bancassurance: the indian scenario

2014 NIT-MTMI International Conference on Emerging Paradigms and Practices in Global Technology, Management & Business Issues December 22-24 , 2014

BANCASSURANCE: THE INDIAN SCENARIO 1

PUNEET BHUSHAN1 AND MOHD ABBAS MURTAZA2 ASSISTANT PROFESSOR, DEPT. OF HUMANITIES AND SOCIAL SCIENCES, 2B.TECH 4TH YEAR STUDENT, ECE BRANCH , JAYPEE UNIVERSITY OF INFORMATION TECHNOLOGY, WAKNAGHAT, SOLAN, HIMACHAL PRADESH, INDIA. E-mail: [email protected] , [email protected]

ABSTRACT Bancassurance is defined as the coalition between the bank and the insurance company (both life and non-life) wherein, the bank provides a platform to the insurance company to promote its products and services. In bancassurance, banks provide insurance companies access to vast database of their customers and in return earn fee based income that is entirely risk free. The synergy can be harnessed to the optimum level especially in a country like India which holds a humongous figure of population over 1.25 billion. Bancassurance acts as a benefactor to all associated with it viz. banking sector, insurance sector and the customers as well. It provides a pathway for banks following which they could diversify the range of products and services rendered by them and as a source of additional income which is totally risk free. The insurance companies take advantage of the confidence and trust that the bank has already earned through its customers and thus enter into wide ranging partnerships so as to widen their purview. The banks in turn relish the appreciation and admiration from the customers for providing integrated financial services under a single roof thereby strengthening the customer relationship and building better customer loyalty and retention levels. Insurance company’s motive of increasing their market penetration and premium turnover is achieved by using bancassurance as a ladder. The customer sees bancassurance as a windfall in terms of high quality product, reduced price, expertise guidance and delivery at doorsteps. An attempt in this paper has been made to study the concept, need, scope, benefits and challenges of bancassurance and to discuss the hidden potential of bancassurance so as to exploit it to the maximum threshold. The results of the study suggest that there is an immense scope for bancassurance in India and it will play a crucial role for the growth and prosperity of financial sector. Keywords: Bancassurance; Insurance Sector; Banking Sector; Bancassurance Models. INTRODUCTION Bancassurance is defined as the selling of insurance products and services using bank as an outlet. Center for Insurance & Financial Planning define it as “Bancassurance assume a wide range of detailed arrangements between banks and insurance companies, but in all cases it includes the provision of insurance and banking products or services from the same sources or to the same customer base”. It is a conglomeration between the bank and the insurance company (both life and non-life) wherein, the bank provides a platform to the insurance company to promote its products and services. It can be understood as a “give and take” phenomenon where the bank grants the insurance company access to their wide-ranging customers to sell their products in return of which they earn proceeds which is known as the fee-based income. The income thus earned does not involve any sort of risk since the bank just acts as a mediator between customers and the insurance company. Thus the harnessed synergy acts as a benefactor to both, the bank as well as the insurance company. Bancassurance is the process of using a bank’s customer relationships to sell life and non- life insurance products and it is emerging as a natural pathway for the effective development of insurance (Gonulal et al. 2012). The concept of bancassurance originated from France in the 1980s in response to certain changes like direct access to corporate funding market and deregulation of credit market in 1986. Bancassurance has been prevalent in Europe as it inculcates the vision of “one-stop-shop” (Agrawal & Hajela, 2011). Soon the trend of bancassurance was promulgated in United States as well as Asian countries. Keeping in view the benefits accruing due to bancassurance, the banks undertook the idea merely rather than repudiating it. Ever since India has embraced financial liberalization following the guidelines of First Narasimham Committee there has been a noteworthy change in the contemporary financial scenario. Banks started exploring in areas marked by financial innovations viz., merchant banking, lease and term finance, activities pertaining to capital market/equity market, hire purchase, indulging in real estate finance and so on. Thus, the banks in today’s era have broader horizons

Department of Mechanical Engineering, National Institute of Technology Hamirpur (H.P) India 703

