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CHAPTER 1

Introduction
Bancassurance is nothing but 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. A relationship which amazingly complements each others strengths and weaknesses.

Research methodology.
Secondary data
 Journals and magazines  Internet

OBJECTIVES
 To study the scope for bancassurance in India.  To study the various bancassurance strategy to capture and maintain new market.  To study the various models through which bancassurance operates in India.  To do the SWOT analysis of Bancassurance in india.

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Literature review

IRDA setting guidelines for bancassurance

ET Bureau Apr 9, 2009, 08.33pm IST

KOLKATA: The Insurance Regulatory & Development Authority (IRDA) is working on a set of guidelines for the bancassurance segment that will enable insurers to pass on the benefit of savings in distribution of policies through the channel. "It is an established fact that the cost of distributing products through the bancassurance channel is less than that of the agency channel where an advisor spends more time and money to travel and convince clients. We have started working on a set of guidelines and policies for the bancassurance sector to give it a legal footage and offer benefits to customers. This will allow insurers to devise models and systems to sell insurance through the banking system at relatively cheaper rates. Additionally, there would be a few guidelines with respect to the products itself, for example there would be a cap on the sum assured for bancassurance products," Mr. R Kannan, member actuary, IRDA. He was talking to reporters on the sidelines of an interactive session with members of Merchants' Chamber of Commerce in Kolkata on Thursday. Mr. Kannan also said IRDA has recently passed a regulation where insurers cannot ask a renewal premium which is less than 75% of the first year premium of life insurance policies. "This has been done to make sure than commissions to agents are reasonable and they have enough incentive to service the policies," he explained. On the insurance ombudsman Mr. Kannan said there is a scope for improvement and IRDA would be organizing a seminar to suggest measures to improve the process of grievance redressal. "IRDA may also look into the possibility of allowing insurers to sell policies through post offices. There could be a number of possibilities and products that do not clash with postal insurance could be one of the possibilities," said the IRDA's chief Actuary. The regulator is also looking at the possibility of allowing more than one life insurers and more than one general insurer to design and sell micro insurance policies together. This is a thought doing the round and it will be taken up for discussion.

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Scope and need of the study

As India is being considered one of the developing countries among the Emerging market economies, financial sector has also developed much vibrant with the financial reforms. In fact, in recent years, it is surmised that even the global economic growth hinges on development prospects of the emerging economies like China and India to a greater extent. Significantly, Indian financial system has recorded an average growth of over 8.5 per cent for the last four years, with macroeconomic and financial stability (RBI, 2006) and indications are that it may grow at even improved rate in the near future provided there is good monsoon. Experience also showed that economic growth had powerfully supported the expansion of middle income class in most of the Asian countries, and now it is the turn of India. Experience reveals that at the early growing stage of the economy the primary financial needs are met by the banking system and thereafter as the economy moves on to advanced pedestal, the need for the other non-banking financial products including insurance, derivatives, etc., were strongly felt. Moreover, as India has already more than 200 million middle class populations coupled with vast banking network with largest depositors base; there is larger scope for use of bancassurance. For instance as at end March 2005, there were more than 466 lakh bank accounts with scheduled commercial banks. It is worth being noted that, Swiss Re (2002) in its study on Asia pointed out that bancassurance penetration is expected to tangibly increase in Asia over next 5 years and this has been greatly proved. In simple words, it is rightly put that bancassurance has promised to combine insurance companies viable edge in the production of insurance products with banks edge in their distribution, through their vast retail networks (Knight, 2006).

Limitations of the study

 As the research contains the secondary data for making a financial analysis, the conclusion would not be a universal one.  Personal biases and prejudices of the customers may also affect the study.

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CHAPTER 2
INTRODUCTION TO BANKING
Banking as per the Banking Regulation Act, Banking is defined as: Accepting for the purpose of lending of deposits of money from the public for the purpose of lending or investment, repayable on demand through cheques, drafts or order. A sound and effective banking system is necessary for a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. Many new things have come up in the banking sector in the recent years. Banks have adopted the new technology because banking has not remained up to accepting and lending but now it is all about satisfying the needs of the customers. The development of the Indian banking sector has been accompanied by the introduction of new norms. New services are the order of the day, in order to stay ahead in the rat race. Banks are now foraying into net banking, securities, and consumer finance, housing finance, treasury market, merchant banking etc. They are trying to provide every kind of service which can satisfy or rather we should say that it can delight the customers. Entry of private and foreign banks in the segment has provided healthy competition and is likely to bring more operational efficiency into the sector. Banks are also coping and adapting with time and are trying to become one-stop financial supermarkets. The market focus is shifting from mass banking products to class banking with the introduction of value added and customized products.

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Brief review of scenario Banking

Emphasis on banking was first witnessed when in 1949 banking regulation ACT was passed.
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The nationalization of all commercial Banks has affected in regularizing Banking policies and monetary policies. RBI is made the policy making body for banking services.

Nationalization of Banks has resulted in spectacular progress in banking services.

Entry of private investment in banking

INTRODUCTION TO INSURANCE SECTOR

Insurance may be defined as: It is a contract between two parties where by one party undertakes to compensate the another party for the loss arising due to an uncertain events for which the another party agrees to pay a certain amount regularly. In India, insurance has a deep-rooted history. Insurance in India has evolved over time heavily drawing from other countries, England in particular. The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. The Insurance Act, 1938 was the first legislation governing all forms of insurance to provide strict state control over insurance business. Today there are 14

P age |6 general insurance companies and 14 life insurance companies operating in the country. But today also the insurance companies are trying to capture Indian markets as not many people are aware of it. The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the countrys GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country.

Brief Review of Scenario - Insurance

Insurance in India started without any Regulation in Nineteenth century. It was story of a typical colonial era .A few British companies dominated the market mostly in large urban centers.
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Insurance was nationalized mainly on 3 counts First, Indian lives were not insured. Second, even if they were insured, they were treated as substandard lives and extra premium was charged. Third, there were gross irregularities in the functioning of insurance companies. 25 companies were already bankrupt and another 25 companies were filed for bankruptcy.

Life insurance was nationalized in the year 1956,and then general insurance was nationalized in the year 1972.

In 1999, the private insurance companies were allowed back again into insurance sector with maximum cap of 26 percent foreign holding.

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WHAT IS BANCASSURANCE?
With the opening up of the insurance sector and with so many players entering the Indian insurance industry, it is required by the insurance companies to come up with innovative products, create more consumer awareness about their products and offer them at a competitive price. Since the banking services, insurance and fund management are all interrelated activities and have inherent synergies, selling of insurance by banks would be mutually beneficial for banks and insurance companies. With these developments and increased pressures in combating competition, companies are forced to come up with innovative techniques to market their products and services. At this juncture, banking sector with its far and wide reach, was thought of as a potential distribution channel, useful for the insurance companies. This union of the two sectors is what is known as Bancassurance.

