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BANCASSURANCE: AS A STRATIGIC MANAGEMENT TOOL
NIRBHAY PANDEY
Bancassurance as a Strategic Management Tool
DECLARATION
PREFACE
The banking and insurance industry have changed rapidly in the changing
economic environment through out the world. In the competitive and
liberalized environment everyone is trying to do better than others and
consequently survival of the fittest has come into effect. Insurance
companies are also to be competitive by cutting cost and serving in a better
way to the customers. Now the time has come to choose and adopt
appropriate distribution channel through which the insurance companies
can get the maximum benefit and serve Customers in man folded ways.
teaming more then one billion populations, India still has a low insurance
penetration of 1.95 percent, 51st in the world. Despite the fact that India
boosts a saving rate around 25 percent, less than 5% is spent on insurance.
ACKNOWLEDGEMENT
Gratitude is the hardest of emotions to
express and often does not find adequate
words to convey the entire one feels, although
it is difficult to mention the nature of all, who
gave me their full support and cooperation
throughout my dissertation work.
THANK YOU
Bancassurance as a Strategic Management Tool
CONTENTS
Introduction
Insurance market in India-A quick look
Present distributional channel for insurance product
What is Bancassurance
Expansion of Banks in India
Entry of Banks in Insurance business
Bancassurance in Asia
Bancassurance in India
RBI guideline for banks entering in Insurance industry
IRDA guideline for Bancassurance
List of companies in Insurance industry
Bancassurance: A SWOT analysis
Long term drivers of bancassurance
How successful has the bancassurance
How bancassurance advantageous to banks
Some bancassurance tie-ups India
Banks…. Insurance synergy
Business models
Bancassurance : Global perspectives
Emerging trends, opportunities & challenges
Banc assurance to banc-securence
Banc assurance Future out look & recommendations
Recent updates (NEWS)
Reference
Bancassurance as a Strategic Management Tool
Introduction:
Your bank has already changed a great deal over the past decade. Your
banker was once content to collect your deposits and then lend the money
to companies at a profit. Now he wants to lend to you as well. It could be a
loan for a new house, a new car or even for education in a foreign
university. Then there are products like demat services and mutual funds.
Soon, there will be more. When you walk into your bank six months from
now, it is likely that they will try to sell a host of insurance products to you
even. Welcome to Bancassurance. Bancassurance - a term
coined by combining the two words bank and insurance (in French) -
connotes distribution of insurance products through banking channels.
Bancassurance encompasses terms such as `Allfinanz' (in German),
`Integrated Financial Services' and `Assure banking'. This concept gained
currency in the growing global insurance industry and its search for new
channels of distribution. Banks, with their geographical spread and
penetration in terms of customer reach of all segments, have emerged as
viable sources for the distribution of insurance products. Presently, there’s
more activity here than anywhere else. And every one wants to jump onto
Bancassurance as a Strategic Management Tool
the bandwagon for a piece of the action cake. The insurance industry has
finally woken up from its long slumber to an altogether new awakening.
It is the rise of a new dawn that has brought with it opportunities galore.
From innumerable insurers, to affordable and quality covers for the
consumer, from increase in distribution channels to incorporating
information technology measures, from net selling to bringing about
increased transparency - its all there. The ubiquitous agent is no more the
only distribution channel today for insurance products. Increase in
distribution channels has among others also seen the concept of
Bancassurance taking roots in India and it is emerging to be a viable
solution to mass selling of insurance products. Bancassurance is a long-
standing dream of offering a seamless service of banking, life & non-life
products. India being the one of the most populous country in the world
with a huge potential for insurance companies, has an envious chain of
bank branches as the lifeline of its financial system. Banks with over
65,000 branches & 65% of household investments are the backbone of the
Indian financial market. In India, there are 75 branches per million
inhabitants. Clearly, that's something insurance companies - both private
and state-owned - would find nearly impossible to achieve on their own.
