Bancassurance - Concept, Scope and Strategies Dr K Ramesha, Professor
Bancassurance • Globalization • Financial Sector Reforms resulting in financial services consolidation • Subsidiary route • Universal banks • Bancassurance • Bank to insurance company (credit agricole) and vice versa (ING of Netherlands - merger of insurance company
Bancassurance 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 post Gramm-Leach-Bliley (GLB) Act, 1999 scenario, it is stated to have indicated increased preference for banks co-terminously dealing with other non-banking financial products, including the insurance products. In Asian countries (e.g., Taiwan, Singapore, Japan, etc.) too the trend has been set towards financial supermarket.
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 (SCOR 2003) • 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 nonlife type in any forms
What is Bancassurance? • Alliance between banks and insurers for the sale of insurance through banks • Insurer is responsible for manufacturing or underwriting • Banks serving as distribution channel • In principle, Bancassurance means both way traffic but in reality it is mostly one way • In India the concept of bancassurance is just emerging and is in fact, another distribution channel
Bancassurance as a Concept • Bancassurance means a package fulfilling both banking and insurance needs • Bancassurance is a term first appeared in France after 1980 to define the sale of insurance through banks • LIMRA defines “provision of life insurance services by banks and building societies” • In our country bancassurance largely means distribution of insurance products by banks
Why Bancassurance? • India has high saving rate - huge insurance potential • Banks are major players in the financial sector • Complementarity between banking and insurance products (for example, in mortgage finance banks require their customers to insure themselves against some standard risk) • Credit risk can be better managed with insurance • Banks can increase revenue (NII)
World view Bank’s non-interest income as% of total income India Spain Sw eden Netherland Canada Australia Belgium Italy Germ any France Japan USA UK Sw itzerland
18
0
10
20
25 27
30
31
34 35 36 36 37 38 38 40 40
44
53 50
60
Why Bancassurance? • Wide range of products/services-competitive edge • High fixed cost in retail branches-Bancassurance improves productivity-economies of scale • Banks client base is more than 100 mn • As a response to long-term shift in the pattern of retail savings (insurers are taking a growing share in retail savings)
Bancassurance - Win-Win Solution? Bank • Customer retention • Satisfaction of more financial needs under the same roof • Revenue diversification • More profitable resource utilisation • Enriched work environment • Establish sales orientated culture
Insurance Company • Revenue and channel diversification • Quality customer access • Quicker geographical reach • Creation of brand equity • Leverage service synergies with Bank • Establish a low cost acquisition channel
Bancassurance Models
Referral Arrangements & Corporate Agen Distributio - Dena Bank (Referral) n Alliance - Union Bank of India (Corporate agency) Joint Venture JV - SBI Life (JV with Cardiff SA & SBI), between - ING Vysya (JV with ING & Vysya Bank) Bank& Insurer
Bancassurance Models • But most banks prefer corporate agency model • Bancassurance is still in its nascent stages • Banks despite huge network of branches and growing insurance business have not been able to take significant commission • Public sector banks have unique advantages over other banks (also disadvantages)
Bancassurance Models (Contd. Not Permitted at present in India - Global banks taken the lead Merger Citigroup - Travelers between - Global Insurance Cos taken the lead Bank & Insurer Allianz-Dresdner Bank Credit Agricole-Predica & Pacifica Build or buy (France) own Insurance May bank-May ban Life & Mayban companies Gen Assurance berhard (Malaysia)
Bancassurance
high
Growth
low
Merger between Bank and Insurance Co
Distribution Alliance
Joint Venture between Bank and Insurer
Build or Buy own Insurance or Banking Company Synergies
high
Bancassurance around the Globe 80%
77%
75% 67%
70%
56%
60% 50%
35%
40%
25%
30%
20%
20%
10%
10%
5%
4%
US ma ny
n
Ge r
Sw e
de
UK
Ta iw an Ma lay s ia Ne t he r la nd
ce
Ita ly
Fr a n
Po r
tug
al
0% Sp ain
Bancassurance Share(%)
90%
1%
International Insurance Penetration (i.e.premium in % of GDP 2003) Comparison 20.00% 18.00% 16.00% 14.00% 12.00% 10.00%
16.25%
8.00% 6.00% 4.00% 2.00%
8.14% 3.24%
3.26%
9.58%
18.78%
10.86%
4.23%
0.00% Thailand
India
Malaysia
World average
United States
Japan
United South Africa Kingdom
India ranking is 43 in terms of insurance penetration Source: Swiss Re, Sigma report 12/2003
Insurance Market - Asia
Bancassurance in India
A Case Study of A Regional Rural Bank (RRB Basti Gramin Bank (BGB) sponsored by SBI Encashing new channel of Income – Bancassurance BGB Background – * Bank Sponsored by SBI on Aug, 1980 * Geographical coverage of 3 backward districts of Eastern U.P.