2014 NIT-MTMI International Conference on Emerging Paradigms and Practices in Global Technology, Management & Business Issues December 22-24 , 2014 along with enlarge operations. Therefore, a bank acquiring the concept of bancassurance is a natural repercussion and is fully rational too as insurance is among one of the services needed by the bank customers. INSURANCE SECTOR REFORMS IN INDIA Insurance sector experienced drastic changes during the late 1990s and 2000 onwards. On the recommendation of Malhotra committee the amendments comprised of the establishment of IRDA (Insurance Regulatory Development Authority) in the year 2000 through the enactment of the IRDA Act 1999. The motive of this authority primarily was to look after the development and regulation of the insurance sector. Analogous to RBI, as the prime governing body for the banking sector, this was made solely to deal with the insurance sector. Thereafter for every insurance company it was mandatory to get itself registered in IRDA and would abide to the norms and conditions formulated by it. Various other statues like Insurance Act 1938, General Insurance Business Nationalization Act (GIBA) 1972, LIC act 1956 were also marked by several amendments. Thereafter, the insurance sector thrived immensely under the supervision of IRDA. Now, the public sector companies that were previously working under General Insurance Company of India broke their alliance and started operating independently thereby increasing the competition in the insurance market. As anticipated these developments resulted in the hiatus of monopoly by the public sector in the insurance sector, thereby carving out a pathway for other private ventures to explore the opportunities that lie un-availed in the insurance sector. It further gave them an idea of how to harness the hidden potential that lies within the insurance sector. This liberalization gave birth to the competition in the insurance industry and now the spark in insurance sector was ready to set ablaze the industry. INSURANCE MARKET IN INDIA According to the IRDA report (2012-2013), the insurance sector in India comprises of 52 insurance companies, out of which 24 are in life insurance business and 27 are in non-life insurance business. In addition to these, General Insurance Corporation (GIC) is the sole national insurer. The life insurance industry marked a figure of premium income of Rs. 2, 87,202 crores during the year 2012-2013 as against Rs. 2, 87,072 crores in the previous financial year, registering a growth of 0.5 per cent. The contribution of life insurance business in total premium was 56.8 per cent globally. However, in case of the Asian region it is 28.9 per cent which is even less than half of the global figure. Whereas for India the figures pertaining to life insurance business was very high at 80.2 per cent while the share of non-life insurance business was small at 19.8 per cent. Owing to these high figures in life insurance business, India is ranked 10th among 88 countries. During 2012, the life insurance premium in India declined by 6.9 per cent (inflation adjusted). Whereas, during the same year global life insurance premium increased by 2.3 per cent. India’s share in global life insurance market was 2.03 per cent during 2012, as against 2.30 per cent in 2011.The Indian non-life insurance sector experienced a hike of about 10.25 per cent (inflation adjusted) during 2012. This figure when compared to the global non-life insurance sector is far better which expanded by meager 2.6 per cent. India is ranked 19th in the global insurance market thereby contributing a small share of 0.66 per cent. The development in insurance sector of a country is marked by the measure of insurance penetration and density. Insurance penetration is measured as the percentage of insurance premium to GDP, whereas insurance density is calculated as the ratio of premium to population (per capita premium). During the initial decade, the insurance penetration increased persistently, from 2.71 per cent in 2001 to 5.2 per cent in 2009. But since 2010 onwards, the level of penetration has started declining at a considerable rate each year and reached to a minimal figure of 3.96 per cent in 2012. The results clearly signify that during past three years, the growth in insurance premium is lower than the growth in national GDP. BANCASSURANCE MODELS Referral model/mixed model Banks not aspiring to involve in any sort of risk could espouse in referral /mixed model wherein the bank just provides the insurance company access to their customer database for business lead and in return to which gets certain amount of income from the insurance company. The main acts of transactions with the prospective client in case of referral model are done by the personals of the insurance company at their office or in the vicinity of the bank itself. Many banks in India have already adopted this model as their bancassurance strategy. Moreover, this type of arrangement would be suitable for all types of banks including the Regional Rural Banks (RRBs) /cooperative banks and even cooperative societies both in rural and urban. The main reason being that it involves risk free income, so for a start they can implement this strategy and thereby shift to other models as time progresses.


