceived by people in India. It deals with the conceptual part of

Bancassurance as well as its practical applications in India.

 The main focus of this project is on benefits and importance of Bancassurance in

India. The regulations governing Bancassurance are also dealt with in this project. SWOT

analysis is also done so as to identify the various opportunities and threats for Bancassurance in

India.

The Indian as well as Global contexts both are taken into account. The project

also revolves around data, facts and figures that are necessary to prove the importance of

Bancassurance.

Further the project also includes the case study of SBI Life Insurance Company, its

various products, the growth they have experienced since the opening up of a wholly owned

subsidiary of SBI Bank that sells insurance products.

A survey analysis has also been done so as to know the popularity and the

growth perspectives of Bancassurance. The survey tries to identify whether the conditions are

favourable for it India or not. At the end some suggestions are also given to fill the potholes that

still exist in this system.

This project is just a gist about how the Globalization, Liberalization and tough

Competition have brought the Banking as well as the Insurance Industries together to help each

other and to provide excellent services to the customers.

 INTRODUCTION TO BANKING

Banking as per the Banking Regulation Act, Banking is defined as: -

“accepting for the purpose of lending of deposits of money from the public for

the purpose of lending or investment, repayable on demand through cheques, drafts or order.”

A sound and effective banking system is necessary for a healthy economy. The banking

system of India should not only be hassle free but it should be able to meet new challenges posed

by the technology and any other external and internal factors. Many new things have come up in

the banking sector in the recent years. Banks have adopted the new technology because banking

has not remained up to accepting and lending but now it is all about satisfying the needs of the

customers.

The development of the Indian banking sector has been accompanied by the

introduction of new norms. New services are the order of the day, in order to stay ahead in the rat

race. Banks are now foraying into net banking, securities, and consumer finance, housing

finance, treasury market, merchant banking etc. They are trying to provide every kind of service

which can satisfy or rather we should say that it can delight the customers.

Entry of private and foreign banks in the segment has provided healthy competition and is likely

to bring more operational efficiency into the sector. Banks are also coping and adapting with

time and are trying to

become one-stop financial supermarkets. The market focus is shifting from mass banking

products to class banking with the introduction of value added and customized products.

Brief review of scenario – Banking

  Emphasis on banking was first witnessed when in 1949 banking regulation ACT was

passed.

 The nationalization of all commercial Banks has affected in regularizing Banking policies

and monetary  policies. RBI is made the policy making body for banking services.

 Nationalization of Banks has resulted in spectacular progress in Banking services.

 Entry of private investment in banking

INTRODUCTION TO INSURANCE SECTOR

Insurance may be defined as: -

“It is a contract between two parties where by one party undertakes to compensate

the another party for the loss arising due to an uncertain events for which the another party

agrees to pay a certain amount regularly.”

In India, insurance has a deep-rooted history. Insurance in India has evolved over time

heavily drawing from other countries, England in particular. The insurance sector in India has

come a full circle from being an open competitive market to nationalization and back to a

liberalized market again. The business of life insurance in India in its existing form started in

India in the year 1818 with the establishment of the Oriental Life Insurance Company in

Calcutta.

The Insurance Act, 1938 was the first legislation governing all forms of insurance to

provide strict state control over insurance business. Today there are 14 general insurance
companies and 14 life insurance companies operating in the country. But today also the

insurance companies are trying to capture Indian markets as not many people are aware of it.

The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with

banking services, insurance services add about 7% to the country’s GDP. A well-developed and

evolved insurance sector is a boon for economic development as it provides long- term funds for

infrastructure development at the same time strengthening the risk taking ability of the country.

Brief Review of Scenario - Insurance

 Insurance in India started without any Regulation in Nineteenth century.

 It was story of a typical colonial era .A few British companies dominated the market

mostly in large urban centers.

 Insurance was nationalized mainly on 3 counts First, Indian lives were not insured.

Second, even if they were insured, they were treated as substandard lives and extra

premium was charged. Third, there were gross irregularities in the functioning of

insurance companies. 25 companies were already bankrupt and another 25 companies

were filed for bankruptcy.

 Life insurance was nationalized in the year 1956,and then general insurance was

nationalized in the year 1972.

 In 1999, the private insurance companies were allowed back again into insurance sector

with maximum cap of 26 percent foreign holding.

 WHAT IS BANCASSURANCE?

With the opening up of the insurance sector and with so many players entering

the Indian insurance industry, it is required by the insurance companies to come up with

innovative products, create more consumer awareness about their products and offer them at a

competitive price. 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. With these developments and increased

pressures in combating competition, companies are forced to come up with innovative

techniques to market their products and services. At this juncture, banking sector with it's 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.

Meaning

Bancassurance is the distribution of insurance products through the

bank's distribution channel. It is a phenomenon wherein insurance products are offered through

the distribution channels of the banking services along with a complete range of banking and

investment products and services. To put it simply, Bancassurance, tries to exploit synergies

between both the insurance companies and banks.

Bancassurance can be important source of revenue. With the increased competition and

squeezing of interest rates spread, profits are likely to be under pressure. Fee based income can

be increased through hawking of risk products like insurance.

Bancassurance if taken in right spirit and implemented properly can be win-win situation for the

all the participants' viz., banks, insurers and the customer.

Origin

The banks taking over insurance is particularly well-documented with reference to the

experience in Europe. Across Europe in countries like Spain and UK, banks started the process

of selling life insurance decades ago and customers found the concept appealing for various

reasons.

Germany took the lead and it was called “ALLFINANZ”. The system of bancassurance was well

received in Europe. France taking the lead, followed by Germany, UK, Spain etc. In USA the

practice was late to start (in 90s). It is also developing in Canada, Mexico, and Australia.

In India, the concept of Bancassurance is very new. With the liberalization and deregulation of

the insurance industry, Bancassurance evolved in India around 2002.

There are many definitions of Bancassurance and in essence depends upon the type of model and

the stage of development that insurance companies are already into.

However the most commonly used definition is:

Production and distribution of Insurance, Banking and other financial products to a

common customer base.

Bancassurance does not mean just selling insurance products through banks but in full holistic

form tries to exploit synergies between insurance companies and banks and thus realizes the full

potential of customer database of banks to develop excellent customer centric service and

generate highest quality returns for insurance companies and banks.

The Birth of Bancassurance

Bancassurance began in the European Continent in second half of the 20th century, when banks

sought to capture the manufacturing income from insurance products as well to supplement the

commission income earned from their sales. By doing so, they sought to leverage their customer

list and the related customer information that would enhance their ability to sell insurance

products to their largely mid-market customers. These early efforts were based on the advantages

that are still recognized as accruing to banks in the insurance business:

 The banks' brand name and reputation

 The productivity levels of branch staff and in-house agents, which can reach three to four

times that of the traditional agency force.

Bancassurance is also known as the Bank Insurance Model or BIM. Bancassurance is an

organizational strategy that allows a bank to offer various types of insurance. The model is

created by establishing ongoing relationships with one or more insurance providers. Those

providers are then able to utilize the bank’s staff and resources to sell the policies.
 Reasons for growing phenomena of Bancassurance

The opening up of the insurance industry to private sector participation in December 1999 has

led to the entry of 20 new players, with 12 in the life insurance sector and eight in the non-life

insurance sector. Almost without exception these companies are seeking to utilize multiple

distribution channels such as traditional agency, bancassurance, brokers and direct marketing.

Bancassurance is seen by many to be a significant or even the primary channel (the latter being

the case for at least SBI Life).

In other Asian markets we have seen bancassurance make significant headway in recent times.

