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About Bancassurance

1. Meaning
2. Origin
3. Models of Bancassurance

1.1.1. Structural classification
ii. Product based classification
iii. Bank Referrals
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
bewin-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.

Models of Bancassurance

I. Structural Classification

a) Referral Model
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 FDIs
participation up to 49 per cent.




II. 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 banks 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 banks 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 banks 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.

III. 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(benifts)
1. For Banks:
i. As a source of fee based income
ii. Product diversification
iii. Building close relations with the customers


2. For Insurance Companies
i. Stiff competition
ii. High cost of agents
iii. Rural penetration
iv. Multi-channel distribution
v. Targeting middle income customers

For Banks
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
elsewhere 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. A typical 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 banks point of view. At the end of the day, it is easy money for
the banks as there are no risks and only gains.


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
set up 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.

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



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.

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.

Multi channel Distribution
Now a days the insurance companies are trying to exploit each and
every way to sell the insurance products. For this they are using
various distribution channels. The insurance is sold through agents,
brokers through subsidiaries etc. In order to make the most out of
Indias large population base and reach out to a worthwhile number of
customers there was a need for Bancassurance as a distribution model.

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 banks middle income customers, there was a need felt
for Bancassurance.






Regulations for Bancassurance in India

1. RBI Norms for banks entering into Insurance sector

2. IRDA Norms for Insurance companies tying up with Banks

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 be 50% 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 contributes 26% 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.

3. A subsidiary of a bank or of another bank will not normally be
allowed to join the insurance company on risk participation
basis.

4. Banks which are not eligible for joint venture participant as
above, can make investments up to 10% of the net worth of the
bank or Rs.50 crore, 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.

5. 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.

6. 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 Section 6AA 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.


7. 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
1. To Banks
2. To Insurance companies
3. To Customers

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 any
where 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 Bancassurance purpose with customers &
noncustomers.
(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 ATMs 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:
1. Career agents
2. Special advisers
3. Salaried agents
4. Bank employees
5. Corporate agency & Brokerage firm
6. Direct response
7. Internet
8. E- Brokerage
9. Outside lead generating techniques (xplntn in detail )


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
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BANCASSURAN
CE
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.
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BANCASSURAN
CE


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:
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BANCASSURAN
CE
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.
28





Marketing & Distribution Channels in Bancassurance
One of the most significant changes in the financial services sector over the past few
years has been the growth and development of bancassurance. Banking institutions and
insurance companies have found bancassurance to be an attractive and profitable
complement to their existing activities. The successes demonstrated by various
bancassurance operations particularly in Europe have triggered an avalanche of mergers
and acquisitions across continents and efforts are on to replicate the early success of
bancassurance in other parts of the world as well.

Distribution is the key issue in bancassurance and is closely linked to the regulatory
climate of the country. Over the years, regulatory barriers between banking and
insurance have diminished and has created a climate increasingly friendly to
bancassurance. The passage of Gramm-Leach Bliley Act of 1999 in US and IRDA Bill in
India in 2000 have stimulated the growth of bancassurance by allowing use of multiple
distribution channels by banks and insurance companies.

Bancassurance experience in Europe as well as in other select countries offers valuable
guidance for those interested in insurance distribution through the banking channel in
developing markets. Many banks and insurers are looking with great interest at building
new revenue through bancassurance - including large, traditional companies that
wouldn't have considered such an approach about a decade ago. Of particular interest,
many believe, is the potential for bancassurance in developing economies such as those
of Latin America and Southeast Asia.

Distribution channels in Bancassurance

Traditionally, insurance products have been promoted and sold principally through
agency systems in most countries. With new developments in consumers behaviors,
evolution of technology and deregulation, new distribution channels have been developed
successfully and rapidly in recent years. Bancassurers make use of various distribution
channels:

-Career Agents
-Special Advisers
-Salaried Agents
-Bank Employees / Platform Banking


-Corporate Agencies and Brokerage Firms
-Direct Response
-Internet
-e-Brokerage
-Outside Lead Generating Techniques

The main characteristics of each of these channels are:

Career Agents:

Career Agents are full-time commissioned sales 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 his contract. Despite this limitation on control, career agents with suitable
training, supervision and motivation can be highly productive and cost effective. Moreover
their level of customer service is usually very high due to the renewal commissions,
policy persistency bonuses, or other customer service-related awards paid to them.

Many bancassurers, however avoid this channel, believing that agents might oversell out
of their interest in quantity and not quality. Such problems with career agents usually
arise, not due to the nature of this channel, but rather due to the use of improperly
designed remuneration and/or incentive packages.

Special Advisers:

Special Advisers are highly trained employees usually belonging to the insurance partner,
who distribute insurance products to the bank's corporate clients. Banks refer complex
insurance requirements to these advisors. The Clients mostly include affluent population
who require personalised and high quality service. Usually Special advisors are paid on a
salary basis and they receive incentive compensation based on their sales.

Salaried Agents:

Having Salaried Agents has the advantages of them being fully under the control and
supervision of bancassurers. These agents share the mission and objectives of the
bancassurers. Salaried Agents in bancassurance are similar to their counterparts in
traditional insurance companies and have the same characteristics as career agents. The


only difference in terms of their remuneration is that they are paid on a salary basis and
career agents receive incentive compensation based on their sales. Some bancassurers,
concerned at the bad publicity which they have received as a result of their career agents
concentrating heavily on sales at the expense of customer service, have changed their
sales forces to salaried agent status.

Platform Bankers:

Platform Bankers are bank employees who spot the leads in the banks and gently
suggest the customer to walk over and speak with appropriate representative within the
bank. The platform banker may be a teller or a personal loan assistant and the
representative being referred to may be a tarined bank employee or a representative
from the partner insurance company.

Platform Bankers can usually sell simple products. However, the time which they can
devote to insurance sales is limited, e.g. due to limited opening hours and to the need to
perform other banking duties. A further restriction on the effectiveness of 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.

