Project On Banc assurance

Presented By:
Sahil Chowdhary PGDM-FS FT (FS)-10-849 Section E

INTRODUCTION
Banc assurance is the term used to describe the parternership between banks and insurance company where by the insurance company uses the banks sales channel In order to sell insurance products. It is also known as bank insurance model. BIM allows the insurance company to maintain smaller direct sales teams as their products are sold through the bank to bank customers by bank staff. Bank staff and tellers, rather than an insurance salesperson, become the point of sale/point of contact for the customer. Bank staff are advised and supported by the insurance company through product information, marketing campaigns and sales training. Both the bank and insurance company share the commission. Insurance policies are processed and administered by the Insurance Company. BIM is extremely popular in European countries such as Spain, France and Austria. The usage of the term picked up as banks and insurance companies merged and banks sought to provide insurance, especially in markets that have been liberalized recently. It is a controversial idea, and many feel it gives banks too great a control over the financial industry or creates too much competition with existing insurers. In some countries, bank insurance is still largely prohibited, but it was recently legalized in countries such as the United States, when the GlassSteagall Act was repealed after the passage of the Gramm-Leach-Bliley Act. But revenues have been modest and flat in recent years, and most insurance sales in U.S. banks are for mortgage insurance, life insurance or property insurance related to loans. But China recently allowed banks to buy insurers and vice versa, stimulating the banc assurance product and some major global insurers in China have seen the banc assurance product greatly expand sales to individuals across several product lines.

Privatbancassurance is a wealth management process pioneered by Lombard International Assurance and now used globally. The concept combines private banking and investment management services with the sophisticated use of life assurance as a financial planning structure to achieve fiscal advantages and security for wealthy investors and their families..

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.

Reasons for growing phenomena of bancassurance

The opening up of the insurance industry to private sector participation in December 1999has led to the entry of 20 new players, with 12 in the life insurance sector and eight in then on-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. 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 withcustomers. 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 banc assurance 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 underserved 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 banc assurance in India

The management of the new Indian operations is 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 banc assurance. 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 banc assurance 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 recognized 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 face-toface 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 householders insurance policy. Millions of people travelling in and out of India can be tapped for Overseas Medicaid 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 banc assurance 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 banc assurance 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 (medic aim 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 banc assurance 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 banc assurance 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 banc assurance 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 their classical way of working that there is a definite threat of resistance to any change that banc assurance may set in. Any relocation to a new company or subsidiary or change from one work to a different kind of work will be presented 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 banc assurance 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 banc assurance venture may never break-even

Regulatory Issues
The development of banc assurance 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 banc assurance 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 have to satisfy the same training and examination requirements as insurance agents. A noticeable exception is that for those possessing the Certified Associate ship 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 banc assurance regulations is that they appear to constrain the corporate agent to receiving only commission; profitsharing arrangements would seem to be ruled out. We feel that this, if applied in practice, is unfortunate as profit-sharing 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 profitsharing 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.

Issues and implementations

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 Associate ship 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 see 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 is 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 In spite of above mentioned tie-up with banks. There are many tie-ups for the purpose of banc assurance. 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.

(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 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 & so on they can also use all the above-mentioned facility for Bank assurance 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.

Impact on Retail Sector

While banks and insurance companies stand to gain, what impact does it have on the retail customer? Retail saving choices is getting increasingly complex internationally and Idea is no exception. There is growing need for more divers instruments and avenues of investment. This coupled with need of integrated financial one stop shops to reduce the transaction costs associated with diversification. Globally, insurance products are a major internment savings and this is likely to be the case in India as well as insurance penetration gathers steam.

The issue of building brand equity is critical for new entrants into the insurance market. However, , tying up with a bank might provide counter-productive if this objective is to be achieved. A number of surveys in the European market have shown, for instance, that in banc assurance partnerships, it is the banks rather than the insurers brand that dominates and insurance brands often get stifled. The issue of integrating the banks IT and other support systems also needs to be emphasized. If these are not dovetailed, the possibility of serious systems failure becomes real. Often this issue is relegated to the background and the obvious synergies between banks and insurers get more than their due emphasis

Benefits to banks
Secure an additional and more stable stream of income through diversification into insurance and reduce their reliance on interest spreads as a major source of income Leverage on their extensive customer bases Sell a whole range of financial to clients and increase customers retention Reduce risk based capital requirement to same level of revenue

 Works towards the provision of integrated financial services tailored to the life cycle of customers Access funds that are otherwise kept with life insurer who sometimes benefits from tax advantages

Benefits to insurance
Tap into the customer base of banks Reduce the reliance on traditional agents by making use of the various channels owned by banks Share the services with the banks Develop new financial products more efficiently in collaboration with their banks partners Establish market presence rapidly without the need to build up a network of agents Obtain additional capital of banks to improve their solvency and expand business

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 has allowed banc assurance 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 banc assurance 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 banc assurance.

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

Finally we can say that the banc assurance 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 them 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.