CHAPTER - 1 INTRODUCTION
1.1 INTRODUCTION TO BANCASSURANCE Bancassurance in its simplest form is the distribution of insurance
products through a bank's distribution distribution channels. In concrete terms Bancassurance, which is also known as Allfinanz - describes a package of financial services that can ca n fulfil both banking and insurance insuran ce needs at the same time. It takes various forms in various countries depending upon the demography and economic and legislative climate of that country.
Demographic
profile
of the country
decides the
kind of
products
Bancassurance shall be dealing in with, economic situation will determine the trend in terms of turnover, market share, etc., whereas legislative climate will decide the periphery within which the Bancassurance has to operate. The
motives behind Bancassurance also vary. For banks it is a means of
product diversification 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 is a winner here. 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. The usage of the term picked up as banks and insurance insurance companies merged merged and banks sought sought to provide provide insurance, insurance, especially in markets that have been liberalised recently. It is a controversial idea, and many feel it gives banks to a greater 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
GLASS – STEAGALL Act was repealed after the passage of the Gramm-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 bancassurance product and some major global insurers in China have seen the bancassurance product greatly expand sales to individuals across several product lines. Private Bancassurance is a wealth management process pioneered by Lombard International Assurance and now used globally. The concept combines private banking and investment investment management services with the sophisticated sophisticated use of life assurance as a financial planning planning structure to achieve fiscal deposits.
administered by the insurance company. The usage of the term picked up as banks and insurance insurance companies merged merged and banks sought sought to provide provide insurance, insurance, especially in markets that have been liberalised recently. It is a controversial idea, and many feel it gives banks to a greater 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
GLASS – STEAGALL 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 bancassurance product and some major global insurers in China have seen the bancassurance product greatly expand sales to individuals across several product lines. Private Bancassurance is a wealth management process pioneered by Lombard International Assurance and now used globally. The concept combines private banking and investment investment management services with the sophisticated sophisticated use of life assurance as a financial planning planning structure to achieve fiscal deposits.
1.5 BANCASSURANCE = INSURER’S PRODUCT + BANK’S
REACH
To put in simple words, bancassurance is the provision of insurance banking products and services through the distribution distribution channel channel of a bank bank or to a common common client base. The usage of the word started picking up when the financial markets witnessed mergers and alliances between the two booming segments – Banking and Insurance. According to a recent study, bancassurance is on the rise, particularly in emerging markets. Worldwide, Worldwide, insurers have been successfully leveraging bancassurance to gain a foothold in markets with low insurance penetration and a limited limited variety of distribution distribution channels. channels. Banks world over have realized that offering value-added services such as insurance, helps to meet client expectations & also
Competition in the Personal Financial Services area is getting `hot‟ in India.
Banks seek to retain customer loyalty by offering them a vastly expanded and more sophisticated range of products.
Customers also want a “one-stop shop” for all their financial needs. Therefore
banks are trying to provide more services and integrate them into their business model. Bancassurance is one such initiative. Further the risks involved in doing this business is very low. Banks are also trying to integrate this business into their own business. Customers would also get this benefit as these products are offered not only by their sales force but also by net banking and other IT enabled services like ATM etc. Insurance companies also have a wide range of insurance products catering to a wide range of needs. Bancassurance is beneficial for insurance companies as well as they would be cutting costs and cross-selling apart from the wider reach of their insurance products. In a country like India, the need of insurance is not felt by customers
1.6 REGULATORY FRAMEWORK IN INDIA
In India, the banking and insurance sectors are regulated by two different entities (banking by RBI and insurance by IRDA) and bancassurance being the combinations 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. The RBI requires any bank intending to undertake insurance business to obtain its prior approval RBI guidelines for banks entering into insurance sector provide three options for banks. They are:
Joint ventures will be allowed for financially strong banks wishing to undertake insurance business with risk participation.
Any commercial bank will be allowed to undertake insurance business as agent of insurance companies. This will be on a fee basis with no-risk participation. Banks are entitled to referral fee on the basis of premium collected.
The Monetary & Credit Policy of the RBI in October 2002 allowed banks to undertake referral business through their network of branches subject to certain restrictions.
The Insurance Regulatory and Development Authority (IRDA) guidelines for the bancassurance are:
Each bank that sells insurance must have a chief insurance executive to handle all insurance activities.
Banks are included w ithin the IRDA‟s Licensing of Corporate Agents Regulation 2002. All the people involved in selling should undergo mandatory training at an institute accredited by IRDA and pass the examination conducted by the authority.
Commercial banks, including cooperative banks and regional rural banks, may become corporate agents for one insurance company.
Banks cannot become insurance brokers.
The whole aim of the present regulatory framework is to ensure that any risks that may arise from insurance business don‟t affect banking business. In essence there should be an “arm length” relationship between the bank and the insurance
company.
1.3THE BANCASSURANCE MODEL IN INDIA The bancassurance model – an attractive alliance for both the parties, has taken a flying start in India; but much more needs to be done in order to reach out to the uninsured Indians.
Bancassurance – selling insurance product under the roof of a bank – had its humble beginning in 1980s in France and soon spread its wings to different parts of the world. In the Indian context (post the March 2000 RBI Amendment and IRDA‟s 2002 notification), the very concept provided a ray of hope to a
number of insurance players as culturally, banks are more acceptable than insurance companies. Add to this the more pragmatic aspect of the penetration of commercial banks (banking is spread both geographically and across different socio-economic groups; there are more than 80,000 branches of scheduled commercial banks), the strategic alliance between a bank and an insurance company could not have come at a more appropriate time.
Given the number of insurance agents, it would appear that an alternative distribution model for insurance products is perhaps not apt in the Indian context. Well perhaps, this is superficially true; dig deep and you realise that the average number of transactions conducted by the agents is well below the international standard, and hence the need for an alternative distribution channel. The truth is that this alternative channel has helped many insurance companies to do away with the disasters related to agent turnovers. The banks, in turn, are able to earn fee-based income to supplement their core lending activities without having to invest in additional resources or infrastructure. As a matter of fact, private sector banks and private insurers have been comparatively more active and hence beneficiaries of bancassurance. It is apparent that there is a natural synergy between banks and insurance companies.
Insurance At the same time it is im portant to consider the fact that the bank‟s appetite to derive revenue from sale of insurance and customers propensity to purchase insurance from banks differ significantly. Interestingly, there is an increasing focus by major banks on joint ventures and ownership models. But amidst all this, how does the customer benefit? As far as customers are concerned, the bancassurance model provides them with a one stop hassle free shopping for all necessary financial services.
While bancassurance does provide an apparently viable model for product diversification by banks and a cost effective distribution channel for insurance
companies, there are some potential areas of conflict between the two that need to be ironed out. The most classic example of conflict of interest is based on the common perception that insurance is a savings product as against a risk management product. In such a situation, insurance products compete with banks‟ term deposit facilities and hence clear conflicts of interest arise. The
branch bankers may have a negative incentive in promoting the insurance product when their focus could be on gaining more commissions through their cash deposit targets.
1.7 WHY SHOULD BANKS ENTER INSURANCE?
There
are
several
reasons
why
banks
should
seriously
consider
Bancassurance, the most important of which is increased return on assets (ROA). The following are the other reasons -
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 bank‟s 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.
1.8 REVIEW OF LITERATURE
Article 1 Bancassurance - A Global Breakdown :
It is important to outline the impact that bancassurance has had on differing regions around the world, as well as looking at the major regulations that impact the further growth of bancassurance. Below, is provided with a brief synopsis of bancassurance markets in certain key areas.
