Bancassurance: A win-win model for insurance companies, banks

Growing biz: The bancassurance channel accounts for about 25 per cent of the total new premium collected by the industry as of today.

Suresh Parthasarathy The Indian insurance sector has undergone a sea change in the last eight years, ever since the sector was opened up for private players. Traditionally, insurance products are sold only through individual agents and they account for a major chunk of the business in retail segment. With the opening up of this sector to private players, competition has become more intense and the public sector major LIC has been challenged with a flood of new products and new means of marketing. Instead of falling back on the individual agents for business, new insurance companies have started to experiment with other channels such as bancassurance and insurance brokers. Successful model Bancassurance is a win-win model for insurance companies and banks. Insurance companies, with their relatively limited infrastructure, were able to sell their products throughout the country by using the distribution channel of bank branches. At the same time, banks, without investing in additional resources or infrastructure, were able to earn a fee-based income, to supplement their core lending activities. Bancassurance simply means selling of insurance products by banks. The IRDA (Insurance Regulatory and Development Authority) notification in 2002 saw the banks begin to act as agents for one life and general insurer, each. Corporate agents

In this alliance between insurance companies and banks, banks were allowed to sell insurance products to their customers. Under this arrangement, banks are appointed as corporate agents, empanelled with one insurance company to sell its products. Banks, with their existing customer base, can leverage on their existing relationships, to convert customers into policyholders. The bank usually earns a high commission on the first premium paid by each customer and a marginal trailing commission on renewal premiums till the maturity of the policy, for regular premium plans. And a one-time commission is paid in case of the single premium policies. Strengths of banks In the insurance market, there are currently 20 private players along with the public sector giant LIC. Out of these companies, the early birds had the advantage of entering into a tie-up with commercial banks and cooperative banks for exclusive bancassurance arrangements. In India, the bank branch network encompasses nearly 75,000 branches inclusive of PSU and private banks. Close to one lakh branches of co-operative, district co-operative and regional rural banks also exist. Normally, commercial banks act as a corporate agent and tie-up with one insurance company. Co-operative banks act as corporate agents or as referral agents. The fee-based income for the bank varies based on whether they operate as a corporate agent these will earn higher commissions than for referral agents, where selling is executed by the insurance companies themselves. Disadvantage One disadvantage that has come up in this model is that banks, after allying with one insurance company may discontinue it to set up their own venture. Changing insurance partners due to attractive benefits offered by a competing insurer is also not ruled out. Mergers and takeover situations may also lead to a rejig in bancassurance partners. The bancassurance channel accounts for about 25 per cent of the total new premium collected by the industry as of today. For insurers, based on the business strategy and the number of tie-ups, the contribution of bankcassurance varies. Aviva Life According to Mr T.R. Ramachandran, Chief Executive Officer and Managing Director of Aviva Life insurance, bancassurance continues to be an important distribution channel and it currently contributes more than 50 per cent of their business. We have bancassurance tie-ups with close to 40 banks. This includes foreign, private, public sector, co-operatives and regional rural banks. With these tieups supplementing our own

branches, we have access to close to 30 million potential customers and we are present in close to 3,000 locations in more than 1,100 towns and cities across the country, he says. Kotak Mahindra The bancassurance channel contributed 21.2 per cent of the total business for Kotak Mahindra Old Mutual Life Insurance in 2007-08. This business has come through one private bank, 22 cooperative banks and the 400 branches pan-India, asserts Mr Shekhar Bhandari, Sr Vice-President Sales, for the insurer. ICICI Pru ICICI Pru Life Insurance has tied up with 18 banks (two commercial and 16 co-operative banks) says Mr Tarun Chugh, Chief - Bancassurance and Alternate Channels. He explains that for the nine month-period ended December 2008, bancassurance contributed 25 per cent of the new business. Presently, ICICI Pru Life products are sold through 2,900 branches across the country. HDFC Standard Life HDFC Standard Life has tieups with HDFC Bank, Indian Bank and Bank of Baroda and many co-operative banks. Of its total business, 40 per cent is accounted through bancassurance channels. LIC Life Insurance Corporation of India, which accounts for 50 per cent of the total new business premium collected in the industry, still depends considerably on individual agents and the business through the bancassurance channel is limited, in relation to the overall business. Birla Sun Life Bancassurance has contributed approximately 20 per cent of the Birla Sun Life Insurance annualised premium equivalent for the year till January 2009, asserts Mr Chander Chellani, Chief Distribution Officer. Currently, Birla Sun has six banking partners and the insurance product is sold through 1,000 branches. Incidentally, it may also be noted that the first bancassurance policy in India was sold by Birla Sun. Untapped potential The penetration of life insurance as a whole is abysmally low at 4.1 per cent of GDP. Bancassurance currently accounts for one fourth of the total new premium collected. Going by the number of the branches selling insurance products, it appears that it is yet to attain critical mass. Out of the over 1.75 lakh branches of commercial and co-operative banks, hardly onefourth are engaged in selling insurance products. If more and more branches start to sell insurance products, particularly the cooperative banks, the penetration of insurance may increase sizeably.

Micro insurance Micro insurance which is at a miniscule level to the overall businesses, may also undergo dramatic change. Insurance companies may have to prepare for more investments in technology to allow processing and issue of policies at the respective towns, to make the process costeffective. There is also scope for banks to explore other models of bancassurance. According to Mr Tarun Chugh, the major part of business in bancassurance still happens only at the branch. The other streams such out of branch model and private banking and wealth management is yet to pick up to a large extent. One possibility suggested by some insurers is that banks can approach the insurance regulator IRDA to change the regulations, so that banks can upgrade themselves from a corporate agent setup to broker model. This would allow them to sell a wider range of products. In urban areas, there can be specialised branches where instead of selling one life product, they can offer a menu of options within life insurance. The customer will have the option to select a product that is more suitable to him, rather than buying products merely by virtue of a relationship with the bank. Related Stories:
http://www.thehindubusinessline.in/2009/02/27/stories/2009022751391800.htm