“BANCASSURANCE & ITS PROSPECTS” (BY- RADHIKA NAUTIYAL)
“BANCASSURANCE & ITS PROSPECTS”
Authored By- Radhika Nautiyal
Christ University
Abstract
A sincere attempt has been made in
this paper to analyze the changes brought about in the Indian banking scenario
with the incorporation of insurance services in the banking sector brought
about liberalization and through the recommendations of the Narsimhan
committee. How has a vast network of customers and banks spread across a wide
geographical area has brought about the need for Bancassurance has been dealt
with in detail in this paper. The role of the Reserve Bank of India with regard
to regulation of policies which govern banks in respect of Bancassurance has
also been covered by this paper. Finally, the benefits and challenges faced by
the banking sector in respect of Bancassurance along with the prevalence of
Bancassurance at the international level particularly in Europe has been
discussed which is followed by the conclusion of this
paper.
Introduction
Selling of insurance products through
a bank is referring to as Bancassurance. It originated in France in the 1980s.
Apart from the general monetary exercises, the role of banks was very
particular and specific which was later united by advancements in banking and
liberalization. This change in the financial situation came about because of
incorporation of the recommendations of the first Narsimhan committee. The
standpoint of parties, financial, social and cultural viewpoints and
authoritative hindrances, which are a part of a business are to be investigated
to determine that whether a particular model is suited for a nation or not. For
example, a bank may see this concept as a means of diversification of business
but companies dealing in insurance policies see it as a way of expanding the
market.[1]
Insurance has a long history in
India. The Insurance sector in India governed by Insurance Act, 1938, the Life
Insurance Corporation Act, 1956 and General Insurance Business
(Nationalization) Act, 1972, Insurance Regulatory and Development Authority
(IRDA) Act, 1999 and other related Acts. Today insurance is growing at the rate
of 15-20 per cent annually. Together with banking services, it adds about 7 per
cent to the country’s GDP. The distribution channel refers to the routes by
which the product prepared by the producers reaches the ultimate consumers. In
other words, it is the mechanism by which products are directed to customers
either through intermediaries or direct. As a result, the distance between
producers and the consumers are bridged by the distribution channel. The most
upcoming distribution channel is Bancassurance. 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.
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 distribute insurance products. The Bancassurance is the
distribution of insurance products through the bank's distribution channels. It
is a phenomenon where in insurance products are offered through the
distribution channels of the banking services along with a complete range of
banking & investment products & services. Bancassurance is the
collaboration between a bank and an insurance company wherein the bank promises
to sell insurance products to its customers in exchange of fees. It is a mutual
relationship between the banks and insurers. One of the most desirable traits
of such an agreement is the low finance required by both the parties.
Bancassurance can then be considered
as nothing more than sharing of resources already present in an organization. It
is a series of merges, tie ups and joint ventures between banks and insurance
companies. Bancassurance started in France in the 1980s, and spread across
different parts of Continental Europe since, it has spread its wings in Asia –
in particular, in India. In India, bancassurance is contributing significantly
in new business especially among the private sector companies. Bancassurance is
tied up with commercial banks, cooperative banks and regional rural banks. It
is expected to account for 13% in life and 5% in non-life business during next
five years. In India, more banks have come to realize the value of their
distribution network and are reportedly trying to discard existing channels in
favor of financial service sector including insurance companies. Only
standardized products are sold through bank channels specific products such as
credit card or bank loans. Unit linked products are also being offered by
bancassurers. Banks have developed more sophisticated investment products that
have more financial content. Accident and health products are being offered by
banc assurers
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.