In many set-ups, the bank employees are assisted by the bank's financial advisers. In
both cases, the bank employee establishes the contact to the client and usually sells the
simple product whilst the more affluent clients are attended by the financial advisers of
the bank which are in a position to sell the more complex products. The financial advisers
either sell in the branch but some banks have also established mobile sales forces.

If bank employees only act as "passive" insurance sales staff (or do not actively generate
leads), then the bancassurer's potential can be severely impeded. However, if bank
employees are used as "active" centres of influence to refer warm leads to salaried
agents, career agents or special advisers, production volumes can be very high and
profitable to bancassurers.

Set-up / Acquisition of agencies or brokerage firms:

In the US, quite a number of banks cooperate with independent agencies or brokerage
firms whilst in Japan or South Korea banks have founded corporate agencies. The
advantage of such arrangements is the availability of specialists needed for complex


insurance matters and -in the case of brokerage firms - the opportunity for the bank
clients to receive offers not only from one insurance company but from a variety of
companies. In addition, these sales channels are more conceived to serve the affluent
bank client.

Direct Response:

In this channel no salesperson visits the customer to induce a sale and no face-to-face
contact between consumer and seller occurs. The consumer purchases products directly
from the 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. The reasonable expectation is that personal banking
services will increasingly be delivered by Internet banking. Bancassurers can also feel
confident that Internet banking will also prove an efficient vehicle for cross selling of
insurance savings and protection products. It seems likely that a growing proportion of
the affluent population, everyone's target market, will find banks with household name
brands and proven skills in e-business a very acceptable source of non-banking
products.

There is now the Internet, which looms large as an effective source of information for
financial product sales. Banks are well advised to make their new websites as interactive
as possible, providing more than mere standard bank data and current rates. Functions
requiring user input (check ordering, what-if calculations, 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. Seminars in particular
can be very effective because in a non-threatening atmosphere the insurance counselor
can make a presentation to a small group of business people (such as the local chamber
of commerce), field questions on the topic, then collect business cards. Adding this
technique to his/her lead generation repertoire, an insurance counselor often cannot help
but be successful.

To make the overall sales effort pay anticipated benefits, insurers need to also help their
bank partners determine what the hot buttons will be for attracting the attention of the
reader of both direct and e-mail. Great opportunities await bancassurance partners today
and, in most cases, success or failure depends on precisely how the process is
developed and managed inside each financial institution. This includes the large regional
bank and the small one-unit community bank.


Distribution Models
Bancassurers have developed three basic distribution models: Integrative, Specialist and
Financial Planning model.

Integrative / Generalist Model:

The integrative model distributes products through existing bank channels, and in its
most well-known European version, branch bankers themselves sell insurance products
to customers. Theoretically, this offers One Stop Banking and requires extensive
training to branch staff. Bank staff are supposed to know the details of all the insurance
products on offer. Telemarketing and direct mail are also examples of integrative
approaches.

Specialist Model:

The specialist model distributes investment or other complex insurance products through
product experts who are generally employees or representatives of the insurance
company. Platform bankers help identify prospects who are then contacted by an


insurance professional. This process requires less training bur requires higher
compensation to support the referral process. This model may not meet all of customers
needs since it lengthens the process of sale of even a simple insurance product which
can otherwise be sold across the counter.

Financial Planning Model:

The financial planning model is the only team approach. This method offers each
customer and prospect a full financial planning package addressing all of the individual's
financial concerns, risk tolerances and location in the cycle of life. This process is
beneficial for the customer, the bank and the insurer, as the customer is viewed outside
the numbers. Bancassurers convey the message that they want to know all about the
customer in relation to their current and future financial needs and want to assist them on
all those aspects of their life.

To move a bank in the direction of becoming an effective user of the financial planning
model, the banks sales force first has to be taught how to qualify prospects and make
referrals and properly approach the customer/prospect. This process will include and
actively involve the bancassurers project incharge who is best acquainted with pertinent
federal and state regulations for the banks geographic market area.

Insurers' bank partners must then learn how to spot existing depositors/borrowers' life
triggers, i.e., milestones in a life that represent insurance opportunities. Although bank
representatives have always done this in conjunction with bank products, it is new to
them to apply this concept to insurance products as well. For example, a younger
depositor mentions he is withdrawing part of his savings to purchase his first car.
Knowledgeable bank representatives or platform bankers would immediately understand
the requirement for the car insurance and may be personal accident insurance. These
bank staff functioning now as financial services representatives can provide such sound
practical advice, i.e., an insurance product to fit customer current and future needs.

In general, a well-trained sales person can always count on certain life triggers -birth,
death, divorce, career change or other catastrophic eventto lead his or her regular
bank customers to new insurance products. If the banks personnel are shown how to
capitalize upon these triggers using insurance products, they will automatically provide
referrals to the insurance group and insurance sales will follow.



Either of these distribution models works under the right circumstances. What's most
important is whether the model is compatible with the bank's customer base and the
insurance company's strategic objectives. European bancassurance experience shows
that the Financial Planning Model is an extremely productive way to reach a large
number of bank customers.

Key Value Drivers

Which distribution model to use is a tactical decision secondary to more basic strategic
concerns. Bancassurance strategies should be driven by markets and channels,
encompass a broad range of tactics and practices, and leverage the competencies of the
bank and the insurer. They should identify and build upon a discrete set of value drivers,
those factors of such fundamental importance that to ignore any one of them could be
fatal to the success of the project. The following four value drivers should be considered
in a bancassurance strategy:

Brand equity. The strategy should leverage the bank's brand equity with consumers.
Consumers throughout the world rate bankers higher than insurance agents in terms of
such criteria as objectivity of advice and product knowledge. A rationalized
bancassurance strategy will build on the superior brand equity of banks by integrating
insurance into the bank product portfolio and distribution infrastructure. For many
customers, banks can become the primary providers of financial services by supplying
personal risk management along with more traditional banking services. Lloyds TSB has
been using its own brand name for a long time and have only recently indicated
rebranding after acquiring Scottish Widow. Halifax and Abbey National continue to use
their own brand names despite acquiring Clerical Medical and Scottish Mutual.

