INSURANCE

Assignment on:

BANCASSURANCE
 BANCASSURANCE

INTRODUCTION

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.

BIM allows the insurance company to maintain smaller direct sales teams as their products
are sold through the bank to bank customers by bank staff. Bank staff and tellers, rather than
an insurance salesperson, become the point of sale/point of contact for the customer. Bank
staff are advised and supported by the insurance company through product information,
marketing campaigns and sales training.

Both the bank and insurance company share the commission. Insurance policies are
processed and administered by the insurance company. BIM is extremely popular in
European countries such as Spain, France and Austria.

The usage of the term picked up as banks and insurance companies merged and banks sought
to provide insurance, especially in markets that have been liberalised recently. It is a
controversial idea, and many feel it gives banks too great a control over the financial industry
or creates too much competition with existing insurers

MODUS OPERANDI

There are various models through which bancassurance operates internationally. In the so
called integrative model, branch bankers themselves directly sell insurance products. In the
specialist model, specialised personnel of the bank or the insurance company have specific
knowledge and training of insurance to sell these products Bancassurance could operate
through ‘strategic alliance’ models involving a simple ‘marketing’ tie-up or through ‘full
integration’ where the bank sells insurance products under its own brand and undertakes all
other functions associated with insurance. In India, this scheme, until now, operates largely
through strategic alliances or joint ventures. Under RBI regulations, the maximum equity that
a bank can hold in JV with an insurance company is 50 per cent, subject to the fact that bank
has a net worth of Rs 500 crore, its Capital adequacy ratio is 10 per cent or more and has a
reasonable level of non performing assets. The insurance Regulatory and Development
Authority also sets guidelines regarding eligibility of corporate agents. Banking personnel
who sell insurance products have to satisfy the same training and examination requirements
as insurance agents.
DETERMINANTS OF BANCASSURANCE

Bancassurance has achieved remarkable success in some markets. In Europe, it is not

uncommon to find over half of life insurance business being transacted by banks. For
example, in France, Portugal and Spain,banks handle over 60% of life insurance business.
Banks and insurers are attracted to the idea of bancassurance for different reasons, which also
influence the way their cooperation takes place.

The following will briefly summaries the determinants of bancassurance from the perspective
of various stakeholders- banks, insurers, consumers and regulators.

Banks

Retail banks earn their income from the spread between the rates they charge on lending and
those they pay for deposits. Growing market competition, however, weighing down heavily
on banks’ interest margins while credit risk is always a headline concern. As a result, banks
are increasingly looking to commissions and fees from selling insurance products to
supplement their core earnings. Some banks are eying bancassurance as a step to the
formation of financial supermarkets where one institution serves all thefinancial needs of its
customers. A potential benefit is the reduction in the volatility of return on equity due to the
lack of synchronization between insurance and banking profitability cycles

From the perspective of banks, bancassurance is attractive because banks can

 Secure an additional and more stable stream of income through diversification into
insurance and reduce their reliance on interest spreads as the major source of income;
 Leverage on their extensive customer bases;
 Sell a whole range of financial services to clients and increase customer retention;
 Reduce risk-based capital requirement for the same level of revenue;
 Work towards the provision of integrated financial services tailored to the life-czcle
of customers;
 Access funds that are otherwise kept with life insurers, who sometimes benefit from
tax advantages.

INSURERS

The benefits to the insurers are equally convincing. The ability to tap into banks’ huge
customer bases is a major incentive. The extensive customer base possessed by banks is
considered to be ideal for the distribution of mass-market products. On the other hand,
insurers can make use of the wide reach of bank customers to categorise potential clients in
detail according to their needs and values. With increasing sophistication on bancassurance
operations, some insurers can focus on the high-net-worth segment, which offers greater
potential for wealth management business.
Apart from the ability to tap into new customers groups, escaping from the high cost of
captive agents is another reason prompting insurers to look into alternative channels. In some
cases, teaming up with a strong bank can help to fund new business development and boster
public confidence in the insurer.

Consumers
Unlike with banks and insurers, where benefits of bancassurance will have to be weighted
against business risk, the positive impacts on consumers are unequivocal. Part of the lowering
of distribution costs will be passed on to clients in the form of lower premium rates. In
addition, it is likely that new products will be developed to better suit client needs, which
otherwise may not be available if banks and insurers worked independently. Examples are
overdraft insurance, depositors’ insurance and other insurance covers sold in conjunction
with existing bank services. The convenience offered by bancassurance should also increase
customer satisfaction, for instance, when it is possible to pay premium as well as to withdraw
and repay cash loans backed by life insurance policies through bank’s ATM s. Just as
important, is more than often a strategic step of financial service providers to shift from being
product-oriented and to focus on distribution and customer relations.