Bancassurance deals with the
distribution, legal, monetary behavioral and cultural aspects. ‘Assure Banking’
is a concept opposite to that of Bancassurance in which the charge of
distribution is in the hands of the insurance companies.[2]
Scope Of Bancassurance In India
The public sector’s monopoly over the
insurance sector in India has led to uneven distribution of work, slow work and
progress. Reliance on conventional agencies like developmental officers and
individual agents has been there for a very long time. There were no efforts
made to find out new means in this sector due to the nonexistence of
competition and this has become a norm.[3]
Strong competition is also visible as result of rapid growth in insurance
sector. Thus, more and more
channels would be needed in near
future.[4]
Why
in India
Through research and statistics, it
has become very evident that for economic growth of India, a very strong
financial base is needed. A vast network of banks and customers in India may
help in the creation of a platform for efficient business in the field of
insurance.[5]Startup
expense can be avoided because insurance industry is capable of a rapid growth.
If a particular share of sales van be pre-arranged for the rural sector, then
the concept of Bancassurance can be successful in India[6]. The banks also get considerable commissions.[7]
The committee on Bancassurance
submitted its report in the year 2011[8],
the conclusion of this report was that a model of Bancassurance is
significantly affected by the existence of several banking groups as insurance
products and services and promoters. However, a lot of observations have come
down to the conclusion that life insurance is a business with an urban bias and
the spread of the business is inversely proportional to the population of a
rural area.[9]Statistics
indicate that life insurance business in India has coverage of about 7%
compared to 25% in Singapore and it is 100% in Japan.[10]
As per the Malhotra Committee Report[11],
India has an insurance market which is largely untapped and the need of the
hour is to focus on the rural sector as it forms a major chunk of our
population.[12] Lack of
awareness amongst the target customers is the main reason for poor coverage in
the rural areas.[13] There is
an urgent need for the insurers to enter into tie ups and collaboration with
other agencies.[14]
Development of Bancassurance to its full potential would help in tapping large
masses of the population of the rural areas.[15]Bancassurance
will prove to be a revolutionary concept and will help in furthering the sale
of insurance products with the help of vast banking networks if the problem of
penetration in the rural areas is tackled efficiently.[16]
Opening up of the insurance sector
has provided multiple opportunities to both the insurance and the banking
sector[17] Entry of
private players as a result of liberalization will continue to open up new
areas for product innovation, alternative distribution channels and the
expansion of existing networks. 22
After 1991, Bancassurance has been
very successful in India because of the pivotal role it has played in the
distribution of insurance by focusing on small as well as the new consumers.
The path paved by bancassurance helps in providing effective costs to the
consumer due to an already established banking infrastructure.[18]
The extensive banking infrastructure
of India is famous for its credibility, branch recognition as well as rate of
profitability in customer operations.[19]
After nationalization, it was the priority of the banks to increase credit flow
to the agricultural sector as well as small industries of India.[20] The
system is catering to the population of the most remote areas also.[21]The RRBs
and the public sector banks account for 92% of the entire banking network which
is includes of 33,000 rural and 14,000 semi urban branches.[22]
Bancanssurance
Models
Banks intending not to take risk
could adopt ‘referral model’ wherein they merely part with their client data
base for business lead for commission. The actual transaction with the
prospective client in referral model is done by the staff of the insurance company
either at the premise of the bank or elsewhere. Referral model is nothing but a
simple arrangement, wherein the bank, while controlling access to the client’s
data base, parts with only the business leads to the agents/ sales staff of
insurance company for a ‘referral fee’ or commission for every business lead
that is passed on. In fact, a number of banks in India have already resorted to
this strategy to begin with. This model would be suitable for almost all types
of banks including the RRBs and cooperative banks and even cooperative
societies both in rural and urban. There is greater scope in the medium term
for this
model. For banks to begin with,
resorts to this model and then move on to the other models.[23]
The other form of non-risk
participatory distribution channel is that of’ corporate agency’, wherein the
bank staff is trained to appraise and sell
the products to the customers. Here the bank as an institution acts as corporateagent
for the insurance products for a fee/ commission. This seems to before viable
and appropriate for most of the mid-sized banks in India as also the rate of
commission would be relatively higher than the referral arrangement. This,
however, is prone to reputational risk of the marketing bank. There are also
practical difficulties in the form of professional knowledge about the
insurance products. Besides, resistance from staff to handle totally new
service/product could not be ruled out. This could, however, be overcome by
intensive training to chosen staff packaged with proper incentives in the banks
coupled with selling of simple insurance products in the initial stage. This
model is best suited for majority of banks including some major urban
cooperative banks because neither there is sharing of risk nor does it require
huge investment in the form of infrastructure and yet could be a good source of
income. Bajaj Allianz stated to have established a growth of 325 per cent
during April-September 2004, mainly due to bancassurance strategy and around 40%
of its new premiums business (Economic Times, October 8, 2004)[24].Interestingly,
even in a developed country like US, banks stated to have preferred to focus on
the distribution channel akin to corporate agency rather than underwriting
business. Several major US banks including Wells Fargo, Wachovia and BB &T
built a large distribution network by acquiring insurance brokerage business.