For example, bancassurance accounted for 24% of new life insurance sales by weighted premium

income* in Singapore in 2002. This is a significant increase on the equivalent 2001 statistic of

15% and is as a result of growth in significant bank-centric bancassurance operations. In Hong

Kong the figure for 2002 is expected to be at the 20% level for the same basic reasons.

1. Life insurance premium represents 55% of the world insurance premium, and as the life

insurance is basically a saving market. So it is one of the methods to increase deposits of

banks.

2. In non-life insurance business banks are looking to provide additional flow of revenues from

the same customers through the same channel of distribution and with the same people.

3. Insurers have been turning in ever-greater numbers to alternative modes of distribution

because of the high costs they have paid for agent services. These costs became too much of

a burden for many insurers compared to the returns they generated.

4. Insurers operate through bancassurance own and control relationships with customers.

Insurers found that direct relationships with customers gave them greater control of their

business at a lower cost. Insurers who operate through the agency relationship are hardly

having any control on their relationship with their clients.

5. The ratio of expenses to premiums, an important efficiency factor, it is noticed very well that

expenses ratio in insurance activities through bancassurance is extremely low. This is

because the bank and the insurance company is benefiting from the same distribution

channels and people.

6. It is believed that the prospects for increased consolidation between banking and insurance is

more likely dominated and derived by the marketing innovations that are likely to follow

from financial service modernization. Such innovations would include cross selling of

banking, insurance, and brokerage products and services; the increased use of the Internet by

consumers; and a melding of insurance and banking corporate cultures.

7. One of the most important reason of considering Bancassurance by Banks 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. Banks

that effectively cross-sell financial products can leverage their distribution and processing

capabilities for profitable operating expense ratios.

8. 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 bankís branch network allows the face-to-

face contact that is so important in the sale of personal insurance.

9. Another advantage banks have over traditional insurance distributors is the lower cost per

sales lead made possible by their sizable, loyal customer base. Banks also enjoy significant

brand awareness within their geographic regions, again providing 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.

10. 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.

11. By successfully mining their customer databases, leveraging their reputation and 'distribution

systemsí (branch, phone, and mail) to make appointments, and utilizing 'sales techniquesí

and products tailored to the middle market, European banks have more than doubled the

conversion rates of insurance leads into sales and have increased sales productivity to a ratio

which is more than enough to make bancassurance a highly profitable proposition.

12. Insurers have much to gain from marketing through banks. Personal-lines carriers have

found it difficult to grow using traditional agency systems because price competition has

driven down margins and increased the compensation demands of successful agents. 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. By capitalizing on bank relationships, insurers will recapture much of

this under served market.

13. 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.

As with any initiative, success requires a clear understanding of what must be done, how it

will be done and by whom. The place to begin is to segment the strengths that the bank and

insurer bring to the business opportunity.

 MODELS OF BANCASSURANCE

1. STRUCTURAL CLASSIFICATION

a) Referral Mode - Banks intending not to take risk could adopt ‘referral model’ wherein they

merely part with their client data base for business lead of commission. The actual transaction

with the prospective client in referral model is done by the staff of the insurance company either

at the premises of the ban0k or elsewhere. Referral model is nothing but a simple arrangement,

wherein the bank, while controlling access to the clients data base, parts with only the business

leads to the agents/ sales staff of insurance company for a ‘referral fee’ or commission for every

business lead that was passed on. In fact a number of banks in India have already resorted to this

strategy to begin with. This model would be suitable for almost all types of banks including the

RRBs /cooperative banks and even cooperative societies both in rural and urban. There is greater

scope in the medium term for this model. For, banks to begin with can resort to this model and

then move on to the other models.

b) Corporate Agency - The other form of non-sick participatory distribution channel is that of

‘Corporate Agency’, wherein the bank staff as an institution acts as corporate agent for the

insurance product 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.

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. This model of bancassurance worked

well in the US, because consumers generally prefer to purchase policies through broker banks

that offer a wide range of products from competing insurers.

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 one more function within. This includes banks

having wholly owned insurance subsidiaries with or without foreign participation. 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

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 FDI’s participation up to 49 per cent.

2. PRODUCT BASED CLASSIFICATION

a) Stand-alone Insurance products -.In this case bancassurance involves marketing of

the insurance products through either referral arrangement or corporate agency without

mixing the insurance products with any of the banks’ own products/ services. Insurance is
 sold as one more item in the menu of products offered to the bank’s customer, however,

the products of banks and insurance will have their respective brands too

b) Blend of insurance with bank products - This method aims at blending of insurance

products as a ‘value addition’ while promoting the bank’s own products. Thus, banks could sell

the insurance products without any additional efforts. In most times, giving insurance cover at a

nominal premium/ fee or sometimes without explicit premium does act as an added attraction to

sell the bank’s own products, e.g., credit card, housing loans, education loans, etc. Many banks

in India, in recent years, has been aggressively marketing credit and debit card business, whereas

the cardholders get the ‘insurance cover’ for a nominal fee or (implicitly included in the annual

fee) free from explicit charges/ premium. Similarly the home loans / vehicle loans, etc., have also

been packaged with the insurance cover as an additional incentive.

3. BANK REFERRALS

There is also another method called 'Bank Referral'. Here the banks do not issue the

policies; they only give the database to the insurance companies. The companies issue the

policies and pay the commission to them. That is called referral basis. In this method also there is

a win-win situation every where as the banks get commission, the insurance companies get

databases of the customers and the customers get the benefits.

 Utilities of Bancassurance

FOR BANKS

1. As a source of fee income - Banks’ traditional sources of fee income have been the

fixed charges levied on loans and advances, credit cards, merchant fee on point of sale

transactions for debit and credit cards, letter of credits and other operations. This kind of

revenue stream has been more or less steady over a period of time and growth has been

fairly predictable. However shrinking interest rate, growing competition and increased

horizontal mobility of customers have forced bankers to look else where to compensate

for the declining profit margins and Bancassurance has come in handy for them. Fee

income from the distribution of insurance products has opened new horizons for the

banks and they seem to love it.

From the banks’ point of view, opportunities and possibilities to earn

fee income via Bancassurance route are endless. Atypical commercial bank has the potential of

maximizing fee income from Bancassurance up to 50% of their total fee income from all sources

combined. Fee Income from Bancassurance also reduces the overall customer acquisition cost

from the bank’s point of view. At the end of the

day, it is easy money for the banks as there are no risks and only gains.

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.

Insurers who are generally accused of being inflexible in the pricing and

structuring of the products have been responding too well to the challenges (say opportunities)

thrown open by the spread of Bancassurance. They are ready to innovate and experiment and

have setup specialized Bancassurance units within their fold. Examples of some new and

innovative Bancassurance products are income builder plan, critical illness cover, return of

premium and Takaful products which are doing well in the market.

3. Building close relations with the 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

FOR INSURANCE COMPANIES

1 . Stiff Competition - At present there are 15 life insurance companies and 14general

insurance companies in India. Because of the 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 India’s large population base and reach out to a worthwhile

number of customers there was a need for Bancassurance as a distribution model.

5 . Targeting Middle income Customers - In previous there was lack of awareness

about insurance. The agents sold insurance policies to a more upscale client base. The middle
income group people got very less attention from the agents. So through the venture with banks,

the insurance companies can recapture much of the under served market. So in order to utilize

the database of the bank’s middle income customers, there was a need felt for Bancassurance.
 REGULATIONS FOR BANCASSURANCE IN INDIA

RBI NORMS FOR BANKS

RBI Guidelines for the Banks to enter into Insurance Business

Following the issuance of Government of India Notification dated August 3, 2000, specifying

‘Insurance’ as a permissible form of business that could be undertaken by banks under Section

6(1)(o)of The Banking Regulation Act, 1949, RBI issued the guidelines on Insurance business for
banks.