EUROPE:
Bancassurance is a construct of Europe (France in particular) and this perhaps helps explain why it is such a phenomenal success within certain European markets. Largely the 1989 Second Banking Coordination Directive motivated the large influx of banks into insurance within Europe in recent years. Currently, the penetration levels are fairly stable in Europe, since bancassurance in the majority of Western European countries (France, Netherlands, Portugal and Spain) has reached what studies such as Swiss Re. (2002) argue to be maturity. These penetration levels will only pick up once bancassurance manages to fully infiltrate Central and Eastern European countries such as Hungary and Poland, and the Baltic nations. Currently, the final major hurdle for bancassurance in Western Europe seems to lie in the U.K. where a predominantly strong insurance board still attempts to resist the bancassurance trend even in the face of widespread deregulations.
FRANCE :
In France, the success of bancassurance is mitigated by a favourable tax treatment on life insurance products, lack of competition within the insurance industry, and an inadequate pension scheme (Bonnet and Arnal (2000). The pioneer of bancassurance in France is argued to be Credit Mutual, which created its own life and non- life subsidiaries in the early 1970‟s. Bancassurance has seen the most success in the life insurance market, something that is true for every nation, increasing from 52% in 1995 to account for 69% of life insurance business n 2000 (Durand (2003), and Turner (1998)). However, as of late, the banking networks market share of the life insurance market has remained fairly stagnant, actually dropping over the years to 66% market share in 2001 and 61% in 2003 (Falautona and Marsiglia (2003), Data monitor (2003)). This resulted from a combination of falling stock market prices and the banking network bearing the brunt of lower transfer prices according to Benoist (2002). This means that banking and insurance companies are overseen separately within the country. For a conglomerate, the regulator will depend on who is the parent of the two.
UNITED KINGDOM :
Bancassurers have faced a tougher time in trying to penetrate the U.K. market, thanks in large to a combination of restrictive regulations and a powerful insurance governing body. The first move for bancassurers came in 1985 when Standard Life purchased a stake in the Bank of Scotland. Changes in legislation soon followed in 1986 and 1988, which made it legal for banks to market insurance products and set up their own insurance subsidiaries (Sakr (2001)).
Even then, the main type of union between the two was a joint venture, since the banks placed an emphasis on maintaining the knowledge of the insurer. Twenty years later, researchers argue that bancassurance is still in its infancy within the U.K., currently accounting for 15% of new insurance premiums issued (Benoist (2002), It is argued that restrictive regulations were detrimental to the growth of bancassurance within the country and that due to the lack of experience the correct model for the U.K. is still to be found (Hubbard (spring 2001)). Two benefits of the regulatory system in the U.K. are firstly, that it is based on one almighty regulator that oversees the different factors of the financial services industry (the financial Services Authority). This leads to more streamlined regulations than in other countries that employ functional form regulatory systems.
SPAIN:
Spain has one of the most developed markets in bancassurance (Data monitor (2003)). Current penetration of bancassurers is over 75% of life insurance business and an ever-increasing proportion of the non-life business. In Spain, the evolution of the bancassurance market is fostered by the phenomenal growth within the insurance services industry (life insurance alone has seen 30% growth per annum over the past 15 years (Durand (2003)). The development of bancassurance in the Spanish market was facilitated by the well-established network of regional building societies, and also the cultural mentality that it is correct to take on risks (Goddard (1999)).
BRAZIL:
In Brazil the laws are in the bancassurers favour, and the banks within the country control more than 65% of the insurance market (Nigh and Saunders (2003)), a size that rivals the leading bancassurers in Europe. Furthermore, in Brazil, bancassurers are assisted by regulations that ban the development of agent networks (Benoist (2002)).
NORTH AMERICA :
The North American financial services market is the largest in the world and bancassurance has developed in a differing manner in this region depending on the country in question. In Canada, there has been consolidated regulation for more than 15 years and banks are legally allowed to own insurance companies, but limitations are placed on the products that can be provided (Dorval (2002)). While in Mexico, bancassurance has been a flourishing industry due largely to the role played by banks in the creation of pension funds since the 1997 pension reforms. Bancassurance in the U.S. has, in contrast, faced a very tight regulatory and legislative environment for many decades. The formation of financial conglomerates was greatly hindered by the Banking Act of 1933 (Glass-Stegall Act) and the Bank Holding Company Act of 1956. Only in 1999 did laws become more favourable to banks offering insurance products, with the passing of the Gramm-Leach Bliely Act. However, due to the divergence between the state and federal laws regarding banks offering insurance products, bancassurers still face a hard time ahead in relation to regulations and attempting to overcome powerful lobbies that aim to maintain existing hierarchies (Boot (2003)).
ASIA AND THE PACIFIC :
Bancassurance in the Asian region has been relatively slow to take off, with the exception of countries such as Australia, Hong Kong and Singapore where regulations have been considerable lenient (Swiss Re. (2002)). The trend in the majority of mainland Asian countries has been for a bank to form ties with a foreign insurer in order to begin bancassurance operations with around 80% of these being life insurers, and the financial structure of the operation tends to be in the form of a distributional agreement. Since bancassurance is still in its infancy in most Asian countries, it is very susceptible to global changes Most countries within Asia have only recently begun allowing the formation of bancassurance operations with the main players listed below. Certain countries within the region are still holding out against the onslaught of the bancassurance trend. Vietnam still restricts banks from offering life insurance products, while South Korea has made certain rules that make it difficult to begin a bancassurance operation within the country
Article 2 Quantitative works of major Researchers related to Bancassurance
Compared to the vast amount of descriptive work that has been published in the field of bancassurance, there is only a limited amount of empirical studies conducted on the effects that bancassurance actually has on the company once implemented. This was largely due to the lack of information that resulted from poor company disclosure statements and inadequate collections of national statistics. As these problems are being rectified, researchers into the bancassurance practice are making more and more empirical research; nevertheless, it is still in its early stages. The following aims at highlighting the
major quantitative findings of certain researchers that have performed research into the union of banks and insurers. The majority of past studies have focused mainly on the risk and profitability effects resulting from the union of a banking and non-banking firm. One of the earliest studies in this area was performed by Boyd and Graham (1986). They conducted a risk-of-failure analysis and looked at two periods around a new Federal Reserve policy (1974s go-slow policy). they found that bank holding companies (BHCs) involvement in non-banking activities is significantly positively correlated with the risk of failure over the period 1971-1977, while the period 1978-1983 showed no significance, thus indicating that the new policy had a considerable impact on bank holding company (BHC) expansion into non-banking activities.