Meaning
Bancassurance is the distribution of insurance products through the bank's distribution channel. It is a phenomenon wherein insurance products are offered through the distribution channels of the banking services along with a complete range of banking and investment products and services. To put it simply, Bancassurance, tries to exploit synergies between both the insurance companies and banks. Bancassurance can be important source of revenue. With the increased competition and squeezing of interest rates spread, profits are likely to be under pressure. Fee based income can be increased through hawking of risk products like insurance.

Bancassurance if taken in right spirit and implemented properly can be win-win situation for the all the participants' viz., banks, insurers and the customer.

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Origin
The banks taking over insurance is particularly well-documented with reference to the experience in Europe. Across Europe in countries like Spain and UK, banks started the process of selling life insurance decades ago and customers found the concept appealing for various reasons. Germany took the lead and it was called ALLFINANZ. The system of bancassurance was well received in Europe. France taking the lead, followed by Germany, UK, Spain etc. In USA the practice was late to start (in 90s). It is also developing in Canada, Mexico, and Australia. In India, the concept of Bancassurance is very new. With the liberalization and deregulation of the insurance industry, Bancassurance evolved in India around 2002.

There are many definitions of Bancassurance and in essence depends upon the type of model and the stage of development that insurance companies are already into.

However the most commonly used definition is:

Production and distribution of Insurance, Banking and other financial products to a common customer base.
Bancassurance does not mean just selling insurance products through banks but in full holistic form tries to exploit synergies between insurance companies and banks and thus realizes the full potential of customer database of banks to develop excellent customer centric service and generate highest quality returns for insurance companies and banks.

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The Birth of Bancassurance

Bancassurance began in the European Continent in second half of the 20th century, when banks sought to capture the manufacturing income from insurance products as well to supplement the commission income earned from their sales. By doing so, they sought to leverage their customer list and the related customer information that would enhance their ability to sell insurance products to their largely mid-market customers. These early efforts were based on the advantages that are still recognized as accruing to banks in the insurance business:

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The banks' brand name and reputation The productivity levels of branch staff and in-house agents, which can reach three to four times that of the traditional agency force.

Bancassurance is also known as the Bank Insurance Model or BIM. Bancassurance is an organizational strategy that allows a bank to offer various types of insurance. The model is created by establishing ongoing relationships with one or more insurance providers. Those providers are then able to utilize the banks staff and resources to sell the policies.

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Reasons for growing phenomena of Bancassurance

The opening up of the insurance industry to private sector participation in December 1999 has led to the entry of 20 new players, with 12 in the life insurance sector and eight in the non-life insurance sector. Almost without exception these companies are seeking to utilize multiple distribution channels such as traditional agency, bancassurance, brokers and direct marketing. Bancassurance is seen by many to be a significant or even the primary channel (the latter being the case for at least SBI Life). In other Asian markets we have seen bancassurance make significant headway in recent times. For example, bancassurance accounted for 24% of new life insurance sales by weighted premium income* in Singapore in 2002. This is a significant increase on the equivalent 2001 statistic of 15% and is as a result of growth in significant bankcentric bancassurance operations. In Hong Kong the figure for 2002 is expected to be at the 20% level for the same basic reasons. 1. Life insurance premium represents 55% of the world insurance premium, and as the life insurance is basically a saving market. So it is one of the methods to increase deposits of banks. 2. In non-life insurance business banks are looking to provide additional flow of revenues from the same customers through the same channel of distribution and with the same people. 3. Insurers have been turning in ever-greater numbers to alternative modes of distribution because of the high costs they have paid for agent services. These costs

P a g e | 11 became too much of a burden for many insurers compared to the returns they generated. 4. Insurers operate through bancassurance own and control relationships with customers. Insurers found that direct relationships with customers gave them greater control of their business at a lower cost. Insurers who operate through the agency relationship are hardly having any control on their relationship with their clients. 5. The ratio of expenses to premiums, an important efficiency factor, it is noticed very well that expenses ratio in insurance activities through bancassurance is extremely low. This is because the bank and the insurance company is benefiting from the same distribution channels and people. 6. It is believed that the prospects for increased consolidation between banking and insurance is more likely dominated and derived by the marketing innovations that are likely to follow from financial service modernization. Such innovations would include cross selling of banking, insurance, and brokerage products and services; the increased use of the Internet by consumers; and a melding of insurance and banking corporate cultures. 7. One of the most important reasons of considering Bancassurance by Banks is increased return on assets (ROA). One of the best ways to increase ROA, assuming a constant asset base, is through fee income. Banks that build fee income can cover more of their operating expenses, and one way to build fee income is through the sale of insurance products. Banks that effectively cross-sell financial product can leverage their distribution and processing capabilities for profitable operating expense ratios. 8. By leveraging their strengths and finding ways to overcome their weaknesses, banks could change the face of insurance distribution. Sale of personal life insurance products through banks meets an important set of consumer needs. Most large retail

P a g e | 12 banks engender a great deal of trust in broad segments of consumers, which they can leverage in selling them personal life insurance products. In addition, a bank is branch network allows the face-to-face contact that is so important in the sale of personal insurance. 9. Another advantage banks have over traditional insurance distributors is the lower cost per sales lead made possible by their sizable, loyal customer base. Banks also enjoy significant brand awareness within their geographic regions, again providing for a lower per-lead cost when advertising through print, radio and/or television. Banks that make the most of these advantages are able to penetrate their customer base and markets for above-average market share. 10. Other bank strengths are their marketing and processing capabilities. Banks have extensive experience in marketing to both existing customers (for retention and cross selling) and non-customers (for acquisition and awareness). They also have access to multiple communications channels, such as statement inserts, direct mail, ATMs, telemarketing, etc. Banks' proficiency in using technology has resulted in improvements in transaction processing and customer service. 11. By successfully mining their customer databases, leveraging their reputation and 'distribution systems (branch, phone, and mail) to make appointments, and utilizing 'sales techniques and products tailored to the middle market, European banks have more than doubled the conversion rates of insurance leads into sales and have increased sales productivity to a ratio which is more than enough to make bancassurance a highly profitable proposition. 12. Insurers have much to gain from marketing through banks. Personal-lines carriers have found it difficult to grow using traditional agency systems because price competition has driven down margins and increased the compensation demands of successful agents. Over the last decade, life agents have sold fewer and larger

P a g e | 13 policies to a more upscale client base. Middle-income consumers, who comprise the bulk of bank customers, get little attention from most life agents. By capitalizing on bank relationships, insurers will recapture much of this underserved market. 13. Most insurers that have tried to penetrate middle-income markets through alternative channels such as direct mail have not done well. Clearly, a change in approach is necessary. As with any initiative, success requires a clear understanding of what must be done, how it will be done and by whom. The place to begin is to segment the strengths that the bank and insurer bring to the business opportunity.

