The life insurance industry in India has been progressing at a swift 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 enormous distribution of strength and tremendous manpower to reach out to such a huge customer base. This distribution has undergone a paradigm shift 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. The Bank Insurance Model (‘BIM’), also sometimes known as ‘Bancassurance’, is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products. The authors have tried to analyse the concept of financial supermarket. Therefore this research paper has been divided into three broad topics. Firstly, What Bancassurance Means. The authors will deal with the definition of Bancassurance along with the historical evolution of the Insurance Market in India. Secondly, A SWOT (Strength, Weakness, Opportunities and Threats) Analysis of the Bancassurance System with a detail studies of the scope of Bancassurance in India. Lastly, the authors will present their Views about Bancassurance and what the customers should expect from Bancassurance along with the Banker’s and Insurer’s perspective.
The Meaning Of Bancassurance
- Background Of The Recent Developments In The Insurance and Banking Sector
The New Economic Policy (NEP) was introduced in India in June 1991 by the then newly elected government and thus, the process of liberalization of Indian financial sector started. The main thrust of reforms in the financial sector was the creation of efficient and stable financial institutions and markets. Reforms in the banking and non-banking sectors focused on creating a deregulated environment, strengthening the prudential norms and the supervisory system, changing the ownership pattern, and increasing competition. The main idea was Globalization, Privatization, Deregulation and Liberalization.
In India, the reforms in the insurance sector (Life and General) commenced with the setting up of the Committee on Reforms on Insurance Sector under the chairman-ship of Dr.R.N.Malhotra, the ex- governor of RBI, by the Government of India in April 1993 for examining the structure of insurance industry. The recommendations of the Committee was submitted in 1994 which was accepted in principle by the government which started implementing the recommendations since December 1999, thus heralding an era of liberalization in the country’s insurance sector. The setting up of Insurance Regulatory and Development Authority (IRDA) and opening up of Insurance Business (life and general) to foreign capital up to 26 per cent were the initial steps in this direction. It is widely acknowledged that the opening up of the insurance sector has been aimed at ushering in greater efficiency in the insurance business by maximising productivity and minimising transaction cost. Competition is believed to bring a wider choice of products at lower prices to the consumers, larger coverage of population, better customer service, superior information technology, higher returns to the policyholders, and so on.
At present there are 21 private life insurers operating in the Indian life insurance market along with the only state owned life insurer Life Insurance Corporation of India (LICI). The total volume of premium reached to Rs. 221,791 crore in 2008-2009 from Rs. 24,630 crore in the year 1999-2000 which is little more than 800% increase by 22 numbers of insurers (including LICI) in India. In India, private life insurers are slowly gaining the momentum to penetrate the market with their new products, services and the global knowledge of expertise in doing life business. This can be witnessed from their growing market share statistics which shows nearly 30 percent of the market are in their hands at the end of 2008-09 financial year. Most important aspect is that their acceptability is on the rise though it is an urban phenomenon. The prominent private players operating actively are ICICI Prudential Life (6.92%), Bajaj Allianz Life (4.79%), SBI Life (3.25%), HDFC Standard Life (2.50%), Birla Sun Life (2.06%), Reliance Life (2.22%), Max New York Life (1.73%), and TATA AIG Life Insurance Company (1.23%)
In India, ever since espousing of financial reforms following the recommendations of First Narasimham Committee, the contemporary financial landscape has been reshaped. Banks, in particular, have stride into several new areas and are offering innovative products, viz., merchant banking, lease and term finance, capital market / equity market related activities, hire purchase, real estate finance and so on. Thus, present-day banks have become far more diversified than ever before. Therefore, their entering into insurance business is only a natural corollary and is fully justified too as ‘insurance’ is another financial product required by the bank customers. The Reserve Bank of India being the regulatory authority of the banking system, recognising the need for banks to diversify their activities at the right time, permitted them to enter into insurance sector as well. Furtherance to this line, it issued a set of detailed guidelines setting out various ways for a bank in India to enter into insurance sector. In the insurance sector, the Insurance Regulatory and Development Authority (IRDA), despite its recent origin in 2000, avowed to regulate and develop the insurance sector in India through calibrated policy initiatives.
- Bancassurance: What It Means.
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 ‘Assurebanking’. 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.
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 persons. Clearly, that’s something insurance companies – both private and state-owned -would find nearly impossible to achieve on their own. As a channel for insurance, it gives insurance 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 mind set of persons involved in this activity, have dominated the study and literature on Bancassurance.
