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Bancassurance as a Strategic Management Tool


Bancassurance as a Strategic Management Tool


I hereby declare that the dissertation on:

Submitted in partial fulfillment of the requirement for
the…………………………………is collected by my own efforts
and it is true and real, to the best of my knowledge.
Bancassurance as a Strategic Management Tool

The banking and insurance industry have changed rapidly in the changing
economic environment through out the world. In the competitive and
liberalized environment everyone is trying to do better than others and
consequently survival of the fittest has come into effect. Insurance
companies are also to be competitive by cutting cost and serving in a better
way to the customers. Now the time has come to choose and adopt
appropriate distribution channel through which the insurance companies
can get the maximum benefit and serve Customers in man folded ways.

The intermediaries in the insurance business and the distribution

channels used by carriers will perhaps be the strongest drivers of growth in
this sector. Multi channel distribution and marketing of insurance products
will be the smart strategy of continue to play an important role in
distribution, alternative channels like corporate agents brokers and
bancassurance will play a greater role in distribution. The time has come
for the industry to gradually move from traditional individual agents
towards new distribution channels with a paradigm shift in creating
awareness and not just selling products. The game is old but the rules are
new and still developing. Ensconced in a monopoly run from the
nationalized days beginning in 1956, the insurance industry has indeed
awakened to a deregulated environment in which several private players
have partnered with multinational insurance giants. However despite of its
Bancassurance as a Strategic Management Tool

teaming more then one billion populations, India still has a low insurance
penetration of 1.95 percent, 51st in the world. Despite the fact that India
boosts a saving rate around 25 percent, less than 5% is spent on insurance.

In India, ever since espousing of financial reforms following the

recommendations of First Narasimham Committee, the contemporary
financial landscape has been reshaped. Banks, in particular, stride into
several new areas and offer innovative products, viz., merchant banking,
lease and term finance, capital market / equity market related activities,
hire purchase, real estate finance and so on. Thus, present-day banks have
become far more diversified than ever before. 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.

To streamline the saving into insurance, bancassurance is

the best channel to tackle four challenges facing the
industry: Product innovation, distribution, customer service
and investments.

The objective of this study is to show the present status of

bancassurance and how it is gaining world wide acceptance.
And why in Indian insurance industry it is seeing as a
strategic management tool. In the age of stiff competition

no one is ready to loose its own possession.

Bancassurance as a Strategic Management Tool

Gratitude is the hardest of emotions to
express and often does not find adequate
words to convey the entire one feels, although
it is difficult to mention the nature of all, who
gave me their full support and cooperation
throughout my dissertation work.

This project report result is not only the

outcome of the efforts put in by me but also by
many helpful hands like the faculty members ,
my mentor, Company persons and many of
my friends.

Bancassurance as a Strategic Management Tool


Insurance market in India-A quick look
Present distributional channel for insurance product
What is Bancassurance
Expansion of Banks in India
Entry of Banks in Insurance business
Bancassurance in Asia
Bancassurance in India
RBI guideline for banks entering in Insurance industry
IRDA guideline for Bancassurance
List of companies in Insurance industry
Bancassurance: A SWOT analysis
Long term drivers of bancassurance
How successful has the bancassurance
How bancassurance advantageous to banks
Some bancassurance tie-ups India
Banks…. Insurance synergy
Business models
Bancassurance : Global perspectives
Emerging trends, opportunities & challenges
Banc assurance to banc-securence
Banc assurance Future out look & recommendations
Recent updates (NEWS)
Bancassurance as a Strategic Management Tool

Your bank has already changed a great deal over the past decade. Your
banker was once content to collect your deposits and then lend the money
to companies at a profit. Now he wants to lend to you as well. It could be a
loan for a new house, a new car or even for education in a foreign
university. Then there are products like demat services and mutual funds.
Soon, there will be more. When you walk into your bank six months from
now, it is likely that they will try to sell a host of insurance products to you
even. Welcome to Bancassurance. Bancassurance - a term
coined by combining the two words bank and insurance (in French) -
connotes distribution of insurance products through banking channels.
Bancassurance encompasses terms such as `Allfinanz' (in German),
`Integrated Financial Services' and `Assure banking'. This concept gained
currency in the growing global insurance industry and its search for new
channels of distribution. Banks, with their geographical spread and
penetration in terms of customer reach of all segments, have emerged as
viable sources for the distribution of insurance products. Presently, there’s
more activity here than anywhere else. And every one wants to jump onto
Bancassurance as a Strategic Management Tool

the bandwagon for a piece of the action cake. The insurance industry has
finally woken up from its long slumber to an altogether new awakening.

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

fastest emerging distribution channel. For insurers, tying up with banks

provides extensive geographical spread and countrywide customer access;
it is the logical route for insurers to take.

Insurance Market in India - A Quick look:

With largest number of life insurance policies in force in the world,

Insurance happens to be a mega opportunity in India. It’s a business
growing at the rate of 15-20 per cent annually and presently is of the
order of Rs. 450 billion. Together with banking services, it adds about 7
per cent to the country’s GDP. Gross premium collection is nearly 2 per
cent of GDP and funds available with LIC for investments are 8 per cent
of GDP.

Yet, nearly 80 per cent of Indian population is without life insurance

cover while health insurance and non-life insurance continues to be below
international standards. And this part of the population is also subject to
weak social security and pension systems with hardly any old age income
security. This it self is an indicator that growth potential for the insurance
sector is immense.

A well-developed and evolved insurance sector is needed for economic

development as it provides long term funds for infrastructure
development and at the same time strengthens the risk taking ability. It is
estimated that over the next ten years India would require investments of
Bancassurance as a Strategic Management Tool

the order of one trillion US dollar. The Insurance sector, to some extent,
can enable investments in infrastructure development to sustain economic
growth of the country.

Insurance is a federal subject in India. There are two legislations that

govern the sector- The Insurance Act- 1938 and the IRDA Act- 1999. The
insurance sector in India has come a full circle from being an open
competitive market to nationalization and back to a liberalized market
again Insurance Market.

With the progress of reforms, Insurance market has been flooded with a
number of players. As at end-March 2007, among the life insurers, there
were 17 companies in private sector and Life Insurance Corporation of
India (LIC) was the solitary public sector company. Among non-life
insurers, 9 companies were in private sector and four companies were in
public sector. As regarding the present size of the insurance market in
India, it is stated that India accounts not even one per cent of the global
insurance market. However, studies have pointed out that India’s insurance
market is expected to grow rapidly in the next 10 years. Mathur (2004) for
instance, stated that in spite of significant growth of life insurance business
through the outstanding efforts of LIC, only 25 to 26% of insurable
population in India has been insured.
Bancassurance as a Strategic Management Tool

Important milestones in the life insurance

business in India:

1912: The Indian Life Assurance Companies Act enacted as the first
statute to regulate the life insurance business.

1928: The Indian Insurance Companies Act enacted to enable the

government to collect statistical information about both life and non-life
insurance businesses.

1938: Earlier legislation consolidated and amended to by the Insurance

Act with the objective of protecting the interests of the insuring public.

1956: 245 Indian and foreign insurers and provident societies taken over
by the central government and nationalized. LIC formed by an Act of
Parliament- LIC Act 1956- with a capital contribution of Rs. 5 crore from
the Government of India.

1993: Insurance Sector Reforms (Malhotra Committee).

1999: Insurance Regulatory Development Authority
Bancassurance as a Strategic Management Tool

Insurance Sector Reforms:

In 1993, Malhotra Committee- headed by former Finance Secretary and
RBI Governor R.N. Malhotra- was formed to evaluate the Indian insurance
industry and recommend its future direction. The Malhotra committee was
set up with the objective of complementing the reforms initiated in the
financial sector. The reforms were aimed at creating a more efficient and
competitive financial system suitable for the requirements of the economy
keeping in mind the structural changes currently underway and recognizing
that insurance is an important part of the overall financial system where it
was necessary to address the need for similar reforms.

The Government of India liberalized the insurance sector in March 2000

with the passage of the Insurance Regulatory and Development Authority
(IRDA) Bill, lifting all entry restrictions for private players and allowing
foreign players to enter the market with some limits on direct foreign
ownership. Under the current guidelines, there is a 26 percent equity cap
for foreign partners in an insurance company. There is a proposal to
increase this limit to 49 percent. The opening up of the sector is likely to
lead to greater spread and deepening of insurance in India and this may
also include restructuring and revitalizing of the public sector companies.
Bancassurance as a Strategic Management Tool

In the private sector 17 life insurance and 11 general insurance companies

have been registered. A host of private Insurance companies operating in
both life and non-life segments have started selling their insurance policies
since 2001.

In terms of ‘insurance penetration ratio:

Insurance premium to GDP, a key indicator of the spread of insurance

coverage and insurance culture, India compares poorly by international
standards. The penetration ratio was less than one per cent in 1990s and it
improved to 4.8% by end-March 2006. As against this, a Survey Report
of Swiss Re revealed that the penetration ratio as at end-March 2006, in
respect of some of the European countries, viz., UK and Switzerland at
16.5% and 11.0%. In Asia, Taiwan and South Korea had registered their
respective ratio of as high as 14.5% and 11.1%. Insurance Penetration
ratio for the World was placed at 7.5% far greater than that of India Thus
in a country with more than 1.2 billion populations; the poor penetration
ratio indicates that a vast majority of population remain outside the reach
of the insurance, especially in rural and semi-urban areas, in the context
of the absence of social security schemes. This clearly suggests the
presence of vast potential for tapping the insurance market particularly by
widening the distribution channels. This is where the strategy of
Bancassurance could possibly become more relevant.
Bancassurance as a Strategic Management Tool

Insurance Sector during Post Reforms - A snapshot:

It is obvious that reforms in financial sector would not be complete if one
of the key sub sectors, viz., and Insurance sector is not being taken along.
Therefore, the Government of India had appointed a Committee on
Reforms in the Insurance Sector under the Chairmanship of Late
R.N.Malhotra (known as Malhotra Committee) in 1994. There has been
considerable time lag between reforms in the insurance sector and the rest
Bancassurance as a Strategic Management Tool

of the financial sector, particularly in comparison with the banking sector.