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MODELS OF BANCASSURANCE

1. STRUCTURAL CLASSIFICATION
a) Referral Mode - Banks intending not to take risk could adopt referral model

wherein they merely part with their client data base for business lead of commission. The actual transaction with the prospective client in referral model is done by the staff of the insurance company either at the premises of the ban0k or elsewhere. Referral model is nothing but a simple arrangement, wherein the bank, while controlling access to the clients 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 was 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 /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 can resort to this model and then move on to the other models.

b) Corporate Agency - The other form of non-sick participatory distribution

channel is that of Corporate Agency, wherein the bank staff as an institution acts as corporate agent for the insurance product for a fee/commission. This seems to be more 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. This could, however, be overcome by intensive training

P a g e | 15 to chosen staff, and 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. 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.

c) Insurance as fully integrated financial service/ Joint Ventures - 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. This includes banks having wholly owned insurance subsidiaries with or without foreign participation. 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. As per the extant regulation of insurance sector the foreign insurance company could enter the Indian insurance market only in the form of joint venture, therefore, this type of bancassurance seems to have emerged out of necessity in India to an extent. There is great scope for further growth both in life and nonlife insurance segments as GOI is reported have been actively considering to increase the FDIs participation up to 49 per cent.

P a g e | 16 2. PRODUCT BASED CLASSIFICATION a) Stand-alone Insurance products -.In this case bancassurance involves marketing of the insurance products through either referral arrangement or corporate agency without mixing the insurance products with any of the banks own products/ services. Insurance is sold as one more item in the menu of products offered to the banks customer, however, the products of banks and insurance will have their respective brands too

b) Blend of insurance with bank products - This method aims at blending of insurance products as a value addition while promoting the banks own products. Thus, banks could sell the insurance products without any additional efforts. In most times, giving insurance cover at a nominal premium/ fee or sometimes without explicit premium does act as an added attraction to sell the banks own products, e.g., credit card, housing loans, education loans, etc. Many banks in India, in recent years, has been aggressively marketing credit and debit card business, whereas the cardholders get the insurance cover for a nominal fee or (implicitly included in the annual fee) free from explicit charges/ premium. Similarly the home loans / vehicle loans, etc., have also been packaged with the insurance cover as an additional incentive.

3. BANK REFERRALS There is also another method called 'Bank Referral'. Here the banks do not issue the policies; they only give the database to the insurance companies. The companies issue the policies and pay the commission to them. That is called referral basis. In this method also there is a win-win situation everywhere as the banks get

P a g e | 17 commission, the insurance companies get databases of the customers and the customers get the benefits.

Utilities of Bancassurance

FOR BANKS
1. As a source of fee income - Banks traditional sources of fee income have been

the fixed charges levied on loans and advances, credit cards, merchant fee on point of sale transactions for debit and credit cards, letter of credits and other operations. This kind of revenue stream has been more or less steady over a period of time and growth has been fairly predictable. However shrinking interest rate, growing competition and increased horizontal mobility of customers have forced bankers to look elsewhere to compensate for the declining profit margins and Bancassurance has come in handy for them. Fee income from the distribution of insurance products has opened new horizons for the banks and they seem to love it. From the banks point of view, opportunities and possibilities to earn fee income via Bancassurance route are endless. Atypical commercial bank has the potential of maximizing fee income from Bancassurance up to 50% of their total fee income from all sources combined. Fee Income from Bancassurance also reduces the overall customer acquisition cost from the banks point of view. At the end of the day, it is easy money for the banks as there are no risks and only gains.

P a g e | 18 2. Product Diversification - In terms of products, there are endless opportunities for the banks. Simple term life insurance, endowment policies, annuities, education plans, depositors insurance and credit shield are the policies conventionally sold through the Bancassurance channels. Medical insurance, car insurance, home and contents insurance and travel insurance are also the products which are being distributed by the banks. However, quite a lot of innovations have taken place in the insurance market recently to provide more and more Bancassurance-centric products to satisfy the increasing appetite of the banks for such products. Insurers who are generally accused of being inflexible in the pricing and structuring of the products have been responding too well to the challenges (say opportunities) thrown open by the spread of Bancassurance. They are ready to innovate and experiment and have setup specialized Bancassurance units within their fold. Examples of some new and innovative Bancassurance products are income builder plan, critical illness cover, return of premium and Takaful products which are doing well in the market.

Building close relations with the customers - 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. Also, banking in India is mainly done in the 'brick and mortar' model, which means that most of the customers still walk into the bank branches. This enables the bank staff to have a personal contact with their customers. In a typical Bancassurance model, the consumer will have

P a g e | 19 access to a wider product mix - a rather comprehensive financial services package, encompassing banking and insurance products

FOR INSURANCE COMPANIES

1. Stiff Competition - At present there are 15 life insurance companies and 14general insurance companies in India. Because of the Liberalization of the economy it became easy for the private insurance companies to enter into the battle field which resulted in an urgent need to outwit one another. Even the oldest public insurance companies started facing the tough competition. Hence in order to compete with each other and to stay a step ahead there was a need for a new strategy in the form of Bancassurance. It would also benefit the customers in terms of wide product diversification.

2. High cost of agents - Insurers have been tuning into different modes of distribution
because of the high cost of the agencies services provided by the insurance companies. These costs became too much of a burden for many insurers compared to the returns they generate from the business. Hence there was a need felt for a Cost-Effective Distribution channel. This gave rise to Bancassurance as a channel for distribution of the insurance products.

3. Rural Penetration - Insurance industry has not been much successful in rural
penetration of insurance so far. People there are still unaware about the insurance as a tool to insure their life. However this gap can be bridged with the help of Bancassurance. The branch network of banks can help make the rural people aware about insurance and there is also a wide scope of business for the insurers. In order to fulfill all the needs bancassurance is needed.

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4. Multi channel Distribution - Now a day the insurance companies are trying to
exploit each and every way to sell the insurance products. For this they are using various distribution channels. The insurance is sold through agents, brokers through subsidiaries etc. In order to make the most out of Indias large population base and reach out to a worthwhile number of customers there was a need for Bancassurance as a distribution model.

5. Targeting Middle income Customers - In previous there was lack of awareness

about insurance. The agents sold insurance policies to a more upscale client base. The middle income group people got very less attention from the agents. So through the venture with banks, the insurance companies can recapture much of the underserved market. So in order to utilize the database of the banks middle income customers, there was a need felt for Bancassurance.

