Bancassurance An Emerging concept in India Naveen Sethi Table of Contents Executive Summary...........................................................................................3 About the Author ...............................................................................................

.3 Introduction .......................................................................................................4 Reasons for growing phenomena of Bancassurance ...........................................5 Why Bancassurance in India? ............................................................................7 Bancassurance in India - A SWOT Analysis......................................................8 1.1. Strengths.......................................................................................................... 8 1.2. Weaknesses ..................................................................................................... 9 1.3. Opportunities ................................................................................................... 9 1.4. Threats............................................................................................................. 9 Regulatory issues .............................................................................................10 Summary .........................................................................................................11 Executive Summary The life insurance industry in India has been progressing at a rapid pace since opening up of the sector in 2000. The size of the country, a diverse set of people combined with problems of connectivity in rural areas, makes insurance selling in India a very difficult proposition. Life insurance companies require immense distribution strength and tremendous manpower to reach out to such a huge customer base. This distribution will undergo a sea change as various insurance companies are proposing to

bring insurance products into the lives of the common man by making them available at the most basic financial point, the local bank branch, through Bancassurance. Simply put, bancassurance is the process through which insurance products are sold to customers at their local banks. With a banking network of 65,000 branches serving more than 300 million retail banking customers, insurance can be available at affordable prices to people even in remote corners of the country. The relationship is symbiotic; but there are challenges. The most common challenges to success 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. Even insurers and banks that seem ideally suited for a bancassurance partnership can run into problems during implementation. Before targeting the market, it is essential to do a SWOT analysis. One more important obstacle in development of bancassurance in India has been a set of regulatory barriers. Some of these have recently been cleared with the passage of the Insurance (Amendment) Act, 2002. Looking at the west where sales through the banking network have been a roaring success, the Indian banking sector has far to go. But one thing stands obvious. If insurance in India is to succeed, it can only be through the Bancassurance channel. About the Author

Naveen Sethi is Currently working as Associate Consultant with Ibexi Solution Private Limited, a specialist consulting firm focusing exclusively on Insurance covering Business Intelligence, Data Warehousing, Program implementation of enterprise wide applications and Business Process Consulting. Introduction Your bank has already changed a great deal over the past decade. Your banker was once content to collect your deposits and then lend the money to companies at a profit. Now he wants to lend to you as well. It could be a loan for a new house, a new car or even for education in a foreign university. Then there are products like demat services and mutual funds. Soon, there will be more. When you walk into your bank six months from now, it is likely that they will try to sell a host of insurance products to you even. Welcome to Bancassurance. Bancassurance - a term coined by combining the two words bank and insurance (in French) - connotes distribution of insurance products through banking channels. Bancassurance encompasses terms such as `Allfinanz' (in German), `Integrated Financial Services' and `Assurebanking'. This concept gained currency in the growing global insurance industry and its search for new channels of distribution. Banks, with their geographical spread and penetration in terms of customer reach of all segments, have emerged as viable sources for the distribution of insurance products. Presently, theres more activity here than anywhere else. And every one wants to jump onto the bandwagon for a piece of the action cake. The insurance industry has finally woken up from its long slumber to an altogether new awakening. It is the rise of a new dawn that has brought with it opportunities galore. From

innumerable insurers, to affordable and quality covers for the consumer, from increase in distribution channels to incorporating information technology measures, from net selling to bringing about increased transparency - its all there. The ubiquitous agent is no more the only distribution channel today for insurance products. Increase in distribution channels has among others also seen the concept of Bancassurance taking roots in India, and it is emerging to be a viable solution to mass selling of insurance products. Bancassurance is a long-standing dream of offering a seamless service of banking, life & non-life products. India, being the one of the most populous country in the world with a huge potential for insurance companies, has an envious chain of bank branches as the lifeline of its financial system. Banks with over 65,000 branches & 65% of household investments are the backbone of the Indian financial market. In India, there are 75 branches per million inhabitants. Clearly, that's something insurance companies - both private and state-owned would find nearly impossible to achieve on their own. Considering it as a channel for insurance gives insurance an unlimited exposure to Indian consumers. Banks have expertise on the financial needs, saving patterns and life stages of the customers they serve. Banks also have much lower distribution costs than insurance companies and thus are the fastest emerging distribution channel. For insurers, tying up with banks provides extensive geographical spread and countrywide customer access; it is the logical route for insurers to take. However, the evolution of bancassurance as a concept and its practical implementation in