Considering it as a channel for insurance gives insurance an unlimited
exposure to Indian consumers. Banks have expertise on the financial needs,
saving patterns and life stages of the customers they serve. Banks also have
much lower distribution costs than insurance companies and thus are the
Bancassurance as a Strategic Management Tool
the order of one trillion US dollar. The Insurance sector, to some extent,
can enable investments in infrastructure development to sustain economic
growth of the country.
With the progress of reforms, Insurance market has been flooded with a
number of players. As at end-March 2007, among the life insurers, there
were 17 companies in private sector and Life Insurance Corporation of
India (LIC) was the solitary public sector company. Among non-life
insurers, 9 companies were in private sector and four companies were in
public sector. As regarding the present size of the insurance market in
India, it is stated that India accounts not even one per cent of the global
insurance market. However, studies have pointed out that India’s insurance
market is expected to grow rapidly in the next 10 years. Mathur (2004) for
instance, stated that in spite of significant growth of life insurance business
through the outstanding efforts of LIC, only 25 to 26% of insurable
population in India has been insured.
Bancassurance as a Strategic Management Tool
1912: The Indian Life Assurance Companies Act enacted as the first
statute to regulate the life insurance business.
1956: 245 Indian and foreign insurers and provident societies taken over
by the central government and nationalized. LIC formed by an Act of
Parliament- LIC Act 1956- with a capital contribution of Rs. 5 crore from
the Government of India.
The Progress in the overall developments in the insurance sector was swift
and more prominent after the establishment of IRDA. The four public
sector non-life insurance companies were de-linked from being subsidiary
of the General Insurance Company of India. Now they operate
independently and compete with each other. The upshot of these
developments was the breakage of monopoly by public sector in the
insurance sector paving the way for the entry of private entities into the
insurance market and the era of competition set in with availability of wide
range of insurance products in the market than ever.
Bancassurance as a Strategic Management Tool
What is Bancassurance?
Bancassurance is the distribution of insurance products through the bank's
distribution channel. It is a phenomenon where in 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 if taken in right spirit and implemented properly can be
win-win situation for the all the participants' viz.
Banks, Insurers and the Customers.
In 1994, Indian stock market was hit by the worst scandal of manipulation
of stock prices in its long history. The stocks fell sharply driving many
investors into safer investment options. Rising saving rate during the late
1990s led to sustained growth of bank deposits (that is, additional
investment in the stock market came in the form of fresh money and not a
flow of money out bank saving. The rising saving came as a result of rising
income across the board. With this background, it is therefore not
surprising that banks have become a vehicle for selling insurance products.
(1) The net worth of the bank/financial institution should not be less than
Rs.5 billon.
(2) The capital adequacy ratio of the bank/financial institution should be
not being Less than 10%.
(3) The bank/financial institution should have track record of at least three
continuous Years of profits.
(4) The level of net Nonperforming Assets should be 1% below the
industry average.
(5) The track record of performance of existing subsidiaries of
banks/financial institutions should be “satisfactory”. Some confusion arose
from the circular. Therefore, the RBI proposed a series of amendments in
March 2000. In addition to the entry of banks, the RBI also laid down a set
of guidelines for the entry of Non-Bank Financial Companies (NBFC) into
insurance business (June 30, 2000). There were two critical differences in
the requirements proposed for the NBFCs.
First, the capital adequacy ratio of the NBFC (applicable only to those
holding public deposits) should not be less than 12 percent if engaged in
equipment leasing/hire purchase finance activities and 15 percent if it is a
loan or investment company.
Bancassurance as a Strategic Management Tool
between its banking business and its insurance outfit. For banks
entering into insurance business with risk participation, the
prescribed entity (viz., separate joint-venture company) also
enables to avoid possible regulatory;
On December 28, 2000, the State Bank of India (SBI) announced a joint
venture Partnership with Cardiff SA (the insurance arm of BNP Paribas
Bank). This Partnership won over several others (with Fortis and with GE
Capital). Many experts in the industry have awaited the entry of the SBI. It
was well known that the SBI has long harbored plans to become a universal
bank (a universal bank has business in banking, insurance and in security).
