Bancassurance in India: Issues & Implications

By

Dr. Amit Kumar Dwivedi
Amity Business School
Amity University
Jaipur

Punit Kumar Dwivedi
Lecturer (Finance)
Vidya Dayini P.G. College
Santoshnagar, Hyderabad
 

Introduction: - As per the investigation made by Graham Morris the opening of insurance industry to private sector participation in December1990 has led to the entry of 20 new players, with 12 in life Insurance Sector & 8 in the non-life insurance sector.  Almost without exception these companies are seeking to utilize multiple distribution channels such as –

1) Traditional Agencies
2) Bancassurance
3) Brokers &
4) Direct Marketing

Bancassurance is seen by many to be a significant or even the primary channel.

The banking & Insurance industry have charged rapidly in the changing and challenging economic environment through out the globe.  In the competitive & open environment each & every one wants to do better than others.  And they know that if they are not able to provide better service the won't survive in Industry.  Insurance companies are also to be competitive by cutting cost & serving in the better way to customers.  Now the time has come to choose and adopt appropriate distribution channel.

The insurance Industry has indeed awakened to deregulated environment in which several private companies have partnered with multinational insurance Insurance companies.  Despite a billion of population, India still has a low insurance percentage of 1.95 and it is in 51^st   position in world.  Despite of the fact that India boosts a saving rate around 25%, less than 5% is spending on insurance.  (Sources).

To streamline the saving in to insurance Bancassurance is the best channel to tackle four challenges facing the insurance industry,

* Product innovation
* Distribution
* Customer Service &
* Investments

Definition: The Bancassurance is the distribution of insurance products through the bank's distribution channels.  It is a phenomenon where in insurance products are offered through the distribution channels of the banking services along with a complete range of banking & investment products & services.  In simple term we can say Bancassurance tries to exploit synergies between both the insurance companies & banks.  In the simple term of insurance there are only two parties.

1) The Bank
2) The Insurer &
3) The customer.

* Bancassurance in India: Bancassurance in India is a very new concept, but if past gaining ground.  In our country the banking & insurance sectors are regulated by two different entries.  They are: -

* Banking is fully governed by RBI &
* Insurance sector is by IRDA

And bank assurance being the combination of two sectors comes under the purview of both the regulators.  Each of the regulators has given out detailed guidelines for banks getting into insurance sector.

* Guidelines given by RBI:- The Reserve Bank of India has given certain guidelines for banks entering into the insurance sector.  They are as follows: -

1. Any commercial bank will be allowed to undertake insurance business as the agent of insurance companies & this will be on fee basis with no-risk participation
2. The second guideline given by the RBI is that the joint ventures will be allowed for financial strong banks wishing to undertake insurance business with risk participation.
3. The third guideline is for banks which are not eligible for this joint venture option, an investment option of
(1) up to 10% of the net worth of the bank or 
(2) Rs. 50 crores.  Whichever is lower is available.

The bank that wants to enter in participates in the Insurance industry they have to follow the above guidelines given by the Reserve Bank of India.

* Guidelines given by IRDA: - 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 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 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: -

(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.

Exception: A noticeable exception is that for the individuals who processing the Certified Associateship of Indian Institute of Banks (CAIIB) only 50 hours training rather than 100 hours.

Restrictive feature :  A restrictive feature of Bancassurance regulation is that:

(1) They appear to constrain the corporate agents to receive only commission, the profit sharing arrangements would seen to be ruled out.
2) The products sold through bank channels / networks can be highly profitable and so such agreement with banks is highly beneficial for banks only.

Important Bancassurance tie-up in India: There are certain tie-up between the Insurance company & banks are given at present days these tie-up are going well, running well & past in the field of Bancassurance.

(1) LIC: The insurance company LIC of India have tie up with the following bank for Bancassurance.  They are: - 

(A) Corporation Bank
(B) Indian Overseas Bank
(C) Centurion Bank
(D) Sahara District Central Co-operative bank
(E) Janta Urban Co-operative bank
(F) Yeotmal Mahila Sahakari Bank
(G) Vijaya Bank &
(H) Oriental Bank of Commerce

2) SBI – Life – Insurance Co: The SBI life Insurance Co Ltd is starting & Running its Insurance business with the help of S.B.I.

3) Bajaj Allianz general Insurance Co. Ltd: In the field of general Insurance the Bajaj Allianz General Insurance Co Ltd., has tie-up with Karur Vysya Bank & Lord Krishna Bank.

