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PART- I INSURANCE

Chapter 1- Introduction to Insurance [1.1] Insurance Sector during Post Reforms - A snapshot [1.2] Insurance Market in India - A Quick look

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Chapter 1 → Introduction to Insurance Insurance is an establishment, which eradicates risk and which replaces certainty for uncertainty. Insurance is a contract between insurer (insurance company) and the insured (whose life or assets are covered) under which the insurer agrees to reimburse the insured for the loss arising from the risk insured against. The term insurance can be defined in both financial and legal terms. In financial sense, “Insurance is a social device in which group of individuals (insured) transfers risk to another party (insurer) in order to combine loss experience, which permits statistical prediction of losses and provides for payment of losses from funds contributed (premium) by all members who transferred risk.” World over the idea of separation of roles between banks and other financial activities has become redundant. Even in the United States which was known for strict separation of banking and non-banking activities during the Glass-Steagall Act regime broke the dividing wall. The financial liberalisation and financial innovations have drawn the worlds of banking and insurance closer together, de-segmenting the financial industry and spurring competition. Therefore, banks dealing in insurance products have increasingly become accepted norm rather than exception.

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. The Reserve Bank of India being the regulatory authority of the banking system, recognising the need for banks to diversify their activities at the right time, permitted them to enter into insurance sector as well. India has a well entrenched wide branch network of banking system which only few countries in the world could match with. Page No - 2

[1.1] 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., 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 of the financial sector, particularly in comparison with the banking sector. 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 Nationalisation Act, 1972 (GIBA). The Progress in the overall developments in the insurance sector were 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.

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[1.2] Insurance Market in India - A Quick look

With the progress of reforms, Insurance market has been flooded with a number of players. As at end-March 2006, among the life insurers, there were 15 companies in private sector and Life Insurance Corporation of India (LIC) was the solitary public sector company. Among non-life insurers, nine 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. In terms of ‘insurance penetration ratio’ (defined as ratio of 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 population, 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.

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Part II BANCASSURANCE EVOLUTION Chapter 2 – Introduction to Bancassurance [2.1] Historical Developments of Bancassurance [2.2] Bancassurance Strategy – The Concept [2.3] Evolution of Bancassurance in India [2.4] Entering Into Bancassurance [2.5] Reasons for Banks to Enter Into Bancassurance [2.6] The Major Need Of Bancassurance In India

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Chapter 2 → Introduction to Bancassurance The banking and insurance industries have developed rapidly in the changing and challenging economic environment all over the world. Due to merging of global financial markets, development of new technologies, universalization of banking industries and with the expansion of non banking activities, the insurance industry has globally brought in new channels of distribution into existence. This has given rise to a new form of business wherein two big financial institutions have come together and have integrated all their strength and efforts to generate new means of marketing for encouraging their products and services. When these two join together it gives birth to “BANCASSURANCE”. Bancassurance is the allocation of insurance products through the huge network of banks whereby, banks act as a distribution channel for providing varieties of banking and investment products and services. In simple words we can say bancassurance tries to develop synergies between both ‐ insurance companies and banks. Banks see value in insurance business due to complementarity of products, fee income derived from the distribution of insurance and ease of recovery of advances in case of death of the borrower or destruction of properties. Several banks being promoters of the insurance companies also gain when valuation of those companies goes up due to synergies derived from bancassurance. The growth of bancassurance depends on how well banks and insurance companies are able to conquer the operational challenges that are frequently thrown at them. The need of the hour for the bancassurance business is to gather together new ideas, new development /advancement / improvement /evolution and work culture. It was initially a controversial issue in the some countries as many critics believed that this would give banking sector too good a control over financial services market. Therefore it was earlier restricted in many countries. But today, many countries have started accepting bancassurance in their market and have seen an incredible boom in this sector. Page No - 6

[2.1] Historical Developments of Bancassurance The concept of bancassurance was started in France in 1980’s and spread across different parts of Continental Europe, USA, and also in Asia, particularly in India. Banks started the process of selling life insurance decades ago and customers found the concept appealing. In Germany, bancassurance was called “ALLFIANZ” and it got well recognized in Europe also. In USA the practice was started in late 90’s. It is also on the rise in Canada, Mexico and Australia. Government of India, during its notification dated 3rd August 2000, has accepted insurance as an acceptable form of banking under the Banking Regulations Act 1949. The Reserve Bank of India too has approved bancassurance by allowing banks to offer physical infrastructure to insurance companies within the premises of some selected branches and allowing them to sell their insurance products to the bank’s customers. These banks in exchange earn referral fees based on the premium collected The companies keep diversifying their product portfolios, using established ‘incumbent’ networks to promote and distribute new product lines. Banks, too, have in the recent past adopted this strategy both in India as well as internationally. This is the phenomenon of ‘universal banking’ that builds on the principle of leveraging existing networks to broaden portfolio offerings. Change in regulatory regimes also facilitated this diversification.

This diversification of banking services has been driven by a number of factors, all of which have threatened bank profitability. In the US, the banks were earlier not allowed to sell insurance due to the restrictions imposed by Glass-Stegall Act of 1933, which acted as a wall between banking and insurance. As a result of this life insurance was primarily sold through individual agents, who focussed on wealthier individuals, leading to a majority of the American middle class households being under-insured. With the repealing of this Act in 1999, the doors were opened for banks to distribute insurance and cater to the large middle class segment.

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Daniel (1995) provided an analysis of how ‘bancassurance’ products have evolved, which reflects the way the concept of bancassurance itself grew. The analysis of Daniel is based on the French market with reference to other European countries. Daniel divided the evolution of bancassurance products into three periods.  In the first period, prior to 1980, banks sold insurance guarantees that were a direct extension of their banking activities, but were not associated with life insurance. For example, credit insurance was not regarded as bancassurance.  After 1980, savings products that benefited from advantageous tax regimes associated with life insurance flourished in the banking markets.  Around 1990, the supply of insurance products by banks became much more diversified in both life and general insurance categories. Figure 2 illustrates the diffusion of bancassurance over time. THE EVOLUTION OF BANCASSURANCE Prior to 1980

Products

Extension of banking

1980

Savings Products classified as Life Assurance

1990

Diversification of Supply: Pure Life & Complex Financial Products

The third period (around 1990), is considered crucial in the development of bancassurance by Daniel. Banks tried to exploit more synergies between banking and insurance. They started innovating, moving away from the very basic vanilla products to products that responded to customers’ needs. These included unit-linked and investment-linked plans that came under variable life insurance categories. In parallel, with bancassurance innovations banks also started selling pure life insurance products. In other European countries, the banks started selling whole-life policies too. Bancassurance has grown in importance over the years, embracing both the distribution and production of insurance. The evolution of bancassurance led to the customer-driven approach to the delivery of financial products. Page No - 8

[2.2] Bancassurance Strategy – The Concept A sound and effective banking system is needed for a healthy economy. The Indian banking system is not hassle free but it is able to meet the new challenges posed by the technology. In the recent years new trends have raised in the banking sector. The business of banking around the globe is changing due to globalization and liberalization. The boundaries that have kept various financial services separate from each other have vanished. The wave of financial deregulation and the changes in customer demands paved the way for the emergence of financial conglomerates which resulted in “Bancassurance”. Bancassurance, i.e., banc + assurance, refers to banks selling the insurance products. Bancassurance term first appeared in France in 1980, to define the sale of insurance products through banks’ distribution channels. Banks are being used as an effective alternate channel to distribute insurance products either as ‘stand-alone insurance products’ or ‘add-ons to the bank products’ by way of combining the insurance with typical banking products/services. According to IRDA, ‘bancassurance’ refers to banks acting as corporate agents for insurers to distribute insurance products. Literature on bancassurance does not differentiate if the bancassurance refers to selling of life insurance products or non-life insurance products. Accordingly, here ‘bancassurance’ is defined to mean banks dealing in insurance products of both life and non-life type in any forms. It is profitable both to Banks and Insurance companies and has a very bright future to be the most develop and efficient means of distribution of Insurance product in very near future. The share of premium collected by banks is increasing in a decent manner from the time it was introduce to the Indian market. In India Bancassurance in guided by Insurance Regulatory and Development Authority Act (IRDA), 1999 and Reserve Bank of India. All banks and insurance company have to meet particular requirements to get into Bancassurance business.

