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The primary focus of actuarial work is on the financial and economic consequences of

events involving risk and uncertainty. Actuarial practice involves the management of

these implications and their associated uncertainties. To gain insights about future

possibilities, the actuary depends on observation and the wisdom gained through prior

experience. The actuary uses these observations and this experience when constructing,

validating and applying models.

Actuarial models are constructed to aid in the assessment of the financial and economic

consequences associated with phenomena that are subject to uncertainty with respect to

occurrence, timing, or severity. This requires:

(a) Understanding the conditions and processes under which past observations were

obtained.

(b) Anticipating changes in those conditions that will affect future experience.

(c) Evaluating the quality of the available data.

(d) Bringing judgment to bear on the modelling process.

(e) Validating the work as it progresses.

(f) Estimating the uncertainty inherent in the modelling process itself.


 
 



—rinciples abstract the key elements of the scientific framework. —rinciples are not

prescriptions that specify how actuarial work is to be done, but are statements grounded

in observations and experience. The concept of actuarial risk defines the subject matter of

actuarial science. An actuarial risk is a phenomenon that has economic consequences and

is subject to uncertainty with respect to one or more of the actuarial risk variables:

occurrence, timing and severity.



 

 



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A model described by this principle together with a present value model, if

applicable, is called an actuarial model. Actuarial assumptions are those upon which

an actuarial model is based. An actuarial model can be constructed using data from

prior experiments, data from related phenomena or judgment. Such a model can be

validated by comparing its results to the actual outcomes to the phenomena being

modelled. In certain circumstances, the actuary¶s choice of assumptions may be

constrained by regulations or by professional standards.

In general, an actuarial model utilizes a present value model if it is intended to

determine economic values. A present value model included in an actuarial model is

often based on assumptions concerning aspects of the future environment, such as

 interest rates and inflation rates. The present value model can reflect the judgment of

the actuary constructing the model or that of the actuary¶s client. Although all

actuarial risk is subject to timing considerations, a present value model directly

addresses timing risk and is used if the time dimension is significant.

Most actuarial models are representations of collection of related actuarial risks. For

example, the actuarial risk of claims under Rs.100,000 life insurance policies issued

to selected 45-year-old males and the actuarial risk of claims under Rs. 200,000

policies for similarly selected insured can usually be represented by the same

actuarial model. The economic consequences in effect act as a scaling factor that

relates these separate phenomena and allows the same model to apply to both. In

other words, the economic consequences suggest exposure measures. This

observation applies to most actuarial models, although the economic consequences

and exposure measures may not be in exact proportion.

 



For most actuarial models, there exist one or more exposure measures that are

approximately proportional to the economic consequences of one or more collections

of the actuarial risks being modelled.

The degree of accuracy of a mathematical model is based on a comparison of values

calculated using the model with known values. As time passes and more known

values are available for comparison, the degree of accuracy of the model may change.

In the case of a model that is initially validated only judgementally, it may become

possible to determine the degree of accuracy.

 Actuarial modelling involves a feedback mechanism. As additional data emerge or

the environment changes, the model may need to be changed.

 

 

 



 


The change over time in the degree of accuracy of an initially valid actuarial model

depends upon changes in the:

a. Nature of the right to receive or the duty to make a payment.

b. Various environments (for example, regulatory, judicial, social, financial, and

economic) within which the modelled events occur financial, economic) within

which the modelled events occur.

c. Sufficiency and quality of the data available to validate the model

d. Actuary understands the environment.


  

   
 



  


 



  

There are three methods of Re-insurance:

1. Facultative method

2. Treaty method

3. —ooling method

 


 
This is the very oldest method of reinsurance. Under this method,

both the parties are found into a contract for any specific risk. It is an arrangement to

reinsure specific risk at a specific time. The reinsurer has the liberty to accept or reject a
proposal received for re-insurance. This method is a flexible one; reinsurance can be

effected according to the needs of circumstance. This method is more suitable for

emergency situations.



Certain important merits are as follows:

(1) There is no restriction on re-insurance.