1. Any scheduled commercial bank would be permitted to undertake insurance business as agent

of insurance companies on fee basis. Without any risk participation

2. Banks which satisfy the eligibility criteria given below will be permitted to set up a joint

venture company for undertaking insurance business with risk participation, subject to

safeguards. The maximum equity contribution such a bank can hold in the Joint Venture

Company will normally be50% of the paid up capital of the insurance company.

The eligibility criteria for joint venture participant are as under:

i. The net worth of the bank should not be less than Rs.500 crore;

ii. The CRAR of the bank should not be less than 10 per cent;

iii. The level of non-performing assets should be reasonable;

iv. The bank should have net profit for the last three consecutive years;

v. The track record of the performance of the subsidiaries, if any, of the concerned bank should

be satisfactory.
3. In cases where a foreign partner contributes26% of the equity with the approval of Insurance

Regulatory and Development Authority/Foreign Investment Promotion Board, more than one

public sector bank or private sector bank may be allowed to participate in the equity of the

insurance joint venture. As such participants will also assume insurance risk, only those banks

which satisfy the criteria given in paragraph 2 above, would be eligible.

4. A subsidiary of a bank or of another bank will not normally be allowed to join the insurance

company on risk participation basis.

5. Banks which are not eligible for ‘joint venture’ participant as above, can make investments up

to10% of the net worth of the bank orRs.50crore, whichever is lower, in the insurance company

for providing

infrastructure and services support. Such participation shall be treated as an investment and

should be without any contingent liability for the bank.

The eligibility criteria for these banks will be as under:

i. The CRAR of the bank should not be less than 10%;

ii. The level of NPAs should be reasonable;

iii. The bank should have net profit for the last three consecutive years.

6. All banks entering into insurance business will be required to obtain prior approval of the

Reserve Bank. The Reserve Bank will give permission to banks on case to case basis keeping in

view all relevant factors including the position in regard to the level of non-performing assets of

the applicant bank so as to ensure that non-performing assets do not pose any future threat to the

bank in its present or the proposed line of activity, viz., insurance business. It should be ensured
that risks involved in insurance business do not get transferred to the bank. There should be

‘arms length’ relationship between the bank and the insurance outfit.

7. Holding of equity by a promoter bank in an insurance company or participation in any form in

insurance business will be subject to compliance with any rules and regulations laid down by the

IRDA/Central Government. This will include compliance with Section6AA of the Insurance Act

as amended by the IRDA Act,1999, for divestment of equity in excess of 26 per cent of the paid

up capital within a prescribed period of time.

8. Latest audited balance sheet will be considered for reckoning the

eligibility criteria.

IRDA NORMS FOR INSURANCE COMPANIES

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 under-go

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.

Issues for regulation: Certain regulatory barriers have slowed the development of

Bancassurance in India down. Which have only recently been cleared with the passage of the

insurance (amendment) Act 2002.Prior it was clearly an impractical necessity and had held up

the implementation of Bancassurance in the country. As the current legislation places the

following:-

1) Training and examination requirements: upon the corporate insurance executive within the

corporate agency, this barrier has effectively been removed. Another regulatory change is

published in recent publication of IRDA regulation relating to the (2) Licensing of Corporate

agents

(2) Specified person to satisfy the training & examination: According to new regulation of

IRDA only the specific persons have to satisfy the training & examination requirement as

insurance agent.
 BENEFITS OF BANCASSURANCE

TO BANKS

From the banks point of view:

(A) By selling the insurance product by their own channel the banker can increase their income.

(B) Banks have face-to-face contract with their customers. They can directly ask them to take a

policy. And the banks need not to go anywhere for customers.

(C) The Bankers have extensive experience in marketing. They can easily attract customers &

non-customers because the customer &non-customers also bank on banks.

(D) Banks are using different value added services life-E. Banking tele banking, direct mail &

so on they can also use all the above-mentioned facility for Bankassurance purpose with

customers & non-customers.

(E) Productivity of the employees increases.

(F) By providing customers with both the services under one roof, they can improve overall

customer satisfaction resulting in higher customer retention levels.

(G) Increase in return on assets by building fee income through the sale of insurance products.

(H) Can leverage on face-to-face contacts and awareness about the financial conditions of

customers to sell insurance products.

(I) Banks can cross sell insurance products E.g.: Term insurance products with loans.

TO INSURERS

From the Insurer Point of view:

(A) The Insurance Company can increase their business through the banking distribution

channels because the banks have so many customers.

(B) By cutting cost Insurers can serve better to customers in terms lower premium rate and better

risk coverage through product diversification.

(C)Insurers can exploit the banks' wide network of branches for distribution of products. The

penetration of banks' branches into the rural areas can be utilized to sell products in those areas.

(D)Customer database like customers' financial standing, spending habits, investment and

purchase capability can be used to customize products and sell accordingly.

(E)Since banks have already established relationship with customers, conversion ratio of leads to

sales is likely to be high. Further service aspect can also be tackled easily.

(F)The insurance companies can also get access to ATM’s and other technology being used by

the banks.

(G)The selling can be structured properly by selling insurance products through banks.

(H) The product can be customized as per the needs of the customers.

TO CUSTOMERS

From the customers' point of view:

(A)Product innovation and distribution activities are directed towards the satisfaction of needs of

the customer.

(B) Bancassurance model assists customers in terms of reduction price, diversified product

quality in time and at their doorstep service by banks.

(C)Comprehensive financial advisory services under one roof. i.e. ,insurance services along with

other financial services such as banking ,mutual funds, personal loans etc.

(D) Easy access for claims, as banks are a regular visiting place for customers.

(E) Innovative and better product ranges and products designed as per the needs of customers.

(F)Any new insurance product routed through the Bancassurance Channel would be well

received by customers.

(G) 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 counseling at single point.
 DISTRIBUTION CHANNELS

Traditionally, insurance products were promoted and sold principally through agency

systems only. The reliance of insurance industry was totally on the agents. Moreover with the

monopoly of public sector insurance companies there was very slow growth in the insurance

sector because of lack of competition. The need for innovative distribution channels was not felt

because all the companies relied only upon the agents and aggressive marketing of the products

was also not done. But with new developments in consumers’ behaviours, evolution of

technology and deregulation, new distribution channels have been developed successfully and

rapidly in recent years. Recently Bancassurers have been making use of various distribution

channels, they are:

 Career Agents:

Career Agents are full-time commissioned sales personnel holding 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 the contract. 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 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. 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:

Salaried Agents are an advantage for the bancassurers because they are under the

control and supervision of bancassurers. These agents share the mission and objectives of the

bancassurers. These are similar to career agents, the only difference is in terms of their

remuneration is that they are paid on a salary basis and career agents receive incentive

compensation based on their sales.

 Bank Employees / Platform Banking:

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. A restriction on the

effectiveness of bank employees 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.

 Corporate Agencies and Brokerage Firms:

There are a number of banks who cooperate with independent agencies or brokerage

firms while some other banks have found corporate agencies. The advantage of such

arrangements is the availability of specialists needed for complex insurance matters and through

these arrangements the customers get good quality of services.

 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
bancassurer 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 :

Internet banking is already securely established as an effective and profitable basis for

conducting banking operations. Bancassurers can feel confident that Internet banking will also

prove an efficient vehicle for cross selling of insurance savings and protection products.

Functions requiring user input (check ordering, what-if calculations, 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:

One last method for developing bancassurance eyes involves "outside" lead

generating techniques, such as seminars, direct mail and statement inserts. 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.
 VARIOUS TRENDS

 Though bancassurance has traditionally targeted the mass market, but bancassurers have

begun to finely segment the market, which has resulted in tailor-made products for each

segment.

 Some bancassurers are also beginning to focus exclusively on distribution. In some markets,

face-to-face contact is preferred, which tends to favour bancassurance development.

