Bancassurance: An Emerging concept in
India
Karumbaiah.K.P
0921216
2 MBA L
Executive Summary
The life insurance industry in India has been progressing at a rapid pace since opening up of the
sector in 2000. The size of the country, a diverse set of people combined with problems of
connectivity in rural areas, makes insurance selling in India a very difficult proposition. Life
insurance companies require immense distribution strength and tremendous manpower to reach
out to such a huge customer base.
This distribution will undergo a sea change as various insurance companies are proposing to
bring insurance products into the lives of the common man by making them available at the most
basic financial point, the local bank branch, through Bancassurance. Simply put, bancassurance
is the process through which insurance products are sold to customers at their local banks. With
banking network of 65,000 branches serving more than 300 million retail banking customers,
insurance can be available at affordable prices to people even in remote corners of the country.
The relationship is symbiotic; but there are challenges. The most common challenges to success
are poor manpower management, lack of a sales culture within the bank, no involvement by the
branch manager, insufficient product promotions, failure to integrate marketing plans, marginal
database expertise, poor sales channel linkages, inadequate incentives, resistance to change,
negative attitudes toward insurance and unwieldy marketing strategy. Even insurers and banks
that seem ideally suited for a bancassurance partnership can run into problems during
implementation. Before targeting the market, it is essential to do a
SWOT analysis.
One more important obstacle in development of bancassurance in India has been a set of
regulatory barriers. Some of these have recently been cleared with the passage of the Insurance
(Amendment) Act, 2002. Looking at the west where sales through the banking network have
been a roaring success, the Indian banking sector has far to go. But one thing stands obvious. If
insurance in India is to succeed, it can only be through the Bancassurance channel.
Introduction
Your bank has already changed a great deal over the past decade. Your banker was once content
to collect your deposits and then lend the money to companies at a profit. Now he wants to lend
to you as well. It could be a loan for a new house, a new car or even for education in a foreign
university. Then there are products like demat services and mutual funds. Soon, there will be
more. When you walk into your bank six months from now, it is likely that they will try to sell a
host of insurance products to you even.
Welcome to Bancassurance. Bancassurance - a term coined by combining the two words bank
and insurance (in French) - connotes distribution of insurance products through banking
channels. Bancassurance encompasses terms such as ‘Allfinanz’ (in German), ‘Integrated
Financial Services’ and ‘Assure banking’. This concept gained currency in the growing global
insurance industry and its search for new channels of distribution. Banks, with their geographical
spread and penetration in terms of customer reach of all segments, have emerged as viable
sources for the distribution of insurance products. Presently, there’s more activity here than
anywhere else. And everyone wants to jump onto the bandwagon for a piece of the action cake.
The insurance industry has finally woken up from its long slumber to an altogether new
awakening. It is the rise of a new dawn that has brought with it opportunities galore. From
innumerable insurers, to affordable and quality covers for the consumer, from increase in
distribution channels to incorporating information technology measures, from net selling to
bringing about increased transparency - its all there. The ubiquitous agent is no more the only
distribution channel today for insurance products. Increase in distribution channels has among
others also seen the concept of Bancassurance taking roots in India, and it is emerging to be a
viable solution to mass selling of insurance products. Bancassurance is a long-standing dream of
offering a seamless service of banking, life & non-life products.
India, being the one of the most populous country in the world with a huge potential for
insurance companies, has an envious chain of bank branches as the lifeline of its financial
system. Banks with over 65,000 branches & 65% of household investments are the backbone of
the Indian financial market. In India, there are 75 branches per million inhabitants. Clearly, that’s
something insurance companies - both private and state-owned - would find nearly impossible to
achieve on their own. Considering banks as a channel for insurance gives an unlimited exposure
to Indian consumers. Banks have expertise on the financial needs, saving patterns and life stages
of the customers they serve. Banks also have much lower distribution costs than insurance
companies and thus are the fastest emerging distribution channel. For insurers, tying up with
banks provides extensive geographical spread and countrywide customer access; it is the logical
route for insurers to take.
