Bancassurance - Concept, Scope

and Strategies
Dr K Ramesha, Professor
National Institute of Bank Management
Pune 411048
Bancassurance - Background
Globalization
Financial Sector Reforms resulting in
financial services consolidation
Subsidiary route
Universal banks
Bancassurance
Bank to insurance company (credit agricole)
and vice versa (ING of Netherlands -
merger of insurance company with bank)
Bancassurance
World over the idea of separation of roles between
banks and other financial activities has become
redundant. Even in the United States which was known
for strict separation of banking and non banking
activities during the Glass-Steagall Act regime broke the
dividing wall.
Trend, now is towards increased preference for banks
co-terminously dealing with other non-banking financial
products, including the insurance products.
In Asian countries (e.g., Taiwan, Singapore, Japan, etc.)
too the trend has been set towards financial supermarket.
Bancassurance
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)
According to IRDA, bancassurance refers to banks acting
as corporate agents for insurers to distribute insurance
products. Literature on bancassurance does not
differentiate if the bancassurance refers to selling of life
insurance products or non-life insurance products.
Accordingly, here bancassurance is defined to mean
banks dealing in insurance products of both life and non-
life type in any forms
What is Bancassurance?
Alliance between banks and insurers for the sale
of insurance through banks
Insurer is responsible for manufacturing or
underwriting
Banks serving as distribution channel
In principle, Bancassurance means both way
traffic but in reality it is mostly one way
In India the concept of bancassurance is just
emerging and is in fact, another distribution
channel
Bancassurance as a Concept
Bancassurance means a package fulfilling both
banking and insurance needs
Bancassurance is a term first appeared in
France after 1980 to define the sale of insurance
through banks
LIMRA defines provision of life insurance
services by banks and building societies
In our country bancassurance largely means
distribution of insurance products by banks
Why Bancassurance?
India has high saving rate - huge insurance
potential
Banks are major players in the financial sector
Complementarity between banking and insurance
products (for example, in mortgage finance banks
require their customers to insure themselves
against some standard risk)
Credit risk can be better managed with insurance
Banks can increase revenue
Why Bancassurance?
Wide range of products/services-competitive
edge
High fixed cost in retail branches-Bancassurance
improves productivity-economies of scale
Banks client base is more than 100 mn
As a response to long-term shift in the pattern of
retail savings (insurers are taking a growing
share in retail savings)


Bancassuance Advantages to
Banks
Additional and stable stream of income through diversification into
insurance and reduction on reliance on interest spreads as the major source
of income
Leverage on their extensive customer bases as also better utilization of fixed
infrastructure inculcation of sales oriented culture amongst staff of banks
Offering a whole range of financial services to clients and increase customer
retention
Reduce risk-based capital requirement for the same level of revenue
increased return on capital as also assets
Work towards the provision of integrated financial services tailored to the
life-cycle of customers
Access funds that are otherwise kept with life insurers, who sometimes
benefit from tax advantages
Better credit risk management by banks by using insurance such as for
instance, mortgage insurance
Bancassuance Advantages to
Insurance Companies
Tap into a huge customer base of banks business growth
Reduce their reliance on high-cost traditional agents by
making use of the various channels owned by banks
Availability of the relatively more sophisticated
technology
Improved efficiency on account of reduced ratio of
expenses to premium
Develop new financial products more efficiently in
collaboration with their bank partners
Establish market presence rapidly without the need to build
up a network of agents/insurance outlets
Obtain additional capital from banks to improve their
solvency and expand business
Bancassuance Advantages to
Consumers
Unlike with banks and insurers, where benefits of bancassurance will have to
be weighted against business risk, the positive impacts on consumers are
unequivocal.
For instance, a part of the reduced distribution cost may be passed on to
clients in the form of lower premium rates.
In addition, it is likely that new products will be developed to better suit
client needs, which otherwise may not be available if banks and insurers
worked independently. Examples are overdraft insurance, depositor's
insurance and other insurance covers sold in conjunction with existing bank
services.
The conveniences offered by bancassurance such as single window, should
also increase customer satisfaction. For instance, from customers point of
view, it is possible to pay premium as well as to withdraw and repay cash
loans backed by life insurance policies through bank's ATMs.
Bancassurance Models
Referral Model
Banks as Corporate Agents
Banks as Insurance Brokers
Bancassurance Models

Growth
high
low
Synergies high
Joint Venture
between Bank
and Insurer
Merger between
Bank and
Insurance Co
Distribution
Alliance
Build or Buy
own Insurance
or Banking
Company
RBI Guidelines
RBI Guidelines
RBI Guidelines
Bancassurance Models
But most banks prefer corporate agency
model
Bancassurance is still in its nascent stages
Banks despite huge network of branches
and growing insurance business have not
been able to take significant commission
Public sector banks have unique advantages
over other banks (also disadvantages)
Bancassurance - Where we stand?
Linking banking with insurance is not an
easy task (whether it is through holding
route, merger, or selling insurance through
banks) - regulatory, accounting, business,
risks et are the issues
Perhaps, banks in India may be interested in
selling only


Bancassurance - Where we stand?
The flip side of the bancassurance as revealed by the international
experience, are that, as some of the products of insurance, especially
from the long term savings point of view, resemble closely that of the
term deposits of the banks, there was apprehension that insurance
products would supplant the bank products instead of supplementing.