For a bank with more than 13,000 branches all over India, this would be a
natural expansion.
In the first round of license issue, the SBI was absent. There were several
reasons for this delay. First, the SBI was seeking a foreign partner to help
with new product design. Second, it did not want the partner to become
dominant in the long run (when the 26% foreign investment cap is
Bancassurance as a Strategic Management Tool
Banking habits:
Bancassurance tends to have greater influence where banking habits are
well entrenched. In Continental Europe, good examples can be found in
countries like France, Belgium, and the Netherlands. Customers there visit
their banks more frequently than in other countries.
In other markets, where securities markets dominate, Bancassurance
developments have been relatively mute. These also happen to be countries
with English Law origin: Australia, Canada, United Kingdom and United
States. However, it is not just those countries where bancassurance has not
taken large market share in Continental Europe. This is probably driven by
restrictive regulatory regime.
In India, banking is well spread both geographically and across different
socio-economic groups. In this respect, India is similar to Continental
Europe. India also owes its legal origin to the English system. Thus, it
shares some of the characteristics of the other Commonwealth countries
mentioned above. In addition, ownership of equity is relatively high
compared with the level of economic development. So far, regulation both
by the IRDA and the RBI has been accommodating.
Bancassurance as a Strategic Management Tool
Bancassurance in Asia:
Malaysia:
Mayans Life Insurance, incorporated in 1992, was established as a
dedicated bancassurance arm of Mayan of Malaysia. Mayans decided to
employ bancassurance and leverage on the bank’s brand name and branch
network to break the tight grip of a handful of large life insurers in the
Malaysian market. The highly integrated model employed (i.e., Maybank
Life Insurance as a subsidiary of Maybank bank) allowed the life insurers
exploit the customer base of its parent company (about five million
customers) through some 265 Maybank and 100 Mayban Finance
branches.
The company was able to pass on some of the cost saving to customers. It
has also Succeeded in using bank’s other capabilities like payment
services. In a similar fashion, Mayban General Assurance (Berhad) was
established later in a partnership with Fortis to distribute non-life insurance
products.
(This example is taken from Sigma 7/2002).
Japan:
The first phase of deregulation of bancassurance in Japan began on April
1, 2001.The range of products that banks are allowed to distribute was
expanded from October 1, 2002. One of the first products that banks were
Bancassurance as a Strategic Management Tool
allowed to sell was credit life insurance. Banks are now allowed to
distribute personal pension insurance, asset formation insurance, individual
life annuity and accident insurance, and personal accident insurance. All of
this is expected to translate into a bancassurance boom in Japan. In many
Asian countries, bancassurance has become an important channel but,
unlike in some countries in Continental Europe (e.g., Portugal, France,
Spain, Belgium), It has not become the main channel of distribution of
insurance. Countries with relatively high bancassurance share of life
insurance distribution are Hong Kong (25%), Singapore (15%), Thailand
(12%) and Malaysia (11%) in 2001 (data taken from Leo Puri’s
presentation at the Swiss Re CEO Summit). In other countries in the
region, such as China, Indonesia and the Philippines, the share of
bancassurance was rather small (5% or less in 2001). Key driver of
bancassurance elsewhere in Asia has been the following. Banks are seeking
ways to raise additional earnings without commitment of additional capital
in a low interest rate environment; increased competition; reducing margin.
Insurance Companies are seeking new customers using new distribution
activities to reach such segment. As noted above, the biggest driver in India
is different at present: banks are seeking an alternative method of
redeploying their surplus workers. Of course, this is a one time only
phenomenon.
