Comparison Of Insurance And Bancassurance

With the beginning of 21st Century, a new revolution in distribution of insurance products emerged. The synergies between the banking and insurance industry suddenly came to limelight and picked up like a wild-fire in a very short span. Equally interesting is the fact that the concept got appreciated across all the countries; developed and developing countries alike. Bancassurance, the provision of insurance services by banks, is an established and growing channel for insurance distribution, though its penetration varies across different markets. Europe has the highest bancassurance penetration rate.

In contrast, penetration is lower in North America, partly reflecting regulatory restrictions. In Asia, however, bancassurance is gaining in popularity, particularly in China, where restrictions have been eased. The research shows that social and cultural factors, as well as regulatory considerations and product complexity, play a significant role in determining how successful bancassurance is in a particular market. Despite having a relatively short history in India, bancassurance is already a major focus for many companies and with a significant market share that is growing exponentially.

Wyatt estimates that the current industry average of non-agency distribution of life insurance in India is over 25 per cent and growing. This paper would study and address the issues related to bancassurance, particularly in India. Strategic considerations at macro economic level on future outlook have also been discussed along with suggestions and recommendations to sustain the growth that it has witnesses till now.

Bancassurance = Insurer’s Product + Bank’s reach: To put in simple words, bancassurance is the provision of insurance banking products and services through the distribution channel of a bank or to a common client base.

The usage of the word started picking up when the financial markets witnessed mergers and alliances between the two booming segments – banking and insurance. According to a recent sigma study, bancassurance is on the rise, particularly in emerging markets. Worldwide, insurers have been successfully leveraging bancassurance to gain a foothold in markets with low insurance penetration and a limited variety of distribution channels. Banks world over 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. Banks seek to retain customer loyalty by offering them a vastly expanded and more sophisticated range of products. Customers also want a “one-stop shop” for all their financial needs. Therefore banks are trying to provide more services and integrate them into their business model. Bancassurance is one such initiative. Further the risks involved in doing this business is very low. Banks are also trying to integrate this business into their own business. Customers would also get this benefit as these products are offered not only by their sales force but also by net banking and other IT enabled services like ATM etc.

Insurance companies also have a wide range of insurance products catering to a wide range of needs. Bancassurance is beneficial for insurance companies as well as they would be cutting costs and cross-selling apart from the wider reach of their insurance products. In a country like India, where the need of insurance is not felt by customers, insurance companies should try to exploit every opportunity of selling their insurance products which Bancassurance promises.

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

Fee-based income for bank – non-funds revenue: Internationally, insurance activities contribute significantly to banks’ total domestic retail revenues. Fee-based selling helps to enhance the levels of staff productivity in banks. This is crucial to bring higher motivation levels in banks in India. The revenue earned through bancassurance alliances are categorized as revenues through fee based income. Such revenues are non-funds revenue and have an additional advantage to the bank that it carries no capital reserve maintenance provision with it.

Similarly, increase brand equity and customer retention by becoming full-service provider is something that every bank would care for. Off late, all Indian banks are trying to increase their proportion of fee based income in their total income.

Selling insurance to existing mass market banking customers is far less expensive than selling to a group of unknown customers. Experience in Europe has shown that bancassurance firms have a lower expense ratio. This benefit could go to the insured public by way of lower premiums. Further for any new entrant in the insurance market, using the already established network and infrastructure of banks makes mores sense than building the entire chain from the scratch. Similarly, banks can put their energies into the `small-commission customers’ that insurance agents would tend to avoid.

Customer relationships: Insurance companies lag far behind in terms of effective customer relationship that they could maintain. The trust and esteem with which a customer holds bank will not be same for an insurance company. Similarly for banks, it gives them an opportunity to serve their existing customers better. Increased brand equity and customer retention by becoming full-service provider is something that every bank would care for. There is now a need for explicit distinction between at least three customer segments for bancassurance:

• The traditional “mass market” bancassurance Private Bancassurance (aimed at wealthy individuals)
• Corporate bancassurance and SMEs (small to medium-sized enterprises) to reach their employees.

Operational efficiency: According to Boston Consulting group, the US banks were able to capture 10-15% of investment and insurance markets by targeting 20% of customers and operate at expense levels 30-50% lower than those of traditional insurers. One of the most important reasons of considering Bancassurance by Banks is increased return on assets (ROA). One of the best ways to increase ROA, assuming a constant asset base, is through fee income.

Banks that build fee income can cover more of their operating expenses, and one way to build fee income is through the sale of insurance products. Banks that effectively cross-sell financial product can leverage their distribution and processing capabilities for profitable operating expense ratios. The ratio of expenses to premiums, an important efficiency factor in insurance activities through bancassurance is extremely low. This is because the bank and the insurance company is benefiting from the same distribution channels and people.