This model of bancassurance worked well in the US, because consumers generally
prefer to purchase policies through broker banks that offer a wide range of
products from competing insurers (Sigma, 2006).[25]
It has certain disadvantages.
Firstly, it risks the bank’s reputation. Secondly, the staff must have
professional expertise regarding the products. Thirdly, because of the products
being new, the staff also refuses to go along.[26]
Exhaustive training for the staff can help in making this model the best model
for the banks because the burden of investment in infrastructural facilities
and risk sharing is not there and it is also a very good source of profits. For
instance, a massive growth of 325% in the
year 2004 was registered by Bajaj
Allianz in 2004. Even, USA has preferred this model.[27]
Apart from
the above two, the fully integrated financial service involves much more
comprehensive and intricate relationship between insurer and bank, where the
bank functions as fully universal in its operation and selling of insurance
products is just one more function within. Where banks will have a counter
within to sell/market the insurance products as an internal part of its rest of
the activities. This includes banks having wholly owned insurance subsidiaries
with or without foreign participation. In Indian case, ICICI bank and HDFC
banks in private sector and State Bank of India in the public sector, have
already taken a lead in resorting to this type of bancassurance model and have
acquired sizeable share in the insurance market, also made a big stride within
a short span of time. The great advantage of this strategy being that the bank
could make use of its full potential to reap the benefit of synergy and
therefore the economies of scope. This may be suitable to relatively larger
banks with sound financials and has better infrastructure. Internationally, the
fully integrated bancassurance have demonstrated superior performance.[28]Even if the banking company forms as a subsidiary and insurance company
being a holding company, this could be classified under this category, so long
as the bank is selling the insurance products alongside the usual banking
services.
For Insurers based on the business strategy and the number of tie-ups,
the contribution of bancassurance in India varies. The bancassurance has
emerged as a very important channel for distributing Insurance products. The
bancassurance channel accounts for about 35 percent of the total new premiums
collected by the Industry in India.[29] SBI Life Insurance Company and Life Insurance of India are the two major
players with nearly a two third or more of their premiums coming from the
bancassurance segment.
For SBI Life Insurance Company, bancassurance continues to be an
important distribution channel and it currently contributes about 69 percent of
their business. Out of the new business premium of Rs.482 crore, during the
year 2004-05, the company could achieve 67 percent of this business through
bancassurance. The SBI Life Insurance could manage the same level of business
through bancassurance even during the financial year 2008 – 2009.
Life insurance Corporation of India accounts for the major share of the
life insurance business in India. The Corporation still depends considerably on
individual agents and the business through the
banc assurance channel is very limited or even negligible (1 percent) in
relation to the overall business.[30]
Regulatory
Authorities-Rules
The
Banking and Insurance sectors are regulated by two different entities in India:
-
i.
Banking sector is regulated by Reserve Bank of India; and
ii.