Bancassurance as a Strategic Management Tool
10
9 Japan
Taiwan
Life Insurance Premium as %GDP 8
7 South Korea
Hong Kong
6
Singapore
5
4
Malaysia
3
China Thailand
India
2
1
Oman Kuw ait Emirates
0
100 1000 10000 100000
GDP/capita (US$)
• India and China still face limited top down control of the bank branches –
Bancassurance.
Bancassurance in India
Bancassurance in India is a very new concept, but is fast gaining
ground. In India, the banking and insurance sectors are regulated by
two different entities (banking by RBI and insurance by IRDA) and
bancassurance being the combinations of two sectors comes under the
purview of both the regulators. Each of the regulators has given out
detailed guidelines for banks getting into insurance sector.
think of entering this sector. In fact, in April, the RBI approved, and issued
guidelines for, the entry of banks into the insurance sector. The guidelines
permit any scheduled commercial bank to undertake insurance business as
an agent of insurance companies, on a fee basis, without any risk
participation, while banks wishing to set up joint ventures to undertake
insurance business with risk-participation have to satisfy the eligibility
criteria.
Normally, the maximum equity a bank can hold in a joint venture is 50 per
cent of the insurance company's paid-up capital. The RBI may, however,
selectively permit an initial higher equity contribution by a promoter bank,
pending divestment of equity with in the prescribed period. Thus, the SBI
has been allowed equity participation of 74 per cent in its joint venture.
The eligibility criteria also stipulate that as on March 31, 2000 the bank's
net worth should be not less than Rs 500 crore, the CRAR not less than 10
per cent, and the level of NPAs reasonable. Vysya Bank has entered an
agreement with the Netherlands major ING Insurance, while Centurion
Bank has tied up with Canada Life.
Financial majors such as the UTI, ICICI, IDBI, and HDFC extended the
scope of their services by opening up banks, and their performance is
encouraging enough to extend activity on similar lines. Thus, banks and
insurance companies can together create an integrated financial services
group, providing customers one-stop financial shopping.
Bancassurance as a Strategic Management Tool
The LIC and the GIC have reportedly approached the Centre for licenses to
offer their customers banking and allied services. When banks, insurers and
financial conglomerates come together, as is increasingly happening,
exploiting the cross-selling potential of the enlarged group is usually stated
as the primary goal. This, the emerging bank-insurer claims, will create
lucrative revenue synergies and generate increased profits for the
stakeholders. To achieve success, the bank-insurance entity
needs to focus on a multi-brand, multi-distribution channel.
The optimum synergy is to have an overall umbrella brand for the group
that endorses the various product and distribution channel brands
throughout the organization.
A quick glance at the global scene indicates that more banks are expanding
into non-life business, and that insurance companies are seeking banking
networks. The formation of the huge European financial conglomerates
Credit Suisse and Winterthur could be the first of a long line of new
conglomerates.
group, Lippo, in Indonesia and Malaysia; and the Bank of Bangkok group
in Thailand. Is all-finance the only possible avenue for insurance
development? While it is certainly one of the major ones, there are also
new developments in distribution channels, such as the Internet and
telemarketing.
Thus far, the renewed efforts of bank-insurance access on the life side have
not been too successful. Only a paltry 3 percent of all new life insurance
premiums are generated through banks and savings institutions, though the
Bancassurance as a Strategic Management Tool
Regulatory concerns:
The big question that persists is whether banks, insurers and consumers are
ready for a fully integrated environment, and how it will change the
industry. Do banks and insurers really understand each other's businesses
well enough to seize the opportunities presented by the financial sector
reforms? The final word on such issues will be voiced by none other then
the consumer.
• For banks which are not eligible for this joint-venture option, an
investment option of up to 10% of the net worth of the bank or Rs.50
crore, whichever is lower, is available;
• Finally, any commercial bank will be allowed to undertake insurance
business as agent of insurance companies. This will be on a fee basis
with no-risk participation.
• Each bank that sells insurance must have a chief insurance executive
to handle all the insurance activities.
• All the people involved in selling should under-go mandatory training
at an institute accredited by IRDA and pass the examination
conducted by the authority.