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

• Banks selling products of their insurance subsidiary exclusively.
• In this model, banks setups its own insurance subsidiary and sells its insurance products. In this setup, the products of this insurance subsidiary are not allowed to be sold by any other bank.
• Banks selling products of an insurance affiliate on an exclusive basis. In this model, the bank gets into an agreement with an insurance agency and sells their insurance product to its existing customers. In this setup also, the banks might get into an exclusive agreement with the insurance company.
• Banks offering products of several insurance companies as `super market’.

Here the bank gets into agreement of selling insurance products of as much insurance companies possible and sells it to its customers. Here the customers can choose between wide ranges of products but the insurance companies would not prefer this as their products would not be always preferred. Corporate Broker model A corporate broker is effectively a principal corporate adviser to an investment trust company. Here the bank is acting as a corporate adviser to an insurance company. The broker would make a certain amount of money from dealing commissions and market making and a great deal more from relatively infrequent corporate deals.

This relationship does not end up in long term relationship or exclusive relationships between the bank and the insurance companies. Corporate Agency Model In India, insurance companies prefer corporate agency tie-ups with banks, as against referral arrangements. Another advantage for banks is that the risk is borne entirely by the insurance company. The growth potential of corporate agency system is immense because we can cross sell several products to our customers. Insurance agents sell only insurance or mutual fund products. Innovation of products is also possible under the corporate agency arrangement.

This model is attractive for the banks as it offers handsome returns (up to 35% in the first year of new business procured) involves very low start-up costs (investment in the time and licensing of employees) and the business risk is underwritten entirely by the insurance companies. Insurance products wrapped around the Bank’s loan and deposit products have also been gaining in popularity due to their mass appeal and simple product design while the referral model tie-ups have not been that successful. A few banks like Allahabad Bank and Bank of India have even migrated from the referral model to the Corporate Agency model.

Traditional vs. Expanded Bancassurance Models: In some markets, face-to-face contact is preferred, which tends to favour bancassurance development. Nevertheless, banks are starting to embrace direct marketing and Internet banking as tools to distribute insurance products. New and emerging channels are becoming increasingly competitive, due to the tangible cost benefits embedded in product pricing or through the appeal of convenience and innovation. Finally, the marketing of more complex products has also gained ground in some countries, alongside a more dedicated focus on niche client segments and the distribution of non-life products.

The drive for product diversification arises as bancassurers realize that over-reliance on certain products may lead to undue volatility in business income. Nevertheless, bancassurers have shown a willingness to expand their product range to include products beyond those related to bank products.

Banks: The focal point : Traditionally, the banks and financial institutions are the key pillars of India’s financial system. Public have immense faith in banks. Share of bank deposits in the total financial assets of households has been steadily rising (presently at about 40%).

Indian Banks have constantly proven their capability reach the maximum number of households. In India at present there are total of 65700 branches of commercial banks, each branch serving an average of 15,000 people. Out of these are 32600 branches are catering to the needs of rural India and 14400 to semi-urban branches, where insurance growth has been most buoyant. (196 exclusive Regional Rural Banks in deep hinterland. ) Rural and semi-urban bank accounts constitute close to 60% in terms of number of accounts, indicating the number of potential lives that could be covered by insurance with the frontal involvement of banks.

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

Bancassurance – global perspective: Bancassurance has seen tremendous acceptance and growth across nations. Although it enjoys a penetration rate in excess of 50% in France, Spain, Italy and Belgium, other countries have opted for more traditional networks. The Life insurance market in the UK is largely in the hands of the brokers. With advent of bancassurance, their market share has increased from 40% in 1992 to 54% in 1999. Sales agents also play an important role on a market entirely regulated by the Financial Services & Markets Act (FSMA) which imposes very strict marketing conditions.

In 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.

Though bancassurance has traditionally targeted the mass market, bancassurers have begun to finely segment the market, which has resulted in tailor-made products for each segment. The quest for additional growth and the desire to market to specific client segments has in turn led some bancassurers to shift away from using a standardized, single channel sales approach to adopting a multiple channel distribution strategy. Some bancassurers are also beginning to focus exclusively on distribution. Wealth management, pioneered by Lombard International Assurancehas found its way in bancassurance alliances.

Termed as Private Bancassurance, the concept combines private banking and investment management services with the sophisticated use of life assurance as a financial planning structure to achieve fiscal advantages and security for wealthy investors and their families As a medium of selling insurance products, Bancassurance moved from second position in 2004 to first position in 2006. Worksite marketing which was in the top position in 2004, fell to fourth position in 2006. Bancassurance moved from second position in 2004 to first position in 2006.

Worksite marketing which was in the top position in 2004, fell to fourth position in 2006. Banks’ insurance sales are high in countries where the products tend to be relatively simple and are a natural fit with banks’ existing products. The life insurance products most successfully sold by bancassurers are mostly simple-deposit-substitutes such as single-premium unit-linked or capitalization products. In France, financial institutions accounted for 66% of single premium unit-linked life business in 2005. In general, bancassurers have been less successful in selling more complex savings products such as pensions.