various parts of the world, have thrown up a number of opportunities and challenges. Aspects such as the most suited model for a given country with its economic, social and cultural ramifications interacting on each other, legislative hurdles, and the mindset of persons involved in this activity, have dominated the study and literature on bancassurance. The motives behind bancassurance also vary. For banks it is a means of product diversification and a source of additional fee income. Insurance companies see bancassurance as a tool for increasing their market penetration and premium turnover. The customer sees bancassurance as a bonanza in terms of reduced price, high quality product and delivery at doorsteps. Actually, everybody can be a winner here. Will it work in India? That can only be answered in the future; the initial action does show that many banks seem to believe that bancassurance will be a big success here. Some foreign and Indian banks -- Stanchart-Grindlays, ABN-Amro, Citibank, HSBC, Bank of Baroda (BoB) and State Bank of India (SBI) -- are hoping to replicate the French success of this insurance-cum-banking model. 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 bank-centric bancassurance operations. In Hong Kong the figure for 2002 is expected to be at the 20% level for the same basic reasons. ! 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. ! 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. ! 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 became too much of a burden for many insurers compared to the returns they generated. ! 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. ! 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. ! 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. ! One of the most important reason 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 products can leverage their distribution and processing capabilities for profitable operating expense ratios. ! By leveraging their strengths and finding ways to overcome their weaknesses, banks could change the face of insurance distribution. Sale of personal line insurance products through banks meets an important set of consumer needs. Most large retail banks engender a great deal of trust in broad segments of consumers, which they can leverage in selling them personal line insurance products. In addition, a banks branch network allows the face-to-face contact that is so important in the sale of personal insurance. ! 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.

! 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.

! 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. ! 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 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 under served market. ! 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. Why Bancassurance in India? The management of the new Indian operations are conscious of the need to grow quickly to reduce painful start-up expense overruns. Banks with their huge networks and large customer bases give insurers an opportunity to do this efficiently. Regulations requiring certain proportions of sales to the rural and social sectors give an added impetus to the drive for bancassurance. Selling through traditional methods to these sectors can be inefficient and expensive. Tying up with a bank with an appropriate customer base can give an insurer relatively cheap access to such sectors. This is still an issue for insurers despite the recent widening of the definition of the rural sector (so that it now accords with the census definition). In India, as elsewhere, banks are seeing margins decline sharply in their core lending business. Consequently, banks are looking at other avenues, including the sale of insurance products, to augment their income. 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 is not simply about selling insurance but about changing the mindset of a bank. In addition to acting as distributors, several banks have recognised the potential of insurance in India and have taken equity stakes in insurance companies. This is perhaps the precursor of a trend we have seen in the United Kingdom and elsewhere where banks started off as distributors of insurance but then moved to a manufacturing role with fully owned insurance subsidiaries. Bancassurance in India - A SWOT Analysis Bancassurance as a means of distribution of insurance products is already in force. Banks are selling Personal Accident and Baggage Insurance directly to their Credit Card members as a value addition to their products. Banks also participate in the distribution of mortgage linked insurance products like fire, motor or cattle insurance to their customers. Banks can straightaway leverage their existing capabilities in terms of database and facetoface contact to market insurance products to generate some income for themselves, which hitherto was not thought of. Huge capital investment will be required to create infrastructure particularly in IT and telecommunications, a call center will have to be created, top professionals of both industries will have to be hired, an R & D cell will need to be created to generate new ideas and products. It is therefore essential to have a SWOT analysis done in the context of bancassurance experiment in India. 1.1. Strengths

In a country of 1 Billion people, sky is the limit for personal lines insurance products. 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 about 200 Million households waiting to be approached for a householder's insurance policy. Millions of people travelling in and out of India can be tapped for Overseas Mediclaim and Travel Insurance policies. After discounting the population below poverty line the middle market segment is the second largest in the world after China. The insurance companies worldwide are eyeing on this, why not we pre-empt this move by doing it ourselves? 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. LIC and GIC both have a good range of personal line products already lined up, therefore R & D efforts to create new products will be minimal in the beginning. Additionally, GIC with 4200 operating offices and LIC with 2048 branch offices are almost already omnipresent, which is so essential for the development of any bancassurance project. 1.2. Weaknesses The IT culture is unfortunately missing completely in all of the future collaborators i.e. banks, GIC & LIC. A late awakening seems to have dawned upon but it is a case of too late and too little. Elementary IT requirement like networking (LAN) is not in place even in the headquarters of these institutions, when the need today is of Wide Area Network (WAN) and