• Commercial banks, including cooperative banks and regional rural
banks, may become corporate agents for one insurance company.
• Banks cannot become insurance brokers.
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. The subsidiaries of banks will also be allowed to
undertake distribution of insurance product on agency basis.
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 per
cent of the paid- up capital of the insurance company. On a selective basis
the Reserve Bank of India may permit a higher equity contribution by a
promoter bank initially, pending divestment of equity within the prescribed
period.
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 percent;
iii. The level of non-performing assets should be reasonable;
iv. The bank should have net profit for the last three consecutive years;
Bancassurance as a Strategic Management Tool
(5) 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.
(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 and that the banking
business does not get contaminated by any risk which may arise from
insurance business. There should be ‘arms length’ relationship between the
bank and the insurance outfit. Hoding 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. Latest audited balance sheet will be considered
for reckoning the eligibility criteria.
Banks which make investments under paragraph 5 of the above guidelines,
and later qualify for risk participation in insurance business (as per
Bancassurance as a Strategic Management Tool
Company % of policies
ICICI Prudential 15% in 2002, 30% in 2004
SBI Life 15% in 2002, 50% in 2004
Birla Sun Life 25% in 2002, 40% in 2004
ING Vyasa Life 10% in 2002
Aviva Life 50% in 2002, 70% in 2004
Allianz Bajaj Life 25% in 2003
Royal Sundaram Allianz 40% in 2002
HDFC Standard Life 10% in 2002, 40% in 2004
MetLife 25% in 2002
have the same stigma that (life) insurance carries. This factor will diminish
in importance over time as people become more educated.
(2) Banks can offer fee-based income for insurance sales. This can be
attractive under current rigid structure of wage benefits. At present, banks
are prohibited from offering commission to the bank employees for selling
insurance products. Banks have found ways to circumvent the problem. For
example, they offer "car allowance" for the employees selling insurance.
(5) When the pension reform is undertaken (and it is in the works), banks
can become natural institutional vehicles for private pension products. In
some countries, banks are explicitly prohibited from selling pension
products (e.g., Australia). In some other countries, banks are the leading
private pension providers (e.g., Mexico).
(7) In many countries, the absence of banks from selling insurance seems
to stem from regulatory reasons. In India, privatization of the insurance
sector signaled an accommodating approach from both the insurance
regulator and the banking regulator for banks entertaining the thoughts of
selling insurance.
per policy and for the Bancassurance channel it is Rs 39,000 per policy.”
Although such concrete numbers are not available industry-wide, there is
general consensus that bancassurance is indeed bringing in customers of
higher value.
Why Banks are highly motivated to Enter in
Insurance Business Now:
Advantages to insurers:
Advantages to consumers:
.
State Bank of India
Benefits to the
insurance company
Structured sales
Larger customer base
approach
C. Customer relationships:
D. Operational efficiency:
is because the bank and the insurance company is benefiting from the same
distribution channels and people.
Business Models
The alliance between banks and insurance companies can be structured in
varied manners, depending upon the type of synergy one is looking for.
Corporate Agency Model is slowly gaining importance across various
nations because of ease in implementation and distribution of authority-
responsibility relationship. Insurance products wrapped around the bank's
deposit and loan products (Wrapper Model) are also gradually gaining in
popularity due to their simple product design while the referral model tie-
up has not been able to really take off. The options available to the banks
are:
In this model, banks setups its own insurance subsidiary and sells its
insurance products. In this setup, the products of this insurance
subsidiary are not allowed to be sold by any other bank.
Finally, the marketing of more complex products has also gained ground in
some countries, alongside a more dedicated focus on niche client segments
and the distribution of non-life products. The drive for product
diversification arises as bancassurers realize that over-reliance on certain
products may lead to undue volatility in business income. Nevertheless,
bancassurers have shown a willingness to expand their product range to
include products beyond those related to bank products.
