Introduction to Banc

8/2/2019 Introduction to Banc

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1.1 INTRODUCTION TO 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 its 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.

1.1.2 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 betweenboth the insurance companies and banks.

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

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

can be increased through hawking of risk products like insurance.

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

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

Bancassurance StrategyThe Concept

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

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

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


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European countries as banks selling insurance products in most of these countries are a

common feature. Banks are being used as an effective alternate channel to distribute insurance

products either as stand-alone insurance products or add-ons to the bank products by way

of combining the insurance with typical banking products/services. According to IRDA,

bancassurance refers to banks acting as corporate agents for insurers to distribute i n s u r a n

c e p r o d u c t s . L i t e r a t u r e o n b a n c a s s u r a n c e d o e s n o t differentiate

if the bancassurance refers to selling of life insurance p r o d u c t s o r n o n - l i f e i n s u

r a n c e p r o d u c t s . A c c o r d i n g l y, h e r e bancassurance is defined to mean

banks dealing in insurance products of both life and non-life type in any forms. Banks in

Europe though predominantly deal with life insurance products, they are also channeling the

non-life insurance products. It is also important to clarify that the term bancassurance does not

just refer specifically to distribution alone. Other features, such as legal, fiscal, cultural and/or

behavioural aspects also form an integral part of the concept of bancassurance (SCOR 2003).

Quite reverse of the concept of bancassurance, there is also a concept known as assure

banking which refers to the provision and distribution of financial and banking services by

insurance companies

1.2. HISTORY OF BANCASSURANCE

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, andAustralia.

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

the insurance industry, Bancassurance evolved in India around 2002.


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

and the stage of development that insurance companies are already into.

However the most commonly used definition is:

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

common customer base.

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

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

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

generate highest quality returns for insurance companies and banks.

The Birth of Bancassurance

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

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

supplement the commission income earned from their sales. By doing so, they sought to

leverage their customer list and the related customer information that would enhance their

ability to sell insurance products to their largely mid-market customers. These early efforts

were based on the advantages that are still recognized as accruing to banks in the insurance

business:

The banks' brand name and reputation The productivity levels of branch staff and in-house agents, which can reach three to

four times that of the traditional agency force.

Bancassurance is also known as theBank InsuranceModel or BIM. Bancassurance is an

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

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

providers are then able to utilize the banks staff and resources to sell the policies.
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6. It is believed that the prospects for increased consolidation between banking andinsurance is more likely dominated and derived by the marketing innovations that are

likely to follow from financial service modernization. Such innovations would include

cross selling of banking, insurance, and brokerage products and services; the increased

use of the Internet by consumers; and a melding of insurance and banking corporate

cultures.

7. One of the most important reason of considering Bancassurance by Banks is increasedreturn on assets (ROA). One of the best ways to increase ROA, assuming a constant asset

base, is through fee income. Banks that build fee income can cover more of their

operating expenses, and one way to build fee income is through the sale of insurance

products. Banks that effectively cross-sell financial products can leverage their

distribution and processing capabilities for profitable operating expense ratios.

8. Another advantage banks have over traditional insurance distributors is the lower cost persales lead made possible by their sizable, loyal customer base. Banks also enjoy

significant brand awareness within their geographic regions, again providing for a lower

per-lead cost when advertising through print, radio and/or television. Banks that make the

most of these advantages are able to penetrate their customer base and markets for above-

average market share.

9. Other bank strengths are their marketing and processing capabilities. Banks haveextensive experience in marketing to both existing customers (for retention and cross

selling) and non-customers (for acquisition and awareness). They also have access to

multiple communications channels, such as statement inserts, direct mail, ATMs,

telemarketing, etc. Banks' proficiency in using technology has resulted in improvements

in transaction processing and customer service.

10.By successfully mining their customer databases, leveraging their reputation and'distribution systems (branch, phone, and mail) to make appointments, and utilizing 'sales

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

doubled the conversion rates of insurance leads into sales and have increased sales

productivity to a ratio which is more than enough to make bancassurance a highly

profitable proposition.


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11.Most insurers that have tried to penetrate middle-income markets through alternativechannels such as direct mail have not done well. Clearly, a change in approach is

necessary. As with any initiative, success requires a clear understanding of what must be

done, how it will be done and by whom. The place to begin is to segment the strengths

that the bank and insurer bring to the business opportunity.


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1.3 OBJECTIVES

To understand the concept of bancassurance. To study the contractual relationship between bank and the insurer. To study the various distribution channels of bancassurance. To find the problems faced by the financial institutions due to bancassurance


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1.4 Utilities of Bancassurance

FOR BANKS

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

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

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

has been more or less steady over a period of time and growth has been fairly predictable.

However shrinking interest rate, growing competition and increased horizontal mobility of

customers have forced bankers to look else where to compensate for the declining profit

margins and Bancassurance has come in handy for them. Fee income from the distribution of

insurance products has opened new horizons for the banks and they seem to love it.