Incidentally, the experiences with many other countries were also very
similar. However, following the implementation of Malhotra Committee’s
far reaching recommendations, the insurance sector had undergone
sweeping changes during the later 1990s and 2000 onwards and of which
only a few developments are highlighted here. IRDA was established in the
year 2000 as an exclusive Regulatory Authority for the insurance sector
through the enactment of IRDA Act, 1999. A number of amendments were
brought in various insurance related statutes, viz. Insurance Act, 1938, LIC
Act, 1956 and General Insurance Business Nationalization Act, 1972

The Progress in the overall developments in the insurance sector was swift
and more prominent after the establishment of IRDA. The four public
sector non-life insurance companies were de-linked from being subsidiary
of the General Insurance Company of India. Now they operate
independently and compete with each other. The upshot of these
developments was the breakage of monopoly by public sector in the
insurance sector paving the way for the entry of private entities into the
insurance market and the era of competition set in with availability of wide
range of insurance products in the market than ever.
Bancassurance as a Strategic Management Tool

Present Distribution Channels for Insurance Products in India:

Insurance industry in India for fairly a longer period relied heavily on
traditional agency (individual agents) distribution network IRDA (2004).
As the insurance sector had been completely monopolized by the public
sector organizations for decades, there was slow and rugged growth in the
insurance business due to lack of competitive pressure. Therefore, the zeal
for discovering new channels of distribution and the aggressive marketing
strategies were totally absent and to an extent it was not felt necessary. The
insurance products, by and large, have been dispensed mainly through the
following traditional major channels:
(1) Development officers,
(2) Individual agents and
(3) Direct sales staff.
(4) Bancassurance
(5) Corporate agent
(6) Agency Office
(7) Brokerage firms
It was only after IRDA came into existence as the regulator, the other
forms of channels, viz., corporate agents including Bancassurance, brokers
(an independent agent who represents the buyer, rather than the insurance
company, and tries to find the buyer the best policy by comparison
shopping2), internet marketing and telemarketing were added on a
professional basis in line with the international practice. As the insurance
Bancassurance as a Strategic Management Tool

sector is poised for a rapid growth, in terms of business as well as number

of new entrant tough competition has become inevitable. Consequently,
addition of new and number of distribution channels would become
With the opening up of the insurance sector and with so many players
entering the Indian insurance industry, it is required by the insurance
companies to come up with innovative products, create more consumer
awareness about their products and offer them at a competitive price. New
entrants in the insurance sector had no difficulty in matching their products
with the customers' needs and offering them at a price acceptable to the
customer. But, insurance not being an off the shelf product and one which
requiring personal counseling and persuasion, distribution posed a major
challenge for the insurance companies. Further insurable population of
over 1 billion spread all over the country has made the traditional channels
of the insurance companies costlier. Also due to heavy competition,
insurers do not enjoy the flexibility of incurring heavy distribution
expenses and passing them to the Customize form, with these
developments and increased pressures in combating competition,
companies are forced to come up with innovative techniques to market
their products and services. At this juncture, banking sector with it's far and
wide reach, was thought of as a potential distribution channel, useful for
the insurance companies. This union of the two sectors is what is known as
Bancassurance as a Strategic Management Tool

What is Bancassurance?
Bancassurance is the distribution of insurance products through the bank's
distribution channel. 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 and investment products and services. To
put it simply, Bancassurance, tries to exploit synergies between both the
insurance companies and banks.
Bancassurance if taken in right spirit and implemented properly can be
win-win situation for the all the participants' viz.
Banks, Insurers and the Customers.

Bancassurance commonly means selling insurance products under the same

roof of a bank. Though Bancassurance had roots in France in the 1980s,
and spread across different parts of Continental Europe since, it has spread
its wings in Asia –in particular, In India, there are a number of reasons why
Bancassurance could play a natural role in the insurance market…..

(1) Banks have a huge network across the country.

(2) Banks can offer fee-based income for the employees for insurance
(3) Banks are culturally more acceptable than insurance companies.
Bancassurance as a Strategic Management Tool

Dealing with (life) insurance, in many parts of India, conjure up an image

of a bad omen. Some bank products have natural complementary insurance
products. For example, if a bank gives out a home loan, it might insist on a
life insurance cover so that in case of death of the borrower, there is no
problem in paying off the home loan. Similarly, a car loan could only be
given if comprehensive auto insurance is taken out on that particular car.

Bancassurance business conducted by companies

Bancassurance as a Strategic Management Tool

Expansion of banks in India:

Penetration of commercial banks in India has been quite extensive. There
are around 66,000 branches of scheduled commercial banks. Each branch
serves an average of 15,000 people. The only other national institution with
a bigger reach is the postal service. Banks have not only been successful in
the urban areas. It has also grown tremendously in the rural areas. Of the
total number of branches of commercial banks, there are 32,600 branches
in rural areas, and 14,400 semi-urban branches. In addition, there are 196
exclusive regional rural banks in deep hinterland. There is research
evidence to show that the deliberate expansion policy of banks in rural
areas has contributed to poverty reduction in India. Instead of simple
headcounts, if we take other bank penetration measure like total value of
deposits as a percent of GDP, it is also exhibiting an upward trend. This
means bank deposits are growing at a rate much faster than the gross
domestic product. Banks have become the main saving vehicle in the
economy. Between 1985 and 1995, the growth of deposits in banks stalled
at under 35% of the GDP (that itself is a high number by the standard of
the developing economies). From 1995, the banking sector started growing
again. The deposits in banks grew another 10% of GDP by 2000. This level
of growth in bank deposit has been totally unprecedented in India since
independence. Why did the bank deposits take a leap? One simple (but
partial) reason is a substitution from the stock market.
Bancassurance as a Strategic Management Tool

In 1994, Indian stock market was hit by the worst scandal of manipulation
of stock prices in its long history. The stocks fell sharply driving many
investors into safer investment options. Rising saving rate during the late
1990s led to sustained growth of bank deposits (that is, additional
investment in the stock market came in the form of fresh money and not a
flow of money out bank saving. The rising saving came as a result of rising
income across the board. With this background, it is therefore not
surprising that banks have become a vehicle for selling insurance products.

Financial Institutions in Insurance Business: RBI Rules

Banks are regulated by the Indian central bank, the Reserve Bank of India
(RBI). Therefore, the RBI has set down the rules for the entry of banks in
the field of insurance. In 1999, the Governor of the Reserve Bank of India
declared: "Presently, there is no provision in the Banking Regulation Act
whereby a bank could undertake the insurance business. The Act may have
to be amended before banks could undertake insurance business.
Alternatively, there is a provision in the Banking Regulation Act whereby
banks could take any other form of business which the central government
may notify.
Thus, if the central government notifies insurance business as a lawful
activity for a banking company, perhaps banks would be able to undertake
insurance business. It may, of course, be necessary to specify what type of
insurance business they could undertake". However, the following year, in
Bancassurance as a Strategic Management Tool

a set of draft guidelines issued to all scheduled commercial banks and

select financial institutions, the RBI laid out a set of parameters that need
to be met.

(1) The net worth of the bank/financial institution should not be less than
Rs.5 billon.
(2) The capital adequacy ratio of the bank/financial institution should be
not being Less than 10%.
(3) The bank/financial institution should have track record of at least three
continuous Years of profits.
(4) The level of net Nonperforming Assets should be 1% below the
industry average.
(5) The track record of performance of existing subsidiaries of
banks/financial institutions should be “satisfactory”. Some confusion arose
from the circular. Therefore, the RBI proposed a series of amendments in
March 2000. In addition to the entry of banks, the RBI also laid down a set
of guidelines for the entry of Non-Bank Financial Companies (NBFC) into
insurance business (June 30, 2000). There were two critical differences in
the requirements proposed for the NBFCs.
First, the capital adequacy ratio of the NBFC (applicable only to those
holding public deposits) should not be less than 12 percent if engaged in
equipment leasing/hire purchase finance activities and 15 percent if it is a
loan or investment company.
Bancassurance as a Strategic Management Tool

Second, the level of nonperforming assets should be no more than 5

percent of total outstanding leased/hire purchase assets and advances. On
November 28, 2001, the same rules were extended to cover “All India”
Financial Institutions. Specifically the rules for these institutions were set at
the same level as the NBFCs noted above. Some confusion still remained
whether it was possible for the financial institutions to accept fees for their
services directly or not. The RBI cleared their position in two separate
circulars: one for the scheduled commercial banks and the other for the
other institutions. It also stated that financial institutions “should not adopt
any restrictive practice of forcing its customers to go in only for a
particular insurance company”.
In the 2001 Report on Currency and Finance, the RBI laid down its views
in more concrete term. “The Reserve Bank, in recognition of the symbiotic
relationship between banking and the insurance industries, has identified
three routes of banks’ Participation in the insurance business, viz.

(i) providing fee-based insurance services without risk participation,

(ii) Investing in an insurance company for providing infrastructure
and services support and Setting up of a separate joint-venture
insurance company with risk participation. The third route, due to
its risk aspects, involves compliance to stringent entry norms.
Further, the bank has to maintain an ‘arms length’ relationship
Bancassurance as a Strategic Management Tool

between its banking business and its insurance outfit. For banks
entering into insurance business with risk participation, the
prescribed entity (viz., separate joint-venture company) also
enables to avoid possible regulatory;

(iii) Overlaps between the Reserve Bank and the Government/IRDA.

The joint-venture insurance company would be subjected entirely
to the IRDA/Government regulations.”