Insurance Sector is regulated by the Insurance Regulatory and
Development Authority
In
India, the Government of India through its Notification dated August 3, 2000,
specified ‘Insurance’ as a permissible form of business that could be
undertaken by banks under section 6(1)(o) of the Banking Regulation Act, 1949.
The notification declared that any bank intending to undertake insurance
business has to follow guidelines issued under the master circular set out in
Annex-3 of the said circular. In addition, the bank has to obtain prior
approval of Reserve Bank of India before entering such a business. Paragraph 12
of the said master circular provides the further formalities to be followed by
the bank. Further, the circular provides that banks need not obtain prior
approval of the RBI for engaging in insurance agency business or referral
arrangement without any risk participation subject to certain conditions.
The Reserve Bank of India that is the
regulatory authority of banks has made a list of rules that guide banks as to
how they should enter the business of insurance. In the year 1999, the Governor
of the Reserve Bank of India expressed the need to make the amendments to the
existing laws in the absence of legislations like the Banking Regulation Act.
The banks are allowed to undertake businesses of any kind provided that they
notify the central bank about it as per Section 6(1)[31]
of the Banking Regulation Act.[32]
In 2000, The RBI issued certain
guidelines to all the financial institutions in this regard.[33]
1.
Scheduled
commercial banks along with their subsidiaries can enter into the business of
insurance acting as agent of insurance companies on compensation.
2.
The
eligible banks can start a joint venture company through which they can enter
the insurance business. Only 50% of
the paid-up capital can be taken up as equity contribution for the purpose of
setting up an insurance company by the company set up by joint venture.
3.
The
eligibility criteria are:
(1) The bank/financial institution should have a net worth of not be less
than 5 billion Rs. (2) The bank/financial institution has to maintain a capital
adequacy ratio of not less than 10%. (3) The bank/financial institution has to
show a minimum of three continuous years of profits. (4) The Nonperforming
Assets of the bank/ financial institution should be at least 1% below the
average of the industry. (5) The existing subsidiaries of the bank/financial
institutions should show a satisfactory track record of performance.[34]
4.
Generally,
subsidiaries companies are not allowed to enter the business of insurance.
5.
If
a bank is ineligible for being a participant in a joint venture, then they have
to make an investment of 50 crores or 10% of the net worth of the bank,
whichever is lower. Such participation does not involve any contingent
liability for the bank and is considered as an investment.
Recognition was given to the
relationship that existed between the insurance markets and the banks by the
Reserve Bank of India and it gave acknowledgement to the concept of
Bancassurance in the year 2001 in its Report on Currency and Finance. The
Reserve Bank of India put forth its views by the identification of three routes
through which banks can enter into the insurance business.[35]
They are:[36]
(i)
Free insurance-based services
provided without any risk.
(ii)
Providing infrastructure and services
support b making an investment in an insurance company for and;
(iii)
Establishment of a separate
joint-venture insurance company which does not involve any risk factors.
However, certain risks can be encountered in
third way because of which there is a requirement of strict compliance with
entry norms that are rigid in nature. The respective regulatory authorities set
up these norms. There is a reduction
in the chances of any overlap between these authorities as this a separate
joint venture company. A distance has to be maintained between the insurance
functions and the banking business. The regulatory authorities direct the
manner in which this company has to perform.[37]
The
master circular provides three options for banks to enter the insurance Sector.
They are as follows: -
Permission with Risk
participation – A bank which wishes to undertake insurance business can be
permitted provided joint ventures must be allowed for financially strong banks
with risk participation. Provided that such bank further satisfies the
following conditions: -
- The minimum net worth of the bank must not be less than
Rs.500 crore.
- The minimum level of Capital Adequacy Ratio must not be
less than 10% in the bank.
- Non-Performing Assets (NPA) should be reasonable in the
bank.
- The bank should have been earning a net profit
continuously for last three years.