- Important Bancassurance tie-up in India:
The essential feature of the Bancassurance sector is the tie-ups between banks and insurance companies. In India also a few Banks have tied up with the insurance companies and these tie-ups have proved beneficial for both the sectors. A few examples of such tie-ups in India are as follows:
- LIC: The insurance company LIC of India has tie-up with the following bank for Bancassurance-
- Corporation Bank
- Indian Overseas Bank
- Centurion Bank
- Sahara District Central Co-operative Bank
- Janta Urban Co-operative Bank
- Yeotmal Mahila Sahakari Bank
- Vijaya Bank, and
- Oriental Bank of Commerce
- SBI-Life Insurance Co.: The SBI life Insurance Co. Ltd. is starting and running its Insurance business with the help of SBI.
- Bajaj Allianz general Insurance Co. Ltd.: In the field of general Insurance the Bajaj Allianz General Insurance Co. Ltd., has tie-up with Karur Vysya and Lord Krishna Bank.
- Birla Sun Life Insurance Co. Ltd.: The Birla Sun Life Insurance Company has a tie-up with the following bank for the insurance purpose:
- Bank of Rajasthan
- Andhra Bank
- Development Credit Bank
- Bank of Muscat
- Dutch Bank, and
- Catholic Syrian Bank.
- Swot Analysis
In a country like India of one billion people where sky is the limit there is a vast untapped potential waiting 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). The insurance companies worldwide have an eye on it.
- Banks have the integrity established with their constituents because of a variety of services and schemes provided by them. They also enjoy good will among the masses because of their prolonged presence and persistent image.
- Bankers are well acquainted with the psychology of the customers because of the daily interaction with them and therefore they can guess the diverse needs and demands of the customers hence contributing to the sale of personal line insurance products
- The Bank Network is spread in the remotest of the areas which helps in taking up and executing large scale tasks easily all around the country.
- The other major strength that both the Insurance as well as the Banking sector enjoys is the large no. of skilled professionals involved in these sectors who can easily be relocated to 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.
The Bancassurance does not only come with Strengths. It has its own weaknesses that hinder its growth as a major force in the Indian Economic Sector. A late awakening seems to have dawned upon but it is a case of too late and too little.
- In spite of growing emphasis on total branch mechanism and full computerization of bank branches, the rural and semi urban areas have still to see Information Technology as an enabler. . 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.
- There is lack of personalized services because the traditional insurance agent is considered a member of the family and hence is able to render a personalized service during and after the sales process. However that may not be the case in regard to a bank employee.
- There are many differences in the ideological approaches of the banks and the insurance companies. Where, banks are traditionally “Demand driven” organizations, with a reactive selling philosophy, the Insurance Companies are “Need driven” institutions, having an aggressive selling philosophy.
- The middle class population that the banks have an eye on is today overburdened, first by inflationary pressures on their pockets and then by the tax net. There is no money left to think of insurance. Fortunately, LIC schemes get IT exemptions but personal line products from GIC (medi-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.
- The practical problem that may arise is that the customers visit the banks to have simple transactions-money deposit or withdrawal. They do not have time to have a discussion on long term durable purchases of insurance products over the counter. Also, the facilities like ATMs and E-banking have further restricted the visits to the urban or metro branches.
- Another drawback is the inflexibility of the products, i.e., it cannot be tailor made to the requirements of the customers. For a Bancassurance venture to succeed it is extremely essential to have in-built flexibility so as to make the product customer centric and appealing.
- To indulge into the sale of insurance products the bank employees have to undergo a certain kind of training for a specific period of time followed up by a test to get them licensed. In the recent past the standard of the test has been raised and hence it has become difficult to clear thereby becoming a major weakness of the Bancassurance concept.
The database of the Indian banks is huge but so is not the case with their goodwill when compared to 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.
There is already an atmosphere created in the country for liberalisation and there appears to be a political consensus also on the subject. Therefore, RBI or IRDA 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.
- The scope of the life insurance sector is vast an needs to be mined carefully. There are more than Nine hundred million lives waiting to be given a life cover (total number of individual life policies sold in 1998-99 was just 91.73 million).
- The numbers of people who are still unaware about the risks covered by the life insurance sector in India are many and they are still waiting for someone to come and inform them about it.
- The scope to market the property related insurances like fire insurances, medi-claim insurances can be enhanced by cross selling them with the bank’s core products and selling them as value added products with credit cards, debit cards, etc.
- Banks’ database is enormous even though the goodwill may not be the same. This database has to be dissected 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.
- Another area that could be of interest to bankers is to exploit the corporate customers and tie-up for insurance of the employees of corporate clients, which would be an avenue with easy access. In most cases Banks provide salary disbursement and loan facilities but here they can provide insurance cover as well.
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 is so well entrenched in its 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.
- Insurance in India is perceived more as a saving option than providing risk cover, so this may create an adverse feeling in the minds of the bankers that such products may lessen the sales of regular bank saving products like investment and good return products (e.g., Fixed Deposit).