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[2.3] Evolution of Bancassurance in India The New Economic Policy (NEP) was introduced in India in June 1991 by the then newly elected government and thus, the process of liberalization of Indian financial sector started. Reforms in the banking and non-banking sectors focused on creating a deregulated environment, strengthening the prudential norms and the supervisory system, changing the ownership pattern, and increasing competition. The main idea was Globalization, Privatization, Deregulation and Liberalization. In India, the reforms in the insurance sector (Life and General) commenced with the setting up of the Committee on Reforms on Insurance Sector under the chairmanship of Dr.R.N.Malhotra, the ex- governor of RBI, by the Government of India in April 1993 for examining the structure of insurance industry. The recommendations of the Committee was submitted in 1994 which was accepted in principle by the government which started implementing the recommendations since December 1999, thus heralding an era of liberalization in the country’s insurance sector. The setting up of Insurance Regulatory and Development Authority (IRDA) and opening up of Insurance Business (life and general) to foreign capital up to 26 per cent were the initial steps in this direction. It is widely acknowledged that the opening up of the insurance sector has been aimed at ushering in greater efficiency in the insurance business by maximising productivity and minimising transaction cost. Competition is believed to bring a wider choice of products at lower prices to the consumers, larger coverage of population, better customer service, superior information technology, higher returns to the policyholders, and so on. At present there are 21 private life insurers operating in the Indian life insurance market along with the only state owned life insurer Life Insurance Corporation of India (LIC). In India, private life insurers are slowly gaining the momentum to penetrate the market with their new products, services and the global knowledge of expertise in doing life business. This can be witnessed from their growing market share statistics which shows nearly 30 percent of the market are in their hands. Most important aspect is that their acceptability is on the rise though it is an urban phenomenon. Page No - 10

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. The Reserve Bank of India being the regulatory authority of the banking system, recognising the need for banks to diversify their activities at the right time, permitted them to enter into insurance sector as well. Furtherance to this line, it issued a set of detailed guidelines setting out various ways for a bank in India to enter into insurance sector. In the insurance sector, the Insurance Regulatory and Development Authority (IRDA), despite its recent origin in 2000, avowed to regulate and develop the insurance sector in India through calibrated policy initiatives. Bancassurance as a concept first began in India when the insurance industry opened up to private participation in December 1999. It is profitable to both banks and insurance companies. India being the one of the most populous country in the world has a huge potential for insurance companies. 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. Despite a billion of population, India still has a low insurance percentage of 1.95 and it is in 51st position in world. Despite of the fact that India boosts a saving rate around 25%, less than 5% is spending on insurance. 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. IRDA had allowed bancassurance from 2002. Under the norms, a bank was allowed to act as an agent for only one life and one general insurer. It is predicted by experts that in future 90% of share of premium will come from Bancassurance business only. Currently there are more and more banking and Insurance Company and venturing into Bancassurance business for better business prospect in future. It is a service that can fulfil both banking and insurance needs at the same time.

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[2.4] Entering into Bancassurance There is no single way of entering into bancassurance which is “best” for every insurer and every bank. As in all business situations, a proper strategic plan drafted according to the company’s internal and external environmental analysis and the objectives of the organization is necessary before any decision is taken. There are many ways of entering into bancassurance. The main scenarios are the following: 

One party’s distribution channels gain access to the client base of the other party. If the two parties do not work together to make the most of the deal, then there will be at best only minimum results and low profitability for both parties. If, however, the bank and the insurance company enter into a distribution agreement, according to which the bank automatically passes on to a friendly insurance company all “warm leads” emanating from the bank’s client base, this can generate very profitable income for both partners. The insurance company sales force, in particular usually only the most competent members of the sales force, sells its normal products to the bank’s clients. The co-operation has to be close to ensuring success.



A bank signs a distribution agreement with an insurance company, under which the bank will act as their appointed representative. With proper implementation this arrangement can lead to satisfactory results for both partners, while the financial investment required by the bank is relatively low. The products offered by the bank can be branded.



A bank and an insurance company agree to have cross shareholdings between them. A member from each company might join the board of directors of the other company. The amount of interest aroused at board level and senior management level in each organization can influence substantially the success of a bancassurance venture, especially under distribution agreements using multi distribution channels.



A joint venture: This is the creation of a new insurance company by an existing bank and an existing insurance company. E.g ICICI-Prudential Life, HDFCStandard Life, Kotak Life (with Old Mutual of South Africa), SBI Life (with Cardiff of France). Page No - 12



A bank wholly or partially acquires an insurance company. This is a major undertaking as it must carefully define in detail the ideal profile of the targeted insurance company and make sure that the added benefit it seeks will materialize.



A bank starts from scratch by establishing a new insurance company wholly owned by the bank. For a bank to create an insurance subsidiary from scratch is a major undertaking as it involves a whole range of knowledge and skills which will need to be acquired. This approach can however be very profitable for the bank, if it makes underwriting profits.



The acquisition (establishment) of a bank that is wholly or partially owned by an insurance company is also possible. In this case the main objective is usually to open the way for the insurance company to use the bank’s retail banking branches and gain access to valuable client information as well as to corporate clients, allowing the insurance company to tap into the lucrative market for company pension plans. Finally, it offers the insurance company’s sales force bank product diversification (and vice versa). This form is used in many cases as a strategy by insurance companies in their effort not to lose their market share to bancassurers.

The best way of entering bancassurance depends on the strengths and weaknesses of the organization and on the availability of a suitable partner if the organization decides to involve a partner. In India, the model of partnership depends upon the regulations of the IRDA, the insurance regulator. If the conditions for corporate agency tie-up are not fulfilled by the bank, the bank may enter into a referral mode of tie-up with the insurer, whereby its staff generates warm leads and offers it to the insurer’s sales persons. The remuneration for the bank would be higher in case of the corporate agency model than a mere referral mode of tie-up. Whatever the form of ownership, a very important factor for the success of a bancassurance venture is the influence that one party’s management has on that of the other. An empowered liaison between respective managements, with regular senior management contacts, as well as sufficient authority to take operational and marketing decisions, is vital. Regular senior management meetings are also a vital element for a successful operation. There must be a strong commitment from the top management to achieving the aims in the business plan. Page No - 13

[2.5] Reasons for Banks To Enter Into Bancassurance The main reasons why banks have decided to enter the insurance industry area are the following:  Intense competition between banks, against a background of shrinking interest margins, has led to an increase in the administrative and marketing costs and limited the profit margins of the traditional banking products. New products could substantially enhance the profitability and increase productivity.  Financial benefits to a bank performance can flow in a number of ways, as briefly outlined below: - Increased income generated, in the form of commissions and/or profits from the business (depending upon the relationship) - Reduction of the effect of the bank fixed costs, as they are now also spread over the life insurance relationship. - Opportunity to increase the productivity of staff, as they now have the chance to offer a wider range of services to clients.  Customer preferences regarding investments are changing. For medium-term and long-term investments there is a trend away from deposits and toward insurance products and mutual funds where the return is usually higher than the return on traditional deposit accounts. This shift in investment preferences has led to a reduction in the share of personal savings held as deposits, traditionally the core element of profitability for a bank which manages client’s money. Banks have sought to offset some of the losses by entering life insurance business. Life insurance is also frequently supported by favourable tax treatment to encourage private provision for protection or retirement planning. This preferential treatment makes insurance products more attractive to customers and banks see an opportunity for profitable sales of such products.

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 Analysis of available information on the customer financial and social situation can be of great help in discovering customer needs and promoting or manufacturing new products or services. Banks believe that the quality of their client information gives them an advantage in distributing products profitably, compared with other distributors (e.g. insurance companies)  The realization that joint bank and insurance products can be better for the customer as they provide more complete solutions than traditional standalone banking or insurance products.  Banks are experiencing the increased mobility of their customers, who to a great extent tend to have accounts with more than one bank. Therefore there is a strong need for customer loyalty to an organization to be enhanced.  Client relationship management has become a key strategy. To build and maintain client relationships, banks and insurers are forming partnerships to provide their clients with a wide range of bank and insurance products from one source.  It is believed that as the number of products that a customer purchases from an organization increases the chance of losing that specific customer to a competitor decreases.

[2.6] The Major Need Of Bancassurance In India  Now banks have realised that by entering into the product value services in insurance sector, they can meet client expectations and earn more profit while carrying on their banking business.  In an insurance product there is a periodic nature of premium deposit which is positive for the bank  Banks have also realised that customer’s loyalty increases profit.  Banks are projected as a ‘shoppers stop’ to provide all kind of financial services.  Insurance sector is in the extensive need to use the bank’s distribution network, large client base and huge customer database, which are helpful in selling their products.  It reduces the cost of distribution of insurance products in comparison to the traditional agency channel. Page No - 15

Part III REGULATORY GUIDELINES GOVERNING BANCASSURANCE

Chapter 3- Guidelines Given By RBI & IRDA [3.1] Regulation Of Banking Companies Indulging In Insurance Services [3.2] Guidelines Given By IRDA [3.3] Recommendations of Committee Constituted By IRDA on Bancassurance

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Chapter 3- Guidelines Given By RBI & IRDA

The best way of entering into bancassurance depends on the strengths and weaknesses of the organization and on the availability of an appropriate partner if the organization decides to involve a partner. In India, the model of partnership depends upon the regulations of the RBI and IRDA, the insurance regulator. 1. RBI Norms for banks entering into Insurance sector 2. IRDA Norms for Insurance companies tying up with Banks

[3.1] Regulation of Banking Companies Indulging In Insurance Services In our country the banking & insurance sectors are regulated by two different entries. They are:  Banking sector is regulated by Reserve Bank of India; and  Insurance Sector is regulated by the Insurance Regulatory and Development Authority (hereinafter IRDA). Bancassurance being the combination of two sectors comes under the purview of both the regulators. Each of the regulators has given out detailed guidelines for banks getting into insurance sector. Government of India issued following 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 Regulation Act, 1949; RBI issued the guidelines on Insurance business for banks. The circular provides three options for banks to enter the Insurance Sector. They are as follows:-

1. Permission with Risk participation A bank which wishes to undertake insurance business can be permitted provided joint ventures must be allowed for financially strong banks with risk participation. Provided that such bank further satisfy the following conditions:Page No - 17

 The minimum net worth of the bank must not be less than Rs.500 crore.  The minimum level of Capital Adequacy Ratio must not be less than 10% in the bank.  Non Performing Assets (NPA) should be reasonable in the bank.  The bank should have been earning a net profit continuously for last three years.  The track record of the performance of the subsidiaries should be satisfactory. For example in India, ICICI Bank and HDFC Bank in private sector and State Bank of India in the public sector has taken its shape by following this model. The main benefit of this model is that the foreign insurance company can enter into the Indian market through a joint venture.

2. Permission without Risk Participation A bank which is not eligible for joint venture participation can make investment up to:  10% of the net worth of bank or  Rs.50 crores, whichever is lower, in the insurance company for providing infrastructure services support. Such participation is treated as investment and does not hold any contingent liability of the bank.