- In case of any subsidiary, the performance of subsidiary
should be satisfactory. For example in India, ICICI Bank and HDFC Bank in
private sector and State Bank of India in the public sector has taken its
shape by following this model. The main benefit of this model is that the
foreign insurance company can enter into the Indian market through a joint
venture.
i.
Permission without Risk Participation – A bank which is
not eligible for joint venture participation can make investment unto
a.
10% of the net worth of bank or
b.
Rs.50 crores, whichever is lower, in the insurance company for
providing infrastructure services support. Such participation is treated as
investment and does not hold any contingent liability of the bank.
ii.
Referral Model – This model of Bancassurance India is
regulated by Insurance Regulatory and Development Authority (Sharing of
Database for Distribution of Insurance Products) Regulations, 2010. Any
commercial bank can undertake insurance business as an agent of insurance
company on fee basis. The bank does not participate in risk under this
category. This is also known as referral model. In this model, a ‘referral
arrangement’ is done between ‘referral company’ and insurer for selling of
insurance products. The referral company only shares the database of its
customers and does not directly indulge in soliciting or selling of insurance
product
through agent or
corporate agent or insurance intermediaries. In other words, the actual
transaction is done by the staff of the insurance company either at the bank
premise or elsewhere. The bank charges only fees or commission for every
business from their customers.
Regulating Guidelines Of IRDA
Insurance Regulation and Development Authority Act 1999 provides the entry norms for any new company for operation in insurance sector. Any such new company must have:-
i.
Minimum paid up capital of Rs. 100 crores;
ii.
Investment of policy holders fund only in India;
iii.
Restriction of foreign companies to minority equity holding of
26%.
Recommendations Of Committee
Constituted By Irda On Bancassurance
As we have discussed earlier those banks are not allowed to sell insurance products of more than one insurance company. But due to persistent request from the side of various life and general insurance companies from the IRDA led to formation of a seven-member committee in the mid of 2009 to look after the matter. The committee had to submit its report and to examine the desirability for a differential treatment of insurance intermediation by banks under the Bancassurance model consistent with intermediation best practices and modified suitably to meet domestic regulatory requirements. The committee submitted its recommendation on 26th May, 2011.
Following are some of the recommendations of the Committee: - channel and therefore there is need to enact a comprehensive legislation to cover all aspects of the working of the Bancassurance activities.
As we have discussed earlier those banks are not allowed to sell insurance products of more than one insurance company. But due to persistent request from the side of various life and general insurance companies from the IRDA led to formation of a seven-member committee in the mid of 2009 to look after the matter. The committee had to submit its report and to examine the desirability for a differential treatment of insurance intermediation by banks under the Bancassurance model consistent with intermediation best practices and modified suitably to meet domestic regulatory requirements. The committee submitted its recommendation on 26th May, 2011.
Following are some of the recommendations of the Committee: - channel and therefore there is need to enact a comprehensive legislation to cover all aspects of the working of the Bancassurance activities.
o
Banks should be allowed to tie up with any of the following two
sets of insurers: -
a.
Two in life insurance sector the committee admitted that at
present there is ambiguity on the organization and practices of the
Bancassurance.
b.
Two in non-life insurance sector excluding health
c.
Two in health insurance sector
d.
ECGC and AIC.
o
Efforts should be made to more use of information technology which
would reduce the manpower requirement and would increase more structured,
transparent and efficient organization.
o
The tenure of the agreement between the banker and insurer is
normally one to three years at present. This makes the relationship between the
two unstable, therefore the minimum period of the agreement between the banker
and the insurer shall not be less than five years. Here, the committee also
made a very significant point that the responsibility of servicing of the
policies issued already through the bank or subsidiary or special purpose
vehicle shall remain with the bancassurance partner even if the tie-up ends and
the said partner shall receive the renewal commission on per renewed policy
basis. For all this purpose there is need of proforma for memorandum of
agreement between bank and insurer with minimum requirement
o
As far as inspection and supervision is concerned, the proposed
regulation must contain separate provision which empowers IRDA and RBI to
inspect any of the Bancassurance partner.