Boyd and Graham (1988) followed their 1986
study with a paper that used a simulation approach, whereby they simulated possible mergers between banking and non-banking companies which were then compared to existing BHCs in order to determine whether the risk of bankruptcy will increase of decrease should expansion be allowed in to the non banking industry, and also to determine the concurrent effect on company profitability. Their main finding was that the risk of bankruptcy only declined should the BHC expand into the life insurance practice. Brewers (1989) study finds similar risk reduction benefits existing however cannot specify whether they originate as a result of diversification, regulation or efficiency gains. Boyd, Graham and Hewitt (1993) build on Boyd et al. (1988) by conducting a simulation study. They once again conclude that mergers of BHCs with insurance companies may reduce risk, whereas those with securities or real-estate firms will not. Saunders and Walter (1994) and Lown, Osler, Strahan and Sufi (2000) use a similar method to Boyd and Graham (1988) and obtain similar results with more current data. Estrella (2001) examines diversification benefits for banks by
using proforma mergers. In contrast to previous studies that incorporate accounting data, Estrella uses market data and a measure of the likelihood of failure that is derived through the application of option pricing theory to the valuation of the firm. the findings indicate that banking and insurance companies are likely to experience gains on both sides in the majority of the cases. The other major series of studies on banks expansion into non-banking activities focus on the wealth effects of such a move. Cybo-Ottone and Murgia (2000) analyzed the stock market valuations of mergers and acquisitions in the European banking industry over the period 1988-1997, and found the existence of significant positive abnormal returns associated with the announcement of product diversification of banks into insurance. Furthermore, they found that country effects do not significantly affect their overall results, suggesting a homogeneous stock market valuation and institutional framework across Europe. Carow (2001) looked at the abnormal returns of bank and insurance companies following the changing legislation brought about as a result of the CiticorpTravelers Group merger, and discovered that investors expect large banks and insurance companies to gain significantly from the legislation removing barriers to bancassurance. In an event study released later in the same year, Carow (Mar 2001) found in support the contestable market theory that insurance companies became worse off and banks had no long-term gains following legislations further supporting bancassurance within the U.S.Cowan, Howell and Power (2002) conducted a similar event study surrounding four separate court rulings and discovered that on average only larger, riskier BHCs with fee-based income gain the most, while smaller, riskier insurers sustain the highest wealth losses. Fields, Fraser and Kolari (2005) find that bancassurance mergers are positive wealth creating events by examining abnormal return data. They further
deduced that scale and scope economies were a contributing factor in these results. As always, the opponents are there. Amel, Barnes, Panetta and Salleo (2004) and Strioh (2004) found that consolidation in the financial sector is beneficial up to a relatively small size in order to reap economies of scale, and that there is no clear evidence supporting cost reductions stemming from improvements in managerial efficiencies. Strioh (2004) finds non-banking income volatile and that there is little evidence of diversification benefits existing. But, the majority of the past studies have found risk reduction and wealth creating benefits associated with the expansion of banks into the insurance industry.
Article 3 Insurers up beat on Bancassurance Channel
Bancassurance is likely to generate approximately 35% of private insurers‟ premium income by 2008, according to an analysis of India‟s bancassurance
sector by Watson Wyatt Worldwide, a leading global insurance consulting firm. „India Bancassurance Benchmarking Study- 2006/7‟ is the first of its kind
survey in the Indian market, and part of an Asia-wide analysis focused on bancassurance distribution. It sets out to define bancassurance performance standards and benchmarks against a cross section of industry practices, processes and productivity indicators. Watson Wyatt has analyzed the bancassurance channel from the perspective of banks, life insurers and non-life insurers separately in the report. Mr Graham Morris, Director, Watson Wyatt Worldwide said: “the purpose of the survey was to focus and understand how banks and insurers develop strategies for selling life and non-life insurance products through the vast
network of bank branches in India and the practical issues they face in implementing the sales process”. Watson Wyatt had chosen India as the first
country in Asia to do the Benchmarking Survey considering the vibrant growth of this alternative channel in the country compared to the other Asian markets. A total of 25 banks covering PSU, Private, and Foreign banks had participated in the Survey, along with almost all private life and general insurers licensed in the country. Source: “Business line” dated Wednesday, 19 December 2008
1.9 ADVANTAGES OF BANCASSURANCE ADVANTAGES TO BANKS
Productivity of the employees increases.
By providing customers with both the services under one roof, they can improve overall customer satisfaction resulting in higher customer retention levels.
Increase in return on assets by building fee income through the sale of insurance products.
Can leverage on face-to-face contacts and awareness about the financial conditions of customers to sell insurance products.
Banks can cross sell insurance products E.g.: Term insurance products with loans.
ADVANTAGES TO CONSUMERS
Comprehensive financial advisory services under one roof. i.e., insurance services along with other financial services such as banking, mutual funds, personal loans etc.
Enhanced convenience on the part of the insured
Easy access for claims, as banks is a regular go.
ADVANTAGES TO INSURERS
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. In their natural and traditional roles and with their current skills, neither banks nor insurance companies could effectively mount a Bancassurance start-up alone.
Collaboration is the key to making this new channel work. Banks bring a variety of capabilities to the table. Most obviously, they own proprietary databases that can be tapped for middle - market warm leads.
OTHER BENEFITS
Better customer retention and stronger relationships.
Clear competitive advantage in the rural areas.
Possibility that the insurer‟s account as well as the accounts from the
claimants will remain with the bank.
Insurance products can augment the value of the banking products and services.
Banks are in better position to offer complete integrated financial solutions.
1.10 SWOT ANALYSIS Even though, banks and insurance companies in India are yet to exchange their wedding rings, Bancassurance as a means of distribution of insurance products is already in force in some form or the other. 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 to face contact to market insurance products to generate some income for themselves which hitherto was not thought of.
Once Bancassurance is embraced in India with full force, a lot will be at stake. Huge capital investment will be required to create infrastructure particularly in IT and telecommunications, a call centre will have to be created, top professionals of both industries will have to be hired, an R & D cell will be needed to create new ideas and products. It is therefore essential to have a SWOT analysis done in the context of Bancassurance experiment in India. 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 enables banks and insurance companies to complement each other‟s strengths as well.
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.
WEAKNESSES
The IT culture is unfortunately missing completely in all 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 are 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.
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
liberalisation 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.
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.
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 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 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.
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.
CHAPTER - 2 RESEARCH METHODOLOGY
Research is an academic activity and as such the term should be used in technical sense. According to Clifford Woody, “Research comprises defining and redefining problems, formulating hypothesis or suggested solutions, collecting, organizing and evaluating data; making deduction and reaching at a conclusion; and at last carefully testing the conclusions to determine whether they fit the formulating hypothesis. ” The main aim of the research is to find out the truth which is hidden and which has not been discovered as yet.
2.1 OBJECTIVES OF RESEARCH :
Primary Objective of my study on the topic “ Bancassurance” is that this is
relatively a new concept in India and thereby I would like to enhance my understanding and improve my knowledge regarding this topic & above all I would definitely want to apply this information so gathered in my future career prospects. Whereas the main objective of making this thesis stands to is research on the Bancassurance strategy adopted by the banking companies i.e the banks sell insurance products. Today the customer is the king of the market and to satisfy his wants and needs the industry has to adopt many strategies. The customer wants everything under, one roof, by thinking of this point the banking
industry
tied
BANCASSURANCE.
up
with
insurance
and
came
up
with
2.2 RESEARCH DESIGN :
Research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure of data. It is a blue print specifying every stage of action in the course of research. The research design adopted in this study for secondary data is exploratory and analytical in nature. Exploratory research aims to gain familiarity and new insights into any phenomenon while analytical research aims at analyzing the current scenario and thereby using that to project the future performance. This research aims at studying the historical performance of the company in Bancassurance and it also evaluates the future prospects of the company. Descriptive research design is used for collecting secondary data. It is concerned with the research studies with a focus on the portrayal of the characteristics of a group or individual or a situation. The main objective of such studies is to acquire knowledge. The major purpose of Descriptive research is description of the state of affairs, as it exists at present. It is concerned with the research studies with a focus on the portrayal of the characteristics of a group or individual or a situation. The main objective of such studies is to acquire knowledge. The major purpose of Descriptive research is description of the state of affairs, as it exists at present. Therefore, their entering into insurance business is only a natural corollary and is fully justified too as „insurance‟ is another financial product required by the
bank customers.