Distribution. The distribution model should accomplish the following objectives:

- It should cater to all segments of the banking population
- It should work as a single shop for all financial requirements for the bank customer
- It should effectively utilize the existing branch banking platform
- It should take advantage of the multiple sales opportunities afforded by the bank's other
distribution channels
- It should strive for congruence between product characteristics and channel.

One of the key economic advantages of bancassurance is the savings achieved through


efficient utilization of the bank's existing distribution channels. At some point in the
development of a bancassurance operation, the marginal cost of adding one more
customer becomes negligible. Bancassurers can reduce significantly the costs of agent
recruitment, selection and conservation. These savings can be passed on to consumers
through lower premiums, or the bank can maintain the premiums at market level in order
to increase profitability. Because the lower and middle segments of the life market are not
price-sensitive, the second option is often more desirable.

Technology:

Bancassurers should plan a technological infrastructure that will exploit customer
information found in the bank's database to uncover sales opportunities and produce
transactional simplicity for insurance customers.

The information banks have about their customers' buying habits, economic status and
money management practices constitutes a valuable asset often unrecognized even by
large, sophisticated banking institutions. Using technology to order information about the
economic behavior of customer segments can provide valuable insights about insurance-
selling opportunities. For instance, customers buying a home through a bank mortgage
can be approached for a variety of insurance products. With a traditional insurer,
behavioral information about policyholders is usually unavailable, but even when known,
can only be employed by agents (who have an economic interest in thwarting a direct
relationship between the company and the client).

Bancassurers should use technology to simplify the insurance purchase as much as
possible, thereby making the purchase an easier, more pleasant experience and further
differentiating themselves in the process. Buying insurance in the traditional way means
dealing with agents and the complications of the underwriting process, which
bancassurance can eliminate. Branch customers are usually in a hurry and don't want to
wait, so banks will serve them best by simplification. With point-of-sale technology,
customers should be able to buy policies in a short time and leave the bank with
coverage in hand. Particularly with an intangible such as an insurance policy, the buying
experience itself is a key part of the purchase. Bancassurers should make the experience
as positive as possible, and technology can contribute greatly to this effort.

Culture:



An effective bancassurance strategy acknowledges the fundamental cultural conflict
between the bank and the insurance company by aligning the bank's interests with those
of the insurance company. Without the bank's total commitment to the insurance strategy,
any bancassurance program is doomed to fail. One of the more effec-tive ways to
achieve this commitment is for the bank to have an equity interest in the insurance
company. With a stake in the financial results of the insurance operation, the bank has a
powerful in-centive to support the insurance strategy. The alternative approach, buying
"shelf space" in the bank to sell insurance products, will rarely be as effective.

In any given situation, one of the four value drivers may greatly outweigh the importance
of the others. In some cases, solving the cultural problem may loom especially large,
while in others building an effective technology platform may be paramount.
Bancassurers will need to consider all four, however, to achieve successful balance.


Trends in Mature Markets

Bancassurance has blossomed across Europe with penetration rates ranging from 20
percent of pensions and life premiums in Germany to 73 percent in spain, according to
Datamonitor. In the UK, around 10 percent of life insurance premium income is generated
regularly through bancassurance channel.

The success of bancassurance in European countries to date and its projected future
growth are eagerly trumpeted by investment bankers, particularly to clients considering
entering the market. In their view, bancassurance is one of the primary beneficiaries of
the global movement toward liberalization and subsequent integration of financial
services. Clearly, the concept of one-stop shopping, or allfinanz, is more advanced in
some European markets where the process of integration of financial services is further
along.

European experience shows that tax-advantaged insurance products with an emphasis
on savings accumulation can be successful in the banking channel under certain
circumstances. Protection products, such as pure term insurance, are rarely promoted,
and the big sellers are investment products with an insurance wrapper. These products
tend to compete with banking or investment products rather than other insurance
products.



In some countries, such as France and Spain, favorable tax treatment affords
bancassurance products competitive advantages. On certain pension products sold in
Europe through banks, the tax advantages are substantial, sometimes even including
deductible premiums. In the United States, where bancassurance has achieved more
modest success, it is openly acknowledged that the market for annuities sold through
banks and insurance agents would evaporate if the government withdrew the favorable
tax treatment of these products. However, annuities continue to enjoy tax advantages,
and the market for these products through the bank channel is booming.


Distribution Strategies in an Emerging Market

The business model for bancassurance in Europe does not necessarily transfer to the
regulatory and economic environment of a developing market. To succeed in emerging
markets, bank marketers will have to develop unique strategies consistently attuned to
local customer expectations and consistent with bank distribution capabilities. The
biggest challenge is determining how to reach the middle and lower-middle economic
classes, which comprise the largest group of bank customers in such countries.

A frequent mistake made by many bankers and insurers is their failure to develop unique
strategies specifically for bancassurance. Instead, they simply extend their traditional
agency distribution approach, because they view bancassurance as just another means
of reaching their existing market of affluent consumers. Agents typically target the affluent
because the average revenue per customer is sufficient to support the fixed and variable
costs of the distribution system. The agency channel thus perpetuates itself:
commissioned agents sell to affluent customers because they generate enough revenue
to make it profitable to sell to other affluent customers. Because agents are the insurance
company's true customers, insurers provide them with products suitable for sale to the
affluent.

In developing markets, affluent populations are much smaller than their counterparts in
North America or Europe. Although distribution models geared to wealthier bank
customers exist, Bancassurers who pursue this segment of the market are forced to
compete directly with traditional insurers. In a developing market, a strategy focused
solely on affluent customers ignores the largest group of bank customers.

A successful bancassurance strategy focused on middle and lower-middle income


segments of the bank marketplace requires insurers to rethink assumptions. To fully
exploit the potential of the mass-market banking channel, insurers need new types of
distribution, underwriting, administration, policy issue and delivery, premium collection
procedures, customer service strategies and sales approaches. In bancassurance,
technology must be combined with fundamental knowledge of insurance to develop
processes unique to the banking environment.