 Nevertheless, banks are starting to embrace direct marketing and Internet banking as tools to

distribute insurance products. New and emerging channels are becoming increasingly

competitive, due to the tangible cost benefits embedded in product pricing or through the appeal

of convenience and innovation.

 Bancassurance proper is still evolving in Asia and this is still in infancy in India and it is too

early to assess the exact position. However, a quick survey revealed that a large number of banks

cutting across public and private and including foreign banks have made use of the

bancassurance channel in one form or the other in India.

 Banks by and large are resorting to either ‘referral models’ or ‘Corporate agency model’ to

begin with.

 Banks even offer space in their own premises to accommodate the insurance staff for selling

the insurance products or giving access to their client’s 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.

 CHALLENGES

 Increasing sales of non-life products, to the extent those risks are retained by the banks,

require sophisticated products and risk management. The sale of non-life products should be

weighted against the higher cost of servicing those policies.

 Bank employees are traditionally low on motivation. Lack of sales culture itself is bigger

roadblock than the lack of sales skills in the employees. Banks are generally used to only product

packaged selling and hence selling insurance products do not seem to fit naturally in their

system.

 Human Resource Management has experienced some difficulty due to such alliances in

financial industry. Poaching for employees, increased work-load, additional training, maintaining

the motivation level are some issues that has cropped up quite occasionally. So, before entering

into a bancassurance alliance, just like any merger, cultural due diligence should be done and

human resource issues should be adequately prioritized.

 Private sector insurance firms are finding ‘change management’ in the public sector, a

major challenge. State-owned banks get a new chairman, often from another bank, almost every

two years, resulting in the distribution strategy undergoing a complete change. So because of this

there is distinction created between public and private sector banks.

 The banks also have fear that at some point of time the insurance partner may end up cross-

selling banking products to their policyholders. If the insurer is selling the products by agents as

well as banks, there is a possibility of conflict if both the banks and the agent target the same

customers.
 SWOT ANALYSIS:

Banking and Insurance are very different businesses. Banks have less risk but the

insurance has a greater risk. Even though, banks and insurance companies in India are yet to

exchange their wedding rings, Bancassurance as a means of distribution of insurance products is

already in force in some form or the other.

Banks are selling Personal Accident and Baggage Insurance directly to their

Credit Card members as a value addition to their products. Banks can straightaway leverage their

existing capabilities in terms of database and face-to face contact to market insurance products to

generate some income for themselves, which previously was not thought of.

The sale of insurance products can earn banks very significant

commissions (particularly for regular premium products). Inaddition, one of the major strategic

gains from implementingbancassurance successfully is the development of a sales culture

withinthe bank. This can be used by the bank to promote traditional bankingproducts and other

financial services as well. Bancassurance enablesbanks and insurance companies to complement

each other’s strengths aswell.

It is therefore essential to have a SWOT analysis done in the

context of bancassurance experiment in India. A SWOT analysis of Bancassurance is given

below:

STRENGTHS:

 In a country like India of one billion people where sky is the limitthere is a vast untapped

potential waiting for life insuranceproducts. Our other strength lies in a huge pool of
skilledprofessionals whether it is banks or insurance companies who maybe easily relocated for

any bancassurance venture.

 Banks have the credibility established with their constituentsbecause of a variety of services

and schemes provided by them.They also enjoy pride of place in the hearts of people because of

their long presence and sustained image.

 Banks also enjoy a wide network of branches, even in the remotestareas that can facilitate

taking up the task on a large and massivescale, simultaneously.

 Banks are very well aware with the psychology of the customersbecause of their interaction

with the customers on regular basis.Because of this the bankers can guess the attitude and

diverseneeds of the customers and could change the face of insurancedistribution to personal line

insurance.

 People rely more upon LIC and GIC for taking insurance. If theproducts of LIC and GIC are

provided through bancassurance itwould be an added advantage to the insurance companies.

 With the help of banks trained staff, its brand name and theconfidence and reliability of

people on the banks, the selling ofinsurance products can be done in a more proper way.

 Other than all these things there is a huge potential for insurancesector, as the population of

India is high and a large part of it hasremained untapped till now. So this can create an added

advantagefor both banks and insurers.

WEAKNESSES:

 In spite of growing emphasis on total branch mechanism and fullcomputerization of bank

branches, the rural and semi-urban bankshave still to see information technology as an

enabler. The ITculture is unfortunately missing completely in all of the futurecollaborations. The

internet connections are also not properlyprovided to the staff.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

themselves licensed. Moreover thestandards of the examination have been raised in the recent

pastmaking it difficult for many examinees to clear the same.

 There is lack of personalized services because the traditionalinsurance agent is considered a

member of the family and hence isable to render a personalized service during and after the

salesprocess. However that may not be the case in regards to a bankemployee.

 There are many differences in the way of thinking and businessapproaches of bankers and

the managers of insurance companies.Banks are traditionally “demand-driven” organizations

with areactive selling philosophy. Insurance organizations are usually“need-driven” and have an

aggressive selling philosophy.

 The visit of a customer to the bank is to have a simple transactionlike deposit or withdrawal.

Busy customers will have no time tohave a discussion on a long-term durable purchase like

insuranceacross the counter. Also, the visits in urban or metro branches aregoing to be fewer

because of ATM’s and e-banking.

 Another drawback is the inflexibility of the products i.e. it cannotbe tailor made to the

requirements of the customer. For abancassurance venture to succeed it is extremely essential to

havein-built flexibility so as to make the product attractive to thecustomers.

OPPORTUNITIES:
 There is a vast untapped potential waiting to be mined particularlyfor lifeinsurance products.

There are more than 900 millionlives waiting to be given a life cover (total number of

individuallife policies sold in 1998-99 was just 91.73 million).

 There are many people in many areas that are still unaware aboutthe insurance and its

various products and are waiting thatsomebody should come and give them the information

about it.

 In urban and metro areas, where the customers are willing to getmany services like lockers

and safe deposit systems and otherproducts and services from banks, there is a good opportunity

tomarket many property related general insurance policies like fireinsurance, burglary insurance

and medi-claim insurance etc.

 Banks' database is enormous even though the goodwill may not be

the same. This database has to be dissected and varioushomogeneous groups are to be churned

out in order to position theBancassurance products. With a good IT infrastructure, this canreally

do wonders.

 Banks in their normal course of functions lend finance in the formof loans for cars, or for

buying a house to clients etc. They can takeadvantage of this by cross-selling the insurance

products andcombine it as a package.

 Another area that could be of interest to bankers to sell insurance isexploiting the corporate

customers and tying up for insurance ofthe employees of corporate clients, which would be an

avenue witheasy access. In most cases banks provide salary disbursement andloan facilities but

here they can provide insurance cover as well.

THREAT:

 Success of a Bancassurance venture requires change in approach,thinking and work culture

on the part of everybody involved. Thework force at every level are so well entrenched in their

classicalway of working that there is a definite threat of resistance to anychange that

Bancassurance may set in. Any relocation to a newcompany or subsidiary or change from one

work to a different kindof work will not be easily acceptable by the employees.

 Another possible threat may come from non-response from thetargeted customers. If many

joint ventures took place betweenbanks and insurance companies then it may happen that

thecustomers may not respond to such ventures as happened in U.S.

 Insurance in India is perceived more as a saving option thanproviding risk cover. So this

may create an adverse feeling in theminds of the bankers that such products may lessen the sales

ofregular bank saving products. Also selling of investment and goodreturn products may affect

the FD Portfolio of the banks.

 There would be a problem of “Reputational Contagion” i.e. loss ofmarket confidence

towards one in a venture leading to loss ofconfidence on the other because of identical brand

recognition,similar management and consolidated financial reporting etc.