(2) This method is flexible. The facility to make reinsurance is based on the

circumstances of the case.

(3) This method is more useful where the risk is not standardised.

(4) This method can be adopted even in emergency situations.

(5) This method makes the original insurer vigilant and makes arrangement for

reinsurance before the insurance is made. In case no re-insurance is available, he may

refuse to accept heavy proposal involving heavy risks.



The important demerits of this method are as follows:

(1) This is an uncertain method.

(2) Many paper-works are involved in the process of reinsurance.

(3) This method is more expensive.

(4) Unnecessary delays take place since the consent of the reinsurer is to be taken again

and again.

(5) This sort of delay in getting the consent of the reinsurer leaves the chance of getting

the insurance proposal.

(6) In absence of getting prior consent of the re-insurer, if the proposals involving heavy

risk are accepted, the insurer has to suffer heavy losses due to involvement of heavy

risk.

(7) This method is impractical and non-beneficial to small and medium re-insurers.

Because of these, and many other drawbacks of facultative reinsurance method, the Auto-

Facultative reinsurance method has been developed. Under this new method, a special

category of risks are reinsured. Re-insurance of this method has much importance in

Engineering Insurance, Air Transport Insurance, Satellite Insurance, Corp Insurance,

Disturbance Insurance etc.


 
It is an informal agreement between two insurers under which the re-

insurer agrees to reinsure risks written by the other insurance company (propose) subject

to the terms and conditions of the treaty and within the prescribed time limit. Treaty is a

formal and legally binding agreement between the parties. The following types of treaty

or agreements are made under this method:

a) Quota or fixed share treaty

b) Surplus treaty

c) Excess of loss treaty

d) Excess of loss ratio or stop-loss treaty.

 !

 

In this method of re-insurance, a fixed share or quota of

the risk is reinsured. For example, accepting reinsurance of 40 per cent of the business, an
agreement is made to accept reinsurance of fixed quota, say 54 per cent of all accidental

insurance.

In this method, reinsurance is made on the same conditions and premium in which the

original insurer has accepted the proposal. As a result, the reinsurer is bound to pay the

liability in the same ratio he has received the premium. He is not made responsible for all

the insurance business. Moreover, this method is suitable for small and medium-scale

insurers. The reason is that they can transfer a major part of their risks on the shoulders of

the reinsurer. This method is also beneficial where it becomes difficult to classify the

risks for which the reinsurance is needed and for which it is not needed.

"  #

 In this method of re-insurance, the original insurer determines his

risk-bearing capacity and for the surplus or for a certain amount, reinsurance is done.

This type of re-insurance is effected on each classes of risk or may be effected on the

basis of proposal risks estimated for a year.

The limit of reinsurance can be fixed in surplus treaty method. This limit may be for the

risk of every year. ³Line unit´ method is used for calculating the limit. One µline¶ is

equivalent the amount of the capacity of insurer. It is decided in advance the line of limit.

If the treaty decides that the limit for reinsurance will be µ10 lines¶ it means that

reinsurance can be possible for 10 times equivalent to his capacity to bear the risk by

himself.

On the basis of surplus treaty, the calculation of re-insurance is made as below, in the

given example, exhibited in the table:

 [ 



 
 % 
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 $   [ 

 &  
   
  

%
  
() & 

$ 
 

Accident 11,00,000 1,00,000 10,00,000 10,00,000 10,00,000

Insurance

Motor 10,50,000 1,00,000 9,50,000 10,00,000 9,50,000

Insurance

Crop 15,50,000, 1,00,000 14,50,000 10,00,000 10,00,000

Insurance

It is clear that the surplus of the total accident insurance and motor insurance come

within the limit of re-insurance. Therefore, reinsurance is possible for the whole surplus

amount. But, in crop insurance, re-insurance is not possible for an amount of Rs.

4,50,000.

  

In this method of reinsurance, reinsurance is effected on basis

of loss or indemnity to be paid, which is worked out in advance. The loss up to certain

limit is borne by the original insurer and the excess limit is reinsured. In this method, the

maximum liability limit under reinsurance is also determined.

