REVIEW OF LITERATURE

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 1970’s (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

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.
DATAANALYSIS AND INTERPRETATION

Secondary data analysis:

Secondary data analysis, the imperative part of this study has been undertaken to
analyse the performance of AXIS bank in bancassurance so far and the contribution of
bancassurance to the progress of the bank in the form of increase in ROA, revenue etc.,
using ratio analysis. Since AXIS bank has started earning revenue for the sale of insurance
policies from 2005 that the analysis includes from the year 2005-2010.

TABLE
AXIS BANK’S EARNINGS FOR THE SALE OF BAJAJ ALLIANZ LIFE
INSURANCE POLICIES FROM 2005-2008
Year 2005 – 2006 -07 2007- 2008- 2009-
06 08 09 10
Revenue 16,99 88,14 112,09 156.0 204.8
earned lacs lacs lacs 4 5
for the sale
of
insuranc
e
policies

CHART
 Revenue (in lacs)
250

200

150 Revenue (in lacs)

100

50

0
2005-06 2006-07 2007-08 2008-09 2009-10

INFERENCE: From the above, it can be seen that there has been an impressive growth in the
revenue over the years for the sale of Bajaj Allianz life insurance policies by AXIS bank.

PRIMARY DATA ANALYSIS:

AGE FACTOR:

AGE LIMIT NO. OF PERCENTAGE

RESPONDENTS
20-25 12 12
25-30 20 20
30-35 24 24
35-40 26 26
Above 40 18 18
TOTAL 100 100

OCCUPATION:

OCCUPATION NO. OF RESPONDENTS PERCENTAGE

Salaried 49 49
Businessman 34 34
Retired 15 15
Others 2 2
TOTAL 100 100
INFERENCE:

From the above table it is observed that 49% of the respondents are salaried,
34% of the respondents are involved in business, and 14% of the respondents retired and
a less percentage of 2 have fallen into the category of others includes professionals. Thus,
majority of the respondents are Salaried.

ANNUAL INCOME:

ANNUAL INCOME NO. OF RESPONDENTS PERCENTAGE

<2 LAKHS 22 22
2-4 LAKHS 43 43
4-6 LAKHS 27 27
Above 6 LAKHS 8 8
TOTAL 100 100