2014 NIT-MTMI International Conference on Emerging Paradigms and Practices in Global Technology, Management & Business Issues December 22-24 , 2014 Corporate agency/strategic alliance Corporate agency or strategic alliance is another form of risk free distribution channel. This type of coalition aims to up skill the bank staff to appraise and sell the products to the clients. The bank here acts as a corporate agent for the insurance company in return to a fee/commission which it receives. This arrangement is plausible for mid sized banks in India which have large staff and caters to even greater number of clients than the banks involved in the referral model. Also the rate of commission on case of strategic alliance is greater than that of the referral model. This however, is prone to reputational risk of the marketing bank. Some pragmatic difficulties related to the professional knowledge of the insurance products may also arise. Besides that, defiance from staff to handle totally new product/services can also become a matter of concern. This could however be remediated by giving rigorous training to chosen staff packaged with proper incentives in form of perks or allowances in the banks coupled with selling of simple insurance products in the initial stage. This type of model is appropriate for most of the banks including major urban cooperative banks because neither there is risk sharing nor does it require huge inputs in the form of infrastructure and yet could be an outstanding source of income. Fully Integrated Financial Service/ Joint ventures Unlike the above two, fully integrated financial service involves much more labyrinthine and comprehensive conglomeration between the bank and the insurer where in bank functions universally and selling of insurance product is a just one more function within. Banks have a separate counter for selling/marketing of these insurance products as an internal part of its rest of the activities. This includes banks having a wholly owned insurance subsidiary with or without foreign participation. As far as Indian banks are concerned, ICICI bank and HDFC bank in private sector and State Bank of India in the public sector, have already have 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 point worth noting in this type of strategy is that it gives an opportunity to the bank to harness the energy to the optimum level and to reap all the available benefits of synergy and therefore the economies of scope. This type of strategy may be favourable for banks having better infrastructure and sound financials. The results of this strategy have been the best globally. Even if the banking forms a subsidiary under an insurance company, then too it would be classified under this model. Moreover, for a foreign insurance company to enter the insurance market, it has to form a joint venture. This in turn increases the scope for further growth both in life and non-life insurance segments NEED AND SCOPE OF BANCASSURANCE This contemporary era marks the popularity of insurance products in Indian economy. Going through the records of insurance companies, it has been observed that the middle strata of society used to take at least one policy, either for self or family. Customarily there are two ways of selling the insurance products. First being the one which is sold directly by the company and second one is selling through agents. Now the direct selling through companies have been popular among corporate while the agents handle the retail selling to the individual customers. Direct selling obliterates commission and carves pathway for expeditious operation. Whereas buying products one to one from agents adds to customers’ purview to compare it to those of different companies. Both of these methods have been used immeasurably but still the potential of the industry could not be harnessed. Thus, with increasing liberalization and globalization, there arose a need to formulate methodologies which could further extract the riches and utilize the resources of the insurance sector to the optimum level. The promulgation of financial reforms marked the development of nontraditional distribution channel i.e. bancassurance, where one distribution channel (banks) could be used as a tool to offer two products synchronously i.e. retail banking and insurance products. Before the arrival of private insurers, state-owned insurance companies relied wholly on the tied agency force and their own employees. But with the advent of concept of bancassurance, the banks acts as a platform for these insurance companies to sell their products (life and non-life), thus providing them access to their huge database of customers in return of which they earn revenue which is known as fee-based income. For the bank, this income is entirely risk free. This concept works in favour of both the bank as well as the insurance company. The percentage of profit (premium) earned by the banks is increasing in a reasonable manner from the time it was introduced in the Indian market. It is predicted by experts that in future 70% of share of premium will come from Bancassurance business only. In nutshell, bancassurance has proved to be an efficacious asset for the banking and the insurance sector. For an economy to grow and flourish, along with strong and vibrant financial sector, more diverse and efficient variety of financial and banking services are required. India holds a humongous figure of middle class population of about 200 million, which is anticipated to enlarge up to 267 million people in the next five years, thus providing a great market opportunity for firms, according to National Council of Applied Economic Research (NCAER). Blending it with vast banking network with largest depositor’s base, there is greater scope for use of bancassurance. Owing to the contemporary era, there is ample scope for bancassurance, since it has