 If no strict norms are there for such ventures then many unholyventures may take place

which may give rise to tough competitionbetween bancassurers resulting in lower prices and

theBancassurance venture may never break because of such situations.

 The most common obstacles to success of Bancassurance are poormanpower management,

lack of a sales culture within the bank, noinvolvement by the branch manager, insufficient

productpromotions, failure to integrate marketing plans, marginal databaseexpertise, poor sales

channel linkages, inadequate incentives,resistance to change, negative attitudes toward insurance

andunwieldy marketing strategy.

REASONS FOR BANKS TO ENTER INTO BANCASSURANCE

There are many reasons for a bank to enter Bancassurance business. Some of the important ones

are - 

• Limitations on profit margins of traditional banking products: The profit margin in the

traditional products is under tremendous pressure and banks are always looking out for other

sources of non interest income 

generation. 

• Regulatory Changes: Earlier RBI had not permitted the banks to enter into insurance

distribution business. Now that the regulator has permitted on non-risk participating basis more

and more banks are looking at this activity with a view of offering more products to its

customers and also to earn more non-interest income. 

• Better use of Banks’ network and infrastructure: Most banks have invested heavily in creating a

huge network of branches and also the infrastructure in terms of the IT base which can be very

effectively used in Bancassurance business. Separate infrastructure need not be created for this

activity. In fact this can be a very good activity taken by the bank for an effective improvement

in the branch Cost-Income ratio. 

• Customer Loyalty: The loyalty factor which the customer has in an institution like banking is

far from any other institution. This is also one of the factors which is leveraged in Bancassurance

business. It has also 

been proved by research that if the bank customers are offered investment products by their

bankers the trust factor is very high and also the The relationship would be that of the bank being

a pure distributor while that of the insurer being a pure manufacturer of the insurance products. 

• Customer’s information as marketing tool: This is a very important aspect why banks must do

Bancassurance. If we logically look at the scenario, a banker is the one who knows the entire

financial transaction of the customer. What money comes in, where the customer issues the

cheques and what is the Net Investible Surplus is all known to the banker. The banker is bound

by the Secrecy Act and cannot disclose the details of the transactions to outside public but the

information available at his finger tips can be made use of for the benefit of the customer. On a

proper analysis of the transactions, the banker can understand the “Investment psychology” of

the customer and accordingly offer the insurance 

products to them. 

All this with the stability of the organization, brand equity, loyalty and trust factor makes the

bank and the banker a perfect person/unit to suggest investment and insurance products to its

customers. When all these products are offered to the customer from the same bank branch, it

automatically makes the bank’s branch a “One stop financial services provider” or a “Super

market of financial services” to its customer.

 INDIAN SENARIO

The business of banking around the globe is changing due to integration of global financial

markets, development of new technologies, universalization of banking operations and

diversification in non-banking activities. Due to all these movements, the boundaries that have

kept various financial services separate from each other have vanished. The coming together of

different financial services has provided synergies in operations and development of new

concepts. One of these is bancassurance.

Bancassurance is a new buzzword in India. 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. Currently bancassurance accounts for a share of almost 25-30% of the

premium income amongst 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 do not get great

margins because of the competition This is why more and more banks are getting into

bancassurance so as to improve their incomes. 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. 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

67,000branches are there for PSU banks alone. If all 67,000 branches sell the insurance products

one can see the reach. This is one method of penetrating the market.

India's rural market has huge potential that is still untapped by the insurance

companies. Setting up their own networks entails such a huge cost, that no company would be

interested in doing so.

Bancassurance again comes as an answer. It helps the insurance companies to tap

the market at a much lower cost. As for the customer the competitive nature of the Indian market

ensures that the reduction in costs would result in benefits in terms of lower premium rates being

passed onto him. The penetration level of life insurance in the Indian market is considerably low

at 2.3% of GDP with only 8% of the total population currently insured.

Thus, bancassurance provide an apparently viable model for product

diversification by banks and a cost-effective distribution channel for insurers. The success of the

partnership between the two entities depends on the ‘right model’ partnership. Given these

changes, bancassurance and collaboration between banks and insurers has a long way to go in

India. With almost half of the population likely to be in the 'wage earner' bracket by 2010, there

is every reason to be optimistic that bancassurance in India will play a long inning.
 GLOBAL SCENARIO

Bancassurance has grown at different pace and taken different shapes and forms in

different countries depending on the demography, economic and legislations in that country.

During the last two decades, bancassurance has taken deep roots in various countries, especially

in Europe. Bnacassurance, so far, has been basically European.

Bancassurance has seen tremendous acceptance and growth across nations.

Although it enjoys a penetration rate in excess of 50% in France, Spain, Italy and Belgium, other

countries have opted for more traditional networks. The Life insurance market in the UK is

largely in the hands of the brokers. With advent of bancassurance, their market share has

increased from 40% in 1992 to 54% in 1999. Sales agents also play an important role on a

market entirely regulated by the Financial Services & Markets Act (FSMA) which imposes very

strict marketing conditions. In Germany, the market continues to be dominated by general sales

agents, even if their market share has declined from 85% in 1992 to54% in 1999.

Bancassurance recorded huge growth in Europe but not in USA and Canada. In

the US, there were hurdles till recently banks were not allowed to do insurance business and vice

versa. In several countries in Latin America, banks have benefited from recent reforms –

financial deregulation, among others – by selling insurance products across the counter. In

China, banks are limited to playing the role of tide agents to insurance companies, which can still

provide a good platform for bancassurance to develop.

In Hong Kong, when a Swiss bank introduced bancassurance, the life insurance

sales went up by 240%. Japan has to make a remarkable headway in bancassurance. In the

Philippines, banks are permitted to own100% of the insurance company. Bancassurance is yet to
be exploited in Singapore. There is a huge market potential out there in many countries and

especially in India when compared to the global benchmark. It is a good news to bancassurers

that only about 25% of the global insurable population is insured, and even among them most are

underinsured.

WHY IS BANCASSURANCE MORE SUITED FOR LIFE INSURANCE

PRODUCTS?

Traditionally, much fewer non-life insurance products are distributed through

bancassurance than life insurance products. There are several reasons for this:

1. The main reason may be the complementary nature of life insurance and banking

products. Bank employees are already familiar with financial products and quickly adapt

to selling insurance - based savings or pension products.

2. On the other hand, the non-life market requires special management and selling skills,

which are not necessarily prevalent in bancassurance. In addition, such competencies

require significant investment in training and motivation, and therefore additional costs.

3. Life insurance products are generally long-term products, which require customers to

have complete confidence in the institution that invests their money. And we now know

that, in many countries, banks have a better image and are more trusted than insurance

companies

4. Bank advisers can use their knowledge of their customers’ finances to target their advice

towards specific needs. This is a major advantage in life insurance and less important in

personal injury insurance

 OTHER TIE-UPS
Life Insurance tie-ups:

Private Sector Companies:

1. Bajaj Allianz Life Insurance Co. Ltd.

2. Birla Sun Life Insurance Co. Ltd.

3. HDFC Standard Life Insurance Co. Ltd.

4. ICICI Prudential Life Insurance Co. Ltd.

5. ING Vysya Life Insurance Co. Pvt. Ltd.

6. SBI Life Insurance Company Limited

7. TATA-AIG Life Insurance Company Ltd.

8. Sahara India Life Insurance Co. Ltd.

9. Aviva Life Insurance Co India Pvt. Ltd.

10. Kotak Mahindra OU Mutual Life Insurance Co. Ltd.

11. Max New York Life Insurance Co. Ltd.

12. MetLife India Insurance Co. Pvt. Ltd.

13. Reliance Life Insurance Co. Ltd.

14. Shriram Life Insurance Co. Ltd.

15. Bharti Axa Life Insurance Co. Ltd.

Public Sector Company:

16. Life Insurance Corporation of India

Non-Life Insurance tie-ups:

Private Sector Companies:

1. Royal Sundaram Allianz Insurance Co. Ltd.

2. TATA-AIG General Insurance Co. Ltd.

3. Reliance General Insurance Co. Ltd.

4. IFFCO-TOKIO General Insurance Co. Ltd.

5. ICICI Lombard General Insurance Co. Ltd.

6. Bajaj Allianz General Insurance Co. Ltd.

7. HDFC Chubb General Insurance Co. Ltd.

8. Cholamandalam MS General Insurance Co. Ltd.

9. Star Health and Alhed Insurance Co. Ltd.

Public Sector Companies:

10. The New India Assurance Co. Ltd.

11. National Insurance Co. Ltd.

12. United India Insurance Co. Ltd.

13. The Oriental Insurance Co. Ltd.

14. Export Credit Guarantee Corporation Ltd.

15. Agriculture Insurance Company Ltd

 RELEVANCE OF BANCASSURANCE IN THE INDIAN FINANCIAL
SECTOR

1. Integration of the financial service industry in terms of banking, securities business and

insurance is a growing worldwide phenomenon. The Universal Banking concept is evolving on

these lines in India.

2. Banks are the key pillars of India’s financial system. The public has immense faith in banks.

3. Share of bank deposits in the total financial assets of households has been steadily rising.

4. Indian Banks have immense outreach to the households. Total of 66000branches (as of 2007)

of commercial banks, each branch serving an average of 15,000 people.

5. Banks enjoy considerable goodwill and access in the rural regions. There are more than 33000

branches in rural India (about 50% of total), and approximately 14,500 semi-urban branches,

where insurance growth has been most buoyant. 200 exclusive Regional Rural Banks in deep

hinterland.

6. Banks have enormous retail customer base. Share of ‘individuals’ as a category in bank

accounts is steadily increasing. Rural and semi urban bank accounts constitiute close to 60% in

terms of number of accounts, indicating the number of potential lives that could be covered by

insurance with the upfront involvement of banks.

7. Banks world over have realized that offering value-added services such as insurance, helps to

meet client expectations. Competition in the Personal Financial Services area is getting `hot’

in India and that Banks can retain customer loyalty by offering them a vastly expanded and more

sophisticated range of products. Insurance distribution can also help the bank to increase the fee-

based earnings to a large extent.

8. Fee-based selling helps to enhance the levels of staff productivity in banks. This is vitally

important to bring higher motivation levels in banks in India.

9. Banks can put their energies into the small-commission customers that insurance agents would

tend to avoid. Banks’ entry in distribution can help to enlarge the insurance customer base

rapidly. This helps to popularize insurance as an important financial protection product.

10. Bancassurance helps to lower the distribution costs of insurers. Acquisition cost of insurance

customer through bank is low. Selling insurance to existing mass market banking customers is

far less expensive than selling to a group of unknown customers. Experience in Europe has

shown that bancassurance firm shave a lower expense ratio. This benefit could go to the insured

public by way of lower premiums.

11. Banks have an important role to play in the pension sector when deregulated. Low cost of

collecting pension contributions is the key element in the success of developing the pension

sector. Money transfer costs in Indian banking is low by international standards. Portability of

pension accounts is a vital requirement which banks can fulfill, in a credible framework.

Bancassurance as a Catalyst for insurance industry

Existing low penetration of insurance coupled with the high per capita income gives Middle East

and gulf countries an unusually strong platform to launch and grow the industry into the future.

Recent economic strides and infrastructural boom in the countries like UAE, Qatar and Bahrain

are working as catalyst and pushing the insurance industry to new horizons. Market opportunities

for banks offering Bancassurance products are endless.

Conventional Bancassurance products like deposit insurance, unit linked products and

investment cum protection products are likely to continue to be sold to its customer base.

However, the asset creation process in most gulf countries through equity markets and

infrastructural investments have created a new generation of High Net Worth Individuals

(HNWIs) and banks would do well to take note of it. In addition, non-conventional products like

Takaful and commercial insurance products can also be sold to individuals and corporate houses

through banks.

In order to assess the potential for the insurance market growth in the region, we need to look at

the following indicators:

Per Capita Premium:

Average per capita premium in the Gulf countries is $155 compared to $3266 in US, $920 in

Europe, $4343 in Switzerland and $3394 in UK. Amongst the Gulf countries, UAE’s per capita

premium is $302, Bahrain-$220, Kuwait-$259, Oman-$77 and Saudi-$47. (Source: Swiss

RE/Sigma)

Insurance penetration:

Another indicator is insurance penetration in terms of premium as % to GDP. Here again, most

Gulf countries have insurance penetration below 1% compared to 9% in US and 14% in UK.

Within the Gulf, UAE has a figure of 1.25%, Oman-0.96%, Kuwait-0.79% and Saudi-0.53%.
All this goes on to prove that this market is still undeveloped or underdeveloped as far as the

realization of the full potential of insurance market is concerned. The situation is even more

contrasting if we are considering the life insurance market. Here, compared to 10.5% life

insurance penetration in UK, UAE has a penetration of 0.23%, Oman-0.17%, Kuwait-0.18% and

Saudi-0.1%.

From Bankers point of view, the potential lies in tapping not only the existing premium turnover

in the market which was around US$12,000 million in the year 2003 but also the likely increase

in Turnover due to the entry of banks in the insurance market.

Identifying successful strategy for entering the market.

Collaboration with an insurance company - This could take multiple forms as below:

 Buying an insurance company out rightly

 Acquiring shares in an existing insurance company

 Cross share holding between the bank and insurance company

 Sign exclusive agreement with one insurance company

 Sign non-exclusive agreement with more than one insurance company

All the above have their own merits and demerits and has to be used for entering the market

based on the market conditions and practicality. For example, if a bank owns an insurance
company which is not an established player in the market, starting Bancassurance with them

alone is not an attractive proposition. However, if the insurance company has a strong standing

and a reputation in the market, it makes sense to sign an exclusive agreement with them.

Vertical integration of insurance activities

This actually means manufacturing of insurance products in-house which may involve risk

taking on the part of the banks. In fact, this is not a good idea as the job should be left to be done

by somebody who is best at that. In the past, many European banks had taken to this kind of

strategy but most of them have discarded vertical integration of insurance after some beatings in

the form of losses suffered. Banks can still get the benefit of vertical integration by properly

coordinating with the insurance company and getting the products done or developed exclusively

for them.

Overcoming the Regulatory challenges

Middle East and Gulf countries are more suitable to perpetuate Bancassurance from Regulatory

point of view. No Regulator in any country in the Middle East prohibits the distribution of

insurance products by the banks to its customers. In most of the countries in Asia and Far East

like Singapore, Thailand, Hong Kong, Indonesia, Philippines, Japan, China, India, they are still

struggling with the Regulation as the Regulators are opening the window very slowly. Further,

there is no ban or express regulation in the Middle East regarding owning or buying shares or

even cross share holding between banks and insurance companies. All these factors together
make this region a perfect platform for the banks to start Bancassurance.

Effective Bancassurance model

The effective Bancassurance model is the one which helps in pushing sales as well as satisfying

customer needs and helping banks to become a ‘One stop shop’. As a Bancassurance model, if

the bank is using distribution agreement model, it should, go in for an exclusive agreement with

an insurance company of repute. The reason being, while signing up with multiple insurers you

end up looking like a broker who is not committed to a ‘brand’ or a ‘product’ or a particular level

of ‘service’, which is so vital for the growth of Bancassurance. By signing an exclusive

agreement with the insurer, the bank can put the stamp of its own ‘Brand’ on the product without

actually taking any risk. The bank will thus be identified with the product it is selling and will be

able to convince the customer in a much better way. However, if the insurance market is not

mature and there is lack of creativity and innovation, even non-exclusive agreement is workable.