Distribution Channels and Product Complexity

The design and implementation of the distribution model is as important, if not more so,
than product design in bancassurance (except for the few clients who require customized
product solutions for individual financial planning needs). If an insurance or investment
product offers basic protection or the promise of reasonable return at a fair price,
consumers will buy it if the product, the distribution system and the channel are
compatible. Low penetration of insurance in emerging markets is not a failure of product
design, but a failure of the distribution system.

The diagram below demonstrates that products at varying levels of complexity require
different distribution channels and cost structures. As products become more customized,
the complexity of the product and the cost of distribution (expressed as the cost-per-
customer contact) increases. As a result, the product and distribution system must also
change. Complicated estate or retirement planning cannot succeed via direct mail, and
it's not economically feasible to sell only accidental death through an external agency
force. In a traditional sales environment, neither the company nor the agent can earn
adequate profits selling a low-premium product (such as accidental death) because costs
are too high. Conversely, a direct mail company can be enormously successful selling an
accident product with an average premium of only $100 because the cost per solicitation
can be kept low.




To be successful, the components of a distribution model must work together; product
features and benefits, distribution costs and marketing channels all should complement
each other. Bancassurers can tap all the channels identified in the model: direct mail,
telemarketing, platform bankers, Internet, in-house specialists, Career Agents or
professional financial advisors. The most effective bancassurance strategies will be
driven by customers and channels, not products, and will leverage the bank's competitive
strengths.

A customer and channel driven bancassurance strategy finds and engages buyers where
they are found. No attempt is made to impose a preconceived product driven strategy.
Traditional life insurers are often trapped: they create a product with features attractive to
agents (such as high commissions), and then let the agents find appropriate target
markets. This is a type of "top-down" product development approach. However, the bank
channel requires an analysis of the market that starts at the bottom, with the customers,
and works up.

A "bottoms-up" approach in bancassurance works differently. A customer and channel-
driven strategy capitalizes on the existing relationship of trust and familiarity between the
banker and branch customer and the frequency of branch visits. In emerging markets, the
lower-income customers found in bank branches are usually wage-earners or small-
business owners - the same type of customers ignored by most insurance agents.

Visiting local branches frequently, these customers often develop close relationships with
branch managers or tellers. (Relatively few insurance agents achieve similar levels of


trust with their customers.) Even in the United States, where Internet banking and
automatic teller machines (ATMs) are omnipresent, 50 percent of bank customers have
monthly contact with their local bank branch. In developing markets, these contacts are
more frequent and personal and often come in the form of visits to a branch to perform
simple transactions such as funds deposits or withdrawals.

The type of distribution channels that a company uses affects the design and pricing of its
products, as well as the way in which the products are promoted and perceived in the
marketplace. Some bancassurers started out by selling simple products which could be
sold in large volumes but which usually had low margins to cover expenses and profits. If
we compare how products and distribution are related to the profits of an organization,
we will come to the conclusion that the more complex the products sold are, the higher
the required margins will need to be.

Many banks entered bancassurance with a defensive strategy in their attempt to avoid
market share erosion by insurance companies. Very soon, though, they realized that they
could gain market share if they expanded their product range, developed a sales culture
within their organizations, created a multi-channel distribution structure and exploited the
potential of the customer information that can enable the identification of customer needs.


Cultural Issues in Distribution

The managers of banks and of life insurance companies can come from quite different
cultures. There may be differences in the way of thinking and business approaches of
bankers and managers of insurance companies. These differences create a
communication and implementation problem in bancassurance operations. Banks are
traditionally demand-driven organizations with a reactive selling philosophy. Life
insurance organizations are usually need-driven and have an aggressive selling
philosophy.

It has been observed that this friction at the level of bank employees and life insurance
salespeople arises from differing philosophies towards selling, the jealousies of bank
employees regarding remuneration of life sales staff and fears of "cannibalization" of
deposits, e.g. the bank employee fears that the salesperson encourages withdrawal of
bank deposits, putting the bank employee's job in greater jeopardy. As a result the team
spirit is negatively influenced and, since this is a crucial factor for the success of any


operation, it has to be confronted.

Cultural differences between the banking and the insurance industries must be
understood, respected and lived with in order for the bancassurance venture to succeed.
The development of a single culture is another possible solution but this requires a very
strong commitment from the top management. This commitment must be continuously
conveyed to all bank employees and life insurance agents. One way of achieving this is
to develop a "statement of mission" for the new organization and to get the staff to
commit to fulfilling this statement. This can help to ensure that there is a common path for
the bank and the life insurer.


Integration of Various Distribution Channels

It seems very difficult for a single distribution channel to successfully reach the
bancassurer's goals and specific target markets. Many bancassurers are using multiple
distribution channels. This way they avoid becoming locked into one channel and they
can offer services to a greater number of target markets. Multiple distribution channels
provide another valuable feature. They enable the enterprise to offer customers multiple
options for access. Therefore, if a customer wants to see someone about a particular
service on one day but wants to transfer funds at a later date, e.g. on a Sunday night, the
availability of both branch office and 24-hour telephone access increase the service value
to that customer.

However, conflicts may arise among the various channels and also within channels under
a multi-channel system. To avoid this it is necessary to ensure the following:

- colleagues within a channel are motivated to cooperate
- there is communication of the importance of every link in the distribution process
- cultural differences are communicated and respected
- the goals of every partner in the distribution process can be fulfilled by the process
- the specific role and performance expectations of each channel member are clearly
stated, understood and accepted
- communication between channels is encouraged
- channel leadership is strong and committed to success.

By completely integrating their distribution channels in accordance with an established


model, companies can achieve substantial cost savings, improve productivity and ensure
that all stakeholders, shareholders, customers and staff are satisfied.

The future of integrated distribution calls for the customer to be placed at the heart of the
distribution network. The call centre and the agency no longer operate as separate
channels. Rather a synergy is realised through realignment of roles and responsibilities
and the creation of a new sales integrated sales process, maximising lead generation
activity. Whatever the combination of distribution channels, the financial services
company must seek to always improve the customer experience and deliver the service
more cost effectively. http://www.einsuranceprofessional.com/artsing.html

















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 clients database for the use of the insurance companies.
As number of banks in India have begun to act as corporate
agents to one or the other insurance company, it is a common sight
that banks canvassing and marketing the insurance products across the
counters.