Entry of Banks in Insurance Business

On December 28, 2000, the State Bank of India (SBI) announced a joint
venture Partnership with Cardiff SA (the insurance arm of BNP Paribas
Bank). This Partnership won over several others (with Fortis and with GE
Capital). Many experts in the industry have awaited the entry of the SBI. It
was well known that the SBI has long harbored plans to become a universal
bank (a universal bank has business in banking, insurance and in security).
For a bank with more than 13,000 branches all over India, this would be a
natural expansion.
In the first round of license issue, the SBI was absent. There were several
reasons for this delay. First, the SBI was seeking a foreign partner to help
with new product design. Second, it did not want the partner to become
dominant in the long run (when the 26% foreign investment cap is
Bancassurance as a Strategic Management Tool

eventually lifted). It wanted to retain its own brand name. It wanted a

partner that is well versed in the universal banking business. This criterion
ruled out an American partner where underwriting insurance business by
banks has been strictly forbidden by law (although with the passage of the
Gramm-Leach-Blily Act, this is not quite as drastic as before). Cardiff is
the third largest insurance company in France. More than 60% of life
insurance policies in France are sold through the banks.
The Reserve Bank of India (RBI) needed to clear participation by the SBI
because in India banks are allowed to enter other businesses on a “case by
case” basis. The SBI entry is groundbreaking for several reasons. This was
the first for an Indian bank to enter the insurance market. Second, even
though the regulators have said that banks would not (generally) be
allowed to hold more than 50% of an insurance company, the SBI was
allowed to do so (with a promise that its share would be eventually
diluted). Ever since the entry of the SBI, a number of other insurance
companies have declared their desired banking partners. In this process,
both life and non life companies have tied up with banks.
Specifically, HDFC Life Insurance is tied with HDFC Bank, ICICI
Prudential with ICICI Bank and so on. The second striking feature of the
table is the proliferation of banks partnering with single insurance
companies. Given that there are only two dozen insurance companies and
hundreds of banks, this outcome is to be expected.
Bancassurance as a Strategic Management Tool

Moreover, insurance companies are targeting different market segments by

affiliating with banks that do niche banking. Take the example of Aviva.
Aviva has evolved a three-layered strategy. The first layer is a tie-up with
ABN Amro and American Express. It caters to high net worth urban
customers. The second layer is a tie up with Canara Bank. Through this
nationalized bank with 2,400 branches, it reaches customers across the
length and breadth of the country. The third layer, at a regional level, a tie-
up with Lakshmi Vilas bank focuses on the region specific customers. This
tie-up helps them reach customers in rural and semi-urban centers in Tamil
Nadu and Andhra Pradesh. The third feature is best illustrated by an
example. Allianz Bajaj does not have the same banking partners for the life
sector as in the non-life sector. These two lists do not match. The same is
true for several other companies.
Some banks appear to have tied up with several insurance companies. For
Example, Citibank appears in the list of a number of lives as well as in the
non-life Insurance company lists. This fact will become important as the
warning of the RBI that banks “should not adopt any restrictive practice of
forcing its customers to go in only for a particular insurance company”
become an issue in the future.
The most recent addition to the list is the Oriental Insurance Company. In
January 2004, it declared that it would distribute insurance policies through
the post offices after it announced a joint venture with the Department of
Posts. Given that the post offices have unprecedented reach around the
Bancassurance as a Strategic Management Tool

country with 155,600 branches, it could distribute policies to the customers

even in very remote areas. The Department of Posts is the only institution
with a reach bigger than the banks in India.
There are several other banks in the pipeline for the approval of the IRDA.
They Include the Punjab National Bank, the Principal Group and Vijaya
Bank. Two of them are well-established banks in India. The Principal
Group, an international financial institution, is mainly in pension business
around the globe. In India, it is likely to enter in a partnership with a bank
with national distribution network in order to ramp up pension products
once pension becomes deregulated in India.
The latest group to receive an outright charter for operating insurance
operation is Sahara Group (on March 5, 2004). Sahara’s entry is notable for
two important reasons. First, Sahara is the only company to enter the
Indian market without any foreign partner. It thus becomes the only purely
domestic company to be granted a license to operate in the insurance
sector. Second, it operates the largest Non-Bank Financial Company in
India. It has over 50 million depositors. To put it differently, one in every
20 Indians has an account with Sahara. It serves the country through 1,700
establishments. Since the company is diversified, it can use multiple
channels for distribution of its product – not the least through its NBFC
Bancassurance as a Strategic Management Tool

Experience from other countries and their relevance for

Some important general points about Bancassurance experience in other

Banking habits:
Bancassurance tends to have greater influence where banking habits are
well entrenched. In Continental Europe, good examples can be found in
countries like France, Belgium, and the Netherlands. Customers there visit
their banks more frequently than in other countries.
In other markets, where securities markets dominate, Bancassurance
developments have been relatively mute. These also happen to be countries
with English Law origin: Australia, Canada, United Kingdom and United
States. However, it is not just those countries where bancassurance has not
taken large market share in Continental Europe. This is probably driven by
restrictive regulatory regime.
In India, banking is well spread both geographically and across different
socio-economic groups. In this respect, India is similar to Continental
Europe. India also owes its legal origin to the English system. Thus, it
shares some of the characteristics of the other Commonwealth countries
mentioned above. In addition, ownership of equity is relatively high
compared with the level of economic development. So far, regulation both
by the IRDA and the RBI has been accommodating.
Bancassurance as a Strategic Management Tool

Extent of development of insurance:

Where insurance is underdeveloped with low penetration, but there is a
strong banking branch network, insurers often using the banking reach as a
cheaper alternative to building from scratch. This has been the experience
in southern Europe (e.g., Spain, Italy). On this count, India comes out as a
mixed bag. There are over 1,000,000 insurance agents in India. Therefore,
it does not appear that India has to have an alternative distribution system.
However, the average number of transactions conducted by these agents is
very low (by international standards). A large proportion of them do not
have access to telephones or electricity, let alone computers. For some
companies, turnover of agents has become a disaster. Banks have more
resources in these regards.
Thus, banks could provide cheaper service (especially for simple products).
In other words, large market like India can sustain serving different market
segments through different channels of distribution.

Role of distribution system:

In some countries (e.g. Germany & Japan), companies have cross sharing
holding arrangements which assign separate roles to the Branch network
and the tied agency network. In India, cross-holding is practically non-
existent for regulatory reasons. Thus, this element is not very important.
Bancassurance as a Strategic Management Tool

Tax and pension structure:

Regulatory advantage - creation of products classed as life insurance. For
example, endowment type life policies have been sold extensively in
France. But they are closer to long term bank deposits rather than “true”
insurance products. Tax structure in the country may encourage this type of
products as well. To some extent, this is also true in India. On maturity,
payments are tax-exempt. There is also a small tax relief for premiums paid
in certain kinds of policies.
However, we have to keep this point in perspective. The proportion of
workers who pay taxes is very small (in the single digit). Therefore, the tax
advantage does not apply to a vast proportion of the population. Similarly,
pension is virtually non-existent in India (with the exception of workers in
the government sector). Thus, this discussion is academic in India.
However, in future, as the economy grows and becomes formalized, this
point will assume greater importance.
Bancassurance as a Strategic Management Tool

Bancassurance in Asia:

Mayans Life Insurance, incorporated in 1992, was established as a
dedicated bancassurance arm of Mayan of Malaysia. Mayans decided to
employ bancassurance and leverage on the bank’s brand name and branch
network to break the tight grip of a handful of large life insurers in the
Malaysian market. The highly integrated model employed (i.e., Maybank
Life Insurance as a subsidiary of Maybank bank) allowed the life insurers
exploit the customer base of its parent company (about five million
customers) through some 265 Maybank and 100 Mayban Finance
The company was able to pass on some of the cost saving to customers. It
has also Succeeded in using bank’s other capabilities like payment
services. In a similar fashion, Mayban General Assurance (Berhad) was
established later in a partnership with Fortis to distribute non-life insurance
(This example is taken from Sigma 7/2002).

The first phase of deregulation of bancassurance in Japan began on April
1, 2001.The range of products that banks are allowed to distribute was
expanded from October 1, 2002. One of the first products that banks were
Bancassurance as a Strategic Management Tool

allowed to sell was credit life insurance. Banks are now allowed to
distribute personal pension insurance, asset formation insurance, individual
life annuity and accident insurance, and personal accident insurance. All of
this is expected to translate into a bancassurance boom in Japan. In many
Asian countries, bancassurance has become an important channel but,
unlike in some countries in Continental Europe (e.g., Portugal, France,
Spain, Belgium), It has not become the main channel of distribution of
insurance. Countries with relatively high bancassurance share of life
insurance distribution are Hong Kong (25%), Singapore (15%), Thailand
(12%) and Malaysia (11%) in 2001 (data taken from Leo Puri’s
presentation at the Swiss Re CEO Summit). In other countries in the
region, such as China, Indonesia and the Philippines, the share of
bancassurance was rather small (5% or less in 2001). Key driver of
bancassurance elsewhere in Asia has been the following. Banks are seeking
ways to raise additional earnings without commitment of additional capital
in a low interest rate environment; increased competition; reducing margin.
Insurance Companies are seeking new customers using new distribution
activities to reach such segment. As noted above, the biggest driver in India
is different at present: banks are seeking an alternative method of
redeploying their surplus workers. Of course, this is a one time only
Bancassurance as a Strategic Management Tool


Bancassurance as a Strategic Management Tool


9 Japan
Life Insurance Premium as %GDP 8

7 South Korea
Hong Kong


China Thailand

Oman Kuw ait Emirates
100 1000 10000 100000
GDP/capita (US$)

Sailient Feature About Bancassurance in ASIA……..

Asia consists of different markets with very different cultures, political

systems and Regulatory environments…..

• Increasing regulatory support for the development of Bancassurance.

• High interest from banks and insurance companies.

• Entering into untapped market potential not covered by current

Distribution channels and product offering.

• Trend from agency distribution into multi-distribution.

• Bancassurance started to grow after the Asian crisis as a contributor to the

Fee- based income of the bank.

Bancassurance as a Strategic Management Tool

• Bancassurance challenges the established market of agency distribution.

• India and China still face limited top down control of the bank branches –


Bancassurance in India
Bancassurance in India is a very new concept, but is fast gaining
ground. 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.

Bancassurance -- Will the customer really benefit?

The opening up of the insurance sector is a reality, and the Insurance

Regulatory and Development Authority (IRDA) has licensed three players.
It is natural that banks, which deal with the public on a day-to-day basis,
Bancassurance as a Strategic Management Tool

think of entering this sector. In fact, in April, the RBI approved, and issued
guidelines for, the entry of banks into the insurance sector. The guidelines
permit any scheduled commercial bank to undertake insurance business as
an agent of insurance companies, on a fee basis, without any risk
participation, while banks wishing to set up joint ventures to undertake
insurance business with risk-participation have to satisfy the eligibility

Normally, the maximum equity a bank can hold in a joint venture is 50 per
cent of the insurance company's paid-up capital. The RBI may, however,
selectively permit an initial higher equity contribution by a promoter bank,
pending divestment of equity with in the prescribed period. Thus, the SBI
has been allowed equity participation of 74 per cent in its joint venture.
The eligibility criteria also stipulate that as on March 31, 2000 the bank's
net worth should be not less than Rs 500 crore, the CRAR not less than 10
per cent, and the level of NPAs reasonable. Vysya Bank has entered an
agreement with the Netherlands major ING Insurance, while Centurion
Bank has tied up with Canada Life.

Financial majors such as the UTI, ICICI, IDBI, and HDFC extended the
scope of their services by opening up banks, and their performance is
encouraging enough to extend activity on similar lines. Thus, banks and
insurance companies can together create an integrated financial services
group, providing customers one-stop financial shopping.
Bancassurance as a Strategic Management Tool

The LIC and the GIC have reportedly approached the Centre for licenses to
offer their customers banking and allied services. When banks, insurers and
financial conglomerates come together, as is increasingly happening,
exploiting the cross-selling potential of the enlarged group is usually stated
as the primary goal. This, the emerging bank-insurer claims, will create
lucrative revenue synergies and generate increased profits for the
stakeholders. To achieve success, the bank-insurance entity
needs to focus on a multi-brand, multi-distribution channel.
The optimum synergy is to have an overall umbrella brand for the group
that endorses the various product and distribution channel brands
throughout the organization.