  


*

In this method of insurance, the total loss is

specified within a limit. In other words, the loss beyond the prescribed limit is stopped.

For example, company µX¶, accepts the reinsurance proposal of Y company and promises
to bear 70 per cent of total loss or liability of Y company, but Y company should remit

more than 60 per cent of the premium collected by it. If the premium so collected is Rs.

50,000 and the claim already paid is Rs. 40,000 the liability of the re-insurer would be:



This method of re-insurance has the following merits:

1. This method of re-insurance is simple, secured and reasonable for the insured.

2. In this method provision exists automatically for reinsurance.

3. This method is more suitable for new and medium class insurers to organise the

business well.

4. It is easier for the insurer to secure more business.

5. The insurer can run the business with more freedom.



Some important demerits are as follows:

1. Re-insurer would not get the opportunity to select the risks of his own choice.

2. —rofits will be very little because reinsurance is made for general insurance risks

also.

3. The class of risk and the claim amount become comparatively less.


 
 This is the method to cover larger risks. A ³pool´ is created by

agreement between different insurance companies. The members of the pool deposit their

business earnings to the pool and claims are paid out of the resources accumulated in the

pool. The profit of the pool is distributed among the members in proportion to their

contribution in the pool.


 "
+"$   *
  
The difference between double insurance and re-insurance is as follows:

1. Basis Double insurance is the method by which an

insured purchases different policies against the

same subject matter whereas in re-insurance an

insurer obtains re-insurance with another insurer.

2. No. of —olicies The insured can obtain more than one policy

issued in the case of double insurance, whereas

only one policy is obtained against re-insurance.

3. Relations In double insurance there will be legal

between parties relationship between parties. In re-insurance,

relationship exists between the original insurer

and the re-insurer. The insured has no

relationship with the re-insurer.

4. Contribution In double insurance, every insurer is bound to

contribute in proportion to the policies on

happening of losses. In re-insurance, the insurer

is required to contribute in proportion to the

amount of re-insurance.

5. Claim In double insurance, the insured has the right to

claim from every insurer subject to the limit of

actual loss. In re-insurance the insured can

 demand compensation from the original insured

only.

6. —urpose The purpose of double insurance is to provide

security to the insured, even if any one of the

insurers become insolvent. The purpose of re-

insurance by the insurer is to reduce the risk and

protect himself.

7. Insured sum In double insurance, the sum assured is increased

according to the number of policies insured

whereas in re-insurance, only certain percentage

of the insured sum is reinsured.

8. Verification In double insurance, every insurer conducts a

verification of the subject matter insured. In re-

insurance the subject matter is not verified again

and again.

9. Advantage In indemnity insurance, the insured does not get

the benefit of double insurance. In reinsurance

the insured gets the benefits.

10 Nomination In the case of life insurance, nomination of all

. types of Double Insurance —olicies is possible. In

the case of re-insurance this facility is not

available to the insurer.



,
 
 




"    

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Bancassurance raises new issues in respect to insurance sales, including ethical ones,

which no doubt lawyers may soon have to address in practical situations.

For example, one issue is the use of information by banks (data mining) which they have

in their capacity as a bank, e.g. the customer¶s financial status, bank balances, amounts in

fixed deposits etc. to target the sale of particular insurance products to particular

customers. It is also not uncommon for banks to make incentive payments to tellers (who

at least know your current bank balance) who direct customers to a financial planner

(sales person). The incentive is paid if the financial planner is successful in making a

sale.