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 (detail)

Indian scenario
Global scenario
Future scope of Bancassurance
Other tie ups
Survey Analysis

Bancassurance: A Feasible Strategy for
Banks in I ndia ?

Bancassurance in India
Scope for Bancassurance in India
Bancassurance What is in store for Customers ?
Othr doc.
RELEVANCE OF BANCASSURANCE IN THE INDIAN FINANCIAL
SECTOR
REASONS FOR BANKS TO ENTER INTO
BANCASSURANCE
WHY IS BANCASSURANCE MORE SUITED TO LIFE INSURANCE PRODUCTS?
Factors that appear to be critical for the success of
bancassurance
Bancassurance training for bank employees:
Remuneration of bank employees:
________________________________________________________


2.1 Bancassurance - A Global Breakdown:
It is important to outline the impact that bancassurance has had on
differing regions around the world, as well as looking at the major regulations that
impact the further growth of bancassurance. Below, is provided with a brief
synopsis of bancassurance markets in certain key areas.

EUROPE:
Bancassurance is a construct of Europe (France in particular) and this
perhaps helps explain why it is such a phenomenal success within certain
European markets. Largely the 1989 Second Banking Coordination Directive
motivated the large influx of banks into insurance within Europe in recent years.
Currently, the penetration levels are fairly stable in Europe, since bancassurance
in the majority of Western European countries (France, Netherlands, Portugal and
Spain) has reached what studies such as Swiss Re. (2002) argue to be maturity.
These penetration levels will only pick up once bancassurance manages to fully
infiltrate Central and Eastern European countries such as Hungary and Poland,
and the Baltic nations. Currently, the final major hurdle for bancassurance in
Western Europe seems to lie in the U.K. where a predominantly strong insurance
board still attempts to resist the bancassurance trend even in the face of
widespread deregulations.

FRANCE:
In France, the success of bancassurance is mitigated by a favorable tax
treatment on life insurance products, lack of competition within the insurance
industry, and an inadequate pension scheme (Bonnet and Arnal (2000). The
pioneer of bancassurance in France is argued to be Credit Mutual, which created
its own life and non-life subsidiaries in the early 1970s (Sakr (2001)).


Bancassurance has seen the most success in the life insurance market, something that is true for
every nation, increasing from 52% in 1995 to account for 69% of life insurance business n 2000
(Durand (2003), and Turner (1998)). However, as of late, the banking networks market share of
the life insurance market has remained fairly stagnant, actually dropping over the years to 66%
market share in 2001 and 61% in 2003 (Falautona and Marsiglia (2003), Datamonitor (2003)).
This resulted from a combination of falling stock market prices and the banking network bearing
the brunt of lower transfer prices according to Benoist (2002).

This means that banking and insurance companies are overseen separately within the
country. For a conglomerate, the regulator will depend on who is the parent of the two.

UNITED KINGDOM:
Bancassurers have faced a tougher time in trying to penetrate the U.K. market, thanks in
large to a combination of restrictive regulations and a powerful insurance governing body. The
first move for bancassurers came in 1985 when Standard Life purchased a stake in the Bank of
Scotland. Changes in legislation soon followed in 1986 and 1988, which made it legal for banks
to market insurance products and set up their own insurance subsidiaries (Sakr (2001)). Even
then, the main type of union between the two was a joint venture, since the banks placed an
emphasis on maintaining the knowledge of the insurer. Twenty years later, researchers argue that
bancassurance is still in its infancy within the U.K., currently accounting for 15% of new
insurance premiums issued (Benoist (2002),

It is argued that restrictive regulations were detrimental to the growth of bancassurance
within the country and that due to the lack of experience the correct model for the U.K. is still to
be found (Hubbard (spring 2001)). Two benefits of the regulatory system in the U.K. are
firstly, that it is based on one almighty regulator that overseas the different factors of the
financial services industry (the financial Services Authority). This leads to more streamlined
regulations than in other countries that employ functional form regulatory systems.

SPAIN:


Spain has one of the most developed markets in bancassurance (Datamonitor (2003)).
Current penetration of bancassurers is over 75% of life insurance business and an ever-increasing
proportion of the non-life business. In Spain, the evolution of the bancassurance market is
fostered by the phenomenal growth within the insurance services industry (life insurance alone
has seen 30% growth per annum over the past 15 years (Durand (2003)). The development of
bancassurance in the Spanish market was facilitated by the well-established network of regional
building societies, and also the cultural mentality that it is correct to take on risks (Goddard
(1999)).

BRAZIL:
In Brazil the laws are in the bancassurers favor, and the banks within the country control
more than 65% of the insurance market (Nigh and Saunders (2003)), a size that rivals the leading
bancassurers in Europe. Furthermore, in Brazil, bancassurers are assisted by regulations that ban
the development of agent networks (Benoist (2002)).

NORTH AMERICA:
The North American financial services market is the largest in the world and
bancassurance has developed in a differing manner in this region depending on the country in
question. In Canada, there has been consolidated regulation for more than 15 years and banks are
legally allowed to own insurance companies, but limitations are placed on the products that can
be provided (Dorval (2002)). While in Mexico, bancassurance has been a flourishing industry
due largely to the role played by banks in the creation of pension funds since the 1997 pension
reforms.
Bancassurance in the U.S. has, in contrast, faced a very tight regulatory and legislative
environment for many decades. The formation of financial conglomerates was greatly hindered
by the Banking Act of 1933 (Glass-Stegall Act) and the Bank Holding Company Act of 1956.
Only in 1999 did laws become more favorable to banks offering insurance products, with the
passing of the Gramm-Leach Bliely Act. However, due to the divergence between the state and
federal laws regarding banks offering insurance products, bancassurers still face a hard time
ahead in relation to regulations and attempting to overcome powerful lobbies that aim to
maintain existing hierarchies (Boot (2003)). Currently, only around 7% of Americans purchase


their insurance products through bank branches (Thomson (summer 2002b)). However, with the
ever-continuing regulatory changes such as the demutualization of insurance companies coupled
with an ageing population, it is widely believed that there will be strong growth potentials for
bancassurers in a mature market such as the U.S.

