Bancassurance - Concept, Scope

and Strategies
Dr K Ramesha, Professor
 Bancassurance
• 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
 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. The post Gramm-Leach-Bliley (GLB)
Act, 1999 scenario, it is stated to have indicated
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 (NII)
 World view
Bank’s non-interest income as% of total
income
India 18
Spain 25
Sw eden 27
Netherland 31
Canada 34
Australia 35
Belgium 36
Italy 36
Germ any 37
France 38
Japan 38
USA 40
UK 44
Sw itzerland 53
0 10 20 30 40 50 60
 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)
 Bancassurance - Win-Win Solution?
Bank
• Customer retention
• Satisfaction of more financial
needs under the same roof
• Revenue diversification
• More profitable resource
utilisation
• Enriched work environment
• Establish sales orientated
culture
Insurance Company
• Revenue and channel
diversification
• Quality customer access
• Quicker geographical reach
• Creation of brand equity
• Leverage service synergies with
Bank
• Establish a low cost acquisition
channel
 Bancassurance Models

Referral Arrangements & Corporate Agen

Distributio
- Dena Bank (Referral)
n
Alliance - Union Bank of India (Corporate agency)

Joint Venture
JV - SBI Life (JV with Cardiff SA & SBI),
between - ING Vysya (JV with ING & Vysya Bank)
Bank&
Insurer
 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 Models (Contd.
Not Permitted at present in India
- Global banks taken the lead
Merger  Citigroup - Travelers
between
Bank - Global Insurance Cos taken the lead
& Insurer  Allianz-Dresdner Bank

 Credit Agricole-Predica & Pacifica

Build or buy (France)
own
Insurance  May bank-May ban Life & Mayban
companies Gen Assurance berhard (Malaysia)
 Bancassurance

Merger between
Distribution
Bank and
high Alliance
Insurance Co

Growth Build or Buy

Joint Venture own Insurance
between Bank or Banking
and Insurer Company

low Synergies high

Bancassurance around the Globe
90%
Bancassurance 80%
77%
75%
Share(%) 70% 67%
60% 56%
50%
40% 35%
30% 25%
20%
20%
10% 4%
10% 5% 1%
0%

UK

US
ly
ain

an
ce
Ita

n
al

s ia

ny
nd

de
tug
Sp

iw

ma
Fr a

lay

r la

e
Ta
r

Sw
Ma
Po

r
t he

Ge
Ne
 International Insurance Penetration
(i.e.premium in % of GDP 2003) Comparison

20.00%
18.00%
16.00%
14.00%
12.00%
10.00% 18.78%
16.25%
8.00%
6.00% 9.58% 10.86%
8.14%
4.00%
3.24% 3.26% 4.23%
2.00%
0.00%
Thailand India Malaysia World United Japan United South Africa
average States Kingdom

India ranking is 43 in terms of insurance penetration

Source: Swiss Re, Sigma report 12/2003
Insurance Market - Asia
Bancassurance in India
A Case Study of A Regional Rural Bank (RRB
Basti Gramin Bank (BGB) sponsored by SBI
Encashing new channel of Income – Bancassurance
BGB Background –
* Bank Sponsored by SBI on Aug, 1980
* Geographical coverage of 3 backward districts
of Eastern U.P.
* Branch network of 105 branches (96-Rural & 9-S
* Strength of 450 staffs
 BGB Case study (Contd.)
Process initiated :
- Bank management realized potential of Bancassurance,
another channel of income to sustain profit
-‘Why’, ‘When’ & ‘How’ of Bancassurance was conveyed
to individual staff members by bank management.
- Became first RRB to obtain corporate agency of SBI Life
in June,2002.

- Bank carefully identified & selected 21 staffs to be

trained as ‘Specified Persons’.
- Bank Started first selling simple, pure risk covers
“Super Suraksha” Group insurance product to bank
customers.
 BGB Case study (Contd.)
- After gaining confidence & success, Bank introduced
saving cum protection policy “Sudershan”.
- In Feb 04, Bank introduced SBI Life’s pension products.

Report Card (Mar, 2004)

Bank earned 24% of net profit from commission on
bancassurance in second year of operation.
Rs. in Lacs
Supersuraksha Sudershan

Sum Assured 7434.00 2254

Premium Collected 35.29 150
No of Proposals 10250 6764
Bancassurance –New Avenue of Bank Income- Why now ?

Necessity is the mother of Invention.

• Cut throat competition in core banking activities,
• Declining profit margin due to thinning spread,
• Slow takeoff in credit,
• Adequate liquidity in the banking system,
• Less profitable fund based business,
• Increasing non interest expenditure.

•Banks diversifying into new fee based avenues

• Bancassurance is one of such avenues
• Income from bancassurance can increase bank ”ROA”
without increasing “A”
An conserative estimate of fee income earning
from Bancassurance
All Scheduled Commercial Banks can earn fee income from bancassurance
anywhere between Rs. 9000 Crores and Rs. 5400 Crores within a
period of 5 years.
Assumptions :
Total Bank accounts - 18 Crores
Premium target - Rs. 2000 from each account holder
Time Period - 5 years
Commission on FPI - 15% to 25%
Insurance Segment - Life
Renewal Premium - Nil
Segment not covered - Non life, Pension &
Health
Calculation :
Maximum---180000000*2000*25%=9000 Crores
Minimum –- 180000000*2000*15%=5400 Crores
 Bancassurance- Prospects
Banks
Improvement in profitability & productivity of banks,
increase in loyalty of customers,
Increase in ROA without increasing ‘A’,
Increase in shareholder value,
Hedging of credit risk upto certain extent,
Increase in retention of customers,
Deployment of surplus manpower due to computerization,
Creation of sale oriented culture among bank employees.
 Bancassurance- Prospects (Contd.)
Insurance
 Lower cost of customer acquisition,
 Penetration in virgin territory,
Creation of brand equity ,
 Increase in profit.
Customer
 One stop shopping of financial services,
 Lower cost of insurance products,
 Variety of new products,
 Hassle free post sale services.
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 bank’s existing range of
products
 Issues in Bancassurance
• Please take a look at handout
– Bancassurance: A Feasible Strategy for Banks
in India, RBI Occasional Paper
– Please focus on Bancassurance in India – Some
Issues, page 149
 Issues and Challenges for Banks
• Corporate Strategy and support from top
• Market Analysis
• Product Positioning
• Distribution - Branch identification
• Support to Branches
– cultural aspects
– training/sensitization
– operational procedures
 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
 Utilizing Branch Network
• Bank Culture
– Banks are not used to `walk-out approach’
– Systematic approach to `customer encounter’ at
branches
– Shift from `selling’ to ‘marketing’
• Products
– Simple and transaction-based products
– Easy to explain and can be sold across the counter
– An average bank officer should be able to sell after
undergoing special training
 Utilizing Branch Network
• Remuneration
– A thorny issue
– Incentives to individuals is, however a must
• Top Management’s Involvement
– Banks should see insurance as a key to their business
strategy and thus invest necessary resources
– A casual foray (as it happened in India with
exceptions) in the long-run may be a failure
– Integrated approach - insurance should be a part of
banking business
Thank you