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REGULATIONS FOR BANCASSURANCE IN INDIA

RBI NORMS FOR BANKS

RBI Guidelines for the Banks to enter into Insurance Business Following the issuance of Government of India Notification dated August 3, 2000, specifying Insurance as a permissible form of business that could be undertaken by banks under Section 6(1)(o)of The Banking Regulation Act, 1949, RBI issued the guidelines on Insurance business for banks. 1. Any scheduled commercial bank would be permitted to undertake insurance business as agent of insurance companies on fee basis. Without any risk participation 2. Banks which satisfy the eligibility criteria given below will be permitted to set up a joint venture company for undertaking insurance business with risk participation, subject to safeguards. The maximum equity contribution such a bank can hold in the Joint Venture Company will normally be 50% of the paid up capital of the insurance company.

The eligibility criteria for joint venture participant are as under: i. The net worth of the bank should not be less than Rs.500 crore; ii. The CRAR of the bank should not be less than 10 per cent; iii. The level of non-performing assets should be reasonable; iv. The bank should have net profit for the last three consecutive years; v. The track record of the performance of the subsidiaries, if any, of the concerned bank should be satisfactory.

3. In cases where a foreign partner contributes26% of the equity with the approval of
Insurance Regulatory and Development Authority/Foreign Investment Promotion Board, more than one public sector bank or private sector bank may be allowed to participate in

P a g e | 22 the equity of the insurance joint venture. As such participants will also assume insurance risk, only those banks which satisfy the criteria given in paragraph 2 above, would be eligible. 4. A subsidiary of a bank or of another bank will not normally be allowed to join the insurance company on risk participation basis. 5. Banks which are not eligible for joint venture participant as above, can make investments up to10% of the net worth of the bank orRs.50crore, whichever is lower, in the insurance company for providing infrastructure and services support. Such participation shall be treated as an investment and should be without any contingent liability for the bank.

The eligibility criteria for these banks will be as under: i. The CRAR of the bank should not be less than 10%; ii. The level of NPAs should be reasonable; iii. The bank should have net profit for the last three consecutive years. 6. All banks entering into insurance business will be required to obtain prior approval of the Reserve Bank. The Reserve Bank will give permission to banks on case to case basis keeping in view all relevant factors including the position in regard to the level of non-performing assets of the applicant bank so as to ensure that non-performing assets do not pose any future threat to the bank in its present or the proposed line of activity, viz., insurance business. It should be ensured that risks involved in insurance business do not get transferred to the bank. There should be arms length relationship between the bank and the insurance outfit.

7. Holding of equity by a promoter bank in an insurance company or participation in any

form in insurance business will be subject to compliance with any rules and regulations laid down by the IRDA/Central Government. This will include compliance with

P a g e | 23 Section6AA of the Insurance Act as amended by the IRDA Act, 1999, for divestment of equity in excess of 26 per cent of the paid up capital within a prescribed period of time. 8. Latest audited balance sheet will be considered for reckoning the eligibility criteria.

IRDA NORMS FOR INSURANCE COMPANIES

The Insurance regulatory development & Authority has given certain guidelines for the Bancassurance they are as follows: 1) Chief Insurance Executive: Each bank that sells insurance must have a chief Insurance Executive to handle all the insurance matters & activities. 2) Mandatory Training: All the people involved in selling the insurance should undergo mandatory training at an institute determined (authorized) by IRDA & pass the examination conducted by the authority 3) Corporate agents: Commercial banks, including co-operative banks and RRBs may become corporate agents for one insurance company. 4) Banks cannot become insurance: brokers.

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Issues for regulation: Certain regulatory barriers have slowed the development of
Bancassurance in India down. Which have only recently been cleared with the passage of the insurance (amendment) Act 2002.Prior it was clearly an impractical necessity and had held up the implementation of Bancassurance in the country. As the current legislation places the following:1) Training and examination requirements: upon the corporate insurance executive within the corporate agency, this barrier has effectively been removed. Another regulatory change is published in recent publication of IRDA regulation relating to the (2) Licensing of Corporate agents (2) Specified person to satisfy the training & examination: According to new regulation of IRDA only the specific persons have to satisfy the training & examination requirement as insurance agent.

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BENEFITS OF BANCASSURANCE

TO BANKS

From the banks point of view: (A) By selling the insurance product by their own channel the banker can increase their income. (B) Banks have face-to-face contract with their customers. They can directly ask them to take a policy. And the banks need not to go anywhere for customers. (C) The Bankers have extensive experience in marketing. They can easily attract customers & non-customers because the customer &non-customers also bank on banks. (D) Banks are using different value added services life-E. Banking tele banking, direct mail & soon they can also use all the above-mentioned facility for Bankassurance purpose with customers & non-customers. (E) Productivity of the employees increases. (F) By providing customers with both the services under one roof, they can improve overall customer satisfaction resulting in higher customer retention levels. (G) Increase in return on assets by building fee income through the sale of insurance products. (H) Can leverage on face-to-face contacts and awareness about the financial conditions of customers to sell insurance products. (I) Banks can cross sell insurance products E.g.: Term insurance products with loans.

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TO INSURERS
From the Insurer Point of view: (A) The Insurance Company can increase their business through the banking distribution channels because the banks have so many customers. (B) By cutting cost Insurers can serve better to customers in terms lower premium rate and better risk coverage through product diversification. (C)Insurers can exploit the banks' wide network of branches for distribution of products. The penetration of banks' branches into the rural areas can be utilized to sell products in those areas. (D)Customer database like customers' financial standing, spending habits, investment and purchase capability can be used to customize products and sell accordingly. (E)Since banks have already established relationship with customers, conversion ratio of leads to sales is likely to be high. Further service aspect can also be tackled easily. (F)The insurance companies can also get access to ATMs and other technology being used by the banks. (G)The selling can be structured properly by selling insurance products through banks. (H) The product can be customized as per the needs of the customers.

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TO CUSTOMERS

From the customers' point of view: (A)Product innovation and distribution activities are directed towards the satisfaction of needs of the customer. (B) Bancassurance model assists customers in terms of reduction price, diversified product quality in time and at their doorstep service by banks. (C)Comprehensive financial advisory services under one roof. i.e. ,insurance services along with other financial services such as banking ,mutual funds, personal loans etc. (D) Easy access for claims, as banks are a regular visiting place for customers. (E) Innovative and better product ranges and products designed as per the needs of customers. (F)Any new insurance product routed through the Bancassurance Channel would be well received by customers. (G) Customers could also get a share in the cost savings in the form of reduced premium rate because of economies of scope, besides getting better financial counseling at single point.