Traditionally, the banks and financial institutions are the key pillars of
India’s financial system. Public have immense faith in banks. Share of
bank deposits in the total financial assets of households has been steadily
rising (presently at about 40%). Indian Banks have constantly proven their
capability reach the maximum number of households. In India at present
there are total of 65,700 branches of commercial banks, each branch
serving an average of 15,000 people. Out of these are 32,600 branches are
catering to the needs of rural India and 14,400 to semi-urban branches,
where insurance growth has been most buoyant. (196 exclusive Regional
Rural Banks in deep hinterland.) Rural and semi-urban bank accounts
constitute close to 60% in terms of number of accounts, indicating the
number of potential lives that could be covered by insurance with the
Bancassurance as a Strategic Management Tool
frontal involvement of banks. Further still banks sell a very small portion
of the products. This means there is a huge scope of banks selling
insurance products. A study conducted in US shows that people are willing
to buy insurance products from their banks as they consider banks as a
single point of buying all financial products. Further there is a severe need
of insurance for agriculture and other insurance products like health
insurance in the rural areas. Insurance companies would not be able to
establish their sales force in rural areas. As banks already have a strong
foothold, it would be hugely beneficial for the insurance companies.
Financial
deregulation
Foreign
companies use
bancassurance
to enter
Asian market
Lastly, cultural and behavioral factors: the good image of banks, their
privileged relationship with customers and the proximity of banking
networks as in France, Spain, Italy and Belgium. In countries where
Bancassurance has met with little success, such as the United
Kingdom or the United States, visiting the bank often does not come
naturally to customers.
Bancassurance:
Emerging trends, opportunities and challenges
According to a recent sigma study, Bancassurance is on the rise,
particularly in emerging markets. Worldwide, insurers have been
successfully leveraging Bancassurance to gain a foothold in markets with
low insurance penetration and a limited variety of distribution channels.
Bancassurance, the provision of insurance services by banks, is an
established and growing channel for insurance distribution, though its
penetration varies across different markets. Europe has the highest
Bancassurance penetration rate. In contrast, penetration is lower in North
America, partly reflecting regulatory restrictions. In Asia, however,
Bancassurance is gaining in popularity, particularly in China, where
restrictions have been eased. The research shows that social and cultural
factors, as well as regulatory considerations and product complexity, play a
significant role in determining how successful Bancassurance is in a
particular market.
Bancassurance as a Strategic Management Tool
Sales front:
Bank employees are traditionally low on motivation. Lack of sales culture
itself is bigger roadblock than the lack of sales skills in the employees.
Bancassurance as a Strategic Management Tool
Banks are generally used to only product packaged selling and hence
selling insurance products do not seem to fit naturally in their system.
HR issues:
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.
In the past, Dena Bank, which had originally partnered Kotak Mahindra
Life, switched loyalty to the public sector Life Insurance Corporation? So
did Allahabad Bank, which had a tie-up with ICICI Prudential Life
Insurance. Punjab National Bank and Vijaya Bank have been forced to
Bancassurance as a Strategic Management Tool
The other conflict that most insurers face is when they have a bank within
their own group. Half of the insurance firms in India are part of a financial
group that has a bank. They include ICICI Bank, State Bank of India, ING
Vysya, HDFC, Jammu & Kashmir Bank, and Kotak Mahindra Bank.
According to Mr. Rajesh Relhan, (Head of Bancassurance) Aviva Life,
there is a fear among banks that at some point in future their insurance
partner may end up cross-selling banking services to their policyholders.
Besides, companies that sells predominantly through agents experience
channel conflict when both agents and banks target the same customer.
Universal Banking
Insurance industry has very low penetration rate in India. The market and
scope in rural India is immense and largely untapped. The insurance
companies should actively try to involve co-operative and regional rural
banks amongst their potential alliances along with the big and
multinational banks. These co-operative banks will have greater reach in
villages of rural India and will also operate at economic cost.
b. Minimize conflicts of interest between the bank and the
insurer:
A formal and standard agreement between these banks and the insurance
companies should be taken up and drafted by an national regulatory body.