4) Birla Sun life Insurance Co. Ltd: The Birla Sun life Insurance Company has a tie-up with the following bank for the insurance purpose :-

(a)  Bank of Rajasthan
(b) Andhra Bank
(c) Bank of Muscat
(d) Development Credit Bank
(e) Dutch Bank &
(f) Catholic Syrian Bank

Inspite of above mentioned tie-up with banks.  There are many tie-ups for the purpose of bancassurance.  Like ICICI Prudential, United India Insurance Co-Ltd. & so on

* Issues to be keep in mind while tie-up: The followings are certain issues that we have to keep in mind while tie-up with bank for Bancassurance purpose

(1) Do not depend upon traditional Method: The tie-up needs to develop innovative products and services rather than depends upon the traditional tracks.  The kind of products.  The bank would be allowed to sell are another major issue.  For example: - a complex unit-linked life insurance product is better sold through brokers & agents, while a standard term product or simple products like auto Insurance, home loan and accident Insurance cover can be handled by bank branches.

(2) Clarity on operational activities : There is need to be clarify on the operational activities of  Bancassurance that :-

(a) Who will do branding?
(b) Will the Insurance Company prefer to place a person at the branch of the bank? Or
(c) Will the bank branch train and keep its own people?
(d) Who will pay remuneration of above-mentioned people bank or Insurance Company or both in some ratio?

(3) Required Good Training: Even though the banks are in personal contact with its client, a high degree of active marketing skill is required to sell the insurance products.  These can be possible through proper training only.

SWOT Analysis of Bancassurance in India:

On order to implement the bancassurance model in our country a lot of steps we have to taken.

(A) Top professionals will have to be hired.    
(B) We have to study the Indians nature regarding insurance.
(C) Study about lower middle as well as upper class of society & how much they are   eager to adopt insurance.
(D) Favorable & easy policies for the people.
(E) High capital investment in infrastructure development particularly in Information Technology & Telecommunication is required
(F) Creation of research & development cell is very important & adaptive task.
(G) We have to study about the SWOP analysis of world in the field of bancassurance & we can take this study as base.

Advantages of Banassurance:  Bancassurance is a tool, which is beneficial to bank, customer & Insurer at a time.  There are certain benefits of bancassurance are given.

(1) 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 any where 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 & so on they can also use all the above-mentioned facility for Bankassurance purpose with customers & non-customers.

(II) 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.

(III) From the customers' point of view: Product innovation and distribution activities are directed towards the satisfaction of needs of the customer.  Bancassurance model assists customers in terms of reduction price, diversified product quality in time and at their doorstep service by banks.

CONCLUSION:

With the opening up of insurance sector and with so many players entering the Indian Insurance Industry it is required by Insurance Companies to come up with well established infrastructure facilities with good call centre service to attract and provide information to customer regarding different good policies & their premium pay scheme. 

The life Insurance Industry in India has been progressing at a rapid growth since opening up of the sector.  The size of country, a diverse set of people combined with problems of connectivity in rural areas, makes insurance selling in India is a very difficult task.  Life Insurance Companies require good distribution strength and tremendous man power to reach out such a huge customer base.

Where legislation ahs allowed bancassurance had mostly been a phenomenal success and although slow to gain pace, is now taking of across Asia, especially now that banks are starting to become more diverse financial institution and the concept of universal banking is being adopted.

In the field of bancassurance banks will bring a customer database, leverage their name, recognition & reputation of both local and regional levels.  If they are using personal contact with customers and non-customers then only they can success in the field of bancassurance. 

But the proper implementation of bancassurance is still facing so many hurdles because of poor manpower management, lack of call centers, no personal contact with customers, inadequate incentives to agents and unfullfilment of other essential requirements.

Finally we can say that the bancassurance would mostly depend on how well insurers and bankers understanding is with each other and how they are capturing the opportunity and how better service they are providing to their, customers.  Let us you all pay more attention towards the policies and enjoy the service provide by banks and Insurance Companies by the mode of Bancassurance.  And finally I am warm welcoming to all the professionals in this field. 

References:

1. Economic Times (Delhi),
2. Financial Express (Delhi),
3. Business Standard (Delhi),
4. Business Economy,
5. Business World,
6. VISION (Journal),
7. Banking Review,
8. Annual Report of RBI.
 

Dr. Amit Kumar Dwivedi
Amity Business School
Amity University
Jaipur

Punit Kumar Dwivedi
Lecturer (Finance)
Vidya Dayini P.G. College
Santoshnagar, Hyderabad
 

Source: E-mail May 10, 2008

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