3. Referral Model This model of Bancassurance India is regulated by Insurance Regulatory and Development Authority (Sharing of Database for Distribution of Insurance Products) Regulations, 2010. Any commercial bank can undertake insurance business as an agent of insurance company on fee basis . The bank does not participate in risk under this category. This is also known as referral model. In this model, a ‘referral arrangement’ is done between ‘Referral Company’ and insurer for selling of insurance products. The referral company only shares the database of its customers and does not directly indulge in soliciting or selling of insurance product through agent or corporate agent or insurance intermediaries. In other words, the actual transaction is done by the staff of the insurance company either at the bank premise or elsewhere. The bank charges only fees or commission for every business from their customers.

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[3.2] Guidelines Given By IRDA

Insurance Regulation and Development Authority Act 1999 provides the entry norms for any new company for operation in insurance sector. Any such new company must have: Banks should have a minimum paid up capital of Rs.100 Crores.  Each bank that sells insurance must have a Chief Insurance Executive to handle all the insurance matters and activities.  There is a restriction for international companies to the minority equity holdings up to 26%.  All the people involved in selling the insurance should undergo mandatory training at an institute determined or authorized by IRDA and should have passed the examination conducted by the authority.  Commercial banks, including co‐operative banks and Regional Rural Banks may become co‐operate agents for one insurance company.  Banks can act as a corporate agent for any one of life or non life insurers.  But, cannot become insurance brokers for many life or non life insurers.  IRDA has also notified regulations relating to registration of insurers, their assets and liabilities, conduct of business, licensing of insurance agents etc.  Investment of policy holders fund only in India.

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[3.3] Recommendations of Committee Constituted By IRDA on Bancassurance As we have discussed earlier that banks are not allowed to sell insurance products of more than one insurance company. But due to persistent request from the side of various life and general insurance companies from the IRDA led to formation of a sevenmember committee in the mid of 2009 to look after the matter . The committee had to submit its report and to examine the desirability for a differential treatment of insurance intermediation by banks under the Bancassurance model consistent with intermediation best practices and modified suitably to meet domestic regulatory requirements. The committee submitted its recommendation on 26th May, 2011. Following are some of the recommendations of the Committee:

Banks should be allowed to tie up with any of the following two sets of insurers: Two in life insurance sector- The committee admitted that at present there is ambiguity on the organization and practices of the Bancassurance.  Two in non-life insurance sector excluding health  Two in health insurance sector  ECGC and AIC.

Efforts should be made to more use of information technology which would reduce the manpower requirement and would increased more structured, transparent and efficient organization. The tenure of the agreement between the banker and insurer is normally one to three year at present. This makes the relationship between the two unstable; therefore the minimum period of the agreement between the banker and the insurer shall not be less than five years. Here, the committee also made a very significant point that the responsibility of servicing of the policies issued already through the bank or subsidiary Page No - 20

or special purpose vehicle shall remain with the bancassurance partner even if the tie-up ends and the said partner shall receive the renewal commission on per renewed policy basis. For all this purpose there is need of proforma for memorandum of agreement between bank and insurer with minimum requirement. As far as inspection and supervision is concerned, the proposed regulation must contain separate provision which empowers IRDA and RBI to inspect any of the Bancassurance partner. The regulation must have provisions of maintaining accounts and certification which should be furnished in periodicals returns to the authority. Corporate governance norms regarding disclosure should be complied by the banks treating bancassurance as integral part of bank’s business operation. Regulations should made it mandatory that the bank staff be fully trained in handling insurance products so that the sale process is transparent and the policyholder gets full disclosure of the features of the product. The committee gave the green light for multiple insurers but only if a bank fulfils all other conditions specified in the committee’s recommendations. The Committee recommended abolition of the referral system of bancassurance because it is costlier than corporate agent model. The reason behind the high cost is that the insurer has not only to pay the higher amount of first year premium as referral fee but also has to deploy staff and infrastructure in the bank premises.

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Part IV BANCASSURANCE BUSINESS

Chapter 4 -Why Bancassurance in India? [4.1] Banking on Bancassurance [4.2] Models on Bancassurance [4.3]Advantages of Bancassurance [4.4] Disadvantages of Bancassurance [4.5] SWOT Analysis [4.6] Obstacles in the Success of Bancassurance [4.7] Distribution Channels of Bancassurance [4.8] Cultural Issues in Distribution

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Chapter 4 -Why Bancassurance in India? The life insurance industry in India has been progressing at a swift pace since opening up of the sector in 2000. The size of the country, a diverse set of people combined with problems of connectivity in rural areas makes insurance selling in India a very difficult proposition. Life insurance companies require enormous distribution of strength and tremendous manpower to reach out to such a huge customer base. This distribution has undergone a paradigm shift as various insurance companies are proposing to bring insurance products into the lives of the common man by making them available at the most basic financial point, the local bank branch, through Bancassurance. The management of the new Indian operations are conscious of the need to grow quickly to reduce painful start -up expense overruns. Banks with their huge networks and large customer bases give insurers an opportunity to do this efficiently. Regulations requiring certain proportions of sales to the rural and social sectors give an added impetus to the drive for bancassurance. Selling through traditional methods to these sectors can be inefficient and expensive. Tying up with a bank with an appropriate customer base can give an insurer relatively cheap access to such sectors. This is still an issue for insurers despite the recent widening of the definition of the rural sector. 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. Bancassurance is not simply about selling insurance but about changing the mindset of a bank. In addition to acting as distributors, several banks have recognised the potential of insurance in India and have taken equity stakes in insurance companies.

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[4.1] Banking on Bancassurance 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 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 costeffective 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. Reasons for Banks' Eagerness to Collaborate with Insurance Companies   

Attraction of fee income Diversion of surplus workforce Development of product range

Reasons for Insurance Companies' Eagerness to Collaborate with Banks   

Reliance on wide network Attraction of strong clientele base Aggressive marketing strategies

Reasons for Consumers' Eagerness to Welcome Bancassurance Consumer perception is itself a very dynamic phenomenon. Today's customer is very demanding and sensitive too. Their expectations in respect of service quality are quite high. They insist on respectable behaviour from their banker. Now, when there are so many operators, they can always switch over their loyalty at any moment. Thus, there is a challenge before service providers that their clientele base is retained. The competitive state of market suits the consumer as customer care is always better. The customer will be benefited the most if the market is developed and competition is aroused to a greater extent.

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[4.2] Models of Bancassurance Bank Insurance Model allows the insurance company to maintain smaller direct sales teams as their products are sold through the bank to bank customers by bank staff. Bank staff and tellers, rather than an insurance salesperson, become the point of sale/point of contact for the customer. Bank staff are advised and supported by the insurance company through product information, marketing campaigns and sales training.

The concept combines banking and investment management services with the sophisticated use of insurance as a financial planning structure to achieve fiscal advantages and security for investors and their families. Models of bancassurance as based on mainly three classifications which are as under: I) Structural classification II) Product based classification III) Bank referrals

I) STRUCTURAL CLASSIFICATION Structural classification can be done as under:  Referral Model Banks which are planning not to consider risk can take up ‘referral model’. The actual transaction with the clients in referral model is done by the staff of the insurance company either at the premises of the bank or elsewhere. Referral model is an agreement, wherein the bank, while controlling the clients data base, does business through the agents/sales staff of the insurance company for a ‘referral fee’ or commission for every business lead that was passed on. In fact a number of banks in India have already started implementing this strategy. This model would be appropriate for almost all types of banks including the Regional Rural Banks (RBBs) /Co‐operative Banks and even Co‐operative Societies both in rural and urban areas.

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 Corporate Agency Corporate agency is another form of non‐risk participatory distribution channel, wherein the bank staff is trained to appraise and sell the products to the customers. Here the bank as an institution operates as corporate agent for the insurance products for a fee/commission. This seems to be more practical and is suitable for most of the banks in India. Here, the rate of commission would be comparatively higher than the referral arrangement. There are also practical difficulties in the form of professional knowledge about the insurance products. Besides, struggle from the staff to handle totally new service/product could not be ruled out. However, this could be overcome by thorough training to selected staff along with proper incentives in the banks for the selling of simple insurance products in the initial stage. This model is best suited for majority of banks including some major urban cooperative banks because it neither involves sharing of risk nor does it require huge investment in the form of infrastructure and yet can be a good source of income.  Insurance as Fully Integrated Financial Service / Joint Venture Apart from the above two, the fully integrated financial service occupies complete and complex relationship between the insurer and the bank. Here, the bank functions as fully universal in its operation and selling of insurance products are just one more function within. The banks will have a separate counter within, to sell the insurance products as an internal part with the rest of its activities. Thus the banks can wholly be an owner to the insurance subsidiary. Eg. ICICI bank and State Bank of India in the public sector have already gone ahead with this type of bancassurance model and have obtained a large share in the insurance market within a short period.

II) PRODUCT BASED CLASSIFICATION Product based classification of the bancassurance model is as under:  Stand‐Alone Insurance Products Under stand‐alone insurance products, marketing of the insurance products is done either through referral arrangement or corporate agency without mixing the insurance products with any of the bank’s own products/services. Insurance is sold as an Page No - 26

additional item in the list of products offered to the bank’s customer. However, the products of banks and insurance will have their individual brands too, e.g., Karur Vysya Bank Ltd selling of life insurance products of Birla Sun Life Insurance or general insurance products of Bajaj Allianz General Insurance Company does act as an additional attraction.  Blend Of Insurance With Bank Products This strategy intends to blend insurance products with the bank product as a ‘value addition’ while encouraging its own products. Thus, banks could sell the insurance products without any extra efforts. Sometimes, giving insurance cover at a nominal premium or without specific premium proves to be an attractive deal for banks to sell an individual product. For example credit card, housing loans, education loans, etc. Many banks in India, are determined in marketing credit and debit card business, whereas the cardholders get the ‘insurance cover’ for a nominal fee or (completely included in the annual fee) free from simple charges/ premium. Similarly the home loans / vehicle loans, etc., have also been designed with the insurance cover as an added incentive.