Bancassurance as a Diversification Strategy by Banks

Banks in GCC or Middle East have been growing at a very high rate compared to their peers in

the international market. Average ROE of GCC banks in 2001 was 15.3% compared to the

average ROE of 12.5% by top 10 international banks (GBC, UK report). Some of the banks like

Doha Bank in Qatar have been growing consistently at a rate of 70% for the last three years.

However, maintaining such a growth for a longer period is not sustainable since market has to
mature at one stage and economic conditions may also change. Bancassurance, therefore, comes

as an additional source of revenue to help maintain the growth momentum. This can also be used

to offset the declining deposits due to the declining interest rate.

Sale of insurance products by the banks offers the following benefits:

1) It adds to the portfolio of retail products already offered by the Banks.

2) It helps in bundling and packaging the existing core banking products like adding deposit life

insurance on a pure term deposit product.

3) Balances the less performing products

4) It is a risk management device, since the fee increase earned on the sale of insurance can be

used to offset the loss on account of bad loans.

5) It helps increase customer loyalty since they have more reason than just the banking to

continue their relationship with the bank.

6) It helps bank to become a ‘one stop shop’ or ‘Alfinanz’ for all the financial needs of the

customers while it is banking insurance investments or state planning.

It is a long journey before the Middle East insurance market reaches its mature stage in the cycle
of evolution. The time now is to innovate and harness the potential of insurance that this region

offers. The buffers of energy, shipping and construction industry is poised to offer more

opportunities as new technology and new pool of human resources shall be looking to the

insurance industry to provide protection. Banks are in a unique position to sell not only personal

lines insurance products but also commercial insurance by leveraging their relationship with their

loyal customer base

BANCASSURANCE IN INDIA – SOME ISSUES:

The difference in working style and culture of the banks and insurance sector

needs greater appreciation. 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. Studies have revealed that the basic attitudinal incompatibility on the

part of employees of banks and insurance companies and the perception of customers about the

poor quality of banks had led to failures of bancassurance even in some of the Latin American

countries. There are also hitches 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 come with an added attraction of tax incentives.

In case the bancassurance is fully integrated with that of the banking institution,

it is suitable only for larger banks, however, it has other allied issues such as putting in place

‘proper risk management techniques’ relating to the insurance business, and the like. 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 product’s 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. 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.

Bankers in India are extremely naïve 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 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. With the financial reforms and

technological revolution embracing the financial system, there has been a great deal of flexibility

in the mind set of people to accept change. The problems outlined above 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.

Scope for Bancassurance in India

By now, it has become clear that as economy grows it not only demands stronger and lively
financial sector but also necessitates to provide with more sophisticated and variety of financial
and banking products and services. Krueger (2004) pointed out that the history of the North
America is a case in reference of one of financial growth and deepening in tandem with
economic growth. As India is being considered one of the developing countries among the
Emerging market economies, financial sector has also developed much vibrant with the
financial reforms. In fact, in recent years, it is surmised that even the ‘global economic growth’
hinges on development prospects of the emerging economies like China and India to a greater
extent.

Significantly, Indian financial system has recorded an average growth of over 8.5 per cent for
the last four years, with macroeconomic and financial stability (RBI, 2006) and indications are
that it may grow at even improved rate in the near future provided there is good monsoon.
Experience also showed that economic growth had powerfully supported the expansion of
middle income class in most of the Asian countries, and now it is the turn of India. Experience
reveals that at the early growing stage of the economy the primary financial needs are met by
the banking system and thereafter as the economy moves on to advanced pedestal, the need for
the other non-banking financial products including insurance, derivatives, etc., were strongly
felt. Moreover, as India has already more than 200 million middle class population coupled
with vast banking network with largest depositors base, there is larger scope for use of
bancassurance. For instance as at end March 2005, there were more than 466 lakh bank
accounts with scheduled commercial banks. It is worth being noted that, Swiss Re (2002) in its
study on Asia pointed out that bancassurance penetration is expected to tangibly increase in
Asia over next 5 years and this has been greatly proved. In simple words, it is rightly put that
bancassurance has promised to combine insurance companies’ viable edge in the “production”
 of insurance products with banks’ edge in their distribution, through their vast retail networks
(Knight, 2006).

     Bankers’ Perspective

In the post reforms, the financial sector has more number of players of both domestic and
foreign and the dividing line between the banks and non-banking financial institutions’
activities had considerably thinned down. Overlapping in one another’s functions/ areas have
become more common than exception. The direct upshot of these developments led to intensive
competition in the banking sector and which in turn had a strong bearing on the banks’ net
interest margin (spread). In fact the emerging scenario is likely to bring down the banks’ spread
even thinner.

ii.    Insurers’ Perspective

Contemporaneously, with the extensive financial reforms in the insurance sector and the
subsequent opening up of this sector, all the private entities plunged almost simultaneously
with a very little spacing of time and the entire insurance sector has been revealed to stiff
competition. A number of foreign insurance companies in both life and non-life segment
have entered by means of joint ventures with an equity stake of upto 26 per cent in the local
companies. IRDA had reported that as much as Rs. 8.7 billion was brought in by these
companies by way of foreign investments, with the extant provision of 26 per cent foreign
capital. In the context of Indian insurance market being growing at an annual rate of 21.9 per
cent (IRDA, 2005), increase in the foreign participation in the capital would only strengthen the
competition with more number of fresh entrants, given the better growth prospects.

Bancassurance Strategy – The Concept

Bancassurance, i.e., banc + assurance, refers to banks selling the insurance products.

Bancassurance term first appeared in France in 1980, to define the sale of insurance products

through banks’ distribution channels (SCOR 2003). This term is extremely familiar among the

European countries as banks selling insurance products in most of these countries are a common
feature. Banks are being used as an effective alternate channel to distribute insurance products

either as ‘stand-alone insurance products’ or ‘add-ons to the bank products’ by way of combining

the insurance with typical banking products/services. According to IRDA, ‘bancassurance’ refers

to banks acting as corporate agents for insurers to distribute i n s u r a n c e p r o d u c t s . L i t

e r a t u r e o n b a n c a s s u r a n c e d o e s n o t differentiate if the bancassurance refers to

selling of life insurance p r o d u c t s o r n o n - l i f e i n s u r a n c e p r o d u c t s . A c c o

r d i n g l y, h e r e ‘bancassurance’ is defined to mean banks dealing in insurance products of

both life and non-life type in any forms. Banks in Europe though predominantly deal with life

insurance products, they are also channeling the non-life insurance products. It is also important

to clarify that the term bancassurance does not just refer specifically to distribution alone. Other

features, such as legal, fiscal, cultural and/or behavioural aspects also form an integral part of the

concept of bancassurance (SCOR 2003). Quite reverse of the concept of bancassurance, there is

also a concept known as ‘assure banking’ which refers to the provision and distribution of

financial and banking services by insurance companies

Scope for Bancassurance in India

By now, it has become clear that as economy grows it not only demands stronger and vibrant

financial sector but also necessitates to provide with more sophisticated and variety of financial

and banking products and services. Krueger (2004) pointed out that the history of t h e No r t h

Ame r i c a i s a c a s e i n r e f e r e n c e o f o n e o f f i n a n c i a l strengthening and

deepening in tandem with economic growth. As India is being considered one of the fast

developing economy among the emerging market economies, financial sector has also grown

much vibrant with the financial reforms. In fact, in recent years, it is surmisedthat even the

‘global economic growth’ hinges on growth prospects of the emerging economies like China and

India to a greater extent. Significantly, Indian economy has recorded an average growth of over

8.5 per cent for the last four years, with macroeconomic and financial stability (RBI, 2006) and

indications are that it may grow at even better rate in the near future provided there is good

monsoon. Experience also showed that economic growth had strongly supported the expansion

of middle income class in most of the Asian countries, and now it is the turn of India. Experience

reveals that at the initial growing stage of the economy the primary financial needs are met by

the banking system and thereafter as the economy moves on to higher pedestal, the need for the

other non-banking financial products including insurance, derivatives, etc., were strongly felt.