This strategy encourages the provision of individualized services with the

back-up of the large financial group, and makes it easier to sell different
products through different channels. For instance, a complex unit-linked
life insurance product is better sold through brokers or agents, while a
standard term product can be handled by bank branches; bancassurance
can, at best, sell such simple products as auto insurance, home loan and
accident insurance cover.

On the critical question of cross-selling, the aspirations of banks and

insurers cannot be over-ambitious, as experience in other countries
indicates that, in general, financial institutions have not achieved great
success in cross-selling to their own customer base. The key to success in
Bancassurance as a Strategic Management Tool

this area is to have a customer overview and, thus, a common database

designed along customer, rather than product, lines. The future trends point
towards the banks (say, the SBI) grappling with the task of bringing
together the businesses of banking and insurance. What will be crucial is
the handling of the most important component the customer. As customers
become more aware, demanding and sophisticated, with fast-changing life-
styles, they want greater convenience in financial services. The emergence
of remote distribution channels, such as PC-banking and Internet-banking,
was a response to just such a demand for quick service.

In India, the main channel for insurance distribution is directly through an

agent. The dependence on direct-agent selling may continue as life and
pension products have long-term commitment and require advice.
However, possible fallout of bank-insurance synergy could be the
emergence of newer distribution channels seeking a market share in the

A quick glance at the global scene indicates that more banks are expanding
into non-life business, and that insurance companies are seeking banking
networks. The formation of the huge European financial conglomerates
Credit Suisse and Winterthur could be the first of a long line of new

In other countries, the all-finance concept is already at work. Instances are:

Caissons Desjardins in Quebec; Bradesco in Brazil; a very large financial
Bancassurance as a Strategic Management Tool

group, Lippo, in Indonesia and Malaysia; and the Bank of Bangkok group
in Thailand. Is all-finance the only possible avenue for insurance
development? While it is certainly one of the major ones, there are also
new developments in distribution channels, such as the Internet and

Recently, major American banks have again turned their attention to

insurance for a variety of reasons:

* Lure of high commissions.

* Presence of a large under-served market, and an inefficient distribution


* Hype about success of bancassurance in Europe.

Many of the banks understand that they are really in a `share-of-wallet'

business. They need to get more out of their customers' financial services
business before somebody else does.

Thus far, the renewed efforts of bank-insurance access on the life side have
not been too successful. Only a paltry 3 percent of all new life insurance
premiums are generated through banks and savings institutions, though the
Bancassurance as a Strategic Management Tool

banks have achieved varying success rates so far in marketing non-life

business. Substantial gains have been achieved in home-owner's insurance,
while the auto insurance business is encountering roadblocks.

Regulatory concerns:

In India, insurance, banking and securities are regulated by different

entities. And with sound reason too. They are fundamentally different
businesses with varying regulatory requirements though with one common
denominator -- the consumer. This could be the main reason why several
countries are moving towards establishing some sort of integrated
approach. Each industry provides personal financial services for millions of
customers who put their trust in the regulator. The regulators need to equip
themes elves to handle the emerging situation.

The IRDA regulations provide for the emergence of newer distribution

channels, such as bancassurance, the Internet, direct marketing and through
corporate bodies (non-insurance players). The expansion may be
advantageous to customers, but proper checks and balances must be in
place. Insurance, even when sold by banks or combined with other
products, is still insurance and needs to be regulated as such. There is a
definite need to preserve IRDA's authority over all insurance-related
Bancassurance as a Strategic Management Tool

`Modernization of financial services' is an intriguing phrase. It has been

heard repeatedly in Europe and the US over the last 10 years. Obviously,
India is also going through this phase. Countries are trying suitably worded
laws. Several amendments and guidelines have been made in the Insurance
Act, 1938 and in banking regulations to accomplish a smooth change-over
to the new situation. It seems clear that barriers which have long separated
the businesses of insurance, banking and securities are penetrable, though it
is still hard to tell how much the customers will benefit.

The big question that persists is whether banks, insurers and consumers are
ready for a fully integrated environment, and how it will change the
industry. Do banks and insurers really understand each other's businesses
well enough to seize the opportunities presented by the financial sector
reforms? The final word on such issues will be voiced by none other then
the consumer.

RBI guideline for banks entering into insurance sector

provides three options for banks.
They are:-

• Joint ventures will be allowed for financially strong banks wishing to

undertake insurance business with risk participation.
Bancassurance as a Strategic Management Tool

• For banks which are not eligible for this joint-venture option, an
investment option of up to 10% of the net worth of the bank or Rs.50
crore, whichever is lower, is available;
• Finally, 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.

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 the insurance activities.
• All the people involved in selling should under-go 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.

RBI Guidelines for the Banks to enter into Insurance

Following the issuance of Government of India Notification dated August
3, 2000, specifying ‘Insurance’ as a permissible form of business that
could be undertaken by banks under Section 6(1) (o) of the Banking
Bancassurance as a Strategic Management Tool

Regulation Act, 1949; RBI issued the guidelines on Insurance business for
1. Any scheduled commercial bank would be permitted to undertake
insurance business as agent of insurance companies on fee basis, without
any risk participation. The subsidiaries of banks will also be allowed to
undertake distribution of insurance product on agency basis.
2. Banks which satisfy the eligibility criteria given below will be permitted
to set up a joint venture company for undertaking insurance business with
risk participation, subject to safeguards. The maximum equity contribution
such a bank can hold in the joint venture company will normally be 50 per
cent of the paid- up capital of the insurance company. On a selective basis
the Reserve Bank of India may permit a higher equity contribution by a
promoter bank initially, pending divestment of equity within the prescribed

The eligibility criteria for joint venture participant

are as under:

I. The net worth of the bank should not be less than Rs.500 crore,
ii. The CRAR of the bank should not be less than 10 percent;
iii. The level of non-performing assets should be reasonable;
iv. The bank should have net profit for the last three consecutive years;
Bancassurance as a Strategic Management Tool

v. The track record of the performance of the subsidiaries, if any, of the

concerned bank should be satisfactory.

3. In cases where a foreign partner contributes 26 per cent of the equity

With the approval of Insurance Regulatory and Development
Authority/Foreign Investment Promotion Board, more than on public
sector bank or private sector bank may be allowed to participate in the
equity of the insurance joint venture. As such participants will also assume
insurance risk, only those banks which satisfy the criteria given in
paragraph 2 above, would be eligible.

(4) A subsidiary of a bank or of another bank will not normally be allowed

to join the insurance company on risk participation basis. Subsidiaries
would include bank subsidiaries undertaking merchant banking, securities,
mutual fund, leasing finance, housing finance business, etc.

(5) Banks which are not eligible for ‘joint venture’ participant as above,
can make investments up to 10% of the net worth of the bank or Rs.50
crore, whichever is lower, in the insurance company for providing
infrastructure and services support. Such participation shall be treated as an
investment and should be without any contingent liability for the bank.

The eligibility criteria for these banks will be as under:

i. The CRAR of the bank should not be less than 10%;
Bancassurance as a Strategic Management Tool

ii. The level of NPAs should be reasonable;

iii. The bank should have net profit for the last three consecutive years.

(6) All banks entering into insurance business will be required to obtain
prior approval of the Reserve Bank. The Reserve Bank will give
permission to banks on case to case basis keeping in view all relevant
factors including the position in regard to the level of non-performing
assets of the applicant bank so as to ensure that non-performing assets do
not pose any future threat to the bank in its present or the proposed line of
activity, viz., insurance business. It should be ensured that risks involved in
insurance business do not get transferred to the bank and that the banking
business does not get contaminated by any risk which may arise from
insurance business. There should be ‘arms length’ relationship between the
bank and the insurance outfit. Hoding of equity by a promoter bank in an
insurance company or participation in any form in insurance business will
be subject to compliance with any rules and regulations laid down by the
IRDA/Central Government. This will include compliance with Section
6AA of the Insurance Act as amended by the IRDA Act, 1999, for
divestment of equity in excess of 26 per cent of the paid up capital within a
prescribed period of time. Latest audited balance sheet will be considered
for reckoning the eligibility criteria.
Banks which make investments under paragraph 5 of the above guidelines,
and later qualify for risk participation in insurance business (as per
Bancassurance as a Strategic Management Tool

paragraph 2 of the guidelines) will be eligible to apply to the Reserve Bank

for permission to undertake Insurance business on risk participation basis.

Insurance Agency Business/ Referral Arrangement:

The banks need not obtain prior approval of the RBI for engaging in
insurance agency business or referral arrangement without any risk
participation, subject to the following conditions:
The bank should comply with the IRDA regulations for acting as
‘Composite corporate agent’ or ‘referral arrangement’ with Insurance
• The bank should not adopt any restrictive practice of forcing its
customers to go in only for a particular insurance company in respect
of assets financed by the bank. The customers should be allowed to
exercise their own choice.
• The bank desirous of entering into referral arrangement, besides
complying with IRDA regulations, should also enter into an
agreement with the insurance company concerned for allowing use of
its premises and making use of the existing infrastructure of the bank.
The agreement should be for a period not exceeding three years at the
first instance and the bank should have the discretion to renegotiate
the terms depending on its satisfaction with the service or replace it
by another agreement after the initial period. Thereafter, the bank will
be free to sign a longer term contract with the approval of its Board in
Bancassurance as a Strategic Management Tool

the case of a private sector bank and with the approval of

Government of India in respect of a public sector bank.
As the participation by a bank’s customer in insurance products purely on a
voluntary basis, it should be stated in all publicity material distributed by
the bank in a prominent way. There should be no ’linkage’ either direct or
indirect between the provision of banking services offered by the bank to
its customers and use of the insurance products.
The risks, if any, involved in insurance agency/referral arrangement should
not get transferred to the business of the bank.
Life Insurance Companies in India as at the end-March

Private Sector Companies:

1. Bajaj Allianz Life Insurance Co. Ltd.
2. Birla Sun Life Insurance Co. Ltd.
3. HDFC Standard Life Insurance Co. Ltd.
4. ICICI Prudential Life Insurance Co. Ltd.
5. ING Vysya Life Insurance Co. Pvt. Ltd.
6. SBI Life Insurance Company Limited
7. TATA-AIG Life Insurance Company Ltd.
8. Sahara India Life Insurance Co. Ltd.
9. Aviva Life Insurance Co India Pvt. Ltd.
10. Kotak Mahindra Mutual Life Insurance Co. Ltd.
11. Max New York Life Insurance Co. Ltd.
12. Metlife India Insurance Co. Pvt. Ltd.
Bancassurance as a Strategic Management Tool

13. Reliance Life Insurance Co. Ltd.

14. Shriram Life Insurance Co. Ltd.
15. Bharti Axa Life Insurance Co. Ltd.
16. Future generali life insurance co.ltd.

Public Sector Company:

• Life Insurance Corporation of India

Non Life Insurance Companies in India as at the end-March 2007

Private Sector Companies:

1. Royal Sundaram Allianz Insurance Co. Ltd.
2. TATA-AIG General Insurance Co. Ltd
3. Reliance General Insurance Co. Ltd.
4. IFFCO-TOKIO General Insurance Co. Ltd.
5. ICICI Lombard General Insurance Co. Ltd.
6. Bajaj Allianz General Insurance Co. Ltd.
7. HDFC Chubb General Insurance Co. Ltd.
8. Cholamandalam MS General Insurance Co. Ltd.
9. Star Health and Allied Insurance Co. Ltd.
10. Future generali insurance Co. ltd.