The quick sales process in a banking hall or branch office by the bank¶s staff (financial

advisor) vis-à-vis the home visit of an insurance agent may raise questions as to whether

the customer has had sufficient opportunity to consider the purchase carefully, especially

taking into account the long term commitment associated with insurance products. And

whether in the limited time available, sufficient information was elicited from the

customer to attempt to sell based on the customer¶s needs rather than merely pushing a

product.
Some of the Bancassurance tie-ups in India are:

$  [  % 

Birla Sun Life Insurance Co. Bank of Rajasthan, Andhra Bank, Bank of

Ltd. Muscat, Development Credit Bank,

Deutsche Bank and Catholic Syrian Bank

Dabur CGU Life Insurance Canara Bank, Lakshmi Vilas Bank,

Company —vt. Ltd. American Express Bank and ABN AMRO

Bank

HDFC Standard Life Insurance Union Bank of India

Co. Ltd.

ICICI —rudential Life Insurance Lord Krishna Bank, ICICI Bank, Bank of

Co. Ltd. India, Citibank, Allahabad Bank, Federal

Bank, South Indian Bank, and —unjab and

Maharashtra Co-operative Bank.

Life Insurance Corporation of Corporation Bank, Indian Overseas Bank,

India Centurion Bank, Satara District Central Co-

operative Bank, Janata Urban Co-operative

Bank, Yeotmal Mahila Sahkari Bank,

Vijaya Bank, Oriental Bank of Commerce.

Met Life India Insurance Co. Karnataka Bank, Dhanalakshmi Bank and

Ltd. J&K Bank

SBI Life Insurance Company State Bank of India

Ltd.

Bajaj Allianz General Insurance Karur Vysya Bank and Lord Krishna Bank

Co. Ltd.

National Insurance Co. Ltd. City Union Bank

Royal Sundaram General Standard Chartered Bank, ABN AMRO

Insurance Company Bank, Citibank, Amex and Repco Bank.

United India Insurance Co. Ltd. South Indian Bank

$
"


Given the roles and diverse skills brought by the banks and insurers to a bancassurance

tie up, it is expected that road to a successful alliance would not be an easy task. Some of

the issues that are to be addressed are:

(a) The tie-ups need to develop innovative products and services rather than depending

on the traditional methods. The kinds of products that the banks would be allowed to sell

are another major issue. For instance, a complex unit-linked life insurance product is

better sold through brokers or agents, while a standard term product or simple product

like auto insurance, home loan and accident insurance cover can be handled by bank

branches.

(b) There needs to be clarity on the operational activities of the bancassurance i.e., who

will do the branding, will the insurance company prefer to place a person at the bank

branch, or will the bank branch train and put up one of its own people with additional

remuneration.
(c) Even though the banks are in personal contact with their clients, a high degree of pro-

active marketing and skill is required to sell the insurance products. This can be

addressed through proper training.

(d) There are hazards of direct competition to conventional banking products. Bank

personnel may become resistant to sell insurance products since they might think they

would become redundant if savings were diverted from banks to their insurance

subsidiaries.

Factors that appear to be critical for the success of bancassurance are:

(a) Strategies consistent with the bank¶s vision, knowledge of target customer¶s needs,

defined sales process for introducing insurance services, simple yet compete product

offerings, strong service delivery mechanism, quality administration, synchronized

planning across all business lines and subsidiaries, complete integration of insurance with

other bank products and services, extensive and high-quality training, sales management

tracking system for reporting on agents¶ time and results of bank referrals and relevant

and flexible database systems.

(b) Another point is the handling of customers. With customer awareness levels

increasing, they are demanding greater convenience in financial services.

(c) The emergence of remote distribution channels, such as —C-banking and Internet-

banking, would hamper the distribution of insurance products through banks.

(d) The emergence of newer distribution channels seeking a market share in the network.


-
%    

Bancassurance has developed in parallel to the dramatic expansion of the world¶s life

insurance market since the mid-1980s. This expansion has relied mostly on savings-type

insurance products, a significant portion of which are very close to traditional banking

products such as fixed-income securities or mutual funds. European wide, bancassurance

has been far more successful selling savings-type products than risky products such as

those relating to longevity or disability. For these kind of risky products, as well as for

property and casualty insurance, traditional insurers have kept their market leadership.