However, the evolution of bancassurance as a concept and its practical implementation in various
parts of the world, have thrown up a number of opportunities and challenges. Aspects such as the
most suited model for a given country with its economic, social and cultural ramifications
interacting on each other, legislative hurdles, and the mindset of persons involved in this activity,
have dominated the study and literature on bancassurance. The motives behind bancassurance
also vary. For banks it is a means of product diversification and a source of additional fee
income. Insurance companies see bancassurance as a tool for increasing their market penetration
and premium turnover. The customer sees bancassurance as a bonanza in terms of reduced price,
high quality product and delivery at doorsteps. Actually, everybody can be a winner here. Will it
work in India? That can only be answered in the future; the initial action does show that many
banks seem to believe that bancassurance will be a big success here. Some foreign and Indian
banks -- Stanchart-Grindlays, ABN-Amro, Citibank, HSBC, Bank of Baroda (BoB) and State
Bank of India (SBI) -- are hoping to replicate the French success of this insurance-cum-banking
model.
Reasons for growing phenomena of Bancassurance
The opening up of the insurance industry to private sector participation in December 1999 has
led to the entry of 20 new players, with 12 in the life insurance sector and eight in the non-life
insurance sector. Almost without exception these companies are seeking to utilize multiple
distribution channels such as traditional agency, bancassurance, brokers and direct marketing.
Bancassurance is seen by many to be a significant or even the primary channel (the latter being
the case for at least SBI Life). In other Asian markets we have seen bancassurance make
significant headway in recent times. For example, bancassurance accounted for 24% of new life
insurance sales by weighted premium income* in Singapore in 2002. This is a significant
increase on the equivalent 2001 statistic of 15% and is as a result of growth in significant bank-
centric bancassurance operations. In Hong Kong the figure for 2002 is expected to be at the 20%
level for the same basic reasons.
Life insurance premium represents 55% of the world insurance premium, and as the life
insurance is basically a saving market. So it is one of the methods to increase deposits of
banks.
In non-life insurance business banks are looking to provide additional flow of revenues
from the same customers through the same channel of distribution and with the same
people.
Insurers have been turning in ever-greater numbers to alternative modes of distribution
because of the high costs they have paid for agent services. These costs became too much
of a burden for many insurers compared to the returns they generated.
Insurers operate through bancassurance own and control relationships with customers.
Insurers found that direct relationships with customers gave them greater control of their
business at a lower cost. Insurers who operate through the agency relationship are hardly
having any control on their relationship with their clients.
The ratio of expenses to premiums, an important efficiency factor, it is noticed very well
that expenses ratio in insurance activities through bancassurance is extremely low. This is
because the bank and the insurance company is benefiting from the same distribution
channels and people.
It is believed that the prospects for increased consolidation between banking and
insurance 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.
One of the most important reason of considering Bancassurance by Banks is increased
return 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 those effectively cross-sell financial products can leverage their
distribution and processing capabilities for profitable operating expense ratios.
By leveraging their strengths and finding ways to overcome their weaknesses, banks
could change the face of insurance distribution. Sale of personal life insurance products
through banks meets an important set of consumer needs. Most large retail banks
engender a great deal of trust in broad segments of consumers, which they can leverage in
selling them personal life insurance products. In addition, a bank branch network allows
the face-to-face contact that is so important in the sale of personal insurance.
Another advantage banks have over traditional insurance distributors is the lower cost per
sales 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.
Other bank strengths are their marketing and processing capabilities. Banks have
extensive 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. 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.
Insurers have much to gain from marketing through banks. Personal-lines carriers have
found it difficult to grow using traditional agency systems because price competition has
driven down margins and increased the compensation demands of successful agents.
Over the last decade, life agents have sold fewer and larger policies to a more upscale
client base. Middle-income consumers, who comprise the bulk of bank customers, get
little attention from most life agents. By capitalizing on bank relationships, insurers will
recapture much of this underserved market.
Most insurers that have tried to penetrate middle-income markets through alternative
channels 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.
Why Bancassurance in India?