2.3 HYPOTHESES
The two hypotheses which are proposed to be verified are 1. The new insurance products offered by the Standard Chartered Bank acts as a tool for improving the performance of the Bank. 2. The Standard Chartered Bank has obtained new techniques for marketing of insurance products to the customers.
2.4 METHODS OF DATA COLLECTION :
1. PRIMARY DATA 2. SECONDARY DATA
PRIMARY DATA:
Primary data is the data collected for the first time through field survey. Some data is collected from company staff and from customers also. SECONDARY DATA
It refers to the information or facts already collected. Such data are collected with the objective of understanding the past status of any variable. Here, secondary data has been used for making a financial analysis.
METHOD OF SECONDARY DATA COLLECTION:
Annual reports
Journals and Magazines
Internet
Various Sites
CHAPTER – 3 OVERVIEW OF STANDARD CHARTERED BANK
3.1 HSTORY OF STANDARD CHARTERED BANK 1969 to 2000
Both banks had acquired other smaller banks along the way and spread their networks further. In 1969, the banks decided to merge, and to counterbalance their existing network by expanding in Europe and the United States, while continuing their expansion in their traditional markets in Asia and Africa. In 1986 Lloyds Bank of the United Kingdom made a hostile takeover bid for the Group. The bid was defeated however it spurred Standard Chartered into a period of change, including a series of divestments notably in the United States and South Africa. In 1987 Standard Chartered sold its remaining interests in the South African bank, and since then the Standard Bank Group has been a separate entity. In 1992, scandal broke when banking regulators charged several employees of Standard Chartered in Mumbai with illegally diverting depositors‟ funds to speculate in the stock market. Fines by Indian regulators and provisions for losses cost the bank almost 350 million pounds, a third of its capital. Scandal erupted again in 1994, when the Sunday Times of London wrote that an executive in the bank‟s metals -trading arm had bribed officials in Malaysia
and the Philippines in order to win business. The bank, in a statement on 18 July 1994, said there were “discrepancies in expense claims” that “included gifts to
individuals in certain countries to facilitate business, a practice contrary to bank rules.' In 1997, Standard Chartered sold its metals trading arm to Toronto-based Scotia bank for $26 million. In 1994, the Hong Kong Securities and Futures Commission found that Standard Chartered Asian investment bank had illegally helped to artificially support the price of new shares they had underwritten for six companies from July 1991 to March 1993. The bank admitted the offense, apologized and reorganized its brokerage units. The commission banned the bank from underwriting IPOs in Hong Kong for nine months. Standard Charterer ‟s Asian investment banking operations never recovered, and in 2000 the bank closed them down. The bank fully recovered in late '90s, during this time, the bank sold off holdings in continental Europe and the Americas, sold the headquarters building (lease-back) and branch properties in Hong Kong. In 2000, Standard Chartered acquired Grind lays Bank & Chase Manhattan Bank Hong Kong retail banking business. The ethics issues and financial losses triggered turmoil in Standard Charterer‟s
London executive suite. The bank went through three CEOs in three years: Malcolm Williamson was replaced in 1998 by Rana Talwar, who was in turn unseated by Mervyn Davies in 2001. By the time Davies took over, his predecessors had systematically sold off the bank‟s holdings in continental
Europe and the Americas. Former CEO Talwar traces Standard Charterer‟s troubles over the years to its
failure to hire local talent. The Indian-born Citigroup Inc. veteran became the bank‟s first non-British CEO when he was appointed in 1998.
2000 to present
In 2000, Standard Chartered acquired Grind lays Bank from ANZ Bank, increasing its presence in private banking and further expanding its operations in India and Pakistan. Standard Chartered retained Grind lays' private banking operations in London and Luxembourg and the subsidiary in Jersey, all of which it integrated into its own private bank. This now serves high net worth customers in Hong Kong, Dubai, and Johannesburg under the name Standard Chartered Grind lays Offshore Financial Services. In India, Standard Chartered integrated most of Grind lays' operations, making Standard Chartered the largest foreign bank in the country. In 2004, Standard Chartered Bank and Astra International (An Indonesian conglomerate, a subsidiary of Jar dine Matheson Group) took over Permata Bank and in 2006, both shareholders increased their joint ownership to 89.01%. With 276 branches and 549 ATMs in 55 cities throughout Indonesia, Permata Bank has the second largest branch network in Standard Chartered organization. On 15 April 2005, the bank acquired Korea First Bank, beating HSBC in the bid. Since then the bank has rebranded the branches as SC First Bank. Standard Chartered completed the integration of its Bangkok branch and Standard Chartered Nakornthon Bank in October, renaming the new entity Standard Chartered Bank (Thailand). Standard Chartered also formed strategic alliances with Fleming Family & Partners to expand private wealth management in Asia and the Middle East, and acquired stakes in ACB Vietnam, Travelex, American Express Bank in Bangladesh and Bohai Bank in China. On 9 August 2006 Standard Chartered announced that it had acquired an 81% shareholding in the Union Bank of Pakistan in a deal ultimately worth $511 million. This deal represented the first acquisition by a foreign firm of a Pakistani bank and the merged bank, Standard Chartered Bank (Pakistan), is
now Pakistan's sixth largest bank. On 22 October 2006 Standard Chartered announced that it had received tenders for more than 51 per cent of the issued share capital of Hsinchu International Bank (“Hsinchu”), established in 1948 in Hsinchu city in Taiwan. Standard Chartered, which had first entered Taiwan in 1985, acquired majority ownership of the bank. Prior to the merger, Hsinchu was Taiwan's seventh largest private sector bank by loans and deposits as at 30 June 2006, but had suffered extensive losses on defaulted credit card debt. Standard Chartered merged its existing three branches with Hsinchu's 83, and then delisted Hsinchu International Bank, changing the bank's name to Standard Chartered Bank (Taiwan) Limited. Today Standard Chartered is the largest foreign bank in Taiwan in terms of branch network. In 2007, Standard Chartered opened its Private Banking global headquarters in Singapore. On 23 August 2007 Standard Chartered entered into an agreement to buy a 49 per cent share of an Indian brokerage firm (UTI Securities) for $36 million in cash from Securities Trading Corporation of India Ltd., with the option to raise its stake to 75 per cent in 2008 and, if both partners agree, to 100 per cent by 2010. UTI Securities offers brokering, wealth management and investment banking services across 60 Indian cities. On 29 February 2008, Standard Chartered PLC announced it had received all the required approvals leading to the completion of its acquisition of American Express Bank Ltd (AEB) from the American Express Company (AXP). The total cash consideration for the acquisition is US$823 million.