III) BANK REFERRALS Under bank referral method, banks do not issue the policies; they only give the database to the insurance companies. These companies issue the policies and pay the commission to the banks. In this method all the three parties involved i.e. banks, insurance companies and customers are benefited. Banks get commission, the insurance companies get records of the customers and the customers get the benefits.

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[4.3] Advantages Of Bancassurance

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

(1) From the Banks point of view: -

 By selling the insurance product by their own channel the banker can increase their income.

 Productivity of the employees increases.  Banks have face-to-face contract with their customers. They can directly ask them to take a policy and the banks need not to go anywhere for customers.

 Banks can cross sell insurance products.  Bankers have extensive experience in marketing. They can easily attract customers & non-customers because the customer & non-customers also bank on banks.

 Banks are using different value added services like- E. Banking, Tele- banking, direct mail & so on. They can also use all the above-mentioned facility for Bancassurance purpose with customers & non-customers.

(2) From the Insurer Point of view:-

 The Insurance Company can increase their business through the banking distribution channels because the banks have so many customers.

 The foremost advantage for insurers being that they will have the direct access to the large customer base, at relatively faster rate and at the lowest cost. Banks’ prior knowledge about the customers and their financial standing and other background is a gold mine for the insurers not only to tap the market but also would help to device the products that suits customers the most.

 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. Page No - 28

 The success or otherwise of any new business/ products/ service depends on how quickly and widely it reaches out to the customers/ potential customers. This holds good even for insurance products, the insurance companies can reach out the entire country at a greater speed with less cost through bancassurance.  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.

 By cutting cost Insurers can serve better to customers in terms lower premium rate and better risk coverage through product diversification. (3) From the Customers' point of view:-

 Product innovation and distribution activities are directed towards the satisfaction of needs of the customer.

 Bancassurance model assists customers in terms of reduction price, diversified product quality in time and at their doorstep service by banks.

 Easy accesses for claims, as banks are a regular go.  Innovative and better product ranges.  Comprehensive financial advisory services under one roof. i.e., insurance services along with other financial services such as banking, mutual funds, personal loans etc.

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[4.4] Disadvantages of Bancassurance

 After allying with one insurance company a bank may discontinue it to set up their own venture. Banks may change insurance partners due to attractive benefits offered by a competing insurer.  Sometimes the banks feel they get a raw deal as the benefit accruing to the bank is negligible as compared to the insurance companies.  The existing insurance companies feel that by granting multiple permissions to the bank may not be fair in promoting a particular companies’ product as there would be clashes of interest.  Many experts feel that the idea of bancassurance gives too great and much control to the banks over the financial market of the country.  Human resource management has experienced some complications due to such association in the financial industry. Recently some issues like increased work load, maintaining the motivation levels have cropped up quite occasionally among the employees. Therefore, human resource issues should be given first priority before entering into bancassurance business.  The banks also fear that at some point the insurance partner may end up cross‐selling banking products to their policy holders. If the insurer is selling the products by agents as well as banks then there is a risk of clash between both if the agents targeting the same customers.

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[4.5] SWOT ANALYSIS

STRENGTHS

OPPORTUNITIES Swot Analysis

WEAKNESS

THREATS

 Huge number of people are without life insurance (91.73 million out of 1 billion had life insurance in 1999)  Millions of people travelling in and out of India can be tapped Strengths

for Overseas Mediclaim and Travel Insurance policies  200 million households waiting for householder’s insurance  Good range of products from Insurance Companies  Good amount of R&D into insurance  Not much IT initiative from leading insurance players

Weaknesses

 Higher tax nets for the middle class  No Tax exemptions for products like householder, travel policies etc  Inflexibility of the products  Bank’s database can help insurance companies devise policies

Opportunities

 Better IT infrastructure from the bank’s side can help integrating  Risks in integrating approach, thinking and work culture

Threats

 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 capital is lower than the existing rate of return

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[4.6] Obstacles in the Success Of Bancassurance There are some cultural differences between the bank and insurance company which are hurdle in the way of success of bancassurance. Some of them are as follows:  There may be a problem at the time of implementation of bancassurance partnership.  Poor manpower management is one of the biggest hurdles in this area.  Lack of sales culture and no involvement of branch manager.  Insufficient product promotions and failure to integrate marketing plans.  The most important in all of them is the negative attitude of the bank staff towards insurance and unwieldy marketing strategy. Besides that, following are the specific cultural differences between both of them:  Banks provides tangible services whereas an insurance company provides intangible services.  Banks sell its product on good-faith. On the other hand, insurance companies sell their products on utmost good-faith.  Banks provided services are 'immediate' whereas insurance provided services are 'futuristic'.  Bank provides short term finance whereas insurance companies provide long term Finance.  Banks generally deal with their customers directly whereas insurance companies deals with their customers through intermediaries.  Bank customers have their accounts in banks whereas insurance customers unaware of their accounts.  Dealing with banks is highly personal whereas dealing with insurance is less personal.  The Reserve Bank of India in its 2009-2010 circular made it mandatory for bank to disclose in the "Notes to Accounts" from the year ending March 31, 2010, the details of fees or remuneration received in respect of bancassurance business undertaken by them Page No - 32

[4.7] Distribution Channels In Bancassurance Distribution is an important factor in bancassurance which is strongly associated with the regulatory issues of the country. Over the years, regulatory obstacles between banking and insurance have lessened and have created an increasingly friendly climate for bancassurance. The passage of Gramm‐Leach Bliley Act of 1999 in US and IRDA Bill in India in 2000 has encouraged the growth of bancassurance by allowing the use of multiple distribution channels by banks and insurance companies. Nowadays, many banks and insurers including large and traditional companies that would not have considered about such an approach about a decade ago are now looking with great interest at constructive new revenues through Bancassurance. Today, insurance products have been supported and sold mainly through agency systems in most of the countries. With new developments in consumer’s behaviors, evolution of technology and deregulation, new distribution channels have been developed successfully in the recent years. The type of distribution channels that a company uses affects the design and pricing of its products, as well as the way in which the products are promoted and perceived in the market place. Recently Bancassurers have been making use of various distribution channels which are as under:

Seminar Selling

Career agents Special Advisers

E-commerce

Distribution Channels Worksite marketing Direct Response

Salaried Agents Bank employees

Corporate Agencies & Brokerage Firms

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The main characteristics of each of these channels are: 1. Career agents: They are full-time commissioned sales personnel holding an agency contract. Although some insurance companies offer such contracts to part timers, within bancassurance operations such people are usually excluded. Career agents are generally considered to be independent contractors. Consequently an insurance company can exercise control only over the activities of the agent which are specified in his contract. Despite this limitation on control, career agents with suitable training, supervision and motivation can be highly productive and cost effective. Moreover their level of customer service is usually very high due to the renewal commissions, policy persistency bonuses, or other customer service-related awards paid to them. However, many bancassurers avoid this channel, believing that agents might oversell out of their interest in quantity and not quality. Such problems with career agents usually arise, not due to the nature of this channel, but rather due to the use of improperly designed remuneration and/or incentive packages. 2. Special advisers: They are highly trained employees usually belonging to the insurance partner, who distribute insurance products to the bank’s corporate clients. Usually they are paid on a salary basis and they receive incentive compensation based on their sales. Otherwise they present the same characteristics as those of career agents, with the exception of their training which focuses on the group and business insurance sectors. 3. Salaried agents: They have the same characteristics as career agents. The only difference in terms of their remuneration is that they are paid on a salary basis and they receive incentive compensation based on their sales. Some bancassurers, concerned at the bad publicity which they have received as a result of their career agents concentrating heavily on sales at the expense of customer service, have changed their sales forces to salaried agent status. 4. Bank employees: They can sell simple products. However, the time which they can devote to insurance sales is limited, e.g. due to limited opening hours and to the need to perform other banking duties. A further restriction on the effectiveness of bank Page No - 34

employees in generating insurance business is that they have a limited target market, i.e. those customers who actually visit the branch during the opening hours. In many setups, the bank employees are assisted by the bank’s financial advisers. The financial advisers either sell in the branch but some banks have also established mobile sales forces. If bank employees only act as “passive” insurance sales staff (or do not actively generate leads), then the bancassurer’s potential can be severely impeded. However, if bank employees are used as “active” centres of influence to refer warm leads to salaried agents, career agents or special advisers, production volumes can be very high and profitable to Bancassurers. 5. Corporate Agencies or Brokerage Firms: In the US, quite a number of banks cooperate with independent agencies or brokerage firms whilst in Japan or South Korea banks have founded corporate agencies. The advantage of such arrangements is the availability of specialists needed for complex insurance matters and – in the case of brokerage firms – the opportunity for the bank clients to receive offers not only from one insurance company but from a variety of companies. In addition, these sales channels are more conceived to serve the affluent bank client. 6. Direct response: In this channel no salesperson visits the customer to induce a sale and no face-to-face contact between consumer and seller occurs. The consumer purchases products directly from the bancassurer by responding to the company’s advertisement, mailing or telephone offers. This channel can be used for simple packaged products which can be easily understood by the consumer without explanation. 7. Worksite marketing: Vastly popular in the US, this channel is used to target employees of the insurer, or a group company. In this method, the insurer launches nonmedical insurance cover for the employees of a group company and offers special discounts to all those who propose to take the cover. There is however no obligation on the part of the employees to buy the policy. Worksite marketing is easier to implement if there is a perceived positive image of the parent company itself among employees. Secondly, simple forms and simpler benefits illustration can go a long way to establish sales growth. Cultural and social differences, coupled with a below average company Page No - 35

