Problems and Prospects of Bancassurance An Evidence from India*

Ali Reza Momeni,

Ph.D., Student, University of Pune, India and

Dr K Ramesha,
Professor, National Institute of Bank Management, Pune, India *First International Conference on Insurance, October 28-30, Tehran, Iran

Bancassurance - Concept
Bancassurance is an alliance between banks and insurance companies for the sale of insurance through banks According to IRDA, bancassurance refers to banks acting as corporate agents for insurers to distribute insurance products Literature on bancassurance does not differentiate if the bancassurance refers to selling of life insurance products or non-life insurance products Accordingly, here bancassurance is defined to mean banks dealing in insurance products of both life and non-life type in any forms

Bancassurance - Concept
According to Swiss Re 2002, the bancassurance is defined as a strategy adopted by banks or insurance companies aiming to operate in the financial services market in a more or less integrated manner and is the distribution of insurance products by banks Although different models of bancassurance are in vogue in India, corporate agency model is most popular
Joint Venture Model Corporate Agency Model Build Insurance or Bank Model Merger of Bank with an Insurance Company or vice versa

Bancassurance Broad Approaches/Models

Integrated model :
Successful in Europe, players in countries like France, Italy, and Spain operate either through fully owned insurance subsidiaries or through joint ventures that have an exclusive distribution agreement with the bank

Non-integrated model:
Banks sell insurance through authorized financial advisers as bank staff are not allowed to sell. For instance, UK

Open architecture model:

Banks usually have non-exclusive distribution agreements with several insurance companies

Bancassurance Broad Approaches/Models

Referral Model
Bank shares clients data base, parts with only the business leads to the agents/sales staff of an insurance company for a referral fee or commission

Corporate Agency
Popular in India - bank as an institution acts as a corporate agent for the insurance company for the purpose of distribution of insurance products for a fee/commission

Integrated Model
Bank and an insurance company together manufacture, distribute and bear all the risks associated with that business

Bancassurance A Win-Win Strategy

Benefits to Banks
Improvement in profitability/productivity Increase in customer loyalty Increase in RoA without increasing Asset Increase in shareholders value Hedging credit risk, to some extent Better utilization of manpower, branch network Creation of sales-oriented culture

Bancassurance A Win-Win Strategy

Benefits to Insurance Companies

Lower cost of customer acquisition Penetration in virgin territory Increase in volume and profit Improved brand equity
One stop shopping for all financial services Lower cost of insurance Hassle-free post-sales services New products/services

Benefits to Customers

Insurance Penetration in India An International Comparison

Insurance Density in India An International Comparison

Growth of Insurance Industry in India

Growth of Life and Non-life Inssurance in India
2500000 2000000 1500000 Life insurance 1000000 500000 0 2003 2004 2005 2006 2007 2008 Non-Life Inssurance

Insurance Distribution Channels

Issues in Bancassurance
Banks

Bank must go for life and general insurance simultaneously in order to obtain scale economies as well as synergy Initially, a joint approach (banker and insurer) to sales and after sales services could be adopted A review of the tie-up arrangements with insurance companies from time to time is essential The trained manpower should be used exclusively for bancassurance Due considerations be given in performance appraisal for specified persons

Issues in Bancassurance
Insurance Companies Insurers must realize that 'putting bancassurance into operation' is a complex process as insurance selling is indeed a distinctive skill The top management of insurance companies, in particular public sector insurers must take bancassurance more seriously and evolve comprehensive strategies to forge alliances with banks. Banks and Insurance Companies There seems to be lack of clarity between insurer and banks in regard to several operational activities including for instance, marketing. Under bancassurance channel, though banks are distribution agents, the need for evolving a distinct business model needs no emphasis in Indian context. Another area of concern is that of customer service and satisfaction

Issues in Bancassurance
Regulators
Current regulations do not allow banks to sell
insurance products of more than one insurance company (one insurance company for life and another for non-life). The insurance regulator has constituted a committee to re-look into the regulatory framework for bancassurance intermediation model and also examine the issues in permitting banks to have multiple tie-ups.

Findings
Insurance industry has been growing at a commendable rate Bancassurance has grown rapidly during the last 5 years Private sector banks and private sector insurance companies have been more active and therefore beneficiaries of bancassurance Private sectors (banks and insurers) performance has been better than Public sector (banks and insurers) Further research is needed to investigate the relative failure of public sector in regard to bancassurance Bancassurance offer huge business potential for banks and insurance companies because of growing economy and banking and insurance sector

Conclusion
In Indian context bancassurance also need to be viewed from societal perspective and if successful can be a long lasting solution for the prevalent problem of financial exclusion The growth in insurance business on account bancassurance can also result in reduced cost of insurance, of course, in the long-run Policy makers, regulators and players themselves must make concerted efforts for the success of bancassurance

Thank You