ASIA AND THE PACIFIC:
Bancassurance in the Asian region has been relatively slow to take off, with the exception
of countries such as Australia, Hong Kong and Singapore where regulations have been
considerable lenient (Swiss Re. (2002)). The trend in the majority of mainland Asian countries
has been for a bank to form ties with a foreign insurer in order to begin bancassurance operations
with around 80% of these being life insurers, and the financial structure of the operation tends to
be in the form of a distributional agreement. Since bancassurance is still in its infancy in most
Asian countries, it is very susceptible to global changes
Most countries within Asia have only recently begun allowing the formation of
bancassurance operations with the main players listed below. Certain countries within the region
are still holding out against the onslaught of the bancassurance trend. Vietnam still restricts
banks from offering life insurance products, while South Korea has made certain rules that make
it difficult to begin a bancassurance operation within the country

2.2 Quantitative works of major Researchers related to bancassurance
Compared to the vast amount of descriptive work that has been published in the field of
bancassurance, there is only a limited amount of empirical studies conducted on the effects
that bancassurance actually has on the company once implemented. This was largely due to
the lack of information that resulted from poor company disclosure statements and inadequate
collections of national statistics. As these problems are being rectified, researchers into the
bancassurance practice are making more and more empirical research; nevertheless, it is still in
its early stages. The following aims at highlighting the major quantitative findings of certain
researchers that have performed research into the union of banks and insurers.

The majority of past studies have focused mainly on the risk and profitability effects
resulting from the union of a banking and non-banking firm. One of the earliest studies in this


area was performed by Boyd and Graham (1986). They conducted a risk-of-failure analysis
and looked at two periods around a new Federal Reserve policy (1974s go-slow policy). they
found that bank holding companies (BHCs) involvement in non-banking activities is
significantly positively correlated with the risk of failure over the period 1971-1977, while
the period 1978-1983 showed no significance, thus indicating that the new policy had a
considerable impact on bank holding company (BHC) expansion into non-banking
activities. Boyd and Graham (1988) followed their 1986 study with a paper that used a
simulation approach, whereby they simulated possible mergers between banking and non-
banking companies which were then compared to existing BHCs in order to determine whether
the risk of bankruptcy will increase of decrease should expansion be allowed in to the non-
banking industry, and also to determine the concurrent effect on company profitability. Their
main finding was that the risk of bankruptcy only declined should the BHC expand into the life
insurance practice. Brewers (1989) study finds similar risk reduction benefits existing
however cannot specify whether they originate as a result of diversification, regulation or
efficiency gains. Boyd, Graham and Hewitt (1993) build on Boyd et al. (1988) by conducting
a simulation study. They once again conclude that mergers of BHCs with insurance
companies may reduce risk, whereas those with securities or real-estate firms will not.
Saunders and Walter (1994) and Lown, Osler, Strahan and Sufi (2000) use a similar method
to Boyd and Graham (1988) and obtain similar results with more current data. Estrella (2001)
examines diversification benefits for banks by using proforma mergers. In contrast to
previous studies that incorporate accounting data, Estrella uses market data and a measure of the
likelihood of failure that is derived through the application of option pricing theory to the
valuation of the firm. the findings indicate that banking and insurance companies are likely
to experience gains on both sides in the majority of the cases.

The other major series of studies on banks expansion into non-banking activities focus on
the wealth effects of such a move. Cybo-Ottone and Murgia (2000) analyzed the stock market
valuations of mergers and acquisitions in the European banking industry over the period 1988-
1997, and found the existence of significant positive abnormal returns associated with the
announcement of product diversification of banks into insurance. Furthermore, they found
that country effects do not significantly affect their overall results, suggesting a homogeneous


stock market valuation and institutional framework across Europe. Carow (2001) looked at the
abnormal returns of bank and insurance companies following the changing legislation brought
about as a result of the Citicorp-Travelers Group merger, and discovered that investors expect
large banks and insurance companies to gain significantly from the legislation removing
barriers to bancassurance. In an event study released later in the same year, Carow (Mar 2001)
found in support the contestable market theory that insurance companies became worse off and
banks had no long-term gains following legislations further supporting bancassurance within the
U.S.Cowan, Howell and Power (2002) conducted a similar event study surrounding four
separate court rulings and discovered that on average only larger, riskier BHCs with fee-based
income gain the most, while smaller, riskier insurers sustain the highest wealth losses. Fields,
Fraser and Kolari (2005) find that bancassurance mergers are positive wealth creating
events by examining abnormal return data. They further deduced that scale and scope
economies were a contributing factor in these results.

As always, the opponents are there. Amel, Barnes, Panetta and Salleo (2004) and Strioh
(2004) found that consolidation in the financial sector is beneficial up to a relatively small size in
order to reap economies of sale, and that there is no clear evidence supporting cost reductions
stemming from improvements in managerial efficiencies. Strioh (2004) finds non-banking
income volatile and that there is little evidence of diversification benefits existing. But, the
majority of the past studies have found risk reduction and wealth creating benefits associated
with the expansion of banks into the insurance industry.