image, may be the major hurdles for growth. Worksite marketing channel has high chances of success, due to the trust and loyalty factor towards their ‘own’ company, as the insurer is perceived to be their ‘own insurance company’. The premium payment usually is monthly mode, and deducted from the salary; thus making the entire process simple. The chance of lapsation of policy is therefore non-existent, creating win-win positions for both, the insurer and the employee. 8. E-commerce: This channel is the fastest growing and most convenient way of purchasing insurance cover. Internet banking is already well‐known as a successful and profitable tool for conducting banking operations. Internet provides large and effective source of information for selling of financial products. . Bancassurers can feel confident that internet banking will also prove to be a qualified medium for cross selling of insurance savings and protection products. Online sales of insurance policies can be encouraged by designing special non-medical term policies, which are easy to understand, and which do not warrant expert advice from trained advisors. E-commerce sites that offer the lowest quotes from all insurers are being introduced by entrepreneurs and they are slowly making their mark. The functions requiring user input like check ordering, calculations; credit and account applications should be immediately added with links to the insurer. Such an arrangement can also provide an effective medium for insurance sales, service and leads. 9. Seminar Selling: One last method for developing bancassurance involves outside lead generating techniques, such as seminars, direct mail and statement inserts. Today great opportunities are lying ahead for bancassurance partners and its success or failure mainly depends on how the process of bancassurance is developed and handled inside each financial institution.

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[4.8] Cultural Issues In Distribution The managers of banks and of life insurance companies can come from quite different cultures. There may be differences in the way of thinking and business approaches of bankers and managers of insurance companies. These differences create a communication and implementation problem in bancassurance operations. Banks are traditionally demand-driven organizations with a reactive selling philosophy. Life insurance organizations are usually need-driven and have an aggressive selling philosophy. It has been observed that this friction at the level of bank employees and life insurance salespeople arises from  Differing philosophies towards selling (push v/s pull strategy)  The jealousies of bank employees regarding remuneration of life sales staff, and  Fears of “cannibalization” of deposits, e.g. the bank employee fears that the salesperson encourages withdrawal of bank deposits, putting the bank employee’s job in greater jeopardy. As a result the team spirit is negatively influenced and, since this is a crucial factor for the success of any operation, it has to be confronted. Cultural differences between the banking and the insurance industries must be understood, respected and lived with in order for the bancassurance venture to succeed. The development of a single culture is another possible solution but this requires a very strong commitment from the top management. This commitment must be continuously conveyed to all bank employees and life insurance agents. One way of achieving this is to develop a “statement of mission” for the new organization and to get the staff to commit to fulfilling this statement. This can help to ensure that there is a common path for the bank and the life insurer. Many organizations try to overcome these cultural differences through the elimination of insurance sales people and the provision of insurance products and services exclusively through bank employees. However this practice creates in four major problems:

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1. By eliminating the sales force, bank employees are forced to cross borders to a different profession where different skills are required and where the competition practices are different. 2. The products that bank employees offer are usually simple packaged products or pure investment products – in many cases without a risk element. However, simple packaged products are not always the best solution for the customer who is undoubtedly the centre of any success. Since the insurance industry offers tailor-made products and services to its customers, the bancassurers who are using only bank employees to distribute their products will feel the pressure to switch to better products or to develop the proper distribution channels. All over the world, more and more consumers are becoming better informed and seek to buy the most appropriate product through a preferred distribution channel. 3. Using only bank employees to sell insurance can severely limit the success of the bancassurer. The bank’s target market is then only the customer-base of the bank accessible to bank employees, e.g. those who come into the branch. More and more, bank customers can manage their affairs without entering the bank branch and are therefore inaccessible to bank employees. 4. Customer service offered in conjunction with the insurance policy is likely to be relatively poor since it is limited to banking hours. Insurance company agents can offer customer service at times more likely to suit the customer.

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Part V PRESENT SCENARIO OF BANCASSURANCE Chapter 5- Relevance of Bancassurance in The Indian Financial Sector [5.1] Why is Bancassurance more suited to Life Insurance products? [5.2] Long Term Drivers of Bancassurance in India

Chapter 6- Factors that appear to be critical for the success of Bancassurance [6.1] Remuneration and Incentives [6.2] Training for Bancassurance [6.3] Reasons for growing phenomena of Bancassurance [6.4] List Of Some of The Tie-Ups of Banks with Insurance .

.

Companies

Chapter 7- Open Architecture of Bancassurance

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Chapter 5→Relevance of Bancassurance in the Indian Financial Sector  Integration of the financial service industry in terms of banking, securities business and insurance is a growing worldwide phenomenon. The Universal Banking concept is evolving on these lines in India.  Banks 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.  Indian Banks have immense reach to households. Total of 65,700 branches of commercial banks, each branch serving an average of 15,000 people.  Banks have enormous retail customer base. Share of ‘individuals’ as a category in bank accounts is steadily increasing. Rural and semi urban bank constitute close to 60% in terms of number of accounts, indicating the number of potential lives that could be covered by insurance with the upfront involvement of banks.  Banks have realized that offering value-added services such as insurance helps to meet client expectations. Competition in the Personal Financial Services area is getting `hot’ in India that Banks can retain customer loyalty by offering them a vastly expanded and more sophisticated range of products. Insurance distribution can also help the bank to increase the fee-based earnings to a large extent. It helps to enhance the levels of staff productivity in banks. This is vitally important to bring higher motivation levels in banks in India.  Banks can put their energies into the small-commission customers’ that insurance agents would tend to avoid. Banks’ entry in distribution can help to enlarge the insurance customer base rapidly. This helps to popularize insurance as an important financial protection product.  Bancassurance helps to lower the distribution costs of insurers. Acquisition cost of insurance customer through bank is low. Selling insurance to existing mass market banking customers is far less expensive than selling to a group of unknown customers. Page No - 40

[5.1] Why is Bancassurance more suited to Life Insurance Products? Traditionally, much fewer non-life insurance products are distributed through bancassurance than life insurance products. There are several reasons for this:  The main reason may be the complementary nature of life insurance and banking products: bank employees are already familiar with financial products and quickly adapt to selling insurance-based savings or pension products;  On the other hand, the non-life market requires special management and selling skills, which are not necessarily prevalent in bancassurance. In addition, such competencies require significant investment in training and motivation, and therefore additional costs;  Life insurance products are generally long-term products, which require customers to have complete confidence in the institution that invests their money. And we now know that, in many countries, banks have a better image and are more trusted than insurance companies;  Bank advisers can use their knowledge of their customers’ finances to target their advice towards specific needs. This is a major advantage in life insurance and less important in personal injury insurance;  Some professionals also refer to the claims management aspect of personal injury insurance, which could have a negative impact on brand image. This would seem to explain why for a long time bancassurance operators hesitated to offer these types of product.

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[5.2] 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.  The culturally more acceptable banking transactions. Banking does not have the same stigma that (life) insurance carries. This factor will diminish its importance over time, as people become more educated.  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.  Narrowing bank margins are another key driver.  Banks have complementary products with insurance products such as the auto insurance, home insurance or annuities.  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).  Healthcare insurance sector can also benefit from bancassurance. In India, only 2.5 million people have access to healthcare facilities. On the other hand, 5% of personal income is spent on healthcare. Banks can distribute and facilitate administration of healthcare insurance.  In many countries, the absence of banks from selling insurance seems to stem from regulatory reasons. In India, privatization of the insurance sector signalled an accommodating approach from both the insurance regulator and the banking regulator for banks entertaining the thoughts of selling insurance

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Chapter 6→ Factors that appear to be critical for the success of Bancassurance  Strategies consistent with the bank's vision, knowledge of target customers' needs, defined sales process for introducing insurance services, simple yet complete product offerings, strong service delivery mechanism, quality administration, synchronized planning across all business lines and subsidiaries, complete integration of insurance with other bank products and services  Another point is the handling of customers. With customer awareness levels increasing, they are demanding greater convenience in financial services.  The emergence of remote distribution channels, such as PC-banking and Internetbanking, would hamper the distribution of insurance products through banks.  The emergence of newer distribution channels seeking a market share in the network

[6.1] Remuneration and Incentives Compensation packages and incentive schemes are critical factors for the success of bancassurance. The way compensation is allocated encourages the distribution channels to act according to what the organization feels is important. Compensation objectives should also contribute to the overall objectives of the organization. A compensation program, therefore, must be tailored to the needs of an organization and its employees. To raise productivity and lower costs in today’s competitive economic environment, organizations are increasingly setting compensation objectives based on a pay-forperformance standard. In bancassurance operations the need is to motivate each of the following groups:  Bank employees involved in generating leads and sales  Sales agents (if the bancassurer uses that approach)  Bank branch management (for their effort in managing life insurance sales through the branch network)  Sales agency managers (if at location) Motivation is particularly important for the sales agents out in the field for whom selfdiscipline is the key to success. The remuneration terms should be attractive to each of the groups involved. In particular, the designer of the remuneration package should seek Page No - 43

to develop a package which helps each one of the groups to feel that they get a fair reward for their contribution. The possible range of benefits and incentives in a life insurance agent’s compensation package is unlimited. The remuneration depends on whether the bank employee or the bank’s financial advisers are involved in the sales process or whether the bank employees are providing warm leads. Any commission payable by the insurance company is, as a principle, to be credited to the bank profit centre for the bancassurance operation. The bank management sets the commission level for each manager and employee engaged in the bancassurance operation.