While they also have expanded very significantly in the life insurance business, it has

been at a slower pace than bancassurance institutions, which have benefited from the

recycling of savings deposits into life products in several countries. This has notably been

the case in France, Belgium, Spain and —ortugal.

A range of bancassurance business models exists and this affects the type of legal

structures used. Nevertheless, these legal structures fall into three main above- mentioned

categories: ³—artnerships´, ³Joint ventures´ or ³captives´.

 

 

In this model, the insurance company distributes its products partly, though not

exclusively, through a banking channel. In addition, there is no dedicated legal entity to

underwrite this business, which is in practice directly accounted for on the insurer¶s

balance sheet. Under this model, the insurance company typically pays distribution

commission to the bank, which is in turn offset by entry and management fees charged to
policyholders. The relationship between the bank and the insurer may also be

complemented by a more or less significant shareholding or cross-shareholding.

The business logic for such a model is the recognition by a bank of a real need to be in a

position to offer (mostly life) insurance products to its customers while being unable or

unwilling to develop such expertise internally. In some cases, it may also be a way for the

bank to create competition among various insurance providers to attract clients by adding

value to its distribution capabilities.

 [ 

 

According to this model, an insurance company markets its products almost exclusively

through the distribution channel of its banking parent. In such cases, the ownership by the

bank in the insurer is typically very high, often 100%. The captive insurance company

typically pays distribution commissions to the bank, which are in turn offset by entry and

management fees charged to policyholders. In addition, the bank also benefits from the

insurer¶s profitability through dividends paid. When compared to the partnership model

or a joint venture, the logic for the captive business model is the recognition by the bank

of a real need to be in a position not only to offer (mostly life) insurance products to its

customers but also to keep the full know-how and profitability of the business in-house.

The insurance captive becomes an important tool of the bank¶s marketing policy and is a

separate legal entity only due to regulatory constraints. Nevertheless, it is very important

that the bank management has sufficient understanding of the insurance business.
Depending on the group structure, the insurance captive may be a direct subsidiary of the

bank or a sister company, both owned by the same holding company. This difference in

terms of legal structure generally reflects the significance of the business written by the

insurance captive through non-group channels. For instance, KBC Bank and KBC

Insurance are sister companies, both owned by KBC Group. Although KBC Insurance

distributes the bulk of its business through the bank¶s network, a significant portion of its

premiums, particularly those coming from Central Europe, are sold via alternative

distributors, mostly tied agents.



 


The Insurance Companies, having decided to adopt Bancassurance as an option to

maximize the returns from it and gain competitive advantage, should address the

following issues:

· History ± Brief outline (history) of the Bancassurance operation (was it set up as a joint

venture, alliance, leveraged life distribution, leveraged bank distribution, Brokerage

driven sales, etc.?)

· —roducts ± Are insurance products specifically designed for the Bancassurance

operation? How do insurance companies decide which products were appropriate and

which weren¶t? How are the products positioned? Has it been designed as ³Enabling

Service´ or ³Supplementary or referral service?´

· Cross Selling ± How effectively are insurance products sold to the bank customers?

What is the number of insurance products sold per bank customer?

· Training ± Are existing staff trained or are new people brought in? If companies did

train existing staff, were there any lessons learnt? If training is not given to existing staff,

what barriers did insurance companies feel existed?

· Technology ± To what extent has technology been useful to create efficiencies? Are

legacy systems still an issue?

· Integration ± How is the Bancassurance channel integrated into other parts of the

operation, from both an internal and customer perspective? In addition, the issues

pertaining to integration of culture and working pattern of Insurance companies and

Banks need to be emphasized upon.

· Key Success Factors ± What insurance companies believe to be the key success factors

for bancassurance in the marketplace?

%    
$

The management of the new Indian operations are conscious of the need to grow quickly

to reduce painful start-up expense over-runs. 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.

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 significantly 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 recognised 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.

%    
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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 centre 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.

#



In a country of more than 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.

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 Mediclaim 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, why not we pre-empt this

move by doing it ourselves?

Our 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.