Vast Area Network (VAN). Internet connection is not available even to the managers of operating offices. The middle class population that we are eyeing at is today overburdened, first by inflationary pressures on their pockets and then by the tax net. Where is the money left to think of insurance? Fortunately, LIC schemes get IT exemptions but personal line products from GIC (mediclaim already has this benefit) like householder, travel, etc. also need to be given tax exemption to further the cause of insurance and to increase domestic revenue for the country. 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 customer. 1.3. Opportunities Banks' database is enormous even though the goodwill may not be the same as in case of their European counterparts. This database has to be dissected variously 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. Other developing economies like Malaysia, Thailand and Singapore have already taken a leap in this direction and they are not doing badly. There is already an atmosphere created in the country for liberalization and there appears to be a political consensus also on the subject. Therefore, RBI or IRA should have no hesitation in allowing the marriage of the two to take place. This can take the form of merger or acquisition or setting up a joint venture or creating a subsidiary by either party or just the working collaboration between banks and insurance

companies. 1.4. Threats Success of a bancassurance venture requires change in approach, thinking and work culture on the part of everybody involved. Our work force at every level are so well entrenched in

Ibexi Solutions Page 10 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 be resented with vehemence. Another possible threat may come from non-response from the target customers. This happened in USA in 1980s after the enactment of Garn - St Germaine Act. A rush of joint ventures took place between banks and insurance companies and all these failed due to the non-response from the target customers. US banks have now again (since late 1990s) turned their attention to insurance mainly life insurance. The investors in the capital may turn their face off in case the rate of return on capital falls short of the existing rate of return on capital. Since banks and insurance companies have major portion of their income coming from the investments, the return from bancassurance must at least match those returns. Also if the unholy alliances are allowed to take place there will be fierce competition in the market resulting in lower prices and the bancassurance venture may never break-even. Regulatory issues The development of bancassurance in India has been slowed down by certain regulatory barriers, which have only recently been cleared with the passage of the Insurance

(Amendment) Act, 2002. Prior to this, all the directors of a company wishing to take up corporate agency (such as a bank) were technically required to undertake 100 hours of agency training and pass an examination. This was clearly an impractical requirement and had held up the implementation of bancassurance in the country. As the current legislation places the training and examination requirements upon a designated person (the corporate insurance executive) within the corporate agency, this barrier has effectively been removed. Other regulatory changes of note in this area are the recently published Insurance Regulatory and Development Authority (IRDA) regulations relating to the licensing of corporate agents. This specifies the institutions that can become corporate agents and sets out the training and examination requirements for the individuals who will be selling on behalf of the corporate agent, the so-called specified persons Specified persons have to satisfy the same training and examination requirements as insurance agents. A noticeable exception is that for those possessing the Certified Associateship of Indian Institute of Bankers (CAIIB) only 50 hours of training (rather than 100 hours) will be required. This also applies to certified accountants and actuaries. It is hoped that this aspect of the regulations will lead to well educated, professional bank officers carrying out the financial advisory process. Although expected, a restrictive feature of the bancassurance regulations is that they appear to constrain the corporate agent to receiving only commission; profit-sharing arrangements

would seem to be ruled out. We feel that this, if applied in practice, is unfortunate as profitsharing agreements, which are increasingly common internationally, serve to align the interests of the bank and the insurance company. Also, as products sold through bank channels can be highly profitable, such agreements may be financially advantageous for banks. In the longer term a profit-sharing agreement can help a bank move from being a distributor to a manufacturer of insurance products thus leading to greater integration in the financial services marketplace. Given the open-mindedness and responsiveness of the IRDA to regulations in general, we hope that it will not be too long before profit-sharing agreements are permitted between insurers and corporate agents. Summary Where legislation has allowed, bancassurance has mostly been a phenomenal success and, although slow to gain pace, is now taking off across Asia, especially now that banks are starting to become more diverse financial institutions, and the concept of universal banking is being accepted. In India, the signs of initial success are already there despite the fact that it is a completely new phenomenon. The factors and principles of why it is a success elsewhere exist in India, and there is no doubt that banks are set to become a significant distributor of insurance related products and services in the years to come. Analysts project strong bancassurance growth By Fei Ya (China Daily) Updated: 2009-09-07 08:06 Comments(0) Print Mail Bancassurance in China has strong potential for growth, but near-term expansion could prove volatile in light of market uncertainties, Moody's Investors Service stated in a recent report.