Public Sector Companies:

Bancassurance as a Strategic Management Tool

1. The New India Assurance Co. Ltd.

2. National Insurance Co. Ltd.
3. United India Insurance Co. Ltd.
4. The Oriental Insurance Co. Ltd.
5. Export Credit Guarantee Corporation Ltd.
6. Agriculture Insurance Company Ltd.

Bancassurance in India - A SWOT Analysis

In India, as elsewhere, banks are seeing margins decline sharply in their

core lending business. Consequently, banks are looking at other avenues,
including the sale of insurance products, to augment their income. The sale
of insurance products can earn banks very significant commissions
(particularly for regular premium products). In addition, one of the major
strategic gains from implementing Bancassurance successfully is the
development of a sales culture within the bank. This can be used by the
bank to promote traditional banking products and other financial services
as well.

Strengths • Huge number of people without life insurance

(91.73 million out of 1 billion had life insurance in
• Millions of people traveling in and out of India
Bancassurance as a Strategic Management Tool

can be tapped for Overseas Mediclaim and Travel

Insurance policies
• 200 million households waiting for householder’s
• Good range of products from LIC/GIC
• Good amount of R&D into insurance

Weaknesses • Not much IT initiative from leading insurance

players (LIC and GIC)
• Higher tax nets for the middle class
• No Tax exemptions for products like householder,
travel policies etc
• Inflexibility of the products
Opportunities • Bank’s database can help insurance companies
devise policies
• Better IT infrastructure from the bank’s side can
help integrating
Threats • Risks in integrating approach, thinking and work
• Non-response from target customers because
banks are considered as insurance company agents
by the customers
• Investors might suffer if the new rate of return on
Bancassurance as a Strategic Management Tool

capital is lower than the existing rate of return

Exhibit: Policies sold by Indian Insurance players via Bancassurance

Company % of policies
ICICI Prudential 15% in 2002, 30% in 2004
SBI Life 15% in 2002, 50% in 2004
Birla Sun Life 25% in 2002, 40% in 2004
ING Vyasa Life 10% in 2002
Aviva Life 50% in 2002, 70% in 2004
Allianz Bajaj Life 25% in 2003
Royal Sundaram Allianz 40% in 2002
HDFC Standard Life 10% in 2002, 40% in 2004
MetLife 25% in 2002

Long Term Drivers of Bancassurance in India:

The staffing problem has redirected some banks to Bancassurance and so
has the Reduction of bad loan problem. But, they are not the long term
drivers of bancassurance in India. The long term drivers in India are going
to be the following.
(1) The culturally more acceptable banking transactions. Banking does not
Bancassurance as a Strategic Management Tool

have the same stigma that (life) insurance carries. This factor will diminish
in importance over time as people become more educated.

(2) Banks can offer fee-based income for insurance sales. This can be
attractive under current rigid structure of wage benefits. At present, banks
are prohibited from offering commission to the bank employees for selling
insurance products. Banks have found ways to circumvent the problem. For
example, they offer "car allowance" for the employees selling insurance.

(3) Narrowing bank margins are another key driver.

(4) Banks have complementary products with insurance products such as

the auto insurance, home insurance or annuities.

(5) When the pension reform is undertaken (and it is in the works), banks
can become natural institutional vehicles for private pension products. In
some countries, banks are explicitly prohibited from selling pension
products (e.g., Australia). In some other countries, banks are the leading
private pension providers (e.g., Mexico).

(6) Healthcare insurance sector can also benefit from Bancassurance. In

India, only 2.5 million people have access to healthcare facilities. On the
Bancassurance as a Strategic Management Tool

other hand, 5% of personal income is spent on healthcare. Banks can

distribute and facilitate administration of healthcare insurance.

(7) In many countries, the absence of banks from selling insurance seems
to stem from regulatory reasons. In India, privatization of the insurance
sector signaled an accommodating approach from both the insurance
regulator and the banking regulator for banks entertaining the thoughts of
selling insurance.

India: American versus European Modalities

Looking forward towards 2020, with a more developed middle income
economy, India will have a bigger insurance market both in life and in non-
life. There are two developed country modalities that India might move to:
the Continental European Model and the American Model. Where is India
headed? The short answer: India is moving towards the Continental
European model. Why? The peculiar structure of the American model is an
outcome of longstanding firewall between banks and insurance companies
and a prohibition of expansion of business for both insurance and banks
across state lines. This overhang is absent in India.

Take the example of insurance business. There is no state by state limit of

insurance business. There are minimum business requirements for rural
areas. The fragmentation of both insurance and banking businesses in the
United States is a direct result of the Glass Steagall Act of 1933.
Bancassurance as a Strategic Management Tool

Nevertheless, it might be instructive to examine what succeeded in

America for The expansion of bancassurance business.

A survey by LIMRA identified the following ten elements for

success of bancassurance:

(1) Strength of the Brand.

(2) Sales Staff Management/Training.
(3) The Branch Network/Geographical Coverage.
(4)Bank and Insurance products form a complementary
(5) Single view of the customer.
(6) Focus on Customer Service/satisfaction.
(8) Use of Customer Relation Management Tools and
(9) Integration of the bank and insurance organizations
Producing a single culture.
(10) Providing advice/solutions, not selling products

( by Marielle Theron at the Swiss Re India CEO Summit, 2003).

Bancassurance as a Strategic Management Tool

How successful has the Bancassurance model been

in India?
There have been two broad classes of agreements between banks and
insurance Companies
. (1) Pure Distribution Agreements:
Under this class, there are two sub-classes of arrangements:
(a) Referral Arrangement and
(b) Corporate Agency Arrangement.
(2) Joint Venture Agreements:
There has been a range of such arrangements from loose to integrated form
of distribution partnerships. There has been a substantial growth of
bancassurance in India. Within two years, the share of bancassurance in the
insurance distribution business has gone from zero to 20% of new business
in the private sector. Provides us a sense of how rapidly Bancassurance is
growing in India. Some experts are predicting that within a decade, this
proportion could rise to 35% to 40%. There is evidence that policies sold
through Bancassurance add more value. In the July 2003 issue of the Asia
Insurance Post, the Mr. P. Nandagopal of Birla Sun Life was quoted as
saying, “The average size of the policy for the agency channel is Rs 19,500
Bancassurance as a Strategic Management Tool

per policy and for the Bancassurance channel it is Rs 39,000 per policy.”
Although such concrete numbers are not available industry-wide, there is
general consensus that bancassurance is indeed bringing in customers of
higher value.
Why Banks are highly motivated to Enter in
Insurance Business Now:

Why banks have an incentive to promote Bancassurance in India?

(1) Overstaffing problem can mitigated without resorting to drastic and
politically unacceptable solutions like large scale firing.

(2) Banks seek to retain customer loyalty by offering them an expanded

and more sophisticated range of products (than simple bank deposits of few

(3) Insurance distribution will increase the fee-based earnings of banks.

(4) Fee-based selling helps to enhance the levels of staff productivity in

banks. This is a key driver for raising motivation among bank workers.

Banks have some in-built advantages in some of these

(a) Banks can put their energies into the small-commission customers that
Bancassurance as a Strategic Management Tool

insurance agents would tend to avoid.

(b) Banks’ entry in distribution helps to enlarge the insurance customer
base rapidly. This helps to popularize insurance as an important financial
protection product.
(c) Bancassurance helps to lower the distribution costs of insurers. A study
by Tillinghast, Towers and Perrin in the UK shows that the cost of selling
insurance through direct sales force is approximately twice as high as the
cost of selling Through Bancassurance. However, the cost of selling the
products through independent financial advisers is approximately the same
as Bancassurance (quoted in Sigma 7/2002). Acquisition cost of insurance
customer through banks is low. Selling insurance to existing mass market
banking customers is far less expensive than selling to a group of unknown
customers. Experience in Europe has shown that Bancassurance firms have
a lower expense ratio. This benefit could go to the insured in the form of
lower premiums. Banks could have an important role to play in the pension
sector when deregulated. Banks can provide collection and payments of
pension contributions. Banks can also play a major role in developing a
viable healthcare program in India.
How Bancassurance advantageous 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.
Bancassurance as a Strategic Management Tool

• 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 eg: Term insurance products
with loans.

Advantages to insurers:

• Insurers can exploit the banks' wide network of branches for

distribution of products. The penetration of banks' branches into the
rural areas can be utilized to sell products in those areas.
• Customer database like customers' financial standing, spending
habits, investment and purchase capability can be used to customize
products and sell accordingly.
• Since banks have already established relationship with customers,
conversion ratio of leads to sales is likely to be high. Further service
aspect can also be tackled easily.

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
Bancassurance as a Strategic Management Tool

• Easy accesses for claims, as banks are a regular go.

• Innovative and better product ranges.

Some of the Bancassurance tie-ups in India are:

Insurance Company Bank
Bank of Rajasthan, Andhra Bank, Bank of Muscat,
Development Credit Bank, Deutsche Bank and Catholic
Syrian Bank
Canara Bank, Lakshmi Vilas Bank, American Express
Bank and ABN AMRO Bank

Union Bank of India

Lord Krishna Bank, ICICI Bank, Bank of India,

Citibank, Allahabad Bank, Federal Bank, South Indian
Bank, and Punjab and Maharashtra Co-operative Bank.

Corporation Bank, Indian Overseas Bank, Centurion

Bank, Satara District Central Co-operative Bank, Janata
Urban Co-operative Bank, Yeotmal Mahila Sahkari
Bank, Vijaya Bank, Oriental Bank of Commerce.