The management of the new Indian operations is conscious of the need to grow quickly to reduce
painful start-up expense overruns. Banks with their huge networks and large customer bases give
insurers an opportunity to do this efficiently. Regulations requiring certain proportions of sales to
the rural and social sectors give an added impetus to the drive for bancassurance. Selling through
traditional methods to these sectors can be inefficient and expensive. Tying up with a bank with
an appropriate customer base can give an insurer relatively cheap access to such sectors. This is
still an issue for insurers despite the recent widening of the definition of the rural sector (so that
it now accords with the census definition).
In India, as elsewhere, banks are seeing margins decline sharply in their core lending business.
Consequently, banks are looking at other avenues, including the sale of insurance products, to
augment their income.
The sale of insurance products can earn banks very significant commissions (particularly for
regular premium products). In addition, one of the major strategic gains from implementing
bancassurance successfully is the development of a sales culture within the bank. This can be
used by the bank to promote traditional banking products and other financial services as well.
Bancassurance is not simply about selling insurance but about changing the mindset of a bank. In
addition to acting as distributors, several banks have recognized the potential of insurance in
India and have taken equity stakes in insurance companies. This is perhaps the precursor of a
trend we have seen in the United Kingdom and elsewhere where banks started off as distributors
of insurance but then moved to a manufacturing role with fully owned insurance subsidiaries.
Bancassurance in India - A SWOT Analysis
Bancassurance as a means of distribution of insurance products is already in force. Banks are
selling Personal Accident and Baggage Insurance directly to their Credit Card members as a
value addition to their products. Banks also participate in the distribution of mortgage linked
insurance products like fire, motor or cattle insurance to their customers. Banks can straightaway
leverage their existing capabilities in terms of database and face-to-face contact to market
insurance products to generate some income for themselves, which hitherto was not thought of.
Huge capital investment will be required to create infrastructure particularly in IT and
telecommunications, a call center will have to be created, top professionals of both industries
will have to be hired, an R & D cell will need to be created to generate new ideas and products. It
is therefore essential to have a SWOT analysis done in the context of bancassurance experiment
in India.
Strengths
In a country of 1 Billion people, sky is the limit for personal lines insurance products. There is a
vast untapped potential waiting to be mined particularly for life insurance products. There are
more than 900 Million lives waiting to be given a life cover (total number of individual life
policies sold in 1998-99 was just 91.73 Million). There are about 200 Million households waiting
to be approached for a householder’s insurance policy. Millions of people travelling in and out of
India can be tapped for Overseas Med claim and Travel Insurance policies. After discounting the
population below poverty line the middle market segment is the second largest in the world after
China. The insurance companies worldwide are eyeing on this.
Our other strength lies in a huge pool of skilled professionals whether it is banks or insurance
companies who may be easily relocated for any bancassurance venture. LIC and GIC both have a
good range of personal line products already lined up, therefore R & D efforts to create new
products will be minimal in the beginning. Additionally, GIC with 4200 operating offices and
LIC with 2048 branch offices are almost already omnipresent, which is so essential for the
development of any bancassurance project.
Weaknesses
The IT culture is unfortunately missing completely in all of the future collaborators i.e. banks,
GIC & LIC. A late awakening seems to have dawned upon but it is a case of too late and too
little. Elementary IT requirement like networking (LAN) is not in place even in the headquarters
of these institutions, when the need today is of Wide Area Network (WAN) and Vast Area
Network (VAN). Internet connection is not available even to the managers of operating offices.
The middle class population that we are eyeing at is today overburdened, first by inflationary
pressures on their pockets and then by the tax net. Where is the money left to think of insurance?
Fortunately, LIC schemes get IT exemptions but personal line products from GIC (med claim
already has this benefit) like householder, travel, etc. also need to be given tax exemption to
further the cause of insurance and to increase domestic revenue for the country.
Another drawback is the inflexibility of the products i.e. it cannot be tailor made to the
requirements of the customer. For a bancassurance venture to succeed, it is extremely essential to
have in-built flexibility so as to make the product attractive to the customer.