"Moody's positive expectations for longer-term growth of bancassurance in China is based on increasing demand for insurance products, low bancassurance penetration of the market and banks' capability to reach customers through their extensive branch networks," said Daniel Wong, a Moody's analyst and author of the report. Bancassurance is a word that evolved from the Bank Insurance Model, or BIM, for selling insurance and banking products through the same channel, typically a bank. According to the Moody's report, in 2008 the Chinese insurance industry recorded a rapid premium growth rate of 39 percent compared to 2007, mainly attributed to strong sales of investment-linked products via banks in the first half of the year. "Moody's identifies the increasing demand for insurance products -- backed by strong longterm economic growth, rising income levels, better awareness of insurance needs and an aging population -- as major drivers of the industry," Wong said. Related readings: Banks get OK for insurance arms Big four banks to launch insurance company BOC may enter insurance sector Pilot for banks buying into insurers may start soon banks, the report stated. "This should in turn help improve the performance of bancassurance in the second half of 2009, which has cooled as a result of volatile financial markets since the second half of 2008, following spectacular growth during the first half of 2008," Wong said. "However, any significant reversal in the recovery of the equity market could dampen growth of the industry," he added. The report also noted that fierce competition has seen profit margins from bancassurance fall, as insurance companies often do not have exclusive sales agreements with banks, resulting in competition between rival insurers for an individual bank's customers. In light of this, sales commissions paid to banks are now so high that products are barely profitable for insurers. In order to maintain profitability, insurers need to ensure that the premium charged is commensurate with the level of risk assumed. "The increasing number of bank branches and solid growth of banks' customer bases should also help insurers reach potential customers and reduce costs," he said. In addition, many bank customers are not aware that they can buy insurance products at bank branches due to limited promotion and marketing, implying that the growth potential of bancassurance is enormous, Moody's reported. Meanwhile, Chinese stock markets' sharp rally of more than 60 percent during the first half of 2009 should improve investment sentiment and boost sales of investment-linked and savings products, which constitute the majority of policies sold through the

In addition, it is more difficult for insurers to ensure that bank staffs are adequately trained to promote insurance products compared to traditional insurance agents. The supply of qualified sales representatives in China is also failing to meet demand. Finally, in recent years, the insurance and banking regulators have relaxed certain restrictions, which has helped promote bancassurance and enhance integration between the insurance and banking sectors. Moody's expected that the regulators will continue to liberalize financial markets and that this will deepen business cooperation between insurers and banks.

Executive Summary The Banking and Insurance industries have changed rapidly inthe changing and challenging economic environment throughout theworld. In this competitive and liberalized environment everyone is tryingto do better than others and consequently survival of the fittest has comeinto effect. This has given rise to a new form of business wherein two bigfinancial institutions have come together and have integrated all theirstrength and efforts and have created a new means of marketing andpromoting their products and services. On one hand it is the Bankingsector which is very competitive and on the other hand is Insurance sectorwhich has a lot of potential for growth. When these two join together, itgives birth to BANCASSURANCE. Bancassurance is nothing but the collaboration between a bankand an insurance company wherein the bank promises to sell insuranceproducts to its customers in exchange of fees. It is a mutual relationshipbetween the banks and insurers. A relationship which amazinglycomplements each other s strengths and weaknesses. It is a new buzz word in India but it is taking roots slowly andgradually. It has been accepted by banks, insurance companies as well asthe customers. It is basically an international concept which is spreadingall around the world and is favored by all. Taking all these things into consideration I would like topresent my project BANCASSURANCE (an emerging concept inIndia). The project flashes some light on Bancassurance and how it isperceived by people in India. It deals with the conceptual part ofBancassurance as well as its practical applications in India. The main focus of this project is on benefits and importance ofBancassurance in India. The regulations governing Bancassurance arealso dealt with in this project. SWOT

analysis is also done so as toidentify the various opportunities and threats for Bancassurance in India. The Indian as well as Global contexts both are taken intoaccount. The project also revolves around data, facts and figures that arenecessary to prove the importance of Bancassurance. Further the project also includes the case study of SBI LifeInsurance Company, its various products, the growth they haveexperienced since the opening up of a wholly owned subsidiary of SBIBank that sells insurance products. A survey analysis has also been done so as to know thepopularity and the growth perspectives of Bancassurance. The surveytries to identify whether the conditions are favourable for it India or not.At the end some suggestions are also given to fill the potholes that stillexist in this system. This project is just a gist about how the Globalization,Liberalization and tough Competition have brought the Banking as wellas the Insurance Industries together to help each other and to provideexcellent services to the customers.