2014 NIT-MTMI International Conference on Emerging Paradigms and Practices in Global Technology, Management & Business Issues December 22-24 , 2014 promised to combine insurance companies’ competitive edge in the “production” of insurance products with banks’ edge in their distribution, through their vast retail networks (Knight, 2005). One of the primary reasons for the customers to adopt bancassurance is that the traditional banking system is considered to be more reliable. Banking does not have the same stigma that life insurance carries. Since the customers don’t easily rely upon the agents, selling through banks serves as an alternative channel since they have already gained the confidence of the customers thus making it easy for insurance companies to sell their products by providing them a platform to do so. But it has been predicted that factor will diminish gradually overtime as people become educated. Secondly, banks get extra fee-based income. The income that is risk-free. Moreover, the employees of the bank who have been assigned to assist the insurance companies get extra benefits in the form of allowances and perks. Thus, they too are interested in carrying out this task owing to the benefits accruing to them. Also that the banks would have complementary products vis. home insurance or annuities, vehicle insurance, health insurance etc and when the pension reform starts functioning, banks can become natural institutional vehicles for private pension products too. Health care sector can also avail the benefits derived from bancassurance. Only 2.5 million people in India have access to healthcare facilities and about 5% of personal income is spent on health care. Thus there is a lot of scope in this area that could be ventured. BENEFITS OF BANCASSURANCE Bancassurance acts as a benefactor to all associated with it viz. banking sector, insurance sector and the clients or the customers as well. It provides a pathway for banks following which they could diversify the range of products and services rendered by them and as a source of additional income which is totally risk free. The insurance companies take advantage of the confidence and trust that the bank has already earned through its customers and thus enter into wide ranging partnerships so as to widen their purview. The banks in turn relish the appreciation and admiration from the customers for providing integrated financial services under a single roof thereby strengthening the customer relationship and building better customer loyalty and retention levels. Insurance company’s motive of increasing their market penetration and premium turnover is achieved by using bancassurance as a ladder. The customer sees bancassurance as a windfall in terms of high quality product, reduced price, expertise guidance and delivery at doorsteps. The Insurance Companies and Banks thus conglomerate together to provide full fledged package of financial services not only to benefits customers but also to maximize their profits. Benefits to the banks • Alternate way to earn fee based income. To cover up the declining profits accruing due to traditional banking systems, the non-interest income thus earned helps them to achieve their profitability target. Moreover, this purely risks free income. In other words increase in return to assets by vending insurance products and services. • Propinquity to clients and huge database • Proper use of existing infrastructure • Optimizing the man power utilization in order to increase efficacy in productivity. • Gaining customer loyalty thereby strengthening the customer relationship. By providing all services under one roof they can improve customer satisfaction thereby leading to higher customer retention levels. • Access funds that are otherwise kept with life insurers, who sometimes benefit from tax advantages. Benefits to insurers • Insurers can harness the hidden potential in banks’ wide range of network of branches for distribution of products. The already existing outlets of banks in the rural can used to sell products in those areas. • Access through a vast customer base, whole financial profile is known viz. financial status, spending habits, investment and purchase capability can be used to customize products as per their suitability and sell accordingly. • Economy in distribution cost. • Using banks as a platform to increase the level of insurance penetration in the country • Using the banks’ existing relationship with its customers, increases the conversation ratio of leads to sales. Furthermore, service aspect can also be tackled easily. • 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.


2014 NIT-MTMI International Conference on Emerging Paradigms and Practices in Global Technology, Management & Business Issues December 22-24 , 2014 Benefits to customers • An amalgamation of financial services under one roof i.e. along with banking facilities such as accounting, loans, mutual funds etc, insurance services are also provided. • Professional expertise and trained executives are there to give them proper advice. • They get risk coverage at bank itself. • Ease of renewal and other formalities. • Easy access for claims OPPORTUNITIES AND CHALLENGES FOR BANCASSURANCE According to a recent sigma study (Sigma, 2014), the dawn of bancassurance has hustled, particularly in emerging markets. Around the globe, insurance companies have been successfully leveraging bancassurance to gain a foothold in markets with low insurance penetration and a limited variety of distribution channels. The use of banks as a platform for vending products and services by the insurance companies is an established and emerging channel for insurance distribution, though its penetration varies across different markets. Europe has the highest bancassurance penetration rate. In contrast, penetration is lower in North America, partly reflecting the stringent regulatory policies. In Asia, however, the promulgation of bancassurance is spreading at a decent pace, particularly in China, where liberalization of reforms leads to the ease in restrictions. The research on bancassurance portrays that social and cultural factors along with the regulatory considerations and product complexity, play an important role in determining how successful bancassurance is in a particular market. 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 (Karunarajan, 2007). India is being considered as one of the fast developing economy among the emerging market economies. Reserve Bank of India forecasts the gross domestic product (GDP) to grow around 5.5% in 2014-15 after two painful years of sub-5% growth. Moreover it also stated that “The Indian economy stands at a crossroads that could take it from a slow bumpy lane to a faster highway.” With greater political stability and a supportive policy framework, investment could turn around and the economy is poised to make a shift to a higher growth trajectory (RBI 2013-14). The outlook for bancassurance remains efficacious. While the evolution of individual markets will be contingent on country's individualistic regulatory and business environment, bancassurers could benefit from some reforms formulated by government such as to privatize health care and pension liabilities. In emerging markets, naïve ventures have espoused bancassurance to compete with reigning companies. Determining the current scenario of the emerging markets where the penetration of bancassurance is low, it is further envisaged and anticipated that the upcoming contemporary era will mark the evolution and success of bancassurance. These developments are expected to challenge traditional bancassurers in the following ways: • The transition from manufacturing to pure distribution requires banks to modify the incentives of various suppliers with their own. • Increasing sales of non-life products, to the extent those risks are retained by the banks, require sophisticated products and risk management. • The sale of non-life products should be weighed against the higher cost of servicing those policies. • Banks will have to be prepared for possible criticisms arising from more frequent non-life insurance claims by the clients disrupting the bank –customer relationship. E. Though the initial target of bancassurance was the mass market, the bancassurers have started practicing the idea of fine segmentation of the market as outcome of which new products were formulated which are exclusive for each segment. The quest for additional growth and targeting the market according to specific client segments has in turn led some bancassurers change their mind from using a standardized, single channel sales approach to adopting a multiple channel distribution strategy . Some bancassurers are also beginning to focus exclusively on distribution. Some markets prefer vis-à-vis contact, which tends to advocate the development of bancassurance. Nevertheless, banks are starting to espouse direct marketing and internet banking as instruments to dispense insurance products. New and transpiring channels are becoming increasingly competitive, due to the tangible cost benefits embedded in product pricing or through the appeal of convenience and innovation. Finally, the marketing of more complex products has also embedded its roots in some countries, alongside a more dedicated focus on niche client segments and the distribution of non-life products. The quest for product diversification crops up as bancassurers realise that over-reliance on certain products may lead to undue volatility in business income.