Karnataka Bank, Dhanalakshmi Bank and J&K Bank

Bancassurance as a Strategic Management Tool

State Bank of India

Karur Vysya Bank and Lord Krishna Bank

City Union Bank

National Insurance Co.
Royal Sundaram General Standard Chartered Bank, ABN AMRO Bank, Citibank,
Insurance Company Amex and Repco Bank.

South Indian Bank

Bank…… Insurance - Synergy

Synergy, as commonly defined is a mutually advantageous conjunction
where the whole is greater than the sum of the parts. Someone have very
thoughtfully conveyed – “Synergy lets you easily share a single mouse and
keyboard between multiple computers, each with its own display.” The
synergy that the world is witnessing in bancassurance is no different. The
synergy here allows sharing of the same distribution channel and networks
(mouse and keyboard) between banking companies and insurance
companies (multiple computers), each with different nature and variety of
product (display). The benefits that a bank can reap from this form of
Bancassurance as a Strategic Management Tool

alliance includes increased brand –equity, customer retention apart from

the revenues.

A. Fee-based income for bank – non-funds revenue:

Internationally, insurance activities contribute significantly to banks’ total

domestic retail revenues. Fee-based selling helps to enhance the levels of
staff productivity in banks. This is crucial to bring higher motivation levels
in banks in India. The revenue earned through Bancassurance alliances are
categorized as revenues through fee based income.
Such revenues are non-funds revenue and have an additional advantage to
the bank that it carries no capital reserve maintenance provision with it.
Similarly, increase brand equity and customer retention by becoming full-
service provider is something that every bank would care for. Off late, all
Indian banks are trying to increase their proportion of fee based income in
their total income. The trend is shown in this is because according to Basel
norms, the fee based income is risk-free and does not consume any capital.

B. Lower distribution costs:

Bancassurance has empirically proven to lower the distribution costs of

insurers by 22-23% due to high sales productivity. Selling insurance to
existing mass market banking customers is far less expensive than selling
to a group of unknown customers. Experience in Europe has shown that
Bancassurance as a Strategic Management Tool

Bancassurance firms have a lower expense ratio. This benefit could go to

the insured public by way of lower premiums. Further for any new entrant
in the insurance market, using the already established network and
infrastructure of banks makes mores sense than building the entire chain
from the scratch. Similarly, banks can put their energies into the `small-
commission customers’ that insurance agents would tend to avoid.

Use Bank’s database

for target segment

IT infrastructure of the Customizing product

bank (ATMs) to the customer

Benefits to the
insurance company

Structured sales
Larger customer base

More funds to deploy

into investment

Banks… Insurance - Synergy

C. Customer relationships:

Insurance companies lag far behind in terms of effective customer

relationship that they could maintain. The trust and esteem with which a
customer holds bank will not be same for an insurance company. Similarly
for banks, it gives them an opportunity to serve their existing customers
Bancassurance as a Strategic Management Tool

better. Increased brand equity and customer retention by becoming full-

service provider is something that every bank would care for.
There is now a need for explicit distinction between at least three customer
segments for Bancassurance:
 The traditional "mass market" Bancassurance
 Private Bancassurance (aimed at wealthy individuals)
 Corporate Bancassurance and SMEs (small to medium-
sized enterprises) to reach their employees.

D. Operational efficiency:

According to Boston Consulting group (BCG), the US banks were able to

capture 10-15% of investment and insurance markets by targeting 20% of
customers and operate at expense levels 30-50% lowers than those of
traditional insurers. One of the most important reasons 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 product can leverage
their distribution and processing capabilities for profitable operating
expense ratios. The ratio of expenses to premiums, an important efficiency
factor in insurance activities through Bancassurance is extremely low. This
Bancassurance as a Strategic Management Tool

is because the bank and the insurance company is benefiting from the same
distribution channels and people.

Business Models
The alliance between banks and insurance companies can be structured in
varied manners, depending upon the type of synergy one is looking for.
Corporate Agency Model is slowly gaining importance across various
nations because of ease in implementation and distribution of authority-
responsibility relationship. Insurance products wrapped around the bank's
deposit and loan products (Wrapper Model) are also gradually gaining in
popularity due to their simple product design while the referral model tie-
up has not been able to really take off. The options available to the banks

• Banks selling products of their insurance

subsidiary exclusively.

In this model, banks setups its own insurance subsidiary and sells its
insurance products. In this setup, the products of this insurance
subsidiary are not allowed to be sold by any other bank.

• Banks selling products of an insurance affiliate

on an exclusive basis.
Bancassurance as a Strategic Management Tool

In this model, the bank gets into an agreement with an insurance

agency and sells their insurance product to its existing customers. In
this setup also, the banks might get into an exclusive agreement with
the insurance company.
• Banks offering products of several insurance
companies as `super market.

Here the bank gets into agreement of selling insurance products of as

much insurance companies possible and sells it to its customers. Here
the customers can choose between wide ranges of products but the
insurance companies would not prefer this as their products would
not be always preferred.

(1) Corporate Broker model:

A corporate broker is effectively a principal corporate adviser to an
investment trust company. Here the bank is acting as a corporate adviser to
an insurance company. The broker would make a certain amount of money
from dealing commissions and market making and a great deal more from
relatively infrequent corporate deals. This relationship does not end up in
long term relationship or exclusive relationships between the bank and the
insurance companies.

(2) Corporate Agency Model:

Bancassurance as a Strategic Management Tool

In India, insurance companies prefer corporate agency tie-ups with banks,

as against referral arrangements. Another advantage for banks is that the
risk is borne entirely by the insurance company. The growth potential of
corporate agency system is immense because we can cross sell several
products to our customers. Insurance agents sell only insurance or mutual
fund products. Innovation of products is also possible under the corporate
agency arrangement.
This model is attractive for the banks as it offers handsome returns (up to
35% in the first year of new business procured) involves very low start-up
costs (investment in the time and licensing of employees) and the business
risk is underwritten entirely by the insurance companies. Insurance
products wrapped around the Bank's loan and deposit products have also
been gaining in popularity due to their mass appeal and simple product
design while the referral model tie-ups have not been that successful. A
few banks like Allahabad Bank and Bank of India have even migrated from
the referral model to the Corporate Agency model.

Traditional vs. Expanded Bancassurance Models:

In some markets, face-to-face contact is preferred, which tends to favour

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
Bancassurance as a Strategic Management Tool

competitive, due to the tangible cost benefits embedded in product pricing

or through the appeal of convenience and innovation.

Finally, the marketing of more complex products has also gained ground in
some countries, alongside a more dedicated focus on niche client segments
and the distribution of non-life products. The drive for product
diversification arises as bancassurers realize that over-reliance on certain
products may lead to undue volatility in business income. Nevertheless,
bancassurers have shown a willingness to expand their product range to
include products beyond those related to bank products.

Banks: The focal point:

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 65,700 branches of commercial banks, each branch
serving an average of 15,000 people. Out of these are 32,600 branches are
catering to the needs of rural India and 14,400 to semi-urban branches,
where insurance growth has been most buoyant. (196 exclusive Regional
Rural Banks in deep hinterland.) Rural and semi-urban bank accounts
constitute close to 60% in terms of number of accounts, indicating the
number of potential lives that could be covered by insurance with the
Bancassurance as a Strategic Management Tool

frontal involvement of banks. Further still banks sell a very small portion
of the products. This means there is a huge scope of banks selling
insurance products. A study conducted in US shows that people are willing
to buy insurance products from their banks as they consider banks as a
single point of buying all financial products. Further there is a severe need
of insurance for agriculture and other insurance products like health
insurance in the rural areas. Insurance companies would not be able to
establish their sales force in rural areas. As banks already have a strong
foothold, it would be hugely beneficial for the insurance companies.


Bancassurance as a Strategic Management Tool

Bancassurance – global perspective:

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
Bancassurance as a Strategic Management Tool

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.

The following table compares the issues related to Bancassurance in

India with Europe and Asia (general):
Europe Asia (general) India
Regulation Liberalized Ranging from Supportive
liberalized to
Mature markets High growth
Market growth High growth
but pension potential
reforms can spur
growth in the
life insurance
Highly integrated Mostly Distributive
models distribution
Bancassurance alliances and
model ventures
Tax concessions Squeeze on
Major drivers Tax free status
for life bank
insurance margins on maturity
premium paid
Squeeze on bank Insurers’ Small tax relief
margins growing cost
pressure and on premium
desire to
expand Narrowing bank
capability margin
Bancassurance as a Strategic Management Tool

companies use
to enter
Asian market

Products Mainly life Mainly life Mainly non-

insurance products insurance
to maximize tax products linked unitized
benefits to bank
Mostly single services and Regular
increasingly, premium
geared towards
Distribution Multi-bank Mainly bank Bank branches
branches branches
Major players Domestic banks Foreign Commercial
and insurers companies are banks & insurer
playing an

Sophistication High Varied Low

Bancassurance as a Strategic Management Tool

In several countries in LatinAmerica, 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 Glass-Steagall Act was repealed after the passage of
the Gramm-Leach-Bliley Act Factors affecting growth in a country.
 The most crucial success factor is undoubtedly the legal and fiscal
environment of the country concerned. National regulations play a
major role here which was illustrated in Italy with the Amato Law
authorizing banks to invest in insurance companies. Conversely, the
Glass-Steagall Act slowed down the phenomenon in the United

Secondly, tax advantages encouraging personal savings: in France this

was one of the crucial factors of success.
Bancassurance as a Strategic Management Tool

Lastly, cultural and behavioral factors: the good image of banks, their
privileged relationship with customers and the proximity of banking
networks as in France, Spain, Italy and Belgium. In countries where
Bancassurance has met with little success, such as the United
Kingdom or the United States, visiting the bank often does not come
naturally to customers.