Why should banks enter in insurance?
Bancassurance could be major revenue stream for local banks

towerswatson.com
An insightful study of bancassurance
performance and practices that describes,
analyses and forecasts trends in India
India Bancassurance Benchmarking survey
2009-10
The growth of bancassurance in India



REASONS FOR BANKS TO ENTER INTO BANCASSURANCE

The main reasons why banks have decided to enter the insurance industry area are the following:

Intense competition between banks, against a background of shrinking
interest margins, has led to an increase in the administrative and marketing
costs and limited the profit margins of the traditional banking products. New
products could substantially enhance the profitability andincrease productivity.
Financial benefits to a bank performance can flow in a number of ways, as
briefly outlined below:
- Increased income generated, in the form of commissions and/or profits
from the business (depending upon the relationship)
- Reduction of the effect of the bank fixed costs, as they are now also spread
over the life insurance relationship.
- Opportunity to increase the productivity of staff, as they now have the
chance to offer a wider range of services to clients

Customer preferences regarding investments are changing. For medium-term and
long-term investments there is a trend away from deposits and toward insurance
products and mutual funds where the return is usually higher than the return on
traditional deposit accounts.This shift in investment preferences has led to a
reduction in the share of personal savings held as deposits, traditionally the core
element of profitability for a bank which manages clients money. Banks have
sought to offset some of the losses by entering life insurance business.Life
insurance is also frequently supported by favourable tax treatment to encourage
private provision for protection or retirement planning. This preferential treatment
makes insurance products more attractive to customers and banks see an
opportunity for profitable sales of such products.
Analysis of available information on the customer financial and social situation
can be of great help in discovering customer needs and promoting or
manufacturing new products or services.Banks believe that the quality of their


client information gives them an advantage in distributing products profitably,
compared with other distributors (e.g. insurance companies).
The realization that joint bank and insurance products can be better for the
customer as they provide more complete solutions than traditional standalone
banking or insurance products.
Banks are experiencing the increased mobility of their customers, who to a great
extent tend to have accounts with more than one bank. Therefore there is a strong
need for customer loyalty to an organization to be enhanced.
Client relationship management has become a key strategy. To build and maintain
client relationships,banks and insurers are forming partnerships to provide their
clients with a wide range of bank and insurance products from one source.
It is believed that as the number of products that a customer purchases from an
organization increases the chance of losing that specific customer to a competitor
decreases.

Broader bancassurance favors all players
By Ted P. Torres (The Philippine Star) Updated March 23, 2010 12:00 AM Comments (0)

MANILA, Philippines -Expanding the scope of bancassurance to include the countrys thrift banking system
means creating a win-win situation, according to industry players.
It is good for the thrift bank sector as it offers another income-generating business activity, while it offers
the life insurance industry a dedicated and professional distribution network.
Opening the practice of bancassurance to thrift banks means more chances that the population can get a life
insurance policy. And the increase in business activity means more revenues for the national government.
Based on the definition of the Bangko Sentral ng Pilipinas (BSP), cross-selling or bancassurance allows a
subsidiary of a commercial bank to market or cross-sell its products within the banks branch network as
well as tap its clientele base.
But the BSP requires that the commercial bank must own at least five-percent equity in the life insurance
company before they are allowed to practice bancassurance. In more advanced countries like Singapore, life
insurance companies is allowed to sell its products in any bank after entering into a business arrangement,
and exclusivity is not an issue.


Recently, the thrift banks expressed their desire to practice bancassurance, and not just market low-cost,
simple and limited coverage micro-insurance products.
Life insurance policies allowed under bancassurance include whole life insurance, endowment, term
insurance (including mortgage redemption insurance), health and accident policies, life annuities and
variable life insurance contracts.
There are 73 thrift banks operating 1,333 branches nationwide while there are 32 life insurance companies.
But some of the insurers have existing relationships with several commercial banks. There are 38 licensed
universal (expanded commercial) and commercial banks operating in the country.
The Philippine American Life and General Insurance Co. (Philamlife) works exclusively with the Bank of the
Philippine Islands (BPI), Insular Life Assurance Co. (Insular Life) with the Union Bank of the Philippines
(UBP), AXA Life Assurance Philippines (AXA Philippines) with the Metropolitan Bank & Trust Co. (Metrobank),
the Manufacturers Life Insurance Co. (Manulife) with the China Banking Corp. (China Bank), the United
Coconut Planters Life (Cocolife) with the United Coconut Planters Bank (UCPB), Great Pacific Life (Grepalife)
with the Rizal Commercial and Banking Corp (RCBC), Generali Pilipinas Life Assurance (Generali Pilipinas)
with Banco de Oro Unibank Inc. (BDO), and Beneficial PNB Life Insurance with the Philippine National Bank
(PNB).
Some of these commercial banks have thrift banks as affiliates or subsidiaries, such as the Metropolitan
Bank & Trust Co. (Metrobank) and the Philippine Savings Bank (PSBank). Thus, it is likely that if the BSP
allows thrift banks to practice bancassurance, PSBank would most likely ally with AXA Philippines, or BPI and
BPI Family Savings Bank with Philamlife.
Expanding bancassurance to include thrift banks will bring life insurance to a wider segment of the
population as thrift banks are consumer or retail-oriented by nature, focused on the Class B and C segments
of the population. Insurance penetration in the Philippines is one of the lowest in the region.
Commercial banks tend to belittle the average individual bank client, favoring the high-networth individual
as well as corporate accounts, although they would gladly take the deposits of the individual bank client
anytime.
Bancassurance offers thrift banks with another bank product to offer its clients, another source of fee-based
income. Commercial banks obviously find some profit in the practice, and their bottomline can attest to it.
Chamber of Thrift Banks (CTB) executive director Suzanne Felix said that they want the same privilege as
commercial banks.
And thrift banks are fully aware that additional opportunities, and risks, does not come without the
additional responsibilities, Felix said, adding that it is similar to the privilege of opening letters of credit
(L/C), derivatives and FCDU foreign currency, which come with the equivalent capital, skills and reportorial
requirements.
For insurers, an alliance would mean two things. One is that having a thrift bank acquiring five-percent
equity means additional capital for the insurer. And two, it will be an established and dedicated distribution
channel for the insurer.