 Selling in the bank’s branches (by employees or by financial advisers): employees could be rewarded with gifts and/or salary increments based on their selling performance in promoting both banking and insurance products. Such performance could be quantified via the use of a points system whereby the various products are allocated as a number of points. For compulsory products linked to banking facilities no commission or other benefit will be offered since these do not require any selling effort on the part of employees. The financial advisers are usually paid on a salary basis and they receive incentive compensation based on their sales.

 Warm leads: In return for providing warm leads, the bank will get a share, say 50%, of the normal first year commissions. The actual split might be agreed upon the basis of the work done by each of the agent and the bank employee in achieving the average sale, which may vary. A possible basis would be: Bank

employees: 25%



Bank profitability: 25% - 50%

The structure shown above generates benefits as:  Financial rewards for employees who generate warm leads  Financial rewards for managers and other staff of the bank branch who have supported bank activities while the assurance business was being generated 

Recognition of the branch’s contribution to bank profits (which can be reflected in the performance rating by the bank of the branch management) Page No - 44

[6.2] Training for Bancassurance Training is a critical part of overall business performance. But even before any training starts, it is important to determine  who needs to receive training,  what kinds of training are required,  who will be responsible for providing training and for testing what the student has learned from the training.

Sales force training for bancassurers: Sales agents and their managers in any selling organization, including insurance, develop a range of knowledge and skills, for example  product knowledge,  application of selling techniques and  motivation skills. Here we concentrate on the types of necessary training for sales staff and sales managers in a bancassurance operation. The bank employees will need to be trained in the following aspects of the insurance business:  Features of the insurance products sold  How to identify and approach a potential customer  Basic insurance needs  Handling basic objections  Other distribution channels and products  Procedures  Remuneration and incentive schemes  Cultures  Customer service

Much of this list will be new to staff used to banking transactions, so it is comparatively long. However, proper and regular training of bank employees is a key to the success of the operation.

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Continuous Training and Supervision: Apart from initial training, there should be further training to support the development of the agent or employee. Some ways in which this can be done are:  Agency meetings  Bank branch meetings  Area banking meetings  In-house magazine  Training circulars  Area sales seminars  Company library  Video tapes  Certified courses  Lectures  Training material booklets

Quality customer service: Quality customer service refers to every single activity that the company, its employees and the distribution channels undertakes for its customers. In all cases the objective of every person in the company should be to give added value to every transaction or communication, providing additional incentives to clients and enabling the company to:  distinguish itself from competitors,  improve its image among customers,  keep its existing customers,  attract new customers, and  create additional sales among existing customers.

Bank employees must be well informed about the customer service standards set by the insurer when they refer them to their customers.

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[6.3] Reasons for growing phenomena of Bancassurance The opening up of the insurance industry to private sector participation in December 1999 has led to the entry of 20 new players, with 12 in the life insurance sector and eight in the non-life insurance sector. Almost without exception these companies are seeking to utilize multiple distribution channels such as traditional agency, bancassurance, brokers and direct marketing. Bancassurance is seen by many to be a significant or even the primary channel. In other Asian markets bancassurance has made significant headway in recent times. For example, bancassurance accounted for 24% of new life insurance sales by ‘weighted’ premium income in Singapore in 2002. This is a significant increase on the equivalent 2001 statistic of 15% and is as a result of growth in significant bank-centric bancassurance operations. In Hong Kong the figure for 2002 is expected to be at the 20% level for the same basic reasons.  Life insurance premium represents 55% of the world insurance premium, and as the life insurance is basically a saving market. So it is one of the methods to increase deposits of banks.  In non-life insurance business banks are looking to provide additional flow of revenues from the same customers through the same channel of distribution and with the same people.  Insurers have been turning in ever-greater numbers to alternative modes of distribution because of the high costs they have paid for agent services. These costs became too much of a burden for many insurers compared to the returns they generated.  Insurers operate through bancassurance own and control relationships with customers. Insurers found that direct relationships with customers gave them greater control of their business at a lower cost. Insurers who operate through the agency relationship are hardly having any control on their relationship with their clients.

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 The ratio of expenses to premiums, an important efficiency factor, it is noticed very well that expenses ratio in insurance activities through bancassurance is extremely low. This is because the bank and the insurance company is benefiting from the same distribution channels and people.  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 those effectively crosssell financial products can leverage their distribution and processing capabilities for profitable operating expense ratios.  Another advantage banks have over traditional insurance distributors is the lower cost per sales lead made possible by their sizable, loyal customer base. Banks also enjoy significant brand awareness within their geographic regions, again providing for a lower per-lead cost when advertising through print, radio and/or television.  Other bank strengths are their marketing and processing capabilities. Banks have extensive experience in marketing to both existing customers (for retention and cross selling) and non-customers (for acquisition and awareness). They also have access to multiple communications channels, such as statement inserts, direct mail, ATMs, telemarketing, etc. Banks' proficiency in using technology has resulted in improvements in transaction processing and customer service.  By successfully mining their customer databases, leveraging their reputation and 'distribution systems’ (branch, phone, and mail) to make appointments, and utilizing 'sales techniques’ and products tailored to the middle market, European banks have more than doubled the conversion rates of insurance leads into sales and have increased sales productivity to a ratio which is more than enough to make bancassurance a highly profitable proposition.

Page No - 48

[6.4] List Of Some of The Tie-Ups Of Banks With Insurance Companies No.

Banks

Insurance Companies

1.

Central Bank of India

LIC

2.

Dena Bank

LIC

3.

Bank of Maharashtra

LIC

4.

UCO Bank

LIC

5.

Corporation bank

LIC

6.

Centurion Bank

LIC

7.

Indian Overseas Bank

LIC

8.

ABN-Amro

Aviva Life Insurance Company

9.

Canara Bank

Aviva Life Insurance Company

10.

Lakshmi Vilas Bank

Aviva Life Insurance Company

11.

Punjab & Sind Bank

Aviva Life Insurance Company

12.

DBS Bank

Aviva Life Insurance Company

13.

Allahabad Bank

ICICI Prudential Life Insurance

14.

Citibank

ICICI Prudential Life Insurance

15.

ICICI Bank

ICICI Prudential Life Insurance

16.

SBI and Associate banks

SBI Life Insurance Company

17.

Bank of Rajasthan

Birla Sun life Insurance Co. Ltd.

18.

Deutsche Bank

Birla Sun life Insurance Co. Ltd.

19.

Bank of Muscat

Birla Sun life Insurance Co. Ltd.

20.

Standard Chartered

Bajaj Allianz

21.

Syndicate bank

Bajaj Allianz

Page No - 49

Chapter 7→ Open Architecture of Bancassurance The Insurance Regulatory and Development Authority of India (IRDA) has asked insurers to pursue an open architecture model in bancassurance. IRDA said that guidelines to facilitate this would be issued soon. IRDA had issued guidelines for banks as brokers in August 2013. However, the response wasn’t there. The call for open architecture has gathered momentum in the past couple of years, as several late entrants did not have a bank to tie-up with. IRDA has strongly recommended that banks work as brokers to increase the insurance penetration. This is on the heels of the Reserve Bank of India’s (RBI) guidelines of January 16, 2015, that banks may become insurance brokers and sell multiple products. According to guidelines, a bank can enter insurance broking only if the capital-to-risk (weighted) assets ratio is 10% or above and the level of net non-performing assets is 3% or below. RBI has also doubled the net worth requirement to Rs 1,000 crores, double the Rs 500 crores proposed earlier. Insurance penetration has been declining steadily in recent years. Between 2009 and 2013, life insurance penetration declined from 4.6% to 3.1%. For general insurance, the rise has been marginal, from 0.78% in 2012 to 0.80% in 2013. At present, bancassurance follows a corporate agent structure. This allows banks to sell insurance products of only one life, one non-life and one health insurance Company each. Open architecture is when a single bank is allowed to sell products of multiple insurers from the same sector. In the recently promulgated insurance ordinance, the government has brought corporate agents within the definition of insurance intermediary, in line with brokers. Insurance intermediaries include insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third party administrators, surveyors and loss assessors. Page No - 50

Part VI COMPARISON OF BANCASSURANCE BETWEEN ICICI AND IDBI BANK

Chapter 8 – ICICI Bank & IDBI Bank [8.1] About ICICI Bank [8.2] Current Scenario in ICICI Bank [8.3] About IDBI Bank [8.4] Current scenario in IDBI Bank [8.5] Field Work on ICICI and IDBI Bank [8.6] Questionnaire [8.7] Comparison of Bancassurance between ICICI and IDBI

Chapter 9 –Recommendations and Conclusions [9.1] Findings [9.2] Recommendations [9.3] Conclusion [9.4] Bibliography and Websites

Page No - 51

Chapter 8→ ICICI Bank & IDBI Bank

[8.1] About ICICI bank ICICI Bank was established by the Industrial Credit and Investment Corporation of India, an Indian financial institution. It was formed in 1955 as a joint‐venture of the World Bank, India's public‐sector banks and public‐sector insurance companies to provide project financing to Indian industry. ICICI Bank started as a wholly owned subsidiary of ICICI Limited. Four years later, when the company offered ICICI Bank's shares to the public, ICICI's shareholding was reduced to 46%. In the year 2000, ICICI Bank offered made an equity offering in the form of ADRs on the New York Stock Exchange (NYSE), thereby becoming the first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE. In the next year, it acquired the Bank of Madura Limited in an all-stock amalgamation. Later in the year and the next fiscal year, the bank made secondary market sales to institutional investors.