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DISTRIBUTION CHANNELS

Traditionally, insurance products were promoted and sold principally through agency systems only. The reliance of insurance industry was totally on the agents. Moreover with the monopoly of public sector insurance companies there was very slow growth in the insurance sector because of lack of competition. The need for innovative distribution channels was not felt because all the companies relied only upon the agents and aggressive marketing of the products was also not done. But with new developments in consumers behaviours, evolution of technology and deregulation, new distribution channels have been developed successfully and rapidly in recent years. Recently Bancassurers have been making use of various distribution channels, they are: Career Agents: Career Agents are full-time commissioned sales personnel holding an agency contract. They are generally considered to be independent contractors. Consequently an insurance company can exercise control only over the activities of the agent which are specified in the contract. Many bancassurers, however avoid this channel, believing that agents might oversell out of their interest in quantity and not quality. Such problems with career agents usually arise, not due to the nature of this channel, but rather due to the use of improperly designed remuneration and incentive packages. Special Advisers: Special Advisers are highly trained employees usually belonging to the insurance partner, who distribute insurance products to the bank's corporate clients. The

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Clients mostly include affluent population who require personalised and high quality service. Usually Special advisors are paid on a salary basis and they receive incentive compensation based on their sales. Salaried Agents: Salaried Agents are an advantage for the bancassurers because they are under the control and supervision of bancassurers. These agents share the mission and objectives of the bancassurers. These are similar to career agents, the only difference is in terms of their remuneration is that they are paid on a salary basis and career agents receive incentive compensation based on their sales.

Bank Employees / Platform Banking: Platform Bankers are bank employees who spot the leads in the banks and gently suggest the customer to walk over and speak with appropriate representative within the bank. The platform banker may be a teller or a personal loan assistant. A restriction on the effectiveness of bank employees in generating insurance business is that they have a limited target market, i.e. those customers who actually visit the branch during the opening hours. Corporate Agencies and Brokerage Firms: There are a number of banks who cooperate with independent agencies or brokerage firms while some other banks have found corporate agencies. The advantage of such arrangements is the availability of specialists needed for complex insurance matters and through these arrangements the customers get good quality of services. Direct Response:

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In this channel no salesperson visits the customer to induce a sale and no faceto-face contact between consumer and seller occurs. The consumer purchases products directly from the bancassurer by responding to the company's advertisement, mailing or telephone offers. This channel can be used for simple packaged products which can be easily understood by the consumer without explanation Internet: Internet banking is already securely established as an effective and profitable basis for conducting banking operations. Bancassurers can feel confident that Internet banking will also prove an efficient vehicle for cross selling of insurance savings and protection products. Functions requiring user input (check ordering, what-if calculations, credit and account applications) should be immediately added with links to the insurer. Such an arrangement can also provide a vehicle for insurance sales, service and leads. E-Brokerage: Banks can open or acquire an e-Brokerage arm and sell insurance products from multiple insurers. The changed legislative climate across the world should help migration of bancassurance in this direction. The advantage of this medium is scale of operation, strong brands, easy distribution and excellent synergy with the internet capabilities. Outside Lead Generating Techniques: One last method for developing bancassurance eyes involves "outside" lead generating techniques, such as seminars, direct mail and statement inserts. Great opportunities await Bancassurance partners today and, in most cases, success or failure

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depends on precisely how the process is developed and managed inside each financial institution.

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VARIOUS TRENDS
Though bancassurance has traditionally targeted the mass market, but bancassurers have begun to finely segment the market, which for each segment. Some bancassurers are also beginning to focus exclusively on distribution. In some markets, face-to-face contact is preferred, which tends to favour bancassurance development. Nevertheless, banks are starting to embrace direct marketing and Internet banking as tools to distribute insurance products. New and emerging channels are becoming increasingly competitive, due to the tangible cost benefits embedded in product pricing or through the appeal of convenience and innovation. Bancassurance proper is still evolving in Asia and this is still in infancy in India and it is too early to assess the exact position. However, a quick survey revealed that a large number of banks cutting across public and private and including foreign banks have made use of the bancassurance channel in one form or the other in India. Banks by and large are resorting to either referral models or Corporate agency model to begin with. Banks even offer space in their own premises to accommodate the insurance staff for selling the insurance products or giving access to their clients database for the use of the insurance companies. As number of banks in India have begun to act as corporate agents to one or the other insurance company, it is a common sight that banks canvassing and marketing the insurance products across the counters. has resulted in tailor-made products

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CHALLENGES

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.

Bank employees are traditionally low on motivation. Lack of sales culture itself is bigger roadblock than the lack of sales skills in the employees. Banks are generally used to only product packaged selling and hence selling insurance products do not seem to fit naturally in their system. Human Resource Management has experienced some difficulty due to such alliances in financial industry. Poaching for employees, increased work-load, additional training, maintaining the motivation level are some issues that has cropped up quite occasionally. So, before entering into a bancassurance alliance, just like any merger, cultural due diligence should be done and human resource issues should be adequately prioritized. Private sector insurance firms are finding change management in the public sector, a major challenge. State-owned banks get a new chairman, often from another bank, almost every two years, resulting in the distribution strategy undergoing a complete change. So because of this there is distinction created between public and private sector banks. The banks also have fear that at some point of time the insurance partner may end up cross-selling banking products to their policyholders. If the insurer is selling the products

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by agents as well as banks, there is a possibility of conflict if both the banks and the agent target the same customers.

SWOT ANALYSIS:

Banking and Insurance are very different businesses. Banks have less risk but the insurance has a greater risk. Even though, banks and insurance companies in India are yet to exchange their wedding rings, Bancassurance as a means of distribution of insurance products is already in force in some form or the other. Banks are selling Personal Accident and Baggage Insurance directly to their Credit Card members as a value addition to their products. 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 previously was not thought of. The sale of insurance products can earn banks very significant 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 enables banks and insurance companies to complement each others strengths as well. It is therefore essential to have a SWOT analysis done in the context of bancassurance experiment in India. A SWOT analysis of Bancassurance is given below:

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STRENGTHS: In a country like India of one billion people where sky is the limit there is a vast untapped potential waiting for life insurance products. Our other 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. Banks have the credibility established with their constituents because of a variety of services and schemes provided by them. They also enjoy pride of place in the hearts of people because of their long presence and sustained image. Banks also enjoy a wide network of branches, even in the remotest areas that can facilitate taking up the task on a large and massive scale, simultaneously. Banks are very well aware with the psychology of the customers because of their interaction with the customers on regular basis. Because of this the bankers can guess the attitude and diverse needs of the customers and could change the face of insurance distribution to personal life insurance. People rely more upon LIC and GIC for taking insurance. If the products of LIC and GIC are provided through bancassurance it would be an added advantage to the insurance companies. With the help of banks trained staff, its brand name and the confidence and reliability of people on the banks, the selling of insurance products can be done in a more proper way.