o
The regulation must have provisions of maintaining accounts and
certification which should be furnished in periodicals returns to the
authority. Corporate governance norms regarding disclosure should be complied
by the banks treating bancassurance as integral part of bank’s business
operation.
o
Regulations should made it mandatory that the bank staff be fully
trained in handling insurance products so that the sale process is transparent
and the policyholder gets full disclosure of the features of the product.
o
The committee gave the green light for multiple insurers but only
if a bank fulfills all other conditions specified in the committee’s
recommendations.
o The Committee recommended
abolition of the referral system of bancassurance because it is costlier than
corporate agent model. The reason behind the high cost is that the insurer has
not only
o
to pay the higher amount of first year
premium as referral fee but also has to deploy staff and infrastructure in the
bank premises.
Reasons For Banks Entering Into Insurance
1.
Competition between banks is rising and
interest rates are going down, so an increase in the costs of marketing and
administrative expenses is also observed. The scope of profit is also narrow
from the conventional banking products. So, it is needed that the banks enter
into new businesses which have boosts its productivity effectively.[38] An
increase in income in the form of profits and commissions in the business is
insured by Bancassurance. There is a reduction in the fixed costs of the bank’s
business with the spread in business. The staff’s productivity can also be
enhanced as a variety of services are available to present to the customers.[39]
2.
Shifts
in the preferences of the consumers are also seen. Instead of medium- and
long-term deposits, the consumers prefer insurance products as the return is
higher. Entering into life-insurance helps the bank in covering up the
reduction in deposits. So, it is more profitable for banks to enter into this
area of business.[40]
Benefits
There can be a lot of prospective
customers for insurance products from a country like India which has a booming
population of 1.2 billion people.[41] The fact
that Mediclaim, Overseas and Travel insurance and other such insurance policies
are not valued in India can also help in opening up prospects for the banking
companies.[42]
Insurance companies also have an option for
expansion of business. Both the customers as well as the banks get a chance to
improve their functioning.[43]Bancassurance
will not carry the stigma that insurance does and will provide for more
acceptable banking transactions. Complementary products like home insurance
will also be provided by some banks.[44]
Health care services will also be benefited by Bancassurance in India as health
care facilities are availed by only 2.5 million
people in India. The productivity of
the employees can be increased as the loss in profits because of competition is
compensated with the help of the fee based
From The Viewpoint Of Bankers
Bankers have the power
and structure to relate to the customers’needs. This
will enable them to enter in the area of
bancassurance. In asituation of constant asset base, the bank can increase
return on Assets (ROA) by increasing their income, by selling insurance
products
throughtheir own channel. It can cover operating expenses and make operatingexpensesprofitable
by leveraging their distribution and processingcapabilities.The bankers have a
branch network to make face to face contact withthe customers and a great
deal of trust over the customers. By leveragingthe facilities,
the bankers can guess the attitude and diverse needs of thecustomers and could
change the face of insurance distribution to personalline insurance.Banks enjoy
significant brand awareness within their geographicalregion providing for a
lower per head cost[45]
The advantage of
a bank overthe traditional distributors of insurance is the lower
cost per sales head,which is made possible by their sizeable loyal
customer base. Banks haveextensive experience in marketing to both
existing customers and non-customers. They also use technology access multiple
communicationchannels such as statement inserts, direct mail, ATMS,
telemarketing etc. forthe improvement in transaction processing and customer
service.[46]
Bancassurance offers
advantages to bankers bycreating a
universal banking platformby offering a wider financial services package and positioning the Bank as a one-stop
shop for all financial and protectionneeds of
customers. With customers getting more financially discerning
innature, a wider product offering is critical for creating customer
loyalty.Bancassurance also offers a good opportunity to increase the
Bank’sshare of the customer’s wallet through insurance cross
sell. Banks may
also be able to garner fresh banking business by using insurance as a sellinghook. Bancassurance
enables a Bank to satisfy the risk protection needs ofits clients
without assuming the underwriting of risk.Building an expensive distribution
network is a major drain on
the bottom-line of a Bank. It is critical that these distribution points areoptimized
by selling a larger range of products, including
Insurance products. The selling of insurance
products provides bank employees withnew challenges and enhanced
skills, thus improving efficiency. Banks can leverage their existing customer service andoperations,
infrastructure and
expertise to effectively
service insurancerelated processes as well.