Chapter 1
History of Banking in India. 1. Definition 2. History
History of Insurance in India 1. Definition 2. History Introduction to Banking Banking as per the Banking Regulation Act, Banking is defined as: accepting for the purpose of lending ofdeposits of money from the public for the purpose oflending or investment, repayable on demand throughcheques, drafts or order. A sound and effective banking system is necessary for a healthyeconomy. The banking system of India should not only be hassle free butit should be able to meet new challenges posed by the technology and anyother external and internal factors. Many new things have come up in thebanking sector in the recent years. Banks have adopted the newtechnology because banking has not remained up to accepting andlending but now it is all about satisfying the needs of the customers. The development of the Indian banking sector has beenaccompanied by the introduction of new norms. New services are theorder of the day, in order to stay ahead in the rat race. Banks are nowforaying into net banking, securities, and consumer finance, housingfinance, treasury market, merchant banking etc.They are trying to provideevery kind of service which can satisfy or rather we should say that it candelight the customers.

Entry of private and foreign banks in the segment has providedhealthy competition and is likely to bring more operational efficiency intothe sector. Banks are also coping and adapting with time and are trying to become one-stop financial supermarkets. The market focus is shiftingfrom mass banking products to class banking with the introduction ofvalue added and customized products. Introduction to Insurance Sector Insurance may be defined as: It is a contract between two parties where byone party undertakes to compensate the another party forthe loss arising due to an uncertain events for which theanother party agrees to pay a certain amount regularly. In India, insurance has a deep-rooted history. Insurance in Indiahas evolved over time heavily drawing from other countries, England inparticular. The insurance sector in India has come a full circle from beingan opencompetitive market to nationalization and back to a liberalizedmarket again. The business of life insurance in India in its existing formstarted in India in the year 1818 with the establishment of the OrientalLife Insurance Company in Calcutta. The Insurance Act, 1938 was the first legislation governing allforms of insurance to provide strict state control over insurancebusiness.Today there are 14 general insurance companies and 14 lifeinsurance companies operating in the country. But today also theinsurance companies are trying to capture Indian markets as not manypeople 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 country s GDP. A well-developed andevolved insurance sector is a boon for economic development as itprovides long- term funds for infrastructure development at the same timestrengthening the risk taking ability of the country. Chapter 2
About Bancassurance 1. Meaning 2. Origin 3. Models of Bancassurance i. Structural classification ii. Product based classification iii. Bank Referrals

What is BANCASSURANCE? With the opening up of the insurance sector and with somany players entering the Indian insurance industry, it is required by theinsurance companies to come up with innovative products, create moreconsumer awareness about their products and offer them at a competitiveprice. Since the banking services, insurance and fund management are allinterrelated activities and have inherent synergies, selling of insurance bybanks would be mutually beneficial for banks and insurance companies.With these developments and increased pressures in combatingcompetition, companies are forced to come up with innovative techniquesto market their products and services. At this juncture, banking sectorwith it's far and wide reach, was thought of as a potential distributionchannel, useful for the insurance companies. This union of the twosectors is what is known asBancassurance. Meaning Bancassurance is the distribution of insurance products through the bank's distribution channel. It is a phenomenon wherein insuranceproducts are offered through the distribution channels of the bankingservices along with a complete range of banking and investment productsand services. To put it simply, Bancassurance, tries to exploit synergiesbetween both the insurance companies and banks. Bancassurance can be important source of revenue. With the increasedcompetition and squeezing of interest rates spread, profits are likely to beunder pressure. Fee based income can be increased through hawking ofrisk products like insurance. Bancassurance if taken in right spirit and implemented properly can bewin-win situation for the all the participants' viz., banks, insurers and thecustomer. Origin he banks taking over insurance is particularly well-documented withreference to the experience in Europe. Across Europe in countries likeSpain and UK, banks started the process of selling life insurance decadesago and customers found the concept appealing for various reasons. Germany took the lead and it was called ALLFINANZ . The system ofbancassurance was well received in Europe. France taking the lead,followed by Germany, UK, Spain etc. In USA the practice was late tostart (in 90s). It is also developing in Canada, Mexico, and Australia. In India, the concept of Bancassurance is very new. With theliberalization and deregulation of the insurance industry, bancassuranceevolved in India around 2002. Models of Bancassurance I. Structural Classification a) Referral Model