These agreements must have necessary clauses of revenue sharing. In case
of possible conflicts, the bank management and the management of the
insurance company should be able to resolve conflicts amicably. If they are
not solved, there can be a apex body set up by IRDA to solve these types of
issues. This could be done by…
Setting up distribution procedures consistent with the manual systems
in most banks.
Establishing credible service level agreements between the bank and
the insurer.
(Householder’s insurance)
House loans and householder’s insurance can be linked. Banks have huge
exposures to house loans. Now as far as the customers are concerned, they
would prefer householder’s insurance also as a package along with the
house loans. The collection of premiums would also not be a problem.
Normally these customers give post-dated cheques. Therefore premiums
can also be collected in the similar fashion. Some concessions to the
customers can be given like extension of payment period etc. Insurance in
Bancassurance as a Strategic Management Tool
Corporate Direct
Individual Brokers Referrals
Insurers Agents Business
agents
Banks Others
1 2 3 4 5 6 7
Private
59.71 16.87 8.92 0.83 7.06 6.61
insurers
LIC 98.37 1.25 0.32 0.06 0.00 0.00
Total 85.67 6.38 0.31 0.31 2.32 2.17
risk products. While reams have been written about the numerous
benefits of bancassurance considering the wide scale availability of
risk products it will enable, rules and regulations regarding the
same are yet to fall in place.
Unique strategies:
Before taking the plunge, banks as also insurers need to work hard
on chalking out strategies to sell risk products through this channel
especially in an emerging market as ours. Through tie-ups some
insurers plan to buy shelf space in banks and sell insurance to those
who volunteer to purchase them. But unless banks set up a trained
task force that will focus on hard-selling risk products, making much
headway is difficult especially with a financial product that is not so
easily bought over the counter.
Reduced costs:
Bancassurance as a Strategic Management Tool
Legal issues:
• Banking on bancassurance
about benefits for both but then what's stopping it from taking off in
a big way?
OM Kotak Mahindra Life Insurance has tied up with Dena Bank and
its own Kotak Bank for bancassurance. The company is targeting
around 10 percent of the business during its start up phase. Adds
Shivaji Dam,' Our focus will not be the affluent class but the middle
class' But in case of SBI Life there is no such emphasis on a
segment of the population perhaps considering the wide reach its
bank branches have even in the remotest corners of the country.
Also SBI Life plans to offer its complete basket of products but OM
Kotak will be selling select products.
Insurers are no doubt optimistic about the channel but it does come
with a few limitations. Sale of insurance comes at a lower cost
through this channel in comparison to the agency route and the
insurance company gains much through the large bank network
spread across the country but the potential can be impeded if bank
officials do not actively generate leads.
Also it is yet to be seen how far buying shelf space in a bank helps
Bancassurance as a Strategic Management Tool
As the MD and CEO of SBI Life — the first private life insurance company to
break even since privatization -Mr. S. Krishnamurthy has proved his
detractors wrong about the viability of the bancassurance model.
Bancassurance has been cost-effective and helped the company make profits
for the first time.
The way ahead for SBI Life, according to Mr. Krishnamurthy, is to strengthen
the penetration of bancassurance through a proposed Rs 40-crore IT project
across bank branches. The CEO projects a growth of 150 per cent in new
business premium and the company will hike its capital base by Rs 100 crore in
the second half of the year. Excerpts from an interview:
Towards this end, we are working on an intranet model along with SBI to
provide on-line sales support to the bank staff. At the touch of a button,
`bancassurance - online', will offer bank staff access to product knowledge,
FAQs, premium calculators and sales illustrations. So, he or she would
immediately be able to answer the customer queries. This will also help them
mine customer data and identify which product would be appropriate for the
client. The estimated investment in this first-of-its-kind project is around Rs 40
crore. The pilot will be launched shortly.