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Other than all these things there is a huge potential for insurance sector, as the population of India is high and a large part of it has remained untapped till now. So this can create an added advantage for both banks and insurers.

WEAKNESSES: In spite of growing emphasis on total branch mechanism and full computerization of bank branches, the rural and semi-urban banks have still to see information technology as an enabler. The IT culture is unfortunately missing completely in all of the future collaborations. The internet connections are also not properly provided to the staff. To undertake the distribution of the insurance products, the bank employees have to

undergo certain minimum period of training, followed by a test and then get them licensed. Moreover the standards of the examination have been raised in the recent past making it difficult for many examinees to clear the same. There is lack of personalized services because the traditional insurance agent is considered a member of the family and hence is able to render a personalized service during and after the sales process. However that may not be the case in regards to a bank employee. There are many differences in the way of thinking and business approaches of bankers and the managers of insurance companies. Banks are traditionally demanddriven organizations with are active selling philosophy. Insurance organizations are usually need-driven and have an aggressive selling philosophy. The visit of a customer to the bank is to have a simple transaction like deposit or withdrawal. Busy customers will have no time to have a discussion on a long-term

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durable purchase like insurance across the counter. Also, the visits in urban or metro branches are going to be fewer because of ATMs and e-banking. 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 customers.

OPPORTUNITIES: 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 (total number of individual life policies sold in 1998-99 was just 91.73 million).

There are many people in many areas that are still unaware about the insurance and its various products and are waiting that somebody should come and give them the information about it. In urban and metro areas, where the customers are willing to get many services like lockers and safe deposit systems and other products and services from banks, there is a good opportunity to market many property related general insurance policies like fire insurance, burglary insurance and medi-claim insurance etc. Banks' database is enormous even though the goodwill may not be

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the same. This database has to be dissected and various homogeneous groups are to be churned out in order to position the Bancassurance products. With a good IT infrastructure, this can really do wonders. Banks in their normal course of functions lend finance in the form of loans for cars, or for buying a house to clients etc. They can take advantage of this by cross-selling the insurance products and combine it as a package. Another area that could be of interest to bankers to sell insurance is exploiting the corporate customers and tying up for insurance of the employees of corporate clients, which would be an avenue with easy access. In most cases banks provide salary disbursement and loan facilities but here they can provide insurance cover as well.

THREAT: Success of a Bancassurance venture requires change in approach, thinking and work culture on the part of everybody involved. The 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 not be easily acceptable by the employees. Another possible threat may come from non-response from the targeted customers. If many joint ventures took place between banks and insurance companies then it may happen that the customers may not respond to such ventures as happened in U.S. Insurance in India is perceived more as a saving option than providing risk cover. So this may create an adverse feeling in the minds of the bankers that such products may

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lessen the sales of regular bank saving products. Also selling of investment and good return products may affect the FD Portfolio of the banks. There would be a problem of Reputational Contagion i.e. loss of market confidence towards one in a venture leading to loss of confidence on the other because of identical brand recognition, similar management and consolidated financial reporting etc. If no strict norms are there for such ventures then many unholy ventures may take place which may give rise to tough competition between bancassurers resulting in lower prices and the Bancassurance venture may never break because of such situations. The most common obstacles to success of Bancassurance are poor manpower management, lack of a sales culture within the bank, no involvement by the branch manager, insufficient product promotions, failure to integrate marketing plans, marginal database expertise, poor sales channel linkages, inadequate incentives, resistance to change, negative attitudes toward insurance and unwieldy marketing strategy.

REASONS FOR BANKS TO ENTER INTO BANCASSURANCE

There are many reasons for a bank to enter Bancassurance business. Some of the important ones are Limitations on profit margins of traditional banking products: The profit margin in the traditional products is under tremendous pressure and banks are always looking out for other sources of non interest income generation. Regulatory Changes: Earlier RBI had not permitted the banks to enter into insurance

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distribution business. Now that the regulator has permitted on non-risk participating basis more and more banks are looking at this activity with a view of offering more products to its customers and also to earn more non-interest income. Better use of Banks network and infrastructure: Most banks have invested heavily in creating a huge network of branches and also the infrastructure in terms of the IT base which can be very effectively used in Bancassurance business. Separate infrastructure need not be created for this activity. In fact this can be a very good activity taken by the bank for an effective improvement in the branch Cost-Income ratio. Customer Loyalty: The loyalty factor which the customer has in an institution like banking is far from any other institution. This is also one of the factors which is leveraged in Bancassurance business. It has also been proved by research that if the bank customers are offered investment products by their bankers the trust factor is very high and also the The relationship would be that of the bank being a pure distributor while that of the insurer being a pure manufacturer of the insurance products. Customers information as marketing tool: This is a very important aspect why banks must do Bancassurance. If we logically look at the scenario, a banker is the one who knows the entire financial transaction of the customer. What money comes in, where the customer issues the cheques and what is the Net Investible Surplus is all known to the banker. The banker is bound by the Secrecy Act and cannot disclose the details of the transactions to outside public but the information available at his finger tips can be made use of for the benefit of the customer. On a proper analysis of the transactions, the banker can understand the Investment psychology of the customer and accordingly offer the

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insurance products to them.

All this with the stability of the organization, brand equity, loyalty and trust factor makes the bank and the banker a perfect person/unit to suggest investment and insurance products to its customers. When all these products are offered to the customer from the same bank branch, it automatically makes the banks branch a One stop financial services provider or a Super market of financial services to its customer.

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INDIAN SCENARIO

The business of banking around the globe is changing due to integration of global financial markets, development of new technologies, universalization of banking operations and diversification in non-banking activities. Due to all these movements, the boundaries that have kept various financial services separate from each other have vanished. The coming together of different financial services has provided synergies in operations and development of new concepts. One of these is bancassurance. 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. As for the insurance company the advantage that

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bancassurance provides is evident. The insurance company gets improved geographical reach without additional costs. In India around 67,000branches 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 onto him. The penetration level of life insurance in the Indian market is considerably low at 2.3% of GDP with only 8% of the total population currently insured. Thus, bancassurance provide an apparently viable model for product diversification by banks and a cost-effective distribution channel for insurers. The success of the partnership between the two entities depends on the right model partnership. Given these changes, bancassurance and collaboration between banks and insurers has a long way to go in India. 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.