Banks intending not to take risk could adopt referral model wherein they merely part with their client data base for business lead ofcommission. The actual transaction with the prospective client in referralmodel is done by the staff of the insurance company either at thepremises of the ban0k or elsewhere. Referral model is nothing but asimple arrangement, wherein the bank, while controlling access to the clients data base, parts with only the business leads to the agents/ salesstaff of insurance company for a referral fee or commission for everybusiness lead that was passed on. In fact a number of banks in India havealreadyresorted to this strategy to begin with. This model would besuitable for almost all types of banks including the RRBs /cooperativebanks and even cooperative societies both in rural and urban. There isgreater scope in the medium term for this model. For, banks to begin withcan resort to this model and then move on to the other models. b) Corporate Agency The other form of non-sick participatory distributionchannel is that of Corporate Agency , wherein the bank staff as aninstitution acts as corporate agent for the insurance product for afee/commission. This seems to be more viable and appropriate for mostof the mid-sized banks in India as also the rate of commissionwould berelatively higher than the referral arrangement. This, however, is prone toreputational risk of the marketing bank. There are also practicaldifficulties in the form of professional knowledge about the insuranceproducts. This could, however, be overcome by intensive training tochosen staff, packaged with proper incentives in the banks coupled withselling of simple insurance products in the initial stage. This model is bestsuited for majority of banks including some major urban cooperativebanks because neither there is sharing of risk nor does it require hugeinvestment in the form of infrastructure and yet could be a good source ofincome. This model of bancassurance worked well in the US, becauseconsumers generally prefer to purchase policies through broker banks thatoffer 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 serviceinvolves much more comprehensive and intricate relationship betweeninsurer and bank, where the bank functions as fully universal in itsoperation and selling of insurance products is just one more functionwithin. This includes banks having wholly owned insurance subsidiarieswith or without foreign participation. The great advantage of this strategybeing that the bank could make use of its full potential to reap the benefitof synergy and therefore the economies of scope. This may be suitable torelatively larger banks with sound financials and has better infrastructure. As per the extant regulation of insurance sector the foreign insurancecompany could enter the Indian insurance market only in the form ofjoint venture, therefore, this type of bancassurance seems to haveemerged out of necessity in India to an extent. There is great

scope forfurther growth both in life and non-life insurance segments as GOI isreported have been actively considering to increase the FDI sparticipation up to 49 per cent. II.Product based classification (a)Stand-alone Insurance Products In this case bancassurance involves marketing of theinsurance products through either referral arrangement or corporateagency without mixing the insurance products with any of the banks ownproducts/ services. Insurance is sold as one more item in the menu ofproducts offered to the bank s customer, however, the products of banksand 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 bank s own products. Thus, bankscould sell the insurance products without any additional efforts. In mosttimes, giving insurance cover at a nominal premium/ fee or sometimeswithout explicit premium does act as an added attraction to sell the bank sown products,e.g., credit card, housing loans, education loans,etc. Manybanks in India, in recent years, has been aggressively marketing creditand debit card business, whereas the cardholders get the insurance cover for a nominal fee or (implicitly included in the annual fee) free fromexplicit charges/ premium. Similarly the home loans / vehicle loans,etc.,have also been packaged with the insurance cover as an additional incentive. III. Bank Referrals There is also another method called 'Bank Referral'. Here thebanks do not issue the policies; they only give the database to theinsurance companies. The companies issue the policies and pay thecommission to them. That is called referral basis. In this method alsothere is a win-win situation every where as the banks get commission, theinsurance companies get databases of the customers and the customersget the benefits. Chapter 3
Utilities of Bancassurance 1. For Banks: i.As a source of fee based income ii. Product diversification iii.Building close relations with the customers 2. For Insurance Companies i. Stiff competition ii.High cost of agents iii. Rural penetration iv. Multi-channel distribution v.Targeting middle income customers