What are your expansion plans for the other distribution channels?
We are planning to grow our retail agency from 8,000 to 25,000. This agency
force will be devoted to high net worth individuals and will sell policies of a
bigger ticket size. Bigger policies would mean that the annual premium size for
traditional policies would be around Rs 10,000 and in the case of unit-linked
plans, it would be around Rs 25,000 to Rs 30,000. SBI Life branch network will
be expanded from 60 to 150 this year.
Which are the new products you will introduce this year?
ULIPs constituted 25 per cent of the product portfolio last fiscal. This year we
expect to increase that to 50 per cent. We are currently seeing a good demand
for ULIPs with equity funds as the main component. SBI Life has been
educating its customers to stay invested in the equity market for the long term
and not get panicky about temporary aberrations.
What is your business target for the year? Will you infuse more
capital this fiscal?
We expect our new business premium to grow by 150 per cent and touch
around Rs 2,500 crore by the end of the fiscal. Our profit should grow to a
double-digit figure from last year's Rs 2 crore.
Bancassurance as a Strategic Management Tool
The company's capital base of Rs 425 crore will be hiked by another Rs 100
crore in the second half of the year to meet growth requirements.
But till today in Asia, as per statistics, 91% of the insurance is done through
agents. This is because people here still believe in face to face interaction
rather than on paperless interaction. As an alternative to the face to face
interaction, banks would be able to sell insurance products better.
Bancassurance has a good potential to grow in India. They have been quite
successful with life insurance products the world over as compared to the
general insurance products. This is because life is more akin to investment. The
customer is likely to pick it up faster than non returnable non-life insurance.
Reach can come through the brokers also. The broker institution has come to
India only three years back. I feel the brokers can have more work when the
markets get de-tariffed. They can appoint more sub-brokers, which is another
way to increase penetration.
M. Ramads,
Chairman and Managing Director of Oriental Insurance Company Ltd
Mr. G. Krishnamurthy, Chairman, LIC, told Business Line that he had written to
several banks asking them to join LIC as distributors of its products. ``We are
awaiting their response,'' he said.
According to him, there are banks which may not be willing to enter the life
insurance sector directly. The RBI has allowed them to be distributors of
insurance products.
Banks, however, will have to obtain license from the Insurance Regulatory and
Development Authority (IRDA) to be agents. They may also have to get
clearance from the Reserve Bank of India. The banks with a corporate agency
can in turn appoint their own individual agents for sales of products.
The RBI has recently issued draft guidelines for banks to enter insurance
business. According to Mr. Krishnamurthy, competition from banks and other
players is welcome as people can get more products and better service. LIC has
geared up to face such com petition.
Mr. Krishnamurthy said LIC proposes to come out with a new product _ Unit
Linked Insurance Product. There is lot of scope for such a product which will be
linked to the capital market. The corpus to this fund will be managed separately
with an expert grow up of fund mangers. The idea is to give customers a higher
yield for their investments, besides the insurance cover, he said.
Mr. Krishnamurthy said the consultants appointed by LIC are for suggesting an
organizational set-up and business strategy for the Corporation is expected to
submit its report by May 1. He said the corporation has been taking several
measures internally to improve its services.
LIC has recently beefed up its investment cell. Besides, the traditional
investment operations, the cell will undertake direct evaluation of projects for
equity participation. On an average LIC have Rs. 5,000 corers per annum for
Bancassurance as a Strategic Management Tool
Mr. Krishnamurthy said LIC is exploring the possibility of entering the life
insurance business in Nepal, as part of its strategy to expand its international
operations.
References:
2. “Bancassurance in India: Who is tying the knot and why” CRIS, 2002.
ON LILE SOURCES:
www.bimaonline.com
Bancassurance as a Strategic Management Tool
www.insurancepost.com
www.insuranceworld.com
www.irdaindia.com
www.swissre.com