2014 NIT-MTMI International Conference on Emerging Paradigms and Practices in Global Technology, Management & Business Issues December 22-24 , 2014 Nevertheless, bancassurers have shown consent to diverse their product range to include products beyond those related to bank products. CONCLUSION The triumph of bancassurance compels banks to fortify the customers relationship, therefore the banks should endeavour towards it. The fact that the banking operations in India, unlike in other developed countries, are still branch oriented and manually operated vis-à-vis highly mechanized and automated banking channels, viz., internet banking, ATMs, etc. are all the more conducive for flourishing of bancassurance. Reforms should be formulated allowing banks to coalesce with more than one insurance company (both life and non-life) providing diverse choice for the customers. Owing to the contemporary pace of bancassurance, it would turn out to be a norm rather than an exception in future in India. Supervisory concerns as pointed out earlier could best be tackled by way of closer and systematized coordination between the respective supervisory authorities. Decent training coupled with adequate incentive system could avert the banks’ staff resistance if any. Determining the current scenario of the emerging markets where the penetration of bancassurance is low, it is further envisaged and anticipated that the upcoming contemporary era will mark the evolution and success of bancassurance. REFERENCES Agrawal, R., & Hajela, A. (2011). Bancassurance- A challenging convergence in Indian prospective. International Journal of Research in IT, Management and Engineering, 1(4), 21-32. Gonulal, S.O., Goulder, N., & Lester, R. (2012). Bancassurance: A valuable tool for developing insurance in emerging market. Policy Research Working Paper 6196. Insurance Regulation Development Authority (IRDA). Annual Report (2012-13). Karunagaran, A. (2007). Bancassurance: A feasible strategy for banks in India. Reserve Bank of India Occasional Papers, 27(3). Knight, D. M. (2005). Meeting worlds? Insurance and banking. Retrieved from http://www.bis.org/list/mgtspeeches/from_01012004/index.html Krishnamurthy, R. (2003). Blueprint for success – Bringing bancassurance to India. IRDA Journal, 1(9), 25-27. Krueger, O. A. (2004). Banking Needs of Global Economy. IBA Bulletin, 27(1). Neelamegam, R., & PushpaVeni. (2008). Bancassurance – An emerging concept in India. The Journal. Popli, G.S., & Rao, D.N. (2009). An empirical study of bancassurance: Prospects & challenges for selling Insurance products through banks in India. Retrieved from http://ssrn.com/abstract=1339471 Reserve Bank of India annual report (2013-14). Sigma (2014). Swiss Reinsurance company. http://www.bnpparibascardif.com/en/cid3191594/the-history-bancassurance-growth-worldwide.html http://www.indiainfoline.com http://www.economictimes.com