Regulators
Bancassurance poses major challenges to regulators. The ability of financial institutions to
diversify into others sectors should help to lower the level of latent systemic risk. Banks will
benefit from lower income volatility while insurers could potentially obtain additional capital
to bolster their solvency levels.

The basic tenet of competition law and regulation that the ownership of large networks is
asignificant barrier to entry. thus insurers who tie up with ones with large networks could
effectively keep out potential entrants. This might not have a immediate impact on the pricing
of premium. The need to penetrate the untapped Indian market might keep premiums low at
this state. However, over the medium to long term this could lead to monopoly power and
high premiums. This is a regulatory issue that needs to be addressed as bancassurance gets
under way in India either through the competition commission or through the insurance
regulator’s office. This is by no means an issue that is unique to bancassurance – the
regulation of ATM networks and other payment systems in Europe has been a hotly debated
issue. A possible solution is to have an arrangement by which all entrant insurers have access
to bank networks. Another regulatory issue related to ‘binding’ or the phenomenon through
which banks offer a consolidated package of products at a single rate. This often involves
cross-subsidization within the package. Thus a bank could charge an artificially low premium
for an insurance product and subsidize it through a relatively high charge on say a credit card.
This form of ‘bundling’ not only impedes transparency of pricing but could also lead to
‘unfair’ advantage for banks offering bancassurance vis-a-vis stand-alone insurers. This
might warrant regulatory intervention.
Thus, while bancassurance does provide an apparently viable model for product
diversification by banks and a cost-effective distribution
CONCLUSION

In a nutshell, insurers are attracted to bancassurance because they can:

 Tap into a huge customer base of banks;

 Reduce their reliance on traditional agents by making use of the various channels
owned by banks;
 Share services with banks;
 Develop new financial products more efficiently in collaboration with their bank
partners;
 Establish market presence rapidly without the need to build up a network of agents;
 Obtain additional capital from banks to improve their solvency and expand business.

Bancassurance has grown at different places and taken shapes and forms in different
countries depending upon demography, economic and legislative prescriptions in that
country. It is most successful in Europe, especially in France, from where it started, Italy,
Belgium and Luxembourg. The concept of bancassurance is relatively new in the USA. As
mentioned above bancassurance growth differs due to various reasons in different countries.
The Glass-Steagall Act of 1933 prevented the banks of the USA from entering into alliance
with different financial services providers, thereby putting a barrier on bancassurance. As a
result of this life insurance was primarily sold through individual agents, who focussed on
wealthier individuals, leading to a majority of the American middle class households being
under-insured. With the US Government repealing the Act in 1999, the concept of
bancassurance started gaining grounds in the USA also.  Coming to Asia, it has been
estimated that bancassurance would contribute almost 16% of the life premium in the Asian
markets in the year 2006 primarily due to the growth expected in India and China.

Coming to India, bancassurance is a new buzzword in India. It originated in India in the year
2000 when the Government issued notification under Banking Regulation Act which allowed
Indian Banks to do insurance distribution. It started picking up after Insurance Regulatory
and Development Authority (IRDA) passed a notification in October 2002 on 'Corporate
Agency' regulations. As per the concept of   Corporate Agency, banks can act as an agent of
one life and one non-life insurer. Currently bancassurance accounts for a share of almost 25-
30% of the premium income amongst the private players in India.

Bancassurance provides various advantages to banks, insurers and the customers. For the
banks, income from bancassurance is the only non interest based income. Interest is market
driven and fluctuating and quite narrowing these days. Banks do not get great margins
because of the competition This is why more and more banks are getting into bancassurance
so as to improve their incomes. Increased competition also makes it difficult for banks to
retain their customers. Banassurance comes as a help in this direction also. Providing
multiple services at one place to the customers means enhanced customer satisfaction. For
example, through bancassurance a customer gets home loans along with insurance at one
single place as a combined product. Another important advantage that bancassurance brings
about in banks is development of sales culture in their employees.

As for the insurance company the advantage that bancassurance provides is evident. The
insurance company gets improved geographical reach without additional costs. In India
around 67,000 branches are there for PSU banks alone. If all 67,000 branches sell the
insurance products one can see the reach. This is one method of penetrating the market.

India's rural market has huge potential that is still untapped by the insurance companies.
Setting up their own networks entails such a huge cost, that no company would be interested
in doing so. Bancassurance again comes as an answer. It helps the insurance companies to tap
the market at a much lower cost. As for the customer the competitive nature of the Indian
market ensures that the reduction in costs would result in benefits in terms of lower premium
rates being passed on to him.

The penetration level of life insurance in the Indian market is abysmally low at 2.3% of GDP
with only 8% of the total population currently insured. With almost half of the population
likely to be in the 'wage earner' bracket by 2010, there is every reason to be optimistic that
bancassurance in India will play a long inning.