With a change in the corporate structure and the budding competition in the Indian Banking industry, the management of both ICICI and ICICI Bank were of the opinion that a merger between the two entities would prove to be an essential step. It was in 2001 that the Boards of Directors of ICICI and ICICI Bank sanctioned the amalgamation of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. ICICI Group Companies :

• ICICI Group

• ICICI Prudential Life Insurance Company • ICICI Securities

• ICICI Lombard General Insurance Company • ICICI Prudential AMC & Trust • ICICI Venture • ICICI Direct • ICICI Foundation • Disha Financial Counselling • ICICI Bank also has banking subsidiaries in UK, Canada and Russia Page No - 52

[8.2] Current Scenario in ICICI Bank Established in 1994, ICICI Bank is today the second largest bank in India and among the top 150 in the world. In less than a decade, the bank has become a universal bank offering a well diversified portfolio of financial services. The hallmark of this exponential growth is ICICI Bank’s unwavering focus on technology.

ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$ 81 billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year ended March 31, 2010. The Bank has a network of 2,016 branches and about 5,219 ATMs in India and presence in 18 countries. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). Expansion and brand recognition have come through acquisitions and mergers as well. The bank believes its strength is constant innovation in retail products and hi-tech delivery channels. Nearly 70 per cent of its transactions take place electronically, and it was among the first banks to go online for all services including opening and using accounts and utility payments.

Under Bancassurance business, ICICI Bank has subsidiary named ICICI Prudential Life Insurance Co. Ltd. and ICICI Lombard General Insurance Co. Ltd. ICICI Prudential Life Insurance Co. Ltd. is a joint venture between ICICI bank and Prudential Plc, a leading international financial services group whose headquarters is in the United Kingdom. It was established in December 2000 after receiving an approval from Insurance Regulatory Development Authority (IRDA). ICICI Lombard General Insurance Co. Ltd. was established in August 2001. It is a joint venture between ICICI Bank Ltd. and Fairfax Financial Holding Ltd, Canada.

Page No - 53

[8.3] About IDBI Bank IDBI Bank Limited is an Indian government-owned financial service company, formerly known as Industrial Development Bank of India, headquartered in Mumbai, India. It was established on 1st July 1964 by an Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India to provide credit and other financial facilities for the development of the fledgling Indian industry. IDBI Bank is the youngest, new generation, public sector universal bank that rides on a cutting edge core banking Information Technology platform. This enables the Bank to offer personalized banking and financial solutions to its clients. The Bank had an aggregate Balance sheet size of Rs.3, 28,997 crore and total business of Rs.4,33,460 crore as on March 31, 2014. IDBI Bank's operations during the financial year ended March 31, 2014 resulted in a net profit of Rs. 1121 crore. Vision for the Bank is “TO BE THE MOST PREFERRED AND TRUSTED BANK ENHANCING VALUE FOR ALL STAKEHOLDERS”. It is currently 10th largest development bank in the world in terms of reach, with 2713 ATMs, 1513 branches, including one overseas branch at Dubai, and 1013 centers, including two overseas centres at Singapore & Beijing. IDBI Bank is on a par with nationalized banks and the SBI Group as far as government ownership is concerned. It is one among the 26 commercial banks owned by the Government of India.

IDBI Group of Companies : • IDBI Capital Market Services Limited (ICMS) • IDBI Asset Management Limited (IAML) • IDBI Federal Life Insurance Company Limited (IDBI Federal) • IDBI MF Trustee Company Limited (IMTCL) • IDBI Intech Limited (IIL) Page No - 54

[8.4] Current Scenario in IDBI Bank IDBI Bank Ltd. is today one of India's largest commercial Banks. For over 40 years, IDBI Bank has essayed a key nation-building role, first as the apex Development Financial Institution (DFI) (July 1, 1964 to September 30, 2004) in the realm of industry and thereafter as a full-service commercial Bank (October 1, 2004 onwards). As a DFI, the erstwhile IDBI stretched its canvas beyond mere project financing to cover an array of services that contributed towards balanced geographical spread of industries, development of identified backward areas, emergence of a new spirit of enterprise and evolution of a deep and vibrant capital market. On October 1, 2004, the erstwhile IDBI Bank converted into a Banking company (as Industrial Development Bank of India Limited) to undertake the entire gamut of Banking activities while continuing to play its secular DFI role. Post the mergers of the erstwhile IDBI Bank with its parent company (IDBI Ltd.) on April 2, 2005 (appointed date: October 1, 2004) and the subsequent merger of the erstwhile United Western Bank Ltd. with IDBI Bank on October 3, 2006, the tech-savvy, new generation Bank with majority Government shareholding today touches the lives of millions of Indians through an array of corporate, retail, SME and Agri- products and services. Headquartered in Mumbai, IDBI Bank today rides on the back of a robust business strategy, a highly competent and dedicated workforce and a state-of-the-art information technology platform. As a Universal Bank, IDBI Bank, besides its core banking and project finance domain, has an established presence in associated financial sector businesses like Capital Market, Investment Banking and Mutual Fund Business. IDBI Bank offers Life Insurance Solutions to suit various customers segments through IDBI Federal Life Insurance Co. Ltd. It was formed on March 2008. It is a joint venture between three financial companies i.e. IDBI Bank, Federal Bank and European insurer Ageas formally known as Fortis. The bank has also entered into an agreement with Bajaj Allianz General Insurance Co. Ltd. to provide Non Life or General insurance requirement from the year 2008.

Page No - 55

[8.5] Field Work on ICICI Bank and IDBI Bank The main objective of this study is the Comparative study of Bancassurance between a Private and Public Sector Bank in India. The performance of both banks and insurance companies inter‐depend on each other. The following study shows the impact of bancassurance on the overall financial performance of Banks with respect to Insurance in India. For this purpose, I have selected 2 different banks from different areas in Mumbai. I made a field visit to ICICI Bank of Worli Branch and IDBI Bank of Cuff Parade Branch. There I met Mr. Raja Ramchandra working in the ICICI bank as a Relationship Manager and Mr. Deepak Shejwal working in the IDBI Bank as Assistant General Manager. I asked them about some relevant information on bancassurance and they solved my queries about the same. Bancassurance has surely paved the way for banks to grow. Although there are number of other factors which contributed to the growth of banks, but bancassurance is one of the factors. I asked them the following questions:

Page No - 56

[8.6] Questionnaire Q1)

What is Bancassurance according to you?

ICICI: Bancassurance is a channel between ICICI bank and ICICI Prudential Life Insurance and ICICI Lombard. Banks get revenue from insurance company. They sell it along with regular transactions of the bank. IDBI: Bancassurance is an extra transaction carried on by banks acting as an agent by providing insurance related service. We have tied up with Bajaj Allianz for providing general insurance and IDBI Federal Life Insurance Company Ltd for providing insurance for life. Q2)

What is the difference between the services provided by bank and insurance company?

ICICI: There is no difference between services provided by bank and insurance company. It is one and the same because they both sell the same products be it in the insurance company or the bank. The only difference is that customers regularly visit the banks and not the insurance company. IDBI: In today’s busy life no one really has the time to literally go to and get themselves or their things insured. Here banks play a major role as they know their customers quite well and can help them to choose their set of policies. Q3)

How do you sell the insurance policies?

ICICI: The insurance policies are sold in 4 ways that is: Bancassurance, Direct marketing, Tied agency, Priority circle, etc. IDBI: The insurance policies here are sold through bancassurance, tied agency and direct marketing.

Page No - 57

Q4)

Who will do the Branding?

ICICI: In Bancassurance case, the branding is done by our own bank for its customers. Though the Insurance Company helps us with the Brochures and presentations, but it is our job to make it noticeable to the customer, when he comes, i.e. walks into our Bank. Branding is done majorly by us for the policies. IDBI: The insurance companies do their part of branding. They don’t have to promote our bank or per se our Banking products, but we have to. They have tie ups with various banks, but we are allowed only 1 tie-up for Life insurance and 1 tie-up for General insurance. So whatever of their products or policies we deal into are branded by us for our customers, so that they may know that even we deal into such insurance policies. Q5)

Who sells the policies, bank employees or the insurance employees?

ICICI: A particular representative from ICICI prudential is appointed in our Branch to transact in bancassurance. All the insurance products are sold through him. He acts as an advisor to the customers who are interested in taking up insurance policies. IDBI: Employee of IDBI bank with required qualification and who is fit for the job of acts as a representative and sells the policies. Q6)

Are the employees trained by insurance companies or by banks?

ICICI: The employees are trained by insurance companies. They are provided with individual or group training as the time permits. IDBI: The employees are trained for 6 months by insurance companies thereafter they are eligible to work as an agent for banks selling insurance policies. Q7)

Do the employees get extra salary for selling insurance policies?

ICICI: No the employees don’t get any extra salary. The overall commission is given to the bank itself by the Insurance Company for the selling the policies. Insurance companies do this because it gets its business from banks. They promote their policies

Page No - 58

in banks. Banks get the revenue and accordingly it gives promotions and incentives to its employees based on their performances. IDBI: No benefit as such in salaries are given to the employee acting as an insurance agent in IDBI banks but some commission is given to the bank by Bajaj and IDBI Federal Life Insurance Company. Such rates of commission differ from banks to banks. Q8) Which kind of customers do you target? ICICI: Bank basically offers insurance policies to its regular retail customers based on the balances in their respective accounts. Mainly we target the NRIs and the HNIs (High net worth individuals). Currently it is the NRI season so we are mainly targeting the NRIs. IDBI: We target the existing customers as well as any walk in Potential Client in need to get insured. Also we have various attractive policies for the Business People and their families who have their Current Accounts with us. Q9)

How do you recruit your agents?