From the banks point of view, opportunities and possibilities to

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

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

from all sources combined. Fee Income from Bancassurance also reduces the overall customer

acquisition cost from the 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.

2.Product Diversification - In terms of products, there are endless opportunities for the

banks. Simple term life insurance, endowment policies, annuities, education plans,

depositors insurance and credit shield are the policies conventionally sold through the

Bancassurance channels. Medical insurance, car insurance, home and contents insurance and

travel insurance are also the products which are being distributed by the banks. However,

quite a lot of innovations have taken place in the insurance market recently to provide more

and more Bancassurance-centric products to satisfy the increasing appetite of the banks for

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

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

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

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


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some new and innovative Bancassurance products are income builder plan, critical illness

cover, return of premium and Takaful products which are doing well in the market.

3.Building close relations with the customers - Increased competition also makes it

difficult for banks to retain their customers. Banassurance comes as a help in this direction

also. Providing multiple services at one place to the customers means enhanced customer

satisfaction. For example, through bancassurance a customer gets home loans along with

insurance at one single place as a combined product. Another important advantage that

Bancassurance brings about in banks is development of sales culture in their employees.

Also, banking in India is mainly done in the 'brick and mortar' model, which means that most

of the customers still walk into the bank branches. This enables the bank staff to have a

personal contact with their customers. In a typical Bancassurance model, the consumer will

have access to a wider product mix - a rather comprehensive financial services package,

encompassing banking and insurance products

FOR INSURANCE COMPANIES

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

insurance companies in India. Because of the Liberalization of the economy it became easy

for the private insurance companies to enter into the battle field which resulted in an urgent

need to outwit one another. Even the oldest public insurance companies started facing the

tough competition. Hence in order to compete with each other and to stay a step ahead there

was a need for a new strategy in the form of Bancassurance. It would also benefit the

customers in terms of wide product diversification.

2. 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.


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3. Multiple distribution channels- 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.

4. 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.

1.5MODELS OF BANCASSURANCE

1. STRUCTURAL CLASSIFICATION

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

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

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

company either at the premises of the ban0k or elsewhere. Referral model is nothing but a

simple arrangement, wherein the bank, while controlling access to the clients data base, parts

with only the business leads to the agents/ sales staff of insurance company for a referral fee

or commission for every business lead that was passed on. In fact a number of banks in India

have already resorted to this strategy to begin with. This model would be suitable for almost

all types of banks including the RRBs /cooperative banks and even cooperative societies both

in rural and urban. There is greater scope in the medium term for this model. For, banks to

begin with can resort to this model and then move on to the other models.

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

of Corporate Agency, wherein the bankstaff as an institution acts as corporate agent for the

insurance product for a fee/commission. This seems to be more viable and appropriate for


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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.

2. PRODUCT BASED CLASSIFICATION

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

insurance products through either referral arrangement or corporate agency without mixing

the insurance products with any of the banks own products/ services. Insurance is sold as one

more item in the menu of products offered to the banks customer, however, the products of

banks and insurance will have their respective brands too.


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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.

3. BANK REFERRALS

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

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

pay the commission to them. That is called referral basis. In this method also there is a win-

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

databases of the customers and the customers get the benefits.

REGULATIONS FOR BANCASSURANCE IN INDIA

RBI NORMS FOR BANKS

RBI Guidelines for the Banks to enter into Insurance Business

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

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

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

for banks.

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

as agent of insurance companies on fee basis. Without any risk participation


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

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

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

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

The eligibility criteria for joint venture participant are as under:

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

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

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

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

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

should be satisfactory.

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

Insurance Regulatory and Development Authority/Foreign Investment Promotion Board, more

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

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

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

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

company on risk participation basis.

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

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

company for providing

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

should be without any contingent liability for the bank.

The eligibility criteria for these banks will be as under:

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

ii.The level of NPAs should be reasonable;

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

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

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


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

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

threat to the bank in its present or the proposed line of activity, viz., insurance business. It

should be ensured that risks involved in insurance business do not get transferred to the bank.

There should be arms length relationship between the bank and the insurance outfit.

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

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

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

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

cent of the paid up capital within a prescribed period of time.

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

eligibility criteria.

IRDA NORMS FOR INSURANCE COMPANIES

The Insurance regulatory development & Authority has given certain guidelines for the

Bancassurance they are as follows: -

1) Chief Insurance Executive: Each bank that sells insurance must have a chief Insurance

Executive to handle all the insurance matters & activities.

2) Mandatory Training: All the people involved in selling the insurance should under-go

mandatory training at an institute determined(authorized) by IRDA & pass the examination

conducted by the authority

3) Corporate agents: Commercial banks, including co-operative banks and RRBs may

become corporate agents for one insurance company.

4) Banks cannot become insurance: brokers.

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

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

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

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

following:-


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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.


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Documents

Introduction to Banc