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GLOBAL SCENARIO

Bancassurance has grown at different pace and taken different shapes and forms in different countries depending on the demography, economic and legislations in that country. During the last two decades, bancassurance has taken deep roots in various countries, especially in Europe. Bnacassurance, so far, has been basically European. Bancassurance has seen tremendous acceptance and growth across nations. Although it enjoys a penetration rate in excess of 50% in France, Spain, Italy and Belgium, other countries have opted for more traditional networks. The Life insurance market in the UK is largely in the hands of the brokers. With advent of bancassurance, their market share has increased from 40% in 1992 to 54% in 1999. Sales agents also play an important role on a market entirely regulated by the Financial Services & Markets Act (FSMA) which imposes very strict marketing conditions. In Germany, the market continues to be dominated by general sales agents, even if their market share has declined from 85% in 1992 to54% in 1999. Bancassurance recorded huge growth in Europe but not in USA and Canada. In the US, there were hurdles till recently banks were not allowed to do insurance business and vice versa. In several countries in Latin America, banks have benefited from recent reforms financial deregulation, among others by selling insurance products across the counter. In China, banks are limited to playing the role of

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tide agents to insurance companies, which can still provide a good platform for bancassurance to develop. In Hong Kong, when a Swiss bank introduced bancassurance, the life insurance sales went up by 240%. Japan has to make a remarkable headway in bancassurance. In the Philippines, banks are permitted to own100% of the insurance company. Bancassurance is yet to be exploited in Singapore. There is a huge market potential out there in many countries and especially in India when compared to the global benchmark. It is good news to bancassurers that only about 25% of the global insurable population is insured, and even among them most are underinsured.

WHY IS BANCASSURANCE MORE SUITED FOR LIFE INSURANCE PRODUCTS?

Traditionally, much fewer non-life insurance products are distributed through bancassurance than life insurance products. There are several reasons for this:

1. The main reason may be the complementary nature of life insurance and banking products. Bank employees are already familiar with financial products and quickly adapt to selling insurance - based savings or pension products. 2. On the other hand, the non-life market requires special management and selling skills, which are not necessarily prevalent in bancassurance. In addition, such competencies require significant investment in training and motivation, and therefore additional costs. 3. Life insurance products are generally long-term products, which require customers to have complete confidence in the institution that invests their money.

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And we now know that, in many countries, banks have a better image and are more trusted than insurance companies 4. Bank advisers can use their knowledge of their customers finances to target their advice towards specific needs. This is a major advantage in life insurance and less important in personal injury insurance

OTHER TIE-UPS
Life Insurance tie-ups: Private Sector Companies: 1. Bajaj Allianz Life Insurance Co. Ltd. 2. Birla Sun Life Insurance Co. Ltd. 3. HDFC Standard Life Insurance Co. Ltd. 4. ICICI Prudential Life Insurance Co. Ltd. 5. ING Vysya Life Insurance Co. Pvt. Ltd. 6. SBI Life Insurance Company Limited 7. TATA-AIG Life Insurance Company Ltd. 8. Sahara India Life Insurance Co. Ltd. 9. Aviva Life Insurance Co India Pvt. Ltd. 10. Kotak Mahindra OU Mutual Life Insurance Co. Ltd. 11. Max New York Life Insurance Co. Ltd. 12. MetLife India Insurance Co. Pvt. Ltd. 13. Reliance Life Insurance Co. Ltd.

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14. Shriram Life Insurance Co. Ltd. 15. Bharti Axa Life Insurance Co. Ltd.

Public Sector Company: 16. Life Insurance Corporation of India

Non-Life Insurance tie-ups:

Private Sector Companies: 1. Royal Sundaram Allianz Insurance Co. Ltd. 2. TATA-AIG General Insurance Co. Ltd. 3. Reliance General Insurance Co. Ltd. 4. IFFCO-TOKIO General Insurance Co. Ltd. 5. ICICI Lombard General Insurance Co. Ltd. 6. Bajaj Allianz General Insurance Co. Ltd. 7. HDFC Chubb General Insurance Co. Ltd. 8. Cholamandalam MS General Insurance Co. Ltd. 9. Star Health and Alhed Insurance Co. Ltd.

Public Sector Companies: 10. The New India Assurance Co. Ltd. 11. National Insurance Co. Ltd. 12. United India Insurance Co. Ltd.

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13. The Oriental Insurance Co. Ltd. 14. Export Credit Guarantee Corporation Ltd. 15. Agriculture Insurance Company Ltd

RELEVANCE OF BANCASSURANCE IN THE INDIAN FINANCIAL SECTOR

1. Integration of the financial service industry in terms of banking, securities business and insurance is a growing worldwide phenomenon. The Universal Banking concept is evolving on these lines in India. 2. Banks are the key pillars of Indias financial system. The public has immense faith in banks. 3. Share of bank deposits in the total financial assets of households has been steadily rising. 4. Indian Banks have immense outreach to the households. Total of 66000 branches (as of 2007) of commercial banks, each branch serving an average of 15,000 people. 5. Banks enjoy considerable goodwill and access in the rural regions. There are more than 33000 branches in rural India (about 50% of total), and approximately 14,500 semi-urban branches, where insurance growth has been most buoyant. 200 exclusive Regional Rural Banks in deep hinterland. 6. Banks have enormous retail customer base. Share of individuals as a category in bank accounts is steadily increasing. Rural and semi urban bank accounts constitute close to

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60% in terms of number of accounts, indicating the number of potential lives that could be covered by insurance with the upfront involvement of banks. 7. Banks world over have realized that offering value-added services such as insurance, helps to meet client expectations Competition in the Personal Financial Services area is

getting `hot in India and that Banks can retain customer loyalty by offering them a vastly expanded and more sophisticated range of products. Insurance distribution can also help the bank to increase the fee-based earnings to a large extent. 8. Fee-based selling helps to enhance the levels of staff productivity in banks. This is vitally important to bring higher motivation levels in banks in India. 9. Banks can put their energies into the small-commission customers that insurance agents would tend to avoid. Banks entry in distribution can help to enlarge the insurance customer base rapidly. This helps to popularize insurance as an important financial protection product. 10. Bancassurance helps to lower the distribution costs of insurers. Acquisition cost of insurance customer through bank is low. Selling insurance to existing mass market banking customers is far less expensive than selling to a group of unknown customers. Experience in Europe has shown that bancassurance firms have a lower expense ratio. This benefit could go to the insured public by way of lower premiums. 11. Banks have an important role to play in the pension sector when deregulated. Low cost of collecting pension contributions is the key element in the success of developing the pension sector. Money transfer costs in Indian banking are low by international standards. Portability of pension accounts is a vital requirement which banks can fulfill, in a credible framework.