ICICI: Agents are recruited on the basis of IRDA exams with training of 50-80 hours. Without Proper Training, they won’t be able to handle the Customers properly. IDBI:

Bank employees have to undergo an exam kept by the IRDA. Only after

achieving the certificate approved by IRDA can the bank employee act as an agent with our Bank. Q10) What benefits does an insurance company get through Bancassurance? ICICI: Bank sells more insurance policies along with their regular products. They get more business through banks. They know the customers need and accordingly guide the customers. IDBI: Being a public bank, there is more assurance in the minds of the account holders that their premiums are paid on time and that other formalities are carried on smoothly

Page No - 59

by the banks on behalf of the customers. This helps to build a strong relationship among them proving an increased sale of insurance policies. Q11) Do you think bancassurance is increasing customer loyalty to the bank? ICICI: Innovative and better product ranges can be tailored according to the needs of the customers, which otherwise would not have been possible if banks and insurers worked independently. This increases the customer loyalty of the bank. IDBI: Easy access for claims as banks is a regular visiting place for customers and also due to the increase in competition, customers can expect improved premium rates and better‐quality services from Bancassurance as compared to traditional insurance companies. This unique quality definitely increases the customer loyalty.…………….

Q12) In your opinion is bancassurance increasing total other income of the bank? ICICI: Bancassurance can facilitate banks to collect non‐fund income which can increase the interest income and also profitability of the banks. IDBI: Banks can cross sell insurance products. The concept of cross‐selling also gives the advantage which will help them to improve the efficiency of the banks like, more interactions with the clients, will lead to more overall sales. E.g.: Term insurance products with loans. Q13) How many policies are sold till now in this financial year? ICICI: Almost 1 crore worth of policies were sold till the month of December in the Worli branch for this financial year 2014-2015. IDBI: Almost 50 thousand worth of policies were sold till the month of December in the Cuffe Parade branch of IDBI bank.

Page No - 60

[8.7] Comparison of Bancassurance between ICICI and IDBI Bank Bancassurance Sales by ICICI and IDBI Bank Year

2008-09 2009-10 2010-11 2011-12 2012-13

ICICI

ICICI

Prudential

Lombard

(Rs. in Crores) -780 258 808 1384 1496

(Rs. in Crores) 24 144 -80 -416 3.06

IDBI Federal

Bajaj Allianz

(Rs. in Crores) 6 21 33 31 45

(Rs. in Crores) 2 2 4 3 4

Source: Annual reports of IDBI Bank and ICICI Bank from 2008 to 2013

Under bancassurance business, ICICI Bank has subsidiary named ICICI Prudential Life Insurance Co. Ltd. and ICICI Lombard General Insurance Co. Ltd. IDBI Bank offers life insurance solution to various customers through IDBI Federal Life Insurance Co. Ltd and also has a corporate agent Bajaj Allianz General Insurance Co. Ltd for general insurance. Thus based on the above stated facts in the table, it is very much clear that here, ICICI Bank is the clear winner. Income from life insurance business of ICICI Prudential has increased significantly. Whereas, insurance income from IDBI Federal and Bajaj Allianz showed a fluctuating growth trend.

Therefore, from the above statements we can conclude that bancassurance is still in its infancy stage and gradually it is gaining recognition in the market. Insurance companies are using banks to sell their products because of the wide network of the banks. As bank is an instrument for insurance companies for earning income, insurance companies are taking a huge portion from the profits of the banks for their business. This relationship is convincing yet highly challenging. ICICI bank, through its subsidiaries, has managed to achieve it, with its extensive marketing strategy.

Growth rate of insurance income is remarkable in some of the banks so there is very good scope for further development in the selling of Bancassurance products by the banks in the long run. Hence, it is too early to judge its potential today. Page No - 61

Chapter 9→ Findings and Recommendations

[9.1] Findings While pursuing the research study, I have come across certain finding pertaining to the theory of bancassurance and they are stated as under:  Quite a few people have a reasonable idea about bancassurance and that their

banks vend various insurance products. But still few people do not know about bancassurance as a concept.  It has been found that banks have many prospects to cross sell insurance

products. The insurance companies may seize the advantage of bank’s wide network and other opportunities to sell their products.  A brand’s name and its image is a very important aspect in marketing a product

line. Hence the banks and the insurance companies must tie-up with the right partners which will help them to generate a better image in the minds of the customers.  Customers have abundance of trust on the banks and because of this reliance the

customers may obtain insurance products from banks.  Private sector banks and foreign banks have a better future in bancassurance.

However the public sector banks are also trying to give a strong competition e.g. SBI Life Insurance Co and IDBI Bank.  Many people in the rural parts of India are still unaware about insurance so, a

huge potential is there before them to be tapped for life insurance business.  Currently banks are trying to offer all kinds of services to its customers. So by

providing insurance, banks can include an extra service to their catalog.

Page No - 62

[9.2] Recommendations  The employees of the banks must be given appropriate training to sell insurance products so that they can respond to any queries of the clients and can supply them with products according to their needs.  The insurance companies need to design products specifically for distributing through banks. Trying to sell traditional products may not work so effectively.  Banks should also provide after sales services.  In order to increase the sale, the public sector banks should be more rigid in selling the insurance products.  Banks should also do the settlement of claims which can increase the trust and reliability of the customers on the banks.  Public sector banks are well known for their lethargic attitude and for providing poor quality of customer services. In order to succeed in bancassurance business they should reconstruct their imperfect image.  The bank’s management and the management of the insurance company should amicably be able to resolve any conflicts arising between them in future.  Banks and insurance companies should improve the products frequently according to the needs of the customers.

Page No - 63

[9.3] Conclusion Today all the banks are giving importance to retain their customers as they are the inevitable part of the business. Bancassurance income can only be raised by providing better services. In this part, the public and private sector banks are competing with each other which in turn influence the economy. And majority of the general public is not giving much importance to public or private sector banks instead they are giving priority for the convenience.

In the consolidating world of financial services, the concept of bancassurance has taken a central role in the strategy of a growing number of financial institutions. Insurance products distributed through the banking channel have become a natural choice for mass-market clients looking for simple and low-cost products available from a trusted financial institution.

The success of bancassurance greatly hinges on banks ensuring excellent customers relationship; therefore banks need to strive towards that direction. The fact that the banking operations in India, unlike in other developed countries, are still branch oriented and manually operated vis-à-vis highly mechanized and automated banking channels, viz., internet banking, ATMs, etc. are all the more conducive for flourishing of bancassurance. Regulators could explore the possibility of allowing banks having tie-up arrangements with more than one insurance company, giving wider choice for the customers. In addition to acting as distributors, banks have recognised the potential of bancassurance in India and will take equity stakes in insurance companies, in the long run. Adequate training coupled with sufficient incentive system could avert the banks’ staff resistance if any. In sum, bancassurance strategy would be a ‘win-win situation’ for all the parties involved - the customer, the insurance companies and the banks.

Page No - 64

The concept of bancassurance in India is still in its emerging stage. But an incredible potential reveals that bancassurance in India has a very bright future. Recently various innovations have taken place in the insurance sector to suit and satisfy the growing needs of various customers. So, there is every reason to be optimistic that bancassurance in India will play a long inning. However, bancassurance segment is still facing many problems because of poor manpower management, lack of call centers, less personal contact with customers, insufficient incentive to the agents etc.

India has a potential market for insurance companies particularly in rural areas. Setting up a network and creating infrastructure for doing business attracts a huge investment by the insurance companies. Bancassurance is a better alternative in this area where insurance

companies

without

investing

on

advertisement,

market

channels,

infrastructure etc does business. The database shared by the bank in this regard help the insurance companies to target the customers easily.

Banks are having the database of their customers and besides it the reputation and recognition of the bank also help in the selling of insurance products by the insurance companies. But we would like to state at this stage that bancassurance would not be successful to the extent it should be due to the poor manpower management, untrained bank staffs in selling the insurance products, lack of incentives to agents, lack of accountability of bank managements for their customer complaints, ambiguity regarding grievance redressal forum etc.

In addition to it, there are also certain issues which need to be clarified by the authorities such as the jurisdiction and interference of RBI and IRDA. I would rather suggest that there should be a separate regulator for regulating Bancassurance and provide remedy for any grievances. It is very important that insurer and bankers must have a good understanding of each other and proper strategy to capture the opportunity and service for their customers. Finally, we appreciate the concept of Bancassurance and feels it is an efficient and cost effective measures for the insurance companies. Page No - 65

[9.4] Bibliography

 Brahmam, R, Lokanandha Reddy Irala, Aparna Pulugundla, “Bancassurance in India‐ Issues and Challenges”, Pratibimba. Vol. 4, No.1, Jan. 2004.  Jyotsana Sethi & Nishwam Bhatia “Elements of Banking & Insurance”, Prentice Hall of India Pvt. Ltd. New Delhi, 2007.  Sathya Swaroop Debashish & Bishnupriya Mishra “Indian Banking System ‐ Development, performance & services”, Mahamaya Publishing House, New Delhi, 2005  Nalini Prava Tripathy & Prabir Pal “Insurance Theory & Practice”, Prentice Hall of India Pvt. Ltd. New Delhi, May 2006.  Santosh Kumar “Bancassurance: Distribution Channels and Strategies in an Emerging Market” Global Vision Publishing House, June 1, 2013

Websites  http://www.idbifederal.com  http://www.iciciprulife.com/public/About-us/About-Us.htm  http://www.icicibank.com  http://www.irda.gov.in  http://www.allbankingsolutions.com/Banking-Tutor/bancassurance.html  http://www.idrbt.ac.in/publications/nl_october04.pdf  http://www.einsuranceprofessional.com  https://www.policymantra.com/blog/irdai-called-for-open-architecture-ofbancassurance/

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