Moreover, as 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.

For instance as at end March 2005, there were more than 466 lakh bank accounts with scheduled
commercial banks. It is worth being noted that, Swiss Re (2002) in its study on Asia pointed out

that bancassurance penetration is expected to tangibly increase in Asia over next 5 years and this

has been greatly proved.

In simple words, it is aptly put that bancassurance has promised t o c o m b i n e i n s u r a n c

e companies’ competitive edge in the“production” of insuran

c e p r o d u c t s wi t h b a n k s ’ e d g e i n t h e i r distribution, through their vast retail

networks (Knight, 2006). i)

Bankers’ Perspective

In the post reforms, the financial sector has more number of players of both domestic and foreign

and the dividing line between the banks and non-banking financial institutions’ activities had

considerably thinned down. Overlapping in one another’s functions/ areas have become more

common than exception. The direct upshot of these developments led to intensive competition in

the banking sector and which in turn had a strong bearing on the banks’ net interest margin

(spread). In fact the emerging scenario is likely to bring down the banks’ spread even thinner. As

it can be seen from the Table 3 that the spread ratio has considerably come down cutting across

allthe banking groups. For the banking system (scheduled commercial banks) the spread ratio

decelerated from 3.31 per cent at end-March 1991 to 2.78 per cent at end-March 2006. In the

case of Indian private sector banks it declined sharply from as high as 4.02 per cent at endMarch

1991 to 2.30 per cent at end-March 2006. Public sector banks are no exception, despite their

monstrous size, they registered a decline in spread ratio from 3.22 per cent to 2.72 per cent

during the same period. Foreign banks operating in India were always known for the higher
spread than the rest, even their spread had decelerated from 3.92 per cent to 3.51 per cent.

Therefore, banks were compelled to be constantly on the look out for a stable alternate sources of

earnings in the form of nontraditional and fee based sources of incomes.

Banks’ response to these developments has been to migrate towards newer and non-

traditional areas of operations especially relating to fee based activities / non-fund based

activities. This is reflected in the sharp increase of proportion of non-interest income to total

income in recent years (Chart 1). Further, banking system in India was prone to very high NPAs,

the net NPA ratio of banking sector was as high as 15.7 per cent at end-March 1997, which, with

concerted efforts declined sharply to around 1.20 per cent by end-March 2006. Although this

was an unprecedent achievement in the Indian banking industry, diversification towards new

areas such as bancassurance, promises greater scope for further enhancement in earnings with no

menace of increase in NPAs. In the ensuing paradigm, the banking sector irrespective of public

or private sector and foreign or domestic banks’, their increased reliance on the non-fund based

business activities would become inevitable. Persistent endeavor in scouting for new technology,

new products/ services/ new avenues, has become necessary for the growth as well as

sustainability of banking system. It is in this context possibly, bancassurance could well be an

appropriate choice for banks to increase their stable source of income with relatively less

investments in the form of new infrastructure.

As far as banking sector’s infrastructure is concerned, only a few countries could

match with India for having largest banking network in terms of bank branches spreading almost

throughout the length and breadth of the country. This is a direct outcome of the then prevailing

deliberate policy thrust towards branch expansion. At end-March 2006, we have as many as 284

scheduled banks, of which 88 are commercial banks and 196 are Regional Rural Banks (RRBs).
There are as many as 70,324 bank offices, of which, nearly 70% of the branches are located in

rural and semi urban areas and the remaining around 30% are in urban and metropolitan areas.

The population served by a bank office worked out to be around 16000 people at end-March

2006. Besides the commercial banking system, India has a large rural credit cooperatives as also

urban cooperative banking network. Taken together these institutional set up, the ratio of

population served by a bank branch would work out to be far lower. Thus, on the one hand we

have a very low insurance penetration andlow insurance density as compared with the

international standards, on the other hand, India has a widely stretched and well established

banking network infrastructure. It is this contrasting situations to assimilate the two systems by

way of ‘bancassurance strategy’ to reap the benefits of synergy. This is an opportune time for

both banking and the insurance sectors to come closer and forge an alliance for the mutual

benefit. For, both the regulators, i.e., RBI and IRDA have already proffered appropriate policy

guidelines and set in a c o n g e n i a l e n v i r o n m e n t f o r s u c h a n e n d e a v o r. B

e s i d e s , t h e Government of India’s unequivocal policy to provide insurance cover to the

low income households and the people at large at a minimum cost are also favourable.

Moreover, going by the present trend of mergers and acquisition a n d c o n s e q u

e n t c o n s o l i d a t i o n , t h e e m e r g e n c e o f f i n a n c i a l supermarkets and

financial conglomerates could not be ruled out in India, therefore bancassurance could as well be

one more financial activity of the banks. There is also one more dimension to this a c t i v i t i e

s , u n l i k e t h e n o rma l b a n k i n g a c t i v i t i e s , i n t e r n a t i o n a l experience

showed that bancassurance helped the banks to have a non-volatile source of income. Above all,

in India still vast majority of banking operations are conducted through the manual operations at

the banks’ branch level with relatively less automation such as ATMs, tele-banking, internet
banking, etc., unlike many developed countries. This stands out as an added advantage for the

banks to have direct interface with the customers, to understand their needs/ tastes and

preferences, etc., and accordingly customize insurance products. In fact there are also greater

scope for innovation of new insurance products in the process. Bancassurance would therefore be

uniquely suited to exploit the economies of scope for the banks in India. Bancassurance also

becomes a blessing in disguise from the point of view of CRAR. Significantly, even customers

stated to be preferring for banks entering into insurance. For instance, a survey conducted by

FICCI revealed that 93 per cent of the respondents h a v e p r e f e r r e d b a n k s s e l l i n g

i n s u r a n c e p r o d u c t s . T h e r e f o r e banc a s sur anc e c an be a f e a s ibl e a c t

ivi ty and vi abl e sour c e of additional revenue for the banks.

Studies have also portrayed that adding life insurance activities to banking operations

allowed banks to increase their assets under management substantially and to diversify their

earnings.

ii) Insurers’ Perspective

Contemporaneously, with the sweeping financial reforms in the insurance sector and the

consequent opening up of this sector, all the private entities plunged almost simultaneously with

a very little spacing of time and the entire insurance sector has been exposed to stiff competition.

A number of foreign insurance companies in both life and non-life segment have entered by way

of joint ventures with an equity stake of upto 26 per cent in the local companies IRDA had

reported that as much as Rs. 8.7 billion was brought in by these companies by way of foreign

investments, with the extant provision of 26 per cent foreign capital. In the context of Indian
insurance market being growing at an annual rate of 21.9 per cent (IRDA, 2005), any increase in

the foreign participation in the capital would only intensify the competition with more number of

fresh entrants, given the better growth prospects

OBJECTIVES

 To study the various bancassurance strategy to capture and maintain new market.

 To study the scope for bancassurance in India.

 To study the various models through which bancassurance operates.

 To study the various benefits that bancassurance provides to consumers, banks and

insurers.

 To study the various marketing and distribution strategy in bancassurance.

 To find the problems faced by the the financial institutions due to bancassurance