3.2 INTRODUCTION TO STANDARD CHARTERD BANK
Standard Chartered PLC (LSE: STAN, SEHK: 2888, NSE: STAN) is a British multinational banking and financial services company headquartered in London, United Kingdom. It operates a network of over 1,700 branches and outlets (including subsidiaries, associates and joint ventures) across more than 70 countries and employs around 87,000 people. It is a universal bank and has operations in consumer, corporate and institutional banking and treasury services. Despite its UK base around 90% of its profits come from Africa, Asia and the Middle East. Standard Chartered has a primary listing on the London Stock Exchange and is a constituent of the FTSE 100 Index. It had a market capitalisation of approximately £33 billion as of 23 December 2011, the 13th-largest of any company with a primary listing on the London Stock Exchange. It has secondary listings on the Hong Kong Stock Exchange and the National Stock Exchange of India. Its largest shareholder is the Government of Singaporeowned Temasek Holdings. The name Standard Chartered comes from the two original banks from which it was founded and which merged in 1969 – The Chartered Bank of India, Australia and China, and The Standard Bank of British South Africa. In the new millennium the bank acquired Grind lays Bank from the ANZ Group and the Chase Consumer Banking operations in Hong Kong in 2000. Since 2005, the bank has achieved several milestones with a number of strategic alliances and acquisitions that will extend their customer or geographic reach and broaden our product range.
3.2.1 THE CHARTERED BANK
Founded by James Wilson following the grant of a Royal Charter by Queen Victoria in 1853. Chartered opened its first branches in Mumbai (Bombay), Calcutta and Shanghai in 1858, followed by Hong Kong and Singapore in 1859 Traditional business was in cotton from Mumbai (Bombay), indigo and tea from Calcutta, rice in Burma, sugar from Java, tobacco from Sumatra, hemp in Manila and silk from Yokohama. Played a major role in the development of trade with the East which followed the opening of the Suez Canal in 1869 and the extension of the telegraph to China in 1871. In 1957 Chartered Bank bought the Eastern Bank together with the Ionian Bank's Cyprus Branches. This established a presence in the Gulf.
3.2.2 THE STANDARD BANK
Founded in the Cape Province of South Africa in 1862 by John Paterson. Commenced business in Port Elizabeth, South Africa, in January 1863. Was prominent in financing the development of the diamond fields of Kimberley from 1867 and later extended its network further north to the new town of Johannesburg when gold was discovered there in 1885. Expanded in Southern, Central and Eastern Africa and by 1953 had 600 offices. In 1965, it merged with the Bank of West Africa expanding its operations into Cameroon, Gambia, Ghana, Nigeria and Sierra Leone. In 1969, the decision was made by Chartered and by Standard to undergo a friendly merger. All was going well until 1986, when a hostile takeover bid was made for the Group by Lloyds Bank of the United Kingdom. When the bid was defeated, Standard Chartered entered a period of change. Provisions had to be made against third world debt exposure and loans to corporations and
entrepreneurs who could not meet their commitments.
Standard Chartered
began a series of divestments notably in the United States and South Africa, and also entered into a number of asset sales. From the early 1990s, Standard Chartered has focused on developing its strong franchises in Asia, the Middle East and Africa using its operations in the United Kingdom and North America to provide customers with a bridge between these markets. Secondly, it would focus on consumer, corporate and institutional banking and on the provision of treasury services - areas in which the Group had particular strength and expertise.
3.3 GLOBAL NETWORK
Standard Chartered has a network of over
1,700 branches and outlets in more
than 70 countries and territories across the globe, making us one of the world's most international banks. Listed on both the London Stock Exchange and the Hong Kong Stock Exchange, Standard Chartered PLC is consistently ranked in the top 25 FTSE [FINANCIAL TIMES STOCK EXCHANGE] 100 companies by market capitalization.
ASIA PACIFIC
UK/EUROPE
Afghanistan
Switzerland
Australia
Turkey
Bangladesh
United Kingdom
Brunei Darussalam
America
3.4 SERVICES PROVIDED BY STANDARD CHARTERED BANK
We can ensure our peace of mind with a wide range of General Insurance products available conveniently at Standard Chartered Bank in association with Bajaj Allianz Life Insurance. SCB
protects us and our family, as well as our hard earned assets and future
earnings. To take care of all our insurance requirements, SCB bring you a variety of products from Bajaj Allianz Life Insurance Company. SCB offers:
One-stop shopping for both life and general insurance
protection
Comprehensive range of products to suit every stage of your life... from childhood to retirement
Trained & certified professionals guide us in ascertaining our insurance needs and assist us in making an insurance plan that is just right for us.
At Standard Chartered Bank they have a comprehensive range of products & services to protect your world
Life Insurance
General Insurance
Standard Chartered offers us a wide range of Life Insurance Products from Bajaj Allianz Life Insurance Company, one of India's leading Insurance companies. At Standard Chartered, we can avail of the services of trained& certified professionals, who can guide us in ascertaining our insurance needs, and assist us in making an insurance plan that is just right for us.
3.5 SOME OF THE KEY LIFE INSURANCE PRODUCTS
UNIT LINKED INSURANCE PLANS
Market linked insurance plans invest the premium in to the equity, debt and cash markets by the way of allocating units, which like any other mutual fund have a NAV and the customer is free to switch between one fund class to another depending on the risk factor he wishes to be in. ULIPs offer a better return than the traditional endowment plans and offer a great deal of flexibility along with great returns making them the finest product offering. Bajaj Allianz Life Insurance have developed a number of Unit Linked Insurance ULIP products which range from single premium to a regular premium option along with investment funds ranging from index funds to mid-cap funds and debt market linked funds.
Regular Premium
I Gain III
Max Advantage Insurance Plan
Money Secure Insurance Plan
Assured Protection Insurance Plan
Single Premium
Guaranteed Maturity Insurance Plan
Wealth Insurance Plan
Shield Insurance Plan
Flexi Advantage Insurance Plan
TRADITIONAL PLANS
Saving Plans that offer bonus are completely safe and are ideal for long term investments. Our products offer additional benefits including 4 times life cover at little extra costs, limited premium payment terms and compounded reversionary bonuses. These features make our traditional plans excellent long term saving instruments.
Endowment
Invest Gain
Save Care Economy SP
Life Time Care
Super Saver
Money Back
Cash Rich Insurance Plan
Super Cash Gain Insurance Plan
Cash Gain
Child Gain
PENSION PLANS
Bajaj Allianz Life Insurance offer Pension Plans which will make sure that we are there to support you in every stage of your life and your savings in pension plan insurance today become your wealth and support for your future years to come.
LIFE + HEALTH INSURANCE FOR HOSPITALIZATION
At Bajaj Allianz Life Insurance we offer unique hospitalisation-cum-insurance plan that takes care of your hospitalization bills and also provides crucial financial support to your dependents in case of your unfortunate death. Our health insurance plans offer a sound protection to safe guard your family from any medical emergencies and will make sure that financial problems are least of your worries in trying to get yourself treated. We offer cash less Mediclaim facility across 2000 hospitals in over 300 towns and provide best treatment in the finest hospitals with our health insurance products.
Health Care Family CareFirst
TERM INSURANCE PLANS
The sole objective of Term insurance policy is to serve the protection needs of the customers and by doing so, safeguard one's family from the financial implications of unfortunate circumstances that one cannot foresee. These term insurance plans are pure risk cover plans with or without maturity benefit. These pure risk plans cover your life at a nominal cost and you may
want to take this term insurance plan to cover your outstanding debts like a mortgage, a home loan etc.
Protector
Term Care
New
Risk Care II
iSecure Insurance Plan
iSecure Loan Insurance Plan
WOMEN INSURANCE PLANS
To cater to women's special needs we offer innovative women specific plans which provide investment benefits, savings, retirement solutions and medical insurance? Our special plans help mothers plan for their children‟s education saves for the future and take care of all medical emergencies in the family.