From the view point of Insurer
The insurer can increase
their volume of business through bankingdistribution channel and gain
better. Thepresence ofabank partnership brings about distribution diversification and places less
reliance ontraditional revenue streams generated from the agency
distribution channel.It can solve the difficulties arising out of price
competition which has drivendown the margins and increased the compensation demand
of successfulagents. Bank partnerships provide a
geographical reach to the insurerthrough the bank’s existing network
without significant investment ininfrastructure. In
India specifically, the costs of network development infar-flung
areas would be prohibitive, and Bancassurance offers an idealsolution to this
problem.[47]
Banks have warm customer
bases, which expect the banks to sellother financial products to them.
Conversion rates of bank customers areexpected to be higher than in alternate
sales channels[48].
Through agents, theinsurer can only sell fewer and large policies to a more
upscale client. Themiddleclass income holders who comprise the bulk of bank
customers getvery little attention from the agents. By using bank channel,
the insurer cancapture much of its underserved market[49].
Banks possess financial and life stage information of customers,which assists
greatly in identifying and filling financial need gaps anddeveloping specially
packaged products targeted at satisfying specificcustomer needs. By cutting
cost, insurer can serve better to the customers interms lower premium rate and
better risk coverage through productdiversification. Insurance companies can
greatly leverage from the brandawareness and equity of Banks,
thus enhancing customers’ receptiveness forinsurance products. Co-branding
and joint marketing effort can greatlyincrease product recognition and
awareness in the mind of the customer.Existing operations and service
infrastructure and expertise of banks providean ideal platform to service
insurance customers acquired through theBancassurance channel.
From the customers’ view point
For customers,
Bancassurance provides the convenience of dealingwith one financial
institution for all financial needs. In an environmentwhere most
adult family members are working and leisure time is at
a premium, customers are even willing to pay more for a one-stop shop.
Further, owing to
the customers’ affinity
towards the Bank, provision ofinsurance through the bank offers a more credible
solution. Customers
also benefit from service convergence between the Bank and insurer through acommon
service point. Product innovation and distribution activities
aredirected towards the satisfaction of the needs of the customer.Bancassurance
model assists customers in terms of reduced price, diversified products,
quality products and in time and doorstep service.
Challenge
Differences in the business approach
and thinking of the bank managers and insurer can exist because of their
cultural differences which will ultimately lead to problems in communication
and execution issues.[50] These
differences are to be comprehended for success in the venture of bancassurance.
Issues like delay in the claim settlement, vague and confusing language can
have an adverse effect both on the policyholder’s faith and the market image of
the company[51]
In India, banks generally face two
main problems. Firstly, a lot of bad loans exist.[52]
However, this is not a very serious issue as the government infused a large
amount of money in the system which sustained for a considerable period of time
following the aftermath of the 1991-92 crises. Secondly, overstaffing in the
banks exist.[53] Many international organizations and
committees have focused on this problem.[54]
The difference in working style and
culture of the banks and insurance sector needs greater appreciation. Insurance
is a ‘business of solicitation’ unlike a typical banking service, it requires
great drive to ‘sell/ market’ the insurance products. It should, however, be
recognized that ‘bancassurance’ is not simply about selling insurance but about
changing the mindset of a bank. Moreover, in India since the majority of the
banking sector is in public sector and which has been widely disparaged for the
lethargic attitude and poor quality of customer service, it needs to refurbish
the blemished image. Else, the bancassurance would be difficult to succeed in
these banks.
