Bancassurance: A Perspective


By

Dr. G Bharathi Kamath
Professor-Economics
Coordinator PGDM
Srinivas School of Business
Srinivas Integrated Campus
Mukka, Mangalore-575021
 


In the ever increasing competition and changing economic scenario across the globe, both banks and insurance sector has changed rapidly to adapt to the environment. In the process a new business concept called bancassurance has developed in which the banks through their wide network of branches sell the insurance product of a specific company. It establishes a mutual relationship between the banks and insurers for collaborative advantage. Though this concept is not new across globe, its origin in India has been recent.

This article takes a look at the meaning and growth of bancassurance in India. The various forms it can take. It provides a perspective on the opportunities it presents to the insurers, banks and the customers.

Meaning and Growth:

The insurance sector has seen substantial changes in the policy in the last decade, the most important being breaking the monopoly of public sector both in the life and non-life segments. With increasing competition, changing needs and requirements of the customer and development of technology more and more need for constant innovations in marketing mix i.e. development of new products, competitive prices, new distribution channels, appealing promotional strategy was increasingly felt by insurance companies. The similar developments in banking sector lead to almost a similar requirement felt by the banking companies.

Bancassurance is the distribution of insurance products through the bank's distribution channel. The banks continue to operate and function with its initial products and services and in addition offer to sell insurance products of a specific company with which it has an agreement. If we look at it from a positive perspective, it allows banks, insurance company and the customers to gain substantially for this collaborative effort.

The concept of banks selling insurance products was well received in many parts of the world like, Canada, UK, Spain etc, however the concept per se in India of recent origin. The main reason for insurance and banks adopting this new strategy was to fight the new competitive pressures that were introduced after conscious policy of privatization and liberalization in both these sectors.

Bancassurance can be practised on a very vast canvas ranging from mere selling of insurance products, giving the referrals of customers to the insurance companies, to integrating the products of insurance with the banks product. On the structural side, the banks can work out a joint venture in the concerned area or just act as an agent to market the insurance products. Whatever may be the form in effect the services of the two different nature merge to the ultimate advantage of the customer.

Benefits of Bancassurance to Banks, Insurers and Customers: An Analysis

The concept of bancassurance if implemented in its real form is a win-win situation for all the parties involved. Let us look at the benefits accrued to each of parties involved.

For the banks, the first and the foremost benefit is that the banks get an additional product in their basket to reduce their risk of regular income. Secondly, by selling the insurance products, they tend to gain additional income in the form of fees. The banks have been having a regular stream of income through its traditional sources of loans and other investments. However, with the competitive pressure, there is always a uncertainty involved in the flow of this source. By product diversification into insurance, the banks get an additional source of income. Thirdly, the banks will get to retain the customers with wider relationship with them by providing them a comprehensive service of banking and insurance at a single window. This will also stand in good stead in the long run in improving the customer satisfaction.

For the insurance companies, selling their products through banks gave them access to the wide rural market. Many public sector banks have branches in the remote rural areas, these acts as a ready untapped market for the insurance companies at a nominal cost. The insurance companies could reach out to the highly endowed and growing middle class section of the society through the banks distribution network.

Besides this, there was an urgent need for looking for fresh channels of distribution due to increasing cost on agents. Insurance companies found an alternative in the form of banks as a channel member. This also provided the much need multi-channel distribution of products to the insurance companies. The increasing competition in the insurance market due to liberalization, also acted as a catalyst in finding better ways of reaching the customer and product diversification. The product can be customized as per the needs of the customers.

For the customers, the Bancassurance model assists in terms of reduction price, diversified product quality in time, all services under one-roof and service at their doorstep service by banks. Innovative and better product ranges and products designed as per the needs of customers. 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 counselling at single point.

The banks have to adhere to the guidelines of Reserve Bank of India (RBI) if it intends to enter into the insurance business. The banks are required to satisfy certain conditions as stipulated by RBI for same. Similarly, Insurance Regulatory and Development Authority (IRDA) has laid down specific guidelines for insurance companies which wish to distribute its products through banks. These guidelines are mainly related to the specific position of insurance in a banks organizational structure and also the mandatory training of the personnel that would be handling the insurance products.

The banks were initially targeting only customers through their branches to the mass customers, however, now the trend is towards tailor made customised products to cater to the specific needs of the niche customers. The banks have started looking at the option of using internet banking, giving in-branch desk to accommodate insurance experts.

The task of bancassurance is not without any challenges, the most important is the conflict of interest faced by customers if they are targeted by both banks and insurance companies. There is an imminent risk of untrained bankers handling insurance products and resultant inefficiency. Many bank employees are poorly motivated to do additional work by additionally promoting a insurance product besides doing their routine work. Moreover, they may not be completely trained in selling process and closing sales.

SWOT of Bancassurance:

Strengths:
* Huge pool of skilled professionals
* Established credibility of the banks
* Wide network of branches, even in the remotest areas
* Understanding about the attitude and behaviour of the consumers
* Market expansion for insurance companies
* Trained staff, brand name and reliability
* High untapped market potential

Weaknesses:
* Rural branches not under CBS, and under-staffed
* No ready availability of trained staff
* Lack of personalized service
* Differences in approaches between banks and insurance companies
* Customers constrained by time
* Inflexibility of the products

Opportunities:
* Huge untapped market
* Requirements of urban customers can be tapped
* Database can be used to find homogenous group
* Cross-selling of insurance products for banking products
* Corporate and salaried customers can be targeted for specific products claiming convenience and ease of access

Threats:
* Changes in work culture and attitude difficult among bank employees
* Non-response from targeted customers
* May affect the portfolio of banks if insurance is perceived as a substitute for bank savings
* There may be loss of business confidence
* Competition between existing players
* Unsuitable marketing strategy and personnel may result in more harm than benefit


Conclusion

Though bancassurance has traditionally targeted the mass market, bancassurers have begun to finely segment the market, which has resulted in tailor-made products for each segment. This widens the scope of the product in the years to come. Banks have been accepted as a source of insurance products, the initial success of the concept proves the above fact. In the years to come, there may be phenomenal growth of this new product and bancassurance would turn out to be a norm rather than an exception.
 


Dr. G Bharathi Kamath
Professor-Economics
Coordinator PGDM
Srinivas School of Business
Srinivas Integrated Campus
Mukka, Mangalore-575021
 

Source: E-mail February 28, 2011

          

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