For Banks
As a source of fee income Banks traditional sources of fee income have been thefixed charges levied on loans and advances, credit cards, merchant fee onpoint of sale transactions for debit and credit cards, letter of credits andother operations. This kind of revenue stream has been more or lesssteady over a period of time and growth has been fairly predictable.However shrinking interest rate, growing competition and increasedhorizontal mobility of customers have forced bankers to look elsewhereto compensate for the declining profit margins and Bancassurance hascome in handy for them. Fee income from the distribution of insuranceproducts has opened new horizons for the banks and they seem to love it. From the banks point of view, opportunities andpossibilities to earn fee income via Bancassurance route are endless. Atypical commercial bank has the potential of maximizing fee incomefrom Bancassurance up to 50% of their total fee income from all sourcescombined. Fee Income from Bancassurance also reduces the overall customer acquisition cost from the bank s point of view. At the end of the day, it is easy money for the banks as there are no risks and only gains.
Product Diversification In terms of products, there are endless opportunities forthe banks. Simple term life insurance, endowment policies, annuities,education plans, depositors insurance and credit shield are the policiesconventionally sold through the Bancassurance channels. Medicalinsurance, car insurance, home and contents insurance and travelinsurance are also the products which are being distributed by the banks.However, quite a lot of innovations have taken place in the insurancemarket recently to provide more and more Bancassurance-centricproducts to satisfy the increasing appetite of the banks for such products. Insurers who are generally accused of being inflexible inthe pricing and structuring of the products have been responding too wellto the challenges (say opportunities) thrown open by the spread ofBancassurance. They are ready to innovate and experiment and have setup specialized Bancassurance units within their fold. Examples of somenew and innovative Bancassurance products are income builder plan,critical illness cover, return of premium and Takaful products which aredoing well in the market. The traditional products that the


Building close relations with the customers Increased competition also makes it difficult for banks toretain their customers. Banassurance comes as a help in this directionalso. Providing multiple services at one place to the customers meansenhanced customer satisfaction. For example, through bancassurance acustomer gets home loans along with insurance at one single place as acombined product. Another important advantage that bancassurancebrings 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 theircustomers. In a typical Bancassurance model, the consumer will haveaccess to a wider product mix - a rather comprehensive financial servicespackage, encompassing banking and insurance products. For Insurance Companies
Stiff Competition At present there are 15 life insurance companies and 14general insurance companies in India. Because of the Liberalization ofthe economy it became easy for the private insurance companies to enterinto the battle field which resulted in an urgent need to outwit oneanother. Even the oldest public insurance companies started facing thetough competition. Hence in order to compete with each other and to staya step ahead there was a need for a new strategy in the form ofBancassurance. It would also benefit the customers in terms of wideproduct diversification.
High cost of agents Insurers have been tuning into different modes of distributionbecause of the high cost of the agencies services provided by theinsurance companies. These costs became too much of a burden for manyinsurers compared to the returns they generate from the business. Hencethere was a need felt for a Cost-Effective Distribution channel. This gaverise to Bancassurance as a channel for distribution of the insurance products.
Rural Penetration Insurance industry has not been much successful in ruralpenetration of insurance so far. People there are still unaware aboutthe insurance as a tool to insure their life. However this gap can bebridged with the help of Bancassurance. The branch network of bankscan help make the rural people aware about insurance and there is alsoa wide scope of business for the insurers. In order to fulfill all theneeds bancassurance is needed.
Multi channel Distribution Now a days the insurance companies are trying to exploit eachand every way to sell the insurance products. For this they are usingvarious distribution channels. The insurance is sold through agents,brokers through subsidiaries etc. In order to make the

most out ofIndia s large population base and reach out to a worthwhile number ofcustomers there was a need for Bancassurance as a distribution model.
Targeting Middle income Customers In previous there was lack of awareness about insurance. Theagents sold insurance policies to a more upscale client base. Themiddle income group people got very less attention from the agents.So through the venture with banks, the insurance companies canrecapture much of the under served market. So in order to utilize thedatabase of the bank s middle income customers, there was a need feltfor Bancassurance.

Chapter 4
Regulations for Bancassurance in India 1. RBI Norms for banks entering into Insurance sector 2. IRDA Norms for Insurance companies tying up with Banks 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 undertakeinsurance business as agent of insurance companies on fee basis.Without any risk participation 2. Banks which satisfy the eligibility criteria given below will bepermitted to set up a joint venture company for undertaking insurancebusiness with risk participation, subject to safeguards. The maximumequity contribution such a bank can hold in the Joint Venture Company will normally be50% 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 besatisfactory.