Regular investment and savings plan, offer:
Investments along with critical illness benefits which provide good returns, long term saving and protection in case of a medical emergency
Investment plans with accidental coverage
Children's education planning
Specialized retirement income plans for homemakers to provide a secure and financial future
CHAPTER - 4 MODELS OF BANCASSURANCE & CHANNELS
THE MODELS
MODELS
STRUCTURAL CLASSIFICATION
REFERRAL MODEL
CORPORATE AGENCY
INSURANCE AS FINANCIAL SERVICE
BANK PRODUCT BASED
STAND ALONE PRODUCTS
REFERRALS
BLEND OF INSURANCE
4.1 STRUCTURAL CLASSIFICATION 4.1.1 REFERRAL MODEL
Banks intending not to take risk could adopt „referral model‟ wherein they
merely part with their client data base for business lead of commission. The actual transaction with the prospective client in referral model is done by the staff of the insurance company either at the premises of the bank or elsewhere. Referral model is nothing but a simple arrangement, wherein the bank, while controlling access to the clients data base, parts with only the business leads to the agents/ sales staff of insurance comp any for a „referral fee‟ or commission for every business lead that was passed on. In fact a number of banks in India have already resorted to this strategy to begin with. This model would be suitable for almost all types of banks including the RRBs /cooperative banks and even cooperative societies both in rural and urban. There is greater scope in the medium term for this model. For, banks to begin with can resort to this model and then move on to the other models.
4.1.2 CORPORATE AGENCY
The other form of non-sick participatory distribution channel is that of „Corporate Agency‟, wherein the bank staff as an institution acts as corporate
agent for the insurance product for a fee/commission. This seems to be more viable and appropriate for most of the mid-sized banks in India as also the rate of commission would be relatively higher than the referral arrangement. This, however, is prone to reputational risk of the marketing bank. There are also practical difficulties in the form of professional knowledge about the insurance products. This could, however, be overcome by intensive training to chosen staff, and packaged with proper incentives in the banks coupled with selling of
simple insurance products in the initial stage. This model is best suited for majority of banks including some major urban cooperative banks because neither there is sharing of risk nor does it require huge investment in the form of infrastructure and yet could be a good source of income. This model of bancassurance worked well in the US, because consumers generally prefer to purchase policies through broker banks that offer a wide range of products from competing insurers.
4.1.3 INSURANCE AS A FULLY INTEGRATED FINANCIAL SERVICE
Apart from the above two, the fully integrated financial service involves much more comprehensive and complicated relationship between insurer and bank, where the bank functions as fully universal in its operation and selling of insurance products is just one more function within. This includes banks having wholly owned insurance subsidiaries with or without foreign participation. The great advantage of this strategy being that the bank could make use of its full potential to reap the benefit of synergy and therefore the economies of scope. This may be suitable to relatively larger banks with sound financials and has better infrastructure. As per the extant regulation of insurance sector the foreign insurance company could enter the Indian insurance market only in the form of joint venture, therefore, this type of bancassurance seems to have emerged out of necessity in India to an extent. There is great scope for further growth both in life and non-life insurance segments as GOI is reported have been actively considering to increase the FDI‟s participation up to 49 per cent.
4.2 PRODUCT BASED CLASSIFICATION 4.2.1 STAND ALONE PRODUCTS
In this case bancassurance involves marketing of the insurance products through either referral arrangement or corporate agency without mixing the insurance products with any of the banks‟ own products/ services. Insurance is sold as one more item in the menu of products offered to the bank‟s customer, however, the
products of banks and insurance will have their respective brands too.
4.2.2 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, banks could sell the insurance
products without any additional efforts. In most times, giving insurance cover at a nominal premium/ fee or sometimes without explicit premium does act as an added attraction to sell the bank‟s own products, e.g., credit card, housing loans,
education loans, etc. Many banks in India, in recent years, has been aggressively marketing credit and debit card business, whereas the cardholders get the „insurance cover‟ for a nominal fee or (implicitly included in the annual fee)
free from explicit charges/ premium. Similarly the home loans / vehicle loans, etc., have also been packaged with the insurance cover as an additional incentive.
4.3 BANK REFERRALS
There is also another method called 'Bank Referral'. Here the banks do not issue the policies; they only give the database to the insurance companies. The
companies issue the policies and pay the commission to them. That is called referral basis.
4.4 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.
DISTRIBUTION CHANNELS DIAGRAM
4.5 CAREER AGENTS
Career Agents are full-time commissioned sales personnel holding an agency contract. They are generally considered to be independent contractors. Consequently an insurance company can exercise control only over the activities of the agent which are specified in the contract. Many bancassurers, however avoid this channel, believing that agents might oversell out of their interest in quantity and not quality. Such problems with career agents usually arise, not due to the nature of this channel, but rather due to the use of improperly designed remuneration and incentive packages.
4.6 SPECIAL ADVISORS
Special Advisers are highly trained employees usually belonging to the insurance partner, who distribute insurance products to the bank's corporate clients. The Clients mostly include affluent population who require personalised and high quality service. Usually Special advisors are paid on a salary basis and they receive incentive compensation based on their sales.
4.7 SALARIED AGENTS
Having Salaried Agents has the advantages of them being fully under the control and supervision of bancassurers. These agents share the mission and objectives of the bancassurers. Salaried Agents in bancassurance are similar to their counterparts in traditional insurance companies and have the same characteristics as career agents. The only difference in terms of their remuneration is that they are paid on a salary basis and career agents receive incentive compensation based on their sales.
4.8 BANK EMPLOYEES / PLATFORM BANKING
Platform Bankers are bank employees who spot the leads in the banks and gently suggest the customer to walk over and speak with appropriate representative within the bank. The platform banker may be a teller or a personal loan assistant and the representative being referred to may be a trained bank employee or a representative from the partner insurance company. Platform Bankers can usually sell simple products. However, the time which they can devote to insurance sales is limited, e.g. due to limited opening hours and to the need to perform other banking duties. A further restriction on the effectiveness of bank employees in generating insurance business is that they have a limited target market, i.e. those customers who actually visit the branch during the opening hours.
4.9 CORPORATE AGENCIES & BROKERAGE FIRMS
There are a number of banks who cooperate with independent agencies or brokerage firms while some other banks have found corporate agencies. The advantage of such arrangements is the availability of specialists needed for complex insurance matters and through these arrangements the customers get good quality of services.
4.10 DIRECT RESPONSE
In this channel no salesperson visits the customer to induce a sale and no faceto-face contact between consumer and seller occurs. The consumer purchases products directly from the bancassurers by responding to the company's advertisement, mailing or telephone offers.
4.11 INTERNET
Internet banking is already securely established as an effective and profitable basis for conducting banking operations. The reasonable expectation is that personal banking services will increasingly be delivered by Internet banking. Bancassurers can also feel confident that Internet banking will also prove an efficient vehicle for cross selling of insurance savings and protection products. It seems likely that a growing proportion of the affluent population, everyone's target market, will find banks with household name brands and proven skills in e-business a very acceptable source of non-banking products. There is now the Internet, which looms large as an effective source of information for financial product sales. Banks are well advised to make their new websites as interactive as possible, providing more than mere standard bank data and current rates. Functions requiring user input (check ordering, what-if calculations, and credit and account applications) should be immediately added with links to the insurer. Such an arrangement can also provide a vehicle for insurance sales, service and leads.
4.12 E- BROKERAGE
Banks can open or acquire an e-Brokerage arm and sell insurance products from multiple insurers. The changed legislative climate across the world should help migration of bancassurance in this direction. The advantage of this medium is scale of operation, strong brands, easy distribution and excellent synergy with the internet capabilities.