Emerging trends, opportunities and challenges
According to a recent sigma study, Bancassurance is on the rise,
particularly in emerging markets. Worldwide, insurers have been
successfully leveraging Bancassurance to gain a foothold in markets with
low insurance penetration and a limited variety of distribution channels.
Bancassurance, the provision of insurance services by banks, is an
established and growing channel for insurance distribution, though its
penetration varies across different markets. Europe has the highest
Bancassurance penetration rate. In contrast, penetration is lower in North
America, partly reflecting regulatory restrictions. In Asia, however,
Bancassurance is gaining in popularity, particularly in China, where
restrictions have been eased. The research shows that social and cultural
factors, as well as regulatory considerations and product complexity, play a
significant role in determining how successful Bancassurance is in a
particular market.
Bancassurance as a Strategic Management Tool

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. 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.
Bancassurance: Emerging Trends

Though Bancassurance has traditionally targeted the mass market,

bancassurers have begun to finely segment the market, which has resulted
in tailor-made products for each segment. The quest for additional growth
and the desire to market to specific client segments has in turn led some
bancassurers to shift away from using a standardized, single channel sales
approach to adopting a multiple channel distribution strategy. Some
bancassurers are also beginning to focus exclusively on distribution.
Wealth management, pioneered by Assurance has found its way in
Bancassurance alliances. Termed as Private Bancassurance, 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 as a medium of selling insurance products, Bancassurance moved
Bancassurance as a Strategic Management Tool

from second position in 2004 to first position in 2006. Worksite marketing

which was in the top position in 2004 fell to fourth position in 2006.
Bancassurance moved from second position in 2004 to first position in
2006. Worksite marketing which was in the top position in 2004 fell to
fourth position in 2006.
Banks’ insurance sales are high in countries where the products tend to be
relatively simple and are a natural fit with banks’ existing products. The
life insurance products most successfully sold by bancassurers are mostly
simple-deposit-substitutes such as single-premium unit-linked or
capitalization products. In France, financial institutions accounted for 66%
of single premium unit-linked life business in 2005. In general,
bancassurers have been less successful in selling more complex savings
products such as pensions.
Manhattan consulting group in its survey has found positive co-relation
between number of products an institution deal in an the attrition levels. It
showed that with increase in product count, the attrition level tends to
decrease sharply as the employee engagement increases.

Quantum of products Attrition

One Product (interest bearing account) 27%
One Additional product 20%
2 or more products 17%
Bancassurance as a Strategic Management Tool

Bancassurance: The 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 ’00, 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.

Sales front:
Bank employees are traditionally low on motivation. Lack of sales culture
itself is bigger roadblock than the lack of sales skills in the employees.
Bancassurance as a Strategic Management Tool

Banks are generally used to only product packaged selling and hence
selling insurance products do not seem to fit naturally in their system.

HR issues:
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.

Public and private divide:

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.

In the past, Dena Bank, which had originally partnered Kotak Mahindra
Life, switched loyalty to the public sector Life Insurance Corporation? So
did Allahabad Bank, which had a tie-up with ICICI Prudential Life
Insurance. Punjab National Bank and Vijaya Bank have been forced to
Bancassurance as a Strategic Management Tool

drop their Bancassurance partnerships after they chose to set up an

insurance broking JV.

Group companies dilemma:

The other conflict that most insurers face is when they have a bank within
their own group. Half of the insurance firms in India are part of a financial
group that has a bank. They include ICICI Bank, State Bank of India, ING
Vysya, HDFC, Jammu & Kashmir Bank, and Kotak Mahindra Bank.
According to Mr. Rajesh Relhan, (Head of Bancassurance) Aviva Life,
there is a fear among banks that at some point in future their insurance
partner may end up cross-selling banking services to their policyholders.
Besides, companies that sells predominantly through agents experience
channel conflict when both agents and banks target the same customer.

Bancassurance : Operational Challenges

The developments in the 21st century, particularly due to increase in non-

life insurance products pose further problems to the Bancassurance

• The shift away from manufacturing to pure distribution requires banks

to better align the incentives of different suppliers with their own.
Bancassurance as a Strategic Management Tool

• Increasing sales of non-life products, to the extent those risks are

retained by the banks, require sophisticated products and risk
• The sale of non-life products should be weighted against the higher
cost of servicing those policies.
• Banks will have to be prepared for possible disruptions to client
relations arising from more frequent non-life insurance claims.

Bancassurance to Banc-sec-urance : A step towards

Universal Banking

Securities business seems an automatic extension to bank and insurance.

This integration will be a step further towards universal banking and would
leverage the efficiencies developed by alliance of banks and insurance
companies. It will be for customers who want to get a one-stop shop for all
financial products. So the banks should transform themselves to a
wholesome entity. This has to be integrated with the internet banking and
other IT infrastructure, for e.g. customers should be able to pay insurance
premium, margin money on security transaction via the Net-banking
facility and the ATM network.

a. Involvement of Co-operative banks:

Bancassurance as a Strategic Management Tool

Insurance industry has very low penetration rate in India. The market and
scope in rural India is immense and largely untapped. The insurance
companies should actively try to involve co-operative and regional rural
banks amongst their potential alliances along with the big and
multinational banks. These co-operative banks will have greater reach in
villages of rural India and will also operate at economic cost.
b. Minimize conflicts of interest between the bank and the

A formal and standard agreement between these banks and the insurance
companies should be taken up and drafted by an national regulatory body.
These agreements must have necessary clauses of revenue sharing. In case
of possible conflicts, the bank management and the management of the
insurance company should be able to resolve conflicts amicably. If they are
not solved, there can be a apex body set up by IRDA to solve these types of
issues. This could be done by…
 Setting up distribution procedures consistent with the manual systems
in most banks.
 Establishing credible service level agreements between the bank and
the insurer.

c. Involvement of senior bank management and skill

development at the operating level at bank branches:
Bancassurance as a Strategic Management Tool

The Bancassurance alliances should be taken up at the top management

level. Such strategic actions require the senior management support not
only during the decision stage but also at the time of implementation. Their
active participation in the process is very much necessary for the success of
such initiatives. The employee base that would be interacting with the
insurance customers should also be properly trained in order to equip
themselves with the skills required in selling insurance products. The bank
employees would not be aware of these selling skills if proper training is
not given.

d. Bancassurance and pension sector:

Pension sector is at the verge of being deregulated. Once this sector is

deregulated, banks would get the dual benefits of managing these huge
pension funds and the opportunity to sell mainly health insurance products
to these pension sector customers. Low cost of collecting pension
contributions is the key element in the success of developing the pension
sector. Money transfer costs in Indian banking are low by international
standards. Portability of pension accounts is a vital requirement which
banks can fulfill in a credible framework.

e. Focus on Group insurance schemes:

Considering the behavior of the Indian customers, group insurance is the

way to go about. As joint accounts or individual accounts of families are
Bancassurance as a Strategic Management Tool

very prominent, we will have to sell these insurance products to these

members of the family as a group.
This would be easier in terms of collection of premiums as 1 or 2 members
of the family would be working and linking insurance premiums from these
savings/ salary accounts would be easier and hassle-free.

f. Targeting frequent travelers (travel insurance):

In India, though some of the airlines have travel insurance, there is no

income from these frequent travelers. As frequent travelers are targeted by
these airlines by giving confessional fares, banks can sell them travel
insurance at some confessional premiums. This would be additional
revenue to the insurance company as well.

g. Tie-ups with residential complex builders:

(Householder’s insurance)

House loans and householder’s insurance can be linked. Banks have huge
exposures to house loans. Now as far as the customers are concerned, they
would prefer householder’s insurance also as a package along with the
house loans. The collection of premiums would also not be a problem.
Normally these customers give post-dated cheques. Therefore premiums
can also be collected in the similar fashion. Some concessions to the
customers can be given like extension of payment period etc. Insurance in
Bancassurance as a Strategic Management Tool

business activities can also be targeted as banks have considerable

exposure to corporate loans.

h. National level healthcare programme:

Banks can play a major role in developing a viable healthcare programme

in India. Only 2.5 million people have access to healthcare facilities. There
is a growing demand for healthcare products which banks can distribute
(and facilitate administration). Banks would be the best medium to
distribute health insurance plans and create awareness among the people.
The Government of India and its planning commission can leverage this
Bancassurance concept to launch a nation wide healthcare programme.

Bancassurance: Future outlook :

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. In
emerging markets, new entrants have successfully employed
Bancassurance as a Strategic Management Tool

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.

New Business (Life) Undertaken under various

intermediaries (2005-2006)

Corporate Direct
Individual Brokers Referrals
Insurers Agents Business
Banks Others
1 2 3 4 5 6 7
59.71 16.87 8.92 0.83 7.06 6.61
LIC 98.37 1.25 0.32 0.06 0.00 0.00
Total 85.67 6.38 0.31 0.31 2.32 2.17


Will bancassurance click?

Bancassurance, the much talked about channel of insurance

distribution through banks that originated in France and which has
been a success story in Europe is yet to take off here. A number of
insurers have already tied up with banks and some banks have
already flagged off bancassurance through soft launches of select
Bancassurance as a Strategic Management Tool

risk products. While reams have been written about the numerous
benefits of bancassurance considering the wide scale availability of
risk products it will enable, rules and regulations regarding the
same are yet to fall in place.

Fee based income:

For banks, bancassurance would mean a major gain. Since interest

rates have been falling and profit on off take of credit has been low
all banks have been able to do is sustain them but not profit much.
Enter bancassurance and fee based income through hawking of risk
products would be guaranteed.

Unique strategies:

Before taking the plunge, banks as also insurers need to work hard
on chalking out strategies to sell risk products through this channel
especially in an emerging market as ours. Through tie-ups some
insurers plan to buy shelf space in banks and sell insurance to those
who volunteer to purchase them. But unless banks set up a trained
task force that will focus on hard-selling risk products, making much
headway is difficult especially with a financial product that is not so
easily bought over the counter.

Identifying Target audience:

Besides, identifying the target audience is yet another important

aspect. Banks have a large depositor base of corporate as well as
retail clients they can tap. Talking of retail clients the lower end and
middle-income group customers constitute a major chunk who have
over a period of time built a good rapport with the bank staff and
thus hold big potential for bancassurance.

Reduced costs:
Bancassurance as a Strategic Management Tool

While products such as retirement planning will involve an

elaborately worked out plan with the help of a financial advisor,
simple products such as an accident cover in other words pure risk
products will be sold through this channel enabling savings on
solicitation costs of these products. So will insurers pass on a part
of the gains on cost saving (saving on agent training etc) to
customers? Also there are no immediate plans to redesign products
to suit the bancassurance channel but banks are gung-ho about
cross-selling products.

Legal issues:

Conversely, the Insurance Regulatory Development Authority

(IRDA) has adopted a cautious approach before Bancassurance is
flagged off. While on the one hand it is an economical proposition to
sell risk products through the numerous bank branches spread
across the country the fact that claim settlement disputes take an
unusually long time in our country is one of the causes for worry. In
such a situation will banks be in a position to fight for the cause of
their clients is a major concern? Besides regulatory authorities for
both - banks and insurance companies are different. Moreover,
banks may have to part with confidential information about their
clients. Now where should banks draw a line?