There has also been problem that not all the insurance products, the
banks could market, in the European countries at least in the initial
stage. Furthermore, there were also resistances, in the initial stages,
from the insurance agents/ brokers due to apprehension of loss of
business for them by channeling insurance products through banks

Bancassurance - Where we stand?
No overall picture of success in Asia
Same is true to some extent in Europe
It is difficult to estimate the share of the total
market which could be captured by banks - Spain
70% of the insurance is sold through banks
whereas in US it is insignificant
Insurance product has not been successfully
integrated into the banks existing range of
products
Issues in Bancassurance - Banks
Commitment of the top management of the banks towards
bancassurance may be conveyed across the organization in terms of
a comprehensive and a perspective policy document on
bancassurance
Sensitization of the top executives with regard to the importance,
issues and constraints will ensure the required support for the people
working down the line
Though tie-ups have been formed, the operational and procedural
aspects relating to bancassurance have not been addressed. The
systems and procedures in regard to bancassurance, therefore, need
to be fine-tuned
Bank must go for life and general insurance simultaneously in order
to obtain scale economies as well as synergy
Initially, a joint approach (banker and insurer) to sales and after
sales services could be adopted

Issues in Bancassurance - Banks
A review of the tie-up arrangements with insurance companies from
time to time is essential
In view of the high growth potential, a separate departmental setup at
Corporate Office to start with and subsequently, in Zonal
Offices/Regional Offices should be created
It is imperative to estimate the branch-wise business potential jointly
by the bank and insurance company. This facilitates the meaningful
fixation of targets for insurance at the branch/RO/ZO level
The large loan proposals sanctioned at the CO/ZO/RO need
wholehearted cooperation from higher authorities to obtain insurance
business
There seems to be inadequate information sharing (or communication
flow) amongst authorities concerned with bancassurance within the
bank as also between the bank and insurance companies
Issues in Bancassurance - Banks
HR department should ensure a well-trained and dedicated pool of
manpower for bancassurance selection procedure may be made more
transparent
The training for Specified Persons should be on ongoing basis and
regulatory aspects like role of IRDA in bacassurance be covered in such
programs
The training colleges/centers of banks should invariably cover
bancassurance and cross-selling of products in all their training programs
The trained manpower should be used exclusively for bancassurance
Facilities like extra petrol, laptop computers, flexi-timings, and mobile
phone with upper limits etc should be seen as basic requirements for
effective discharging of duties by specified persons
Apart from facilities, an appropriate package of incentives for the persons
involved in bancassurance may be worked out in consultations with staff
unions and the insurance company. Further, branch as a whole may be
incentivised for better results
Due considerations be given in performance appraisal for specified
persons

Issues in Bancassurance - Insurers
The top management of insurance companies, in particular public
sector insurers must take bancassurance more seriously and evolve
comprehensive strategies to forge alliances with banks.
It appears that the insurers are not extending wholehearted support
to banks in regard to the distribution of complicated and high-
value products. Insurers must pass-on to banks the complete
information about products and also assist bank in distribution of
complex products such as non-life insurance products
Insurers must realize that 'putting bancassurance into operation' is
a complex process as insurance selling is indeed a distinctive skill.
Onus of preparing banks as also sensitization of the staff therefore
lies with the insurer.
Issues Concerning Banks and
Insurance Companies
There seems to be lack of clarity between insurer and banks in
regard to several operational activities including for instance,
marketing. There has also been a problem that not all the
insurance products, the banks could market, in the European
countries at least in the initial stage. Unless these issues are
addressed jointly the bancassurance will not move forward.
Under bancassurance channel, though banks are distribution
agents, the need for evolving a distinct business model needs no
emphasis in Indian context. Functional aspects such as
enunciation of clear and aligned goals, setting mutually acceptable
targets, addressing training and competence requirements,
mechanism for conflict resolution and revenue sharing,
exploitation of each other's database on clients without violating
privacy rights, and clear understanding of protection rules should
be factored into the business model.
Issues Concerning Banks and
Insurance Companies
Another area of concern is that of customer service and satisfaction. At
present a customer after the purchase of insurance from a bank will receive
service from the insurance company. Any lacunae in the service quality of
the insurer will impact the banking relationship. In this context, joint
efforts are required to ensure higher levels of customer service and service
quality.
It appears the research and development in regard to bancassurance is
almost not there as there is no proactive approach from either insurers side
or banks side. Utilization of banks customer data base for product
innovation has remained on paper only. It is imperative that bancassurance
can be successful if existing insurance products are modified or new
products are specially designed to suit the needs of the customers of the
bank which is possible only through collaborative efforts.
While financial inclusion is the buzz word in banking sector as of today,
we must remember this financial inclusion encompasses insurance also.
Both banks and insurers therefore must work towards ensuring providing
insurance to these excluded sections through bancassurance.
Revisiting Bancassurance
Revamp Organizational Support - Create
FSC
unit attached to ZO
marketing insurance (mainly life) and other
third party products through branches
sufficiently empowered - sensitized -
incentivised
pilot project - subsequently replication if
successful
Thank you