4.13 OUTSIDE LEAD GENERATING TECHNIQUES
One last method for developing bancassurance eyes involves "outside" lead generating techniques, such as seminars, direct mail and statement inserts. Seminars in particular can be very effective because in a non-threatening atmosphere the insurance counsellor can make a presentation to a small group of business people (such as the local chamber of commerce), field questions on the topic, then collect business cards. Adding this technique to his/her lead generation repertoire, an insurance counsellor often cannot help but be successful. To make the overall sales effort pay anticipated benefits, insurers need to also help their bank partners determine what the “hot buttons” will be for attracting
the attention of the reader of both direct and e-mail. Great opportunities await bancassurance partners today and, in most cases, success or failure depends on precisely how the process is developed and managed inside each financial institution. This includes the large regional bank and the small one-unit community bank.
CHAPTER – 5 SCENARIOS, TRENDS & CHALLENGES OF BANCASSURANCE
5.1 INDIAN SCENARIO
The business of banking around the globe is changing due to integration of global financial markets, development of new technologies, universalization of banking operations and diversification in non-banking activities. Due to all these movements, the boundaries that have kept various financial services separate from each other have vanished. The coming together of different financial services has provided synergies in operations and development of new concepts. One of these is bancassurance. Bancassurance is a new buzzword in India. It originated in India in the year 2000 when the Government issued notification under Banking Regulation Act which allowed Indian Banks to do insurance distribution. It started picking up after Insurance Regulatory and Development Authority (IRDA) passed a notification in October 2002 on 'Corporate Agency' regulations. As per the concept of Corporate Agency, banks can act as an agent of one life and one non-life insurer. Currently bancassurance accounts for a share of almost 25-30% of the premium income amongst the private players in India. Traditionally, the banks and financial institutions are the key pillars of India‟s
financial system. Public have immense faith in banks. Share of bank deposits in the total financial assets of households has been steadily rising (presently at about 40%). Indian Banks have constantly proven their capability reach the
maximum number of households. In India at present there are total of 65700 branches of commercial banks, each branch serving an average of 15,000 people. Out of these are 32600 branches are catering cate ring to the needs of rural India and 14400 to semi-urban branches, where insurance growth has been most buoyant. (196 exclusive exclusive Regional Regional Rural Banks in deep hinterland) hinterland)
5.1.1 REASONS FOR BANKS ENTERING INSURANCE IN
INDIA
Indian insurance market is a hidden goldmine – an estimated Rs. 1, 80,000 crore in terms of annual insurance premium.
Sale of insurance through banks will meet an important set of consumer needs.
Bank‟s branch network allows face to face contact that is so important in
the sale of insurance.
Bank channel can also boost sales productivity.
Banks are best qualified to sell insurance products. They have a wide distribution reach. Because of the strong ties with the customers they are in a better position to sell insurance products to them.
Banks can provide integrated financial services under one roof to their customers.
Another main advantage in tapping the ban k‟s retail distribution network is cutting the cost of distribution by almost 30%. As some of the studies revealed that 50% of an insurer‟s cost structure is directly or indirectly
related to distribution.
Though insurance companies are good underwriters of risk, they are not too well known for their expertise in investment management. On the other hand, banks are generally perceived to be not good at managing risk
but they are perceived to be better at investment investment management. Bancassurance is about bringing the two attributes together. According to reliable research sources, bancassurance salesman has a
much faster learning curve, usually around two years as compared with four and a half years in an insurance company. In that sense, the cost of training is amortized over a shorter period of time and therefore turns-out cheaper. Valid reasons why banks should allow insurance salesman to sell
insurance products in their premises: a. Bank gets a royalty or a commission for every insurance policy sold. b. The bank gets an investment management fee for managing the insurer‟s investment.
c. Insurance products, like retirement and pension plans, are growth areas for banks.
With greater need to downsize - banks can utilize their existing surplus manpower – – reducing costs and optimum use of infrastructure.
Instant access to 60,000 + bank branches including in remote areas.
Availability of insurance in rural areas, through cost effective banking channels.
As banks are increasingly resorting to alternate delivery channels, surplus space would be available to distribute insurance products. 5.2
GLOBAL SCENARIO
Bancassurance has seen tremendous acceptance and growth across nations. Although it enjoys a penetration rate in excess of 50% in France, Spain, Italy and Belgium, other countries have opted for more traditional networks. The Life insurance market in the UK is largely in the hands of the brokers. With advent
of bancassurance, their market share has increased from 40% in 1992 to 54% in 1999. Sales agents also play an important role on a market entirely regulated by the Financial Services & Markets Act (FSMA) which imposes very strict marketing conditions. In Germany, the market continues to be dominated by general sales agents, even if their market share has declined from 85% in 1992 to 54% in 1999. In Asia, there is a need for financial institutions to be proactive and interact with regulator in order to explore the potential that bancassurance has a complementary distribution channel. Market share per distribution network for insurance products across various countries has been detailed in the below diagram. diagram. Bancassurance recorded huge growth in Europe but not in USA and Canada. In the US, there were hurdles till recently banks were not allowed to do insurance business and vice versa. In several countries countries in Latin America, banks have benefited from recent reforms – financial deregulation, among others – by selling insurance products across the country. Bancassurance has seen tremendous acceptance and growth across nations. Although it enjoys a penetration rate in excess of 50% in France, Spain, Italy and Belgium, other countries have opted for more traditional networks. The Life insurance market in the UK is largely in the hands of the brokers. With advent of bancassurance, their market share has increased from 40% in 1992 to 54% in 1999.
5.2.1 BANCASSURANCE BUSINESS CONDUCTED BY COs
In several countries in Latin-American, banks have benefited from recent reforms – financial deregulation, among others – by selling insurance products across the counter. An example is the Brazilian market where private pension products are marketed. Bancassurance also took advantage of the large number of national and especially international partnerships which took place in the 1990s. In some countries, bancassurance is still largely prohibited. Even in United States, it was legalized in after much deliberation, when the GlassStegall Act was repealed after the passage of the Gramm-Leach-Bliley Act.
5.2.2 Bancassurance in India vs. Bancassurance in Asia & Europe The following table compares the issues related to bancassurance in India with Europe and Asia (general):
Regulation
Europe Liberalized
Mature Market markets but pension growth reforms can spur growth in the life insurance sector Bancassurance Highly model integrated models
Major drivers
Tax concessions for life insurance premium paid
Squeeze on bank margins
Asia (general) Ranging from liberalized to forbidden
India Supportive
High growth potential
High growth
Mostly distribution alliances and joint ventures
Distributive
Squeeze on bank Margins. Insurers‟ growing cost pressure and desire to expand distribution capability.
Financial deregulation Foreign companies use Bancassurance to enter Asian Markets
Tax free status on maturity Small tax relief on premium. Narrowing bank margin
Products
Europe
Asia (general)
Mainly life insurance products to maximize tax benefits
Mainly life insurance Mainly non products linked to bank unitized services and increasingly, products geared towards managed Savings Regular premium
Mostly single premium
India
Distribution
Multi-bank branches
Mainly bank branches
Bank branches
Major players
Domestic banks and insurers
Foreign companies are playing an important role.