* Branch network of 105 branches (96-Rural & 9-S * Strength of 450 staffs
BGB Case study (Contd.) Process initiated : - Bank management realized potential of Bancassurance, another channel of income to sustain profit -‘Why’,
‘When’ & ‘How’ of Bancassurance was conveyed to individual staff members by bank management.
- Became
first RRB to obtain corporate agency of SBI Life in June,2002.
- Bank carefully identified & selected 21 staffs to be trained as ‘Specified Persons’. - Bank Started first selling simple, pure risk covers “Super Suraksha” Group insurance product to bank customers.
BGB Case study (Contd.) - After gaining confidence & success, Bank introduced saving cum protection policy “Sudershan”. - In Feb 04, Bank introduced SBI Life’s pension products.
Report Card (Mar, 2004) Bank earned 24% of net profit from commission on bancassurance in second year of operation. Rs. in Lacs
Supersuraksha
Sum Assured Premium Collected No of Proposals
7434.00 35.29 10250
Sudershan 2254 150 6764
Bancassurance –New Avenue of Bank Income- Why now ? Necessity is the mother of Invention. • Cut throat competition in core banking activities, • Declining profit margin due to thinning spread, • Slow takeoff in credit, • Adequate liquidity in the banking system, • Less profitable fund based business, • Increasing non interest expenditure. •Banks diversifying into new fee based avenues • Bancassurance is one of such avenues • Income from bancassurance can increase bank ”ROA” without increasing “A”
An conserative estimate of fee income earning from Bancassurance All Scheduled Commercial Banks can earn fee income from bancassurance anywhere between Rs. 9000 Crores and Rs. 5400 Crores within a period of 5 years.
Assumptions : Total Bank accounts Premium target Time Period Commission on FPI Insurance Segment Renewal Premium Segment not covered
Calculation :
-
18 Crores Rs. 2000 from each account holder 5 years 15% to 25% Life Nil Non life, Pension & Health
Maximum---180000000*2000*25%=9000 Crores Minimum –- 180000000*2000*15%=5400 Crores
Bancassurance- Prospects Banks Improvement in profitability & productivity of banks, increase in loyalty of customers, Increase in ROA without increasing ‘A’, Increase in shareholder value, Hedging of credit risk upto certain extent, Increase in retention of customers, Deployment of surplus manpower due to computerization, Creation of sale oriented culture among bank employees.
Bancassurance- Prospects (Contd.) Insurance Lower cost of customer acquisition, Penetration in virgin territory, Creation of brand equity , Increase in profit. Customer One stop shopping of financial services, Lower cost of insurance products, Variety of new products, Hassle free post sale services.
Bancassurance - Where we stand? • Linking banking with insurance is not an easy task (whether it is through holding route, merger, or selling insurance through banks) - regulatory, accounting, business, risks et are the issues • Perhaps, banks in India may be interested in selling only
Bancassurance - Where we stand? The flip side of the bancassurance as revealed by the international experience, are that, as some of the products of insurance, especially from the long term savings point of view, resemble closely that of the term deposits of the banks, there was apprehension that insurance products would supplant the bank products instead of supplementing. There has also been problem that not all the insurance products, the banks could market, in the European countries at least in the initial stage. Furthermore, there were also resistances, in the initial stages, from the insurance agents/ brokers due to apprehension of loss of business for them by channeling insurance products through banks
Bancassurance - Where we stand? • No overall picture of success in Asia • Same is true to some extent in Europe • It is difficult to estimate the share of the total market which could be captured by banks - Spain 70% of the insurance is sold through banks whereas in US it is insignificant • Insurance product has not been successfully integrated into the bank’s existing range of products
Issues in Bancassurance • Please take a look at handout – Bancassurance: A Feasible Strategy for Banks in India, RBI Occasional Paper – Please focus on Bancassurance in India – Some Issues, page 149
Issues and Challenges for Banks • • • • •
Corporate Strategy and support from top Market Analysis Product Positioning Distribution - Branch identification Support to Branches – cultural aspects – training/sensitization – operational procedures
Revisiting Bancassurance • Revamp Organizational Support - Create FSC – unit attached to ZO – marketing insurance (mainly life) and other third party products through branches – sufficiently empowered - sensitized incentivised – pilot project - subsequently replication if successful
Utilizing Branch Network • Bank Culture – Banks are not used to `walk-out approach’ – Systematic approach to `customer encounter’ at branches – Shift from `selling’ to ‘marketing’
• Products – Simple and transaction-based products – Easy to explain and can be sold across the counter – An average bank officer should be able to sell after undergoing special training
Utilizing Branch Network • Remuneration – A thorny issue – Incentives to individuals is, however a must
• Top Management’s Involvement – Banks should see insurance as a key to their business strategy and thus invest necessary resources – A casual foray (as it happened in India with exceptions) in the long-run may be a failure – Integrated approach - insurance should be a part of banking business
Thank you