3. In cases where a foreign partner contributes26% of the equity with theapproval of Insurance Regulatory and Development Authority/ForeignInvestment Promotion Board, more than one public sector bank or privatesector bank may be allowed to participate in the equity of the insurancejoint venture. As such participants will also assume insurance risk, onlythose banks which satisfy the criteria given in paragraph 2 above, wouldbe 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.50 crore, 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. TheCRAR of the bank should not be less than 10%; ii. The level ofNPAs 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 relevantfactors including the position in regard to the level of non-performingassets 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 ofactivity,viz., insurance business. It should be ensured that risks involvedin 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 orparticipation in any form in insurance business will be subject tocompliance with any rules and regulations laid down by the IRDA/Central Government. This will include compliance with Section 6AA 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 havea chief Insurance Executive to handle all the insurance matters & activities. 2) Mandatory Training: All the people involved in selling the insuranceshould under-go 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. Issues for regulation: Certain regulatory barriers have slowed the development of Bancassurance in India down. Which have only recentlybeen cleared with the passage of the insurance (amendment) Act 2002.Prior it was clearly an impractical necessity and had held up theimplementation of Bancassurance in the country.As the currentlegislation 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.

Chapter 5
Benefits of Bancassurance 1. To Banks 2. To Insurance companies 3. To Customers

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 candirectly 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 telebanking, direct mail & so on 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 highercustomer 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. 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 fordistribution of products. The penetration of banks' branches into the ruralareas 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 productsand sell accordingly. (E)Since banks have already established relationship with customers,conversion ratio of leads to sales is likely to be high. Further serviceaspect can also be tackled easily. (F)The insurance companies can also get access to ATM s 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. 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 ofreduced premium rate because of economies of scope, besides gettingbetter financial counseling at single point.

Chapter 6
Distribution Channels: 1. Career agents 2. Special advisers 3. Salaried agents 4. Bank employees 5. Corporate agency & Brokerage firm 6. Direct response 7. Internet 8. E- Brokerage 9. Outside lead generating techniques

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 personnelholding an agency contract. They are generally considered to beindependent contractors. Consequently an insurance company canexercise control only over the activities of the agent which are specifiedin the contract. Many bancassurers, however avoid this channel, believingthat agents might oversell out of their interest in quantity and not quality.Such problems with career agents usually arise, not due to the nature ofthis channel, but rather due to the use of improperly designedremuneration and incentive packages.
Special Advisers:

Special Advisers are highly trained employees usuallybelonging to the insurance partner, who distribute insurance productsto the bank's corporate clients. The Clients mostly include affluentpopulation who require personalised and high quality service. UsuallySpecial advisors are paid on a salary basis and they receive incentivecompensation based on their sales.
Salaried Agents: Salaried Agents are an advantage for the bancassurers becausethey are under the control and supervision of bancassurers. Theseagents share the mission and objectives of the bancassurers. These aresimilar to career agents, the only difference is in terms of theirremuneration is that they are paid on a salary basis and career agentsreceive incentive compensation based on their sales.
Bank Employees / Platform Banking: Platform Bankers are bank employees who spot the leads inthe banks and gently suggest the customer to walk over and speakwith appropriate representative within the bank. The platform bankermay be a teller or a personal loan assistant. A restriction on theeffectiveness of bank employees in generating insurance business isthat they have a limited target market, i.e. those customers whoactually visit the branch during the opening hours.
Corporate Agencies and Brokerage Firms: There are a number of banks who cooperate with independentagencies or brokerage firms while some other banks have foundcorporate agencies. The advantage of such arrangements is theavailability of specialists needed for complex insurance matters andthrough these arrangements the customers get good quality of services.
Direct Response: In this channel no salesperson visits the customer to induce asale and no face-toface contact between consumer and seller occurs.The consumer purchases products directly from the bancassurer byresponding to the company's advertisement, mailing or telephoneoffers. This channel can be used for simple packaged products whichcan be easily understood by the consumer without explanation

Internet Internet banking is already securely established as an effectiveand profitable basis for conducting banking operations. Bancassurers canfeel confident that Internet banking will also prove an efficient vehicle forcross selling of insurance savings and protection products. Functionsrequiring user input (check ordering, what-if calculations, credit andaccount applications) should be immediately added with links to theinsurer. Such an arrangement can also provide a vehicle for insurancesales, service and leads.
E-Brokerage: Banks can open or acquire an e-Brokerage arm and sellinsurance products from multiple insurers. The changed legislativeclimate across the world should help migration of bancassurance inthis direction. The advantage of this medium is scale of operation,strong brands, easy distribution and excellent synergy with the internetcapabilities.
Outside Lead Generating Techniques: One last method for developing bancassurance eyesinvolves "outside" lead generating techniques, such as seminars, directmail and statement inserts. Great opportunities await bancassurancepartners today and, in most cases, success or failure depends onprecisely how the process is developed and managed inside eachfinancial institution. Chapter 7
Various Trends
Challenge