- There would be a problem of “Reputational Contagion”, i.e. loss of market confidence towards one in a venture leading to loss of confidence on the other because of identical brand recognition, similar management and consolidated financial reporting, etc.
- 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.
- The most common obstacles to success of Bancassurance are poor manpower management, lack of a sales culture within a 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.
- Another possible threat may come from non-response from the target customers as 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.
- Legislations For Bancassurance
- Guidelines given by RBI:
The Reserve Bank of India has given certain guidelines for banks entering into the insurance sector. They are as follows:
- Any commercial bank will be allowed to undertake insurance business as the agent of insurance companies and this will be on fee basis with no-risk participation.
- The second guideline given by the RBI is that the joint ventures will be allowed for financial strong banks wishing to undertake insurance business with risk participation.
- The third guideline is for banks which are not eligible for this joint venture option, an investment option of
i) Up to 10% of the net worth of the bank or
ii) Rs. 50 crores. Whichever is lower is available.
The bank that wants to enter in participates in the insurance industry they have to follow the above guidelines given by the Reserve Bank of India.
- Guidelines given by IRDA:
The Insurance Regulatory and Development Authority have given certain guidelines for the Bancassurance which are as follows:
1) Chief Insurance Executive: Each bank that sells insurance must have a chief Insurance Executive to handle all the insurance matters and activities.
2) Mandatory Training: All the people involved in selling the insurance should undergo mandatory training at an institute determined (authorized) by IRDA and 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:
1) Training and examinations 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 licensing of Corporate Agents
2) Specified person to satisfy the training and examination: According to new regulation of IRDA only the specific persons have to satisfy the training and examination requirement as insurance agent.
- Restrictive feature:
A restrictive feature of Bancassurance is that it limits the ambit of corporate agents to commission based earning and rules out the possibility of profit sharing in the company. Hence it affects the basic mindset of the already working bank employees thus acting as a restrictive feature. Another restrictive feature is that the products sold through bank channels/ networks can be highly profitable and so such agreement with banks is highly beneficial for banks only and therefore the interests of the insurance sector is shaken.
- Advantages of Bancassurance:
Bancassurance has its own shortcomings but undoubtedly if implemented properly it may change the face of Indian economy for its own good. Bancassurance is a tool which is beneficial to bank, customer and insurer at the same time. It is ‘Win Win Situation’for everyone. The advantages of Bancassurance from different points of view have been discussed below:
i) From the Banks’ point of view:
- It will enhance the income of the Banks if they will sell the insurances through their own channels hence adding up to the gross profit of the sector.
- Due to the huge customer database of the Banks they need not to go anywhere to sell the policies. They have a face to face contact with the customers and hence the sale of such products becomes easy and profitable as well.
- The bankers have extensive marketing skills therefore they can easily attract the customers as the banks possess goodwill in the minds of the customers.
- Banks use different value added services like E-banking, Tele-banking, Direct mail and so on. They can also use all the above mentioned facility for Bancassurance purpose with customers and non-customers.
ii) From the Insurers’ point of view:
- The Insurance companies can really mine the huge customer database of the banks for the sale of their policies.
- By cutting cost, insurers can serve better to customers in terms lower premium rate and better risk coverage through product diversification.
iii) From the Customers’ point of view:
- Product innovation and distribution activities are directed towards the satisfaction of needs of the customers.
- Bancassurance model assists customers in terms of reduction price, diversified product quality in time and at their doorstep service by banks.
In the current scenario of high interest rates banks are looking to find new avenue to increase their profitability; going in this direction banks are focusing to increase their fee based income.
To increase their fee based income banks are eagerly waiting for the Insurance Regulatory and Development Authority (IRDA) to open up Bancassurance which will allow them to tie up with four insurance firms in life, non-life and health segment; at present banks are allowed to tie up with one insurer in each Life and non-life segment.
However banks do not hold similar views on the opening up of Bancassurance as small banks which do not have direct presence in insurance sector are in favour of it while banks who have their insurance subsidiaries are not in favour of it; small banks in support of their views says that as interest rates have been hiked 10 times and increase in interest rates on saving account from 3.5% to 4% will contract their margins hence it has become essential for them to focus on non-interest income; they also say that as insurance sector is a capital intensive sector which require long term investment hence tying up with more insurance companies will help them to grow their fee based income.
On the contrary banks which have their insurance subsidiary are not in support of this move as they argue that this will increase the competition which will result in rivals offering more incentive and commission to lure the customers and this may also result in mis-selling of the products as insurance products are complex products and banks staff may not be highly trained to explain the difference in the features of the products to the customers correctly.
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Karunagaran, A. , Bancassurance – A Feasible Strategy For Banks In India, Reserve Bank of India Occasional Papers, Vol. 27, No. 3, Winter 2006
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Assessed on :16-09-2013.