Studies have revealed that the basic
attitudinal incompatibility on the part of employees of banks and insurance
companies and the perception of customers about the poor quality of banks had
led to
failures of bancassurance even in
some of the Latin American countries. There are also hitches in the system of
bancassurance strategy in the form of ‘conflict of interests’, as some of the
products offered by the banks, viz., ‘term deposits and other products which
are mainly aimed at long term savings/ investments can be very similar to that
of the insurance products.
Banks could as well feel apprehension
about the possibility of substitution effect between its own products and
insurance products and more so, as a number of insurance products in India come
with an added attraction of tax incentives. In case the bancassurance is fully
integrated with that of the banking institution, it is suitable only for larger
banks, however, it has other allied issues such as putting in place ‘proper
risk management techniques’ relating to the insurance business, and the like.
As there is a great deal of difference in the approaches of ‘selling of
insurance products and the usual banking services- thorough understanding of
the insurance products by the bank staff coupled with extra devotion of time on
each customer explaining in detail of each product’s intricacies is a
prerequisite.
Moreover, insurance products have
become increasingly complex over a period of time, due to improvisation over
the existing products as well as due to constant innovation of new products,
emanating from the excessive competition adding to even more difficulties in
comprehension of the products and marketing by the bank staff. These can result
in resistance to change and leading to problems relating to industrial
relations. Unlike, the banking service, there is no guarantee for insurance
products that all efforts that a bank staff spends in explaining to a customer
would clinch the deal due to the very nature of the insurance products. This
frustration of the bank staff has the danger of spillover effect even on their
regular banking business. Bankers in India are extremely naïve in insurance
products as there were no occasions in the past for the bankers to deal in
insurance products, therefore they require strong motivation of both monetary
and non-monetary incentives. This would be more so in the emerging scenario due
to complex innovations in the field of insurance / pension products at a rapid
pace with the entry of a number of foreign insurance companies with vast
experience in the developed countries’ framework.
It has been mostly observed that Bancassurance
is a successful method when backed by a relevant legislation. Now, it is
spreading steadily throughout Asia giving birth to the concept of ‘Universal
Banking’. The major role in its success in India has been played by the
banker-consumer relationship. The regulatory authorities have a very vital role
to play in their success and failure i.e., how coordination execution of
policies is being done by them. If it continues to grow at its current pace, it
will no longer be an exception and become and accepted norm. The major
resistance that exists can be done away only with the provision of satisfactory
incentives and by proper training of the staff.
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 a success 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.
India has a potential
market for insurance companies particularly in rural areas. Setting up a
network and creating infrastructure for doing business attracts a huge
investment by the insurance companies. Bancassurance is a better alternative in
this area where insurance companies without investing on advertisement, market
channels, infrastructure etc. does business. The database shared by the bank in
this regard help the insurance companies to target thecustomerseasily.
In addition to it, there are also certain issues which need to be clarified by the authorities such as the jurisdiction and interference of RBI and IRDA. We would rather suggest that there should be a separate regulator for regulating Bancassurance and provide remedy for any grievances. It is very important that insurer and bankers must have a good understanding of each other and proper strategy to capture the opportunity and service for their customers. Finally, we appreciate the concept of Bancassurance and feels it is an efficient and cost-effective measures for the insurance companies.
In addition to it, there are also certain issues which need to be clarified by the authorities such as the jurisdiction and interference of RBI and IRDA. We would rather suggest that there should be a separate regulator for regulating Bancassurance and provide remedy for any grievances. It is very important that insurer and bankers must have a good understanding of each other and proper strategy to capture the opportunity and service for their customers. Finally, we appreciate the concept of Bancassurance and feels it is an efficient and cost-effective measures for the insurance companies.