• Banking on bancassurance

Though much ado was made about bancassurance, an alternate

channel to hawk risk products through banks, the channel is yet to
pick up pace as of today. Most of the insurance companies have
already tied up with banks to explore the potential of the channel
that has been a success story in Europe and legislations are also in
place. For insurance companies and banks the convergence brings
Bancassurance as a Strategic Management Tool

about benefits for both but then what's stopping it from taking off in
a big way?

Bancassurance primarily banks on the relationship the customer has

developed over a period of time with the bank. And pushing risk
products through banks is a cost-effective affair for an insurance
company compared to the agent route, while for banks, considering
the falling interest rates, fee based income coming in at a minimum
cost is more than welcome.

SBI Life Insurance Company a predominant player in bancassurance

is positive about the channel bringing about a transformation in the
way insurance has been sold so far. The company is banking heavily
on bancassurance and plans to explore the potential of State Bank
of India's 10000 plus branches spread across the country and also
its 4500 plus associate banks - one of the reasons why SBI Life
Insurance is not laying much emphasis on increasing its agent force
from the present 3000.

The company plans to appoint Certified Insurance Facilitators (CIFs)

in a phased manner. For now around 320 CIFs, one from each of its
bank branches have been identified for the purpose in addition to
setting up insurance counters at its banking outlets. The number is
expected to go up to 500. 'Out of our present business of around Rs
150-200 crore bancassurance has brought in 50 percent while
corporate agency and the agent channel have contributed about 10
percent and 40 percent respectively', says Pradeep Pandey, Head,
PR, SBI Life Insurance Company. The company aims at acquiring 75
percent of the total business through bancassurance and the
balance through the other channels by 2007.

Various models are used by banks for bancassurance. One is the

insurance salesman of the respective company being posted in the
bank, the other is where a select group of wealth management
people of the bank sell insurance and the third is where the bank
employees are incentives to hawk insurance products.

But the pertinent question is how far will bancassurance succeed

Bancassurance as a Strategic Management Tool

when insurance is a product that is sold not bought in our country.

Insurance needs hard selling but banks have never been aggressive
about selling financial products. Says Pradeep Pandey' I agree that
in our country insurance awareness is low but with falling interest
rates, banks are on the look out for additional revenue and
bancassurance can provide them fee based income -insurance is
one outlet where income can be gained. And the cost that banks
have to incur is minimal. With the other entire infrastructure in
place already, the cost is only about training a few individuals'.

And will products sold through bancassurance be any different? 'The

products sold will be the same. In the first phase we plan to sell
endowment and pension' opines Mr. Pandey, SBI Life Insurance. On
the contrary Shivaji Dam, CEO, OM Kotak Mahindra Life Insurance
begs to differ,’ Yes products will have to be different to be sold
through bancassurance. They will have to be term and savings
products with not much of complications. In other words products
that are static and simple'

OM Kotak Mahindra Life Insurance has tied up with Dena Bank and
its own Kotak Bank for bancassurance. The company is targeting
around 10 percent of the business during its start up phase. Adds
Shivaji Dam,' Our focus will not be the affluent class but the middle
class' But in case of SBI Life there is no such emphasis on a
segment of the population perhaps considering the wide reach its
bank branches have even in the remotest corners of the country.
Also SBI Life plans to offer its complete basket of products but OM
Kotak will be selling select products.

Insurers are no doubt optimistic about the channel but it does come
with a few limitations. Sale of insurance comes at a lower cost
through this channel in comparison to the agency route and the
insurance company gains much through the large bank network
spread across the country but the potential can be impeded if bank
officials do not actively generate leads.

Also it is yet to be seen how far buying shelf space in a bank helps
Bancassurance as a Strategic Management Tool

push sale of insurance. Besides the target audience is limited to

those individuals who visit the bank during the working hours. And
with technology changing at a rapid pace ATMs and internet banking
have been reducing the individual's visit to the bank which could
perhaps be a dampener for bancassurance.

Insurance companies are positive about the bancassurance channel

raking in volume business at a low cost and banks have been
salivating over the fee based income that it will bring. But unless
products are simple, easy to understand and easy to market the
benefits the bancassurance channel.

Bancassurance model pays off for SBI Life

As the MD and CEO of SBI Life — the first private life insurance company to
break even since privatization -Mr. S. Krishnamurthy has proved his
detractors wrong about the viability of the bancassurance model.
Bancassurance has been cost-effective and helped the company make profits
for the first time.

The way ahead for SBI Life, according to Mr. Krishnamurthy, is to strengthen
the penetration of bancassurance through a proposed Rs 40-crore IT project
across bank branches. The CEO projects a growth of 150 per cent in new
business premium and the company will hike its capital base by Rs 100 crore in
the second half of the year. Excerpts from an interview:

What are the challenges ahead for SBI Life?

We aim to strengthen the bancassurance model through the branches of State

Bank of India and other associate banks we have tie-ups with. Currently, SBI
Life products are being sold in over 6,500 branches of the State Bank Group -
around 1,500 branches are selling individual policies and another 5,000 group

Bancassurance is the company's key distribution channel, contributing over 43

per cent to the total premium o, at Rs 470 crore for the financial year ended
March 31, 2006. This year we hope to increase that to 50 per cent.
Bancassurance as a Strategic Management Tool

What is the strategy to increase the contribution of bancassurance

to 50 per cent?

We have to increase the penetration in each of the branches. For instance, if a

branch has 5,000 customers, currently we would have tapped about 80-100
customers. The idea is to increase this to 1,000 to 1,500 customers.

Towards this end, we are working on an intranet model along with SBI to
provide on-line sales support to the bank staff. At the touch of a button,
`bancassurance - online', will offer bank staff access to product knowledge,
FAQs, premium calculators and sales illustrations. So, he or she would
immediately be able to answer the customer queries. This will also help them
mine customer data and identify which product would be appropriate for the
client. The estimated investment in this first-of-its-kind project is around Rs 40
crore. The pilot will be launched shortly.

What are your expansion plans for the other distribution channels?

We are planning to grow our retail agency from 8,000 to 25,000. This agency
force will be devoted to high net worth individuals and will sell policies of a
bigger ticket size. Bigger policies would mean that the annual premium size for
traditional policies would be around Rs 10,000 and in the case of unit-linked
plans, it would be around Rs 25,000 to Rs 30,000. SBI Life branch network will
be expanded from 60 to 150 this year.

Which are the new products you will introduce this year?

We will be introducing around three or four pension products in the unit-linked

version. We will also plan unit-linked group products for corporate in the
pension and superannuation segment.

ULIPs constituted 25 per cent of the product portfolio last fiscal. This year we
expect to increase that to 50 per cent. We are currently seeing a good demand
for ULIPs with equity funds as the main component. SBI Life has been
educating its customers to stay invested in the equity market for the long term
and not get panicky about temporary aberrations.

What is your business target for the year? Will you infuse more
capital this fiscal?

We expect our new business premium to grow by 150 per cent and touch
around Rs 2,500 crore by the end of the fiscal. Our profit should grow to a
double-digit figure from last year's Rs 2 crore.
Bancassurance as a Strategic Management Tool

The company's capital base of Rs 425 crore will be hiked by another Rs 100
crore in the second half of the year to meet growth requirements.

The insurance penetration in India is very low. So can

bancassurance improve the situation?
Bancassurance is one mode which can definitely improve the insurance reach
especially in the rural areas. For a new insurance company, setting up a large
reach is quite expensive. Bancassurance is an automatic way of getting the
reach at least cost. This is a very strong model suggested for penetration.

But till today in Asia, as per statistics, 91% of the insurance is done through
agents. This is because people here still believe in face to face interaction
rather than on paperless interaction. As an alternative to the face to face
interaction, banks would be able to sell insurance products better.
Bancassurance has a good potential to grow in India. They have been quite
successful with life insurance products the world over as compared to the
general insurance products. This is because life is more akin to investment. The
customer is likely to pick it up faster than non returnable non-life insurance.

Reach can come through the brokers also. The broker institution has come to
India only three years back. I feel the brokers can have more work when the
markets get de-tariffed. They can appoint more sub-brokers, which is another
way to increase penetration.

M. Ramads,
Chairman and Managing Director of Oriental Insurance Company Ltd

LIC to sell products through banks

Bancassurance as a Strategic Management Tool

LIFE Insurance Corporation of India has approached commercial banks to

appoint them as their corporate agents.

Mr. G. Krishnamurthy, Chairman, LIC, told Business Line that he had written to
several banks asking them to join LIC as distributors of its products. ``We are
awaiting their response,'' he said.

According to him, there are banks which may not be willing to enter the life
insurance sector directly. The RBI has allowed them to be distributors of
insurance products.

We certainly like them to be our distributors. The combined efforts of banks'

network and our expertise and our network could help us serve our customers
better,'' Mr. Krishnamurthy said.

Banks, however, will have to obtain license from the Insurance Regulatory and
Development Authority (IRDA) to be agents. They may also have to get
clearance from the Reserve Bank of India. The banks with a corporate agency
can in turn appoint their own individual agents for sales of products.

The RBI has recently issued draft guidelines for banks to enter insurance
business. According to Mr. Krishnamurthy, competition from banks and other
players is welcome as people can get more products and better service. LIC has
geared up to face such com petition.

Mr. Krishnamurthy said LIC proposes to come out with a new product _ Unit
Linked Insurance Product. There is lot of scope for such a product which will be
linked to the capital market. The corpus to this fund will be managed separately
with an expert grow up of fund mangers. The idea is to give customers a higher
yield for their investments, besides the insurance cover, he said.

Mr. Krishnamurthy said the consultants appointed by LIC are for suggesting an
organizational set-up and business strategy for the Corporation is expected to
submit its report by May 1. He said the corporation has been taking several
measures internally to improve its services.

LIC has recently beefed up its investment cell. Besides, the traditional
investment operations, the cell will undertake direct evaluation of projects for
equity participation. On an average LIC have Rs. 5,000 corers per annum for
Bancassurance as a Strategic Management Tool

investment infrastructure projects.

Mr. Krishnamurthy said LIC is exploring the possibility of entering the life
insurance business in Nepal, as part of its strategy to expand its international


1. R.Krishnamurthy, SBI Life Insurance, “Bancassurance in Insurance

Distribution: Key Issues in the Indian context”, FICCI seminar, October 2001

2. “Bancassurance in India: Who is tying the knot and why” CRIS, 2002.

3. Sigma report, “Bancassurance: emerging trends, opportunities and challenges”,

Swiss Re, 2007

4. Annual report, Insurance Regulatory and Development Authority, India

(IRDA), 2005-2006

5. News papers & Magazines.


Bancassurance as a Strategic Management Tool