Opportunities
Banks’ database is enormous even though the goodwill may not be the same as in case of their
European counterparts. This database has to be dissected variously and various homogeneous
groups are to be churned out in order to position the bancassurance products. With a good IT
infrastructure, this can really do wonders.
Other developing economies like Malaysia, Thailand and Singapore have already taken a leap in
this direction and they are not doing badly. There is already an atmosphere created in the country
for liberalization and there appears to be a political consensus also on the subject.
Therefore, RBI or IRA should have no hesitation in allowing the marriage of the two to take
place. This can take the form of merger or acquisition or setting up a joint venture or creating a
subsidiary by either party or just the working collaboration between banks and insurance
companies.
Threats
Success of a bancassurance venture requires change in approach, thinking and work culture on
the part of everybody involved. Our work force at every level are so well entrenched in their
classical way of working that there is a definite threat of resistance to any change that
bancassurance may set in. Any relocation to a new company or subsidiary or change from one
work to a different kind of work will be presented with vehemence. Another possible threat may
come from non-response from the target customers. This happened in USA in 1980s after the
enactment of Garn - St Germaine Act. A rush of joint ventures took place between banks and
insurance companies and all these failed due to the non-response from the target customers. US
banks have now again (since late 1990s) turned their attention to insurance mainly life insurance.
The investors in the capital may turn their face off in case the rate of return on capital falls short
of the existing rate of return on capital. Since banks and insurance companies have major portion
of their income coming from the investments, the return from bancassurance must at least match
those returns. Also if the unholy alliances are allowed to take place there will be fierce
competition in the market resulting in lower prices and the bancassurance venture may never
break-even.
Regulatory issues
The development of bancassurance in India has been slowed down by certain regulatory barriers,
which have only recently been cleared with the passage of the Insurance (Amendment) Act,
2002. Prior to this, all the directors of a company wishing to take up corporate agency (such as a
bank) were technically required to undertake 100 hours of agency training and pass an
examination. This was clearly an impractical requirement and had held up the implementation of
bancassurance in the country. As the current legislation places the training and examination
requirements upon a designated person (.the corporate insurance executive.) within the corporate
agency, this barrier has effectively been removed.
Other regulatory changes of note in this area are the recently published Insurance Regulatory and
Development Authority (IRDA) regulations relating to the licensing of corporate agents. This
specifies the institutions that can become corporate agents and sets out the training and
examination requirements for the individuals who will be selling on behalf of the corporate
agent, the so-called .specified persons. Specified persons have to satisfy the same training and
examination requirements as insurance agents. A noticeable exception is that for those
possessing the Certified Associate ship of Indian Institute of Bankers (CAIIB) only 50 hours of
training (rather than 100 hours) will be required. This also applies to certified accountants and
actuaries. It is hoped that this aspect of the regulations will lead to well educated, professional
bank officers carrying out the financial advisory process. Although expected, a restrictive feature
of the bancassurance regulations is that they appear to constrain the corporate agent to receiving
only commission; profit-sharing arrangements would seem to be ruled out. We feel that this, if
applied in practice, is unfortunate as profit sharing agreements, which are increasingly common
internationally, serve to align the interests of the bank and the insurance company. Also, as
products sold through bank channels can be highly profitable, such agreements may be
financially advantageous for banks. In the longer term a profit-sharing agreement can help a
bank move from being a distributor to a manufacturer of insurance products thus leading to
greater integration in the financial services marketplace.
Given the open-mindedness and responsiveness of the IRDA to regulations in general, we hope
that it will not be too long before profit-sharing agreements are permitted between insurers and
corporate agents.
Summary
Where legislation has allowed, bancassurance has mostly been a phenomenal success and,
although slow to gain pace, is now taking off across Asia, especially now that banks are starting
to become more diverse financial institutions, and the concept of universal banking is being
accepted.
In India, the signs of initial success are already there despite the fact that it is a completely new
phenomenon. The factors and principles of why it is successes elsewhere exist in India, and there
is no doubt that banks are set to become a significant distributor of insurance related products
and services in the years to come.