NA
Sophistication
High
Varied
Low
In several countries in Latin-American, banks have benefited from recent reforms – financial deregulation, among others – by selling insurance products across the counter. An example is the Brazilian market where private pension products are marketed. Bancassurance also took advantage of the large number of national and especially international partnerships which took place in the 1990s. In some countries, bancassurance is still largely prohibited. Even in United States, it was legalized in after much deliberation, when the GlassStegall Act was repealed after the passage of the Gramm-Leach-Bliley Act.
5.3 CURRENT SCENARIO
While bancassurance is a success story in Europe and other offshore markets, it is still in its nascent stage in India. We examine the challenges and opportunities for these products in India. In its simplest form, bancassurance is distribution of insurance products through a bank‟s branch network. Hence, there is a room for bancassurance where
banking and insurance congregate with each other. To be clear, a bank selling insurance products, and an insurance company, which is involved in banking activity can get into bancassurance. To symbolize this congregation bancassurance is also referred to as Allfinanz. Bancassurance assumes different forms in different countries based on the demographic factors of the country. In a way these demographic factors are the key variables that create challenges and opportunities in each country. Why congregate? Banks over a period of time might have developed a relationship with the customers and have unique identification in the minds of people. Also, banks have a wide branch network, spreading across the nook and corner. Banks have got a huge database of customers spread across the geographic region, in which they operate. If an insurance company had to develop all these strengths it would consume a large amount of resources and time. Hence, the best option for these companies would be to get in touch with these banks. It is beneficial even for banks as it brings in a new source of income in the form of service charges. Over the years, the regulatory glitches in the process of amalgamation of bank and insurance have reduced in number. These regulatory and other monetary benefits for the parties involved have ensured a rise in the use of bancassurance. As of 2004, bancassurance represented over 65% of the total life insurance
premium in Spain, 60% in France and 50% in Italy and Belgium. Nevertheless, in comparison with life insurance products, non-life products, especially Property and Casualty (P&C) products are yet to pick up speed. In the aforementioned countries, a negligible amount of business comes from bancassurance. For instance, in Spain, just 6% of P&C business comes from bancassurance. In Belgium and France 5% and 4% is respectively contributed by bancassurance.
5.4 TRENDS
The Trends which were seen in Bancassurance are:
Though bancassurance has traditionally targeted the mass market, but bancassurers have begun to finely segment the market, which has resulted in tailor-made products for each segment.
Some bancassurers are also beginning to focus exclusively on distribution. In some markets, face-to-face contact is preferred, which tends to favor bancassurance development.
Nevertheless, banks are starting to embrace direct marketing and Internet banking as tools to distribute insurance products. New and emerging channels are becoming increasingly competitive, due to the tangible cost benefits embedded in product pricing or through the appeal of convenience and innovation.
Bancassurance proper is still evolving in Asia and this is still in infancy in India and it is too early to assess the exact position. However, a quick survey revealed that a large number of banks cutting across public and private and including foreign banks have made use of the bancassurance channel in one form or the other in India.
Banks even offer space in their own premises to accommodate the insurance staff for selling the insurance products or giving access to their client‟s database for the use of the insurance companies.
5.5 CHALLENGES
Banks could be more enduring than individual agents when selling insurance, but bancassurance relationships are not. Since the opening up of the insurance sector in ‟2000, as many as six bancassurance alliances have ended in divorce
says Economic Times. If bancassurance was termed as marriage between banks and insurance, then the probability of divorces can‟t be ruled out. Critics opine that bancassurance is a
controversial idea, and it gives banks too great a control over the financial industry. The challenge to sustain such alliances could be immensely daunting. The difference in regulation, not only across countries but between banks and insurance industry as well has been cited as the primary reason. The difference in trade customs, work culture in these industries is another impediment. Human Resource Management has experienced some difficulty due to such alliances in financial industry. Poaching for employees, increased work-load, additional training, maintaining the motivation level are some issues that has
cropped up quite occasionally. So, before entering into a bancassurance alliance, just like any merger, cultural due diligence should be done and human resource issues should be adequately prioritized. Private sector insurance firms are finding „change management‟ in the public
sector a major challenge. State-owned banks get a new chairman, often from another bank, almost every two years, resulting in the distribution strategy undergoing a complete change. In the private sector, the M&A activity is one of the causes for change.
5.6 FUTURE SCOPE FOR BANCASSURANCE
By now, it has become clear that as economy grows it not only demands stronger and vibrant financial sector but also necessitates providing with more sophisticated and variety of financial and banking products and services. The outlook for bancassurance remains positive. While development in individual markets will continue to depend heavily on each country‟s regulatory and business environment, bancassurers could profit from the tendency of governments to privatize health care and pension liabilities. India has already more than 200 million middle class population coupled with vast banking network with largest depositors base, there is greater scope for use of bancassurance. In emerging markets, new entrants have successfully employed bancassurance to compete with incumbent companies. Given the current relatively low bancassurance penetration in emerging markets, bancassurance will likely see further significant development in the coming years.
In India the bancassurance model is still in its nascent stages, but the tremendous growth and acceptability in the last three years reflects green pasture in future. The deregulation of the insurance sector in India has resulted in a phase where innovative distribution channels are being explored. In this phase, bancassurance has simply outshined other alternate channels of distribution with a share of almost 25-30% of the premium income amongst the private players.
CHAPTER - 6 FINDINGS, RECOMMENDATIONS & CONCLUSION
6.1 FINDINGS
Although the concept is simple enough in theory, but in practice it has been found to be far from straightforward.
Almost many people have a fair idea about Bancassurance and that their banks sell various insurance products. But still few people don‟t know
about Bancassurance as a concept.
It has been also found out that the banks have various opportunities to cross sell insurance products. The insurance companies also have the opportunity to take advantage of the bank‟s network and other avenues.
It is also seen that customers have a lot of trust on the banks, and because of that trust the customers will take the insurance products from banks.
As the brand name of the banks is important so is the brand image of the insurance companies. So the banks and the insurance companies must tieup with the right partners. This will help them to create a better image in the minds of the customers.
It has also clear from the study that the private sector and the foreign banks have better future in Bancassurance. But the public sector banks are also trying to give them a tough competition e.g. SBI Life Insurance Co.
6.2 RECOMMENDATIONS
The Insurance companies need to design products specifically for distributing through banks. Trying to sell traditional products may not work so effectively.
The employees of the banks who are selling insurance products must be given proper training so that they can answer to any queries of the customers and can provide them products according to their needs.
Banks should also provide after sales services and they should be more aggressive in selling the insurance products.
Banks should also do the settlement of claims which will increase the trust and reliability of the customers on the banks.
In India, since the majority of the banking sector is in public sector which has been widely responsible for the lethargic attitude and poor quality of
customer service, it needs to rebuild the blemished image. Else, the bancassurance would be difficult to succeed in these banks.
A formal and standard agreement between these banks and the insurance companies should be taken up and drafted by a national regulatory body. These agreements must have necessary clauses of revenue sharing.
6.3 CONCLUSION
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 a very difficult task. Life Insurance Companies require good distribution strength and tremendous man power to reach out such a huge customer base. The concept of Bancassurance in India is still in its nascent stage, but the tremendous growth and the potential reflects a very bright future for bancassurance in India. With the coming up of various products and services tailored as per the c ustomer‟s needs there is every reason to be optimistic that bancassurance in India will play a long inning. But the proper implementation of bancassurance 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 unfulfillment of other essential requirements. I have experienced a lot during the preparation of the project. I had just a simple idea about Bancassurance. But after a detailed research in this topic I have