" , 

The IT culture is unfortunately missing completely in all of the future collaborators i.e.

banks, GIC and 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 (mediclaim 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.

 /




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 chummed 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.

 


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 resented 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.





The development of bancassurance in India has been slowed down by certain regulatory

barriers, which have only been cleared with the passage of the Insurance (Amendment)

Act, 2002. —rior 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 µspecified persons¶. µSpecified —ersons¶ have

to satisfy the same training and examination requirements as insurance agents. A

noticeable exception is that for those possessing the Certified Associateship 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. It is felt 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 agreements 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, it

can be hoped that it will not be too long before profit-sharing agreements are permitted

between insurers and corporate agents.

,0


If we are looking around the world then we can see that European countries are doing

better than others where hardly 20% of banks are selling insurance in 1998 against 70%

to 90% in many European countries. Market penetration of bancassurance in new life

business in Europe ranges between 30% in UK to nearly 70% in France. Almost 100%

banks in France are selling insurance products. In 1991 Nationale Nederlanden of

Netherlands merged with —ost Bank, the banking subsidiary of the post office to create

the ING group a new dimension to the bancassurance is harnessing the databank of the

post office as well. CN—, the largest independent insurance company in France has

developed its products distribution through post offices. The merger of Winterthur, the

largest Swiss insurance company, with Credit Suisse and Citibank with Traverlers group

has resulted in some of the largest financial conglomerates in the world.

Despite the phenomenal success of bancassurance in Europe, properly and casualty

products have not made much inroads. In Spain, Belgium, Germany and France where

more than 50% of all new life premium is generated by bancassurance, only about 6%

property and casualty business comes from banks in Spain, 5% in Belgium, 4% in France

and Italy.

· A recent study by Boston Consulting Group and Bank Administrative Institute in USA

claims that if bank made a major commitment to insurance and a more narrowly targeted

commitment to investors within 5 years they could increase retail revenues by nearly

50%. It further states that:

· Banks could capture 10% to 15% of the total US insurance and investment market by

selling products to 20% of their existing customers.

· Banks¶ existing infrastructure enables them to operate at expense levels that are 30% to

50% lower than those of traditional insurers.

· Bancassurance¶s bank branch-based systems sell 3 to 5 times as many insurance policies

as a conventional insurance sales and distribution force.

· By simplifying bancassurance products, each bank office employees can quintuple

managing policies compared to traditional insurers.

%    
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The following are the challenges to bancassurance in India:

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+ 


Rigid unionized workforce, archaic systems, lack of vision of a broader service spectrum

slowed the Indian public sector banks down while the newer banks are constrained by

their lack of reach and meagre branch strength. For banks, in order to become a

predominant channel for selling insurance, will require a paradigm shift.

1&





" 

Banks all over the world have rarely been able to utilise their databases in their original

form, but have had to modify them before they could use them profitably for

bancassurance.

Many Indian banks emphasize only the identification aspect, when the customer opens

his account. This truncates a database severely, since it is financial profile of the
customer such as savings and loan distribution, which will actually give important leads

to his insurance potential. Now the detail of transactions of each account holder has to be

tediously analysed to generate the leads. The situation, of course, is not that bad with

foreign and few private sector banks, who ask for details such as educational background,

number of earning members in the family, assets such as houses, cars, etc. Banks, which

are planning to enter insurance, have to work overtime to get over this weak link.

-&

 



The mere fact that banks are in personal contact with their clients and can access them,

unlike insurance companies, is no doubt a major strength. But that¶s going to require an

incredible degree of pro-active marketing ± its native to expect that bank customers are

inevitably going to walk up to the insurance desk and ask for life covers themselves.

2&
 
" 




There are considerable hazards of cannibalisation, especially when banks enter the

saving-linked life segment, as these are in direct competition to conventional banking

products. For example, in Sweden, a change in regulations allowed banks to offer a

savings account linked to individual pensions, which was, in effect, an insurance product.

Since this came under the purview of the insurance subsidiaries, banks there had to

expand their product profile to compensate for the revenue lost to them.