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Bancassurance as a Catalyst for insurance industry

Existing low penetration of insurance coupled with the high per capita income gives Middle East and gulf countries an unusually strong platform to launch and grow the industry into the future. Recent economic strides and infrastructural boom in the countries like UAE, Qatar and Bahrain are working as catalyst and pushing the insurance industry to new horizons. Market opportunities for banks offering Bancassurance products are endless.

Conventional Bancassurance products like deposit insurance, unit linked products and investment cum protection products are likely to continue to be sold to its customer base. However, the asset creation process in most gulf countries through equity markets and infrastructural investments have created a new generation of High Net Worth Individuals (HNWIs) and banks would do well to take note of it. In addition, non-conventional products like Takaful and commercial insurance products can also be sold to individuals and corporate houses through banks.

In order to assess the potential for the insurance market growth in the region, we need to look at the following indicators:

Per Capita Premium:

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Average per capita premium in the Gulf countries is $155 compared to $3266 in US, $920 in Europe, $4343 in Switzerland and $3394 in UK. Amongst the Gulf countries, UAEs per capita premium is $302, Bahrain-$220, Kuwait-$259, Oman-$77 and Saudi$47. (Source: Swiss RE/Sigma)

Insurance penetration:

Another indicator is insurance penetration in terms of premium as % to GDP. Here again, most Gulf countries have insurance penetration below 1% compared to 9% in US and 14% in UK. Within the Gulf, UAE has a figure of 1.25%, Oman-0.96%, Kuwait-0.79% and Saudi-0.53%.

All this goes on to prove that this market is still undeveloped or underdeveloped as far as the realization of the full potential of insurance market is concerned. The situation is even more contrasting if we are considering the life insurance market. Here, compared to 10.5% life insurance penetration in UK, UAE has a penetration of 0.23%, Oman-0.17%, Kuwait-0.18% and Saudi-0.1%.

From Bankers point of view, the potential lies in tapping not only the existing premium turnover in the market which was around US$12,000 million in the year 2003 but also the likely increase in Turnover due to the entry of banks in the insurance market.

Identifying successful strategy for entering the market.

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Collaboration with an insurance company - This could take multiple forms as below:

y y y y y

Buying an insurance company out rightly Acquiring shares in an existing insurance company Cross share holding between the bank and insurance company Sign exclusive agreement with one insurance company Sign non-exclusive agreement with more than one insurance company

All the above have their own merits and demerits and has to be used for entering the market based on the market conditions and practicality. For example, if a bank owns an insurance company which is not an established player in the market, starting Bancassurance with them alone is not an attractive proposition. However, if the insurance company has a strong standing and a reputation in the market, it makes sense to sign an exclusive agreement with them.

Vertical integration of insurance activities

This actually means manufacturing of insurance products in-house which may involve risk taking on the part of the banks. In fact, this is not a good idea as the job should be left to be done by somebody who is best at that. In the past, many European banks had taken to this kind of strategy but most of them have discarded vertical integration of insurance after some beatings in the form of losses suffered. Banks can still get the

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benefit of vertical integration by properly coordinating with the insurance company and getting the products done or developed exclusively for them.

Overcoming the Regulatory challenges

Middle East and Gulf countries are more suitable to perpetuate Bancassurance from Regulatory point of view. No Regulator in any country in the Middle East prohibits the distribution of insurance products by the banks to its customers. In most of the countries in Asia and Far East like Singapore, Thailand, Hong Kong, Indonesia, Philippines, Japan, China, India, they are still struggling with the Regulation as the Regulators are opening the window very slowly. Further, there is no ban or express regulation in the Middle East regarding owning or buying shares or even cross share holding between banks and insurance companies. All these factors together make this region a perfect platform for the banks to start Bancassurance.

Effective Bancassurance model

The effective Bancassurance model is the one which helps in pushing sales as well as satisfying customer needs and helping banks to become a One stop shop. As a Bancassurance model, if the bank is using distribution agreement model, it should, go in for an exclusive agreement with an insurance company of repute. The reason being, while signing up with multiple insurers you end up looking like a broker who is not committed to a brand or a product or a particular level of service, which is so vital for the

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growth of Bancassurance. By signing an exclusive agreement with the insurer, the bank can put the stamp of its own Brand on the product without actually taking any risk. The bank will thus be identified with the product it is selling and will be able to convince the customer in a much better way. However, if the insurance market is not mature and there is lack of creativity and innovation, even non-exclusive agreement is workable.

Bancassurance as a Diversification Strategy by Banks

Banks in GCC or Middle East have been growing at a very high rate compared to their peers in the international market. Average ROE of GCC banks in 2001 was 15.3% compared to the average ROE of 12.5% by top 10 international banks (GBC, UK report). Some of the banks like Doha Bank in Qatar have been growing consistently at a rate of 70% for the last three years.

However, maintaining such a growth for a longer period is not sustainable since market has to mature at one stage and economic conditions may also change. Bancassurance, therefore, comes as an additional source of revenue to help maintain the growth momentum. This can also be used to offset the declining deposits due to the declining interest rate.

Sale of insurance products by the banks offers the following benefits:

1) It adds to the portfolio of retail products already offered by the Banks.

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2) It helps in bundling and packaging the existing core banking products like adding deposit life insurance on a pure term deposit product.

3) Balances the less performing products

4) It is a risk management device, since the fee increase earned on the sale of insurance can be used to offset the loss on account of bad loans.

5) It helps increase customer loyalty since they have more reason than just the banking to continue their relationship with the bank.

6) It helps bank to become a one stop shop or Alfinanz for all the financial needs of the customers while it is banking insurance investments or state planning.

It is a long journey before the Middle East insurance market reaches its mature stage in the cycle of evolution. The time now is to innovate and harness the potential of insurance that this region offers. The buffers of energy, shipping and construction industry is poised to offer more opportunities as new technology and new pool of human resources shall be looking to the insurance industry to provide protection. Banks are in a unique position to sell not only personal lines insurance products but also commercial insurance by leveraging their relationship with their loyal customer base

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BANCASSURANCE IN INDIA SOME ISSUES:

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

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insurance products by the bank staff coupled with extra devotion of time on each customer explaining in detail of each products 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 spill over effect even on their regular banking business. Bankers in India are extremely nave 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. In view of the above, reorientation of staff in the public sector banks in particular, to be less bureaucratic and more customers friendly would indeed be a challenging task, albeit it is a prerequisite for the success of bancassurance. With the financial reforms and technological revolution embracing the financial system, there has been a great deal of flexibility in the mind set of people to accept change. The problems outlined above need not, however, deter the banking sector to embark on bancassurance

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as any form of resistance from the bank employees could be tackled by devising an appropriate incentive system commensurate with intensive training to the frontline bank staff.

BIBLIOGRAPHY
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