Philippine Prudential Life Insurance Co. (Philippine Prudential Life) president and chief executive officer
Gregorio D. Mercado said that bancassurance means an additional source of capital and a new distribution
channel.
What we can give is another bank product and the expertise of personal client care, Mercado said.
For insurers that may be too expensive for one thrift bank, it could consider a pool of thrift banks acquiring
the minimum five-percent equity requirement.
Grepalife Financial Inc. (formerly the Great Pacific Life Assurance Corp. or Grepalife) president and chief
executive officer Victor Quisumbing applauded the BSP decision to seriously look into expanding the scope of
bancassurance.
Quisumbing said that it would allow smaller insurance firms an opportunity to participate in bancassurance.
But regulators must put a minimum capital requirement to minimize risk for banks, insurers and maximum
protection for the public.
Whats critical is the collaboration of the bank and the insurer to make bancassurance work, he added.
"Bancassurance" in French and "All Finanz" (Universal Banking) in German refers to a tie up
arrangement of banks with insurance companies for selling the insurance products in life and
non life segments as corporate agents for fee based income.This income is risk-free,as the
bank plays a role of a intermediary for souring business to insurance company.
Bancassurance is a package of banking and insurance service at one roof.The introduction of
Bancassurance has broadened the scope of retail banking.

Origin and Global Scenario:


Bancassurance has grown in different places in different forms based on the
demographic,economic and legislative condition of the country.This concept has been
successful in Europe,France (from where it originated),Italy,Belgium and
Luxembourg.Bancassurance was not much popular in USA as Steagall Act,1933 prevented
banks of USA from entering into alliance with financial service providers,therefore putting a
ban on bancassurance.As a result of this,Life insurance was primarily sold by insurance
agents,who focused mainly on wealthier class of people, which lead to majority of American
middle class households uninsured.With US government repealing the act,and after the
passage of Gramm-Leach Bliley Act,1999,the concept of Bancassurance started gaining
momentum in USA also.


Bancassurance in Indian Context:

In India,Bancassurance is a novel concept. Insurance and Banking are two different sectors
and are regulated by different entities :

(1)All Banks come under the control of Reserve Bank of India (RBI)
(2)Insurance sector follow the guidelines of Insurance Regulatory Development Authority
(IRDA)

Hence ,the banks entering into Insurance business has to follow the norms of both RBI and
IRDA.

RBI Guidelines:



1. Any Commercial Bank can undertake insurance business as an agent of insurance company
on fee basis.There is no risk participation for such banks.

2. Joint Ventures will be allowed for financially strong banks who are wishing to undertake
insurance business with risk participation if they satisfy the following criteria:
- Net worth of the bank should be not less than Rs.500 crore.
- Capital Adequacy Ratio should be not less than 10% in the bank.
- There should be reasonable level of Non Performing Assets(NPA)
- The bank should have earned net profit continuously for last three years.
- If there is any subsidiary, in such cases,the performance of subsidiaries
should be satisfactory.

3.Banks which are not eligible for joint venture participation can opt up to
- 10% of the net worth of bank (or)
- Rs.50 Crores whichever is lower.
Besides this,the requirements relating to the Non Performing Assets,Capital Adequacy Ratio
and Net Profit maintained has to be followed as per the rules mentioned in the participation
of banks in Joint ventures.

IRDA Norms:

According to IRDA,a private sector participant has to fulfill the following requirements to
enter into the insurance business:

1.Banks should have a minimum paid up capital of Rs.100 Crores

2.Investments has to be made in the policyholder funds only in India.

3.There is a restriction of international companies to the minority equity holdings up to 26%.

4.Each bank selling insurance should have a Chief Insurance Executive to handle all the
activities and matters relating to the insurance.

5.Commercial Banks,Co-operative Banks and Regional Rural Banks may become the
corporate agents for one insurance company.

6.Banks can act as a corporate agent for any one of life or non life insurers.But, cannot
become insurance brokers for many life or non life insurers.

IRDA has also notified regulations relating to registration of insurers,their assets and
liabilities,conduct of business,licensing of insurance agents etc.

Relevance of Bancassurance in Indian Financial Sector:

In India,the concept of Bancassurance appears to be growing more rapidly both through
commission based agents and Joint Ventures between banks and insurance companies.
Indian Banks have immense reach to the households.

-There are around 65,700 branches of Commercial banks .Each bank has average of 15,000
people
-India's rural market has huge potential that is still untapped by insurance companies.In rural
region,there are 32,600 branches and 14,400 semi-urban branches where insurance has
become most buoyant.
-There are 196 exclusive Regional Rural Banks in remote areas.

These help bank to enjoy considerable goodwill and access to the target customers. This also
helps the banks to pay a major role in developing insurance products including health care
and pension sector too.



Few Tie-ups in India:

1.Life Insurance Corporation (LIC)has a tie up with Corporation Bank,Indian Overseas
Bank,Sahara Development Central Co-operative bank,and Vijaya bank.

2 State Bank of India has tie up with State Bank of India Insurance Company.State Bank
Insurance Co is starting and running insurance business with the help of State Bank of India.

3.Bajaj Allianz General Insurance Company has tie up with Karur Vysya Bank and ord Krishna
Bank.

4.Bira Sunlife Insurance Co td has tie up with the following banks for the purpose of
Insurance such as - Bank of Rajasthan, Andhra Bank,Citi Bank,Bank Of Muscat,Development
Credit bank and Dutch bank

5.HDFC bank with Chubb,USA and Standard ife,UsA

6.ING Vysya Bank has tie up with Royal sundaram and ING life Insurance,Canada

7.ICICI bank has tie up with Lombard insurance,England and Prudential life, England





Implementation of Bancassurance-Key challenge to India:

At present ,the Bancassurance is facing problems such as poor management,lack of call
centres, no personal contact,inadequate infrastructure, inadequate incentive to agents and in
complete fulfillment of other essential requirements. Hence following points can taken into
consideration for proper implementation of Bancassurance:

1.There should be involvement of top management in banks.

2.The banks should motivate and develop the skills of staffs at the operating level

3.If there is any possible conflicts of interest between banker and insurer.That has to be
resolved.

4.Banks have to set up a consistent Distribution procedure with manual manual systems in
banks.

5.Service level agreements between banker and insurer should be established.

6.High Capital investment in Information and Technology and Telecommunication.

7.Study about low income groups,middle and upper class of the society and their eagerness
to adopt insurance policies and provide favourabe policies to people.

8.Establishment of Research And Development Cell for adaptive task.

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