Manhattan consulting group in its survey has found positive co-relation between number of products an institution deal in an the attrition levels. It showed that with increase in product count, the attrition level tends to decrease sharply as the employee engagement increases. Quantum of productsAttrition levels One Product (interest bearing account)27% One Additional product20% 2 or more products17%

Bancassurance: The Challenges Banks could be more enduring than individual agents when selling insurance, but bancassurance relationships are not. Since the opening up of the insurance sector in ’00, as many as six bancassurance alliances have ended in divorce says Economic Times. If bancassurance was termed as marriage between banks and insurance, then the probability of divorces can’t be ruled out. Critics opine that bancassurance is a controversial idea, and it gives banks too great a control over the financial industry. The challenge to sustain such alliances could be immensely daunting. The difference in regulation, not only across countries but between banks and insurance industry as well has been cited as the primary reason.

The difference in trade customs, work culture in these industries is another impediment Sales front: Bank employees are traditionally low on motivation. Lack of sales culture itself is bigger roadblock than the lack of sales skills in the employees. Banks are generally used to only product packaged selling and hence selling insurance products do not seem to fit naturally in their system HR issues: Human Resource Management has experienced some difficulty due to such alliances in financial industry.

Poaching for employees, increased work-load, additional training, maintaining the motivation level are some issues that has cropped up quite occasionally. So, before entering into a bancassurance alliance, just like any merger, cultural due diligence should be done and human resource issues should be adequately prioritized. Public and private divide: Private sector insurance firms are finding ‘change management’ in the public sector a major challenge. State-owned banks get a new chairman, often from another bank, almost every two years, resulting in the distribution strategy undergoing a complete change.

In the private sector, the M&A activity is one of the causes for change. In the past, Dena Bank, which had originally partnered Kotak Mahindra Life, switched loyalty to the public sector Life Insurance Corporation? So did Allahabad Bank, which had a tie-up with ICICI Prudential Life Insurance. Punjab National Bank and Vijaya Bank have been forced to drop their bancassurance partnerships after they chose to set up an insurance broking JV. Group companies dilemma: The other conflict that most insurers face is when they have a bank within their own group.

Half of the insurance firms in India are part of a financial group that has a bank. They include ICICI Bank, State Bank of India, ING Vysya, HDFC, Jammu & Kashmir Bank, and Kotak Mahindra Bank. According to Rajesh Relhan, head of bancassurance, Aviva Life, there is a fear among banks that at some point in future their insurance partner may end up cross-selling banking services to their policyholders. Besides, companies that sell predominantly through agents experience channel conflict when both agents and banks target the same customer.

Operational Challenges: The developments in the 21st century, particularly due to increase in non-life insurance products pose further problems to the bancassurance alliances:

• The shift away from manufacturing to pure distribution requires banks to better align the incentives of different suppliers with their own.
• Increasing sales of non-life products, to the extent those risks are retained by the banks, require sophisticated products and risk management.
• The sale of non-life products should be weighted against the higher cost of servicing those policies. Banks will have to be prepared for possible disruptions to client relations arising from more frequent non-life insurance claims.

Bancassurance: Future outlook and Recommendations: The outlook for bancassurance remains positive. While development in individual markets will continue to depend heavily on each country’s regulatory and business environment, bancassurers could profit from the tendency of governments to privatise health care and pension liabilities. In emerging markets, new entrants have successfully employed bancassurance to compete with incumbent companies.

Given the current relatively low bancassurance penetration in emerging markets, bancassurance will likely see further significant development in the coming years. We recommend following for sustainable and inclusive growth in bancassurance alliances. a. Bancassurance to Banc-sec-urance: A step towards Universal Banking Securities business seems an automatic extension to bans and insurance. This integration will be a step further towards universal banking and would leverage the efficiencies developed by alliance of banks and insurance companies. It will be for customers who want to get a one-stop shop for all financial products.

So the banks should transform themselves to a wholesome entity. This has to be integrated with the internet banking and other IT infrastructure, for e. g. customers should be able to pay insurance premium, margin money on security transaction via the net-banking facility and the ATM network. b. Involvement of Co-operative banks: Insurance industry has very low penetration rate in India. The market and scope in rural India is immense and largely untapped. The insurance companies should actively try to involve co-operative and regional rural banks amongst their potential alliances along with the big and multinational banks.

These co-operative banks will have greater reach in villages of rural India and will also operate at economic cost. c. Minimize conflicts of interest between the bank and the insurer: A formal and standard agreement between these banks and the insurance companies should be taken up and drafted by an national regulatory body. These agreements must have necessary clauses of revenue sharing. In case of possible conflicts, the bank management and the management of the insurance company should be able to resolve conflicts amicably. If they are not solved, there can be a apex body set up by IRDA to solve these types of issues.

This could be done by Setting up distribution procedures consistent with the manual systems in most banks. Establishing credible service level agreements between the bank and the insurer. d. Involvement of senior bank management and skill development at the operating level at bank branches: The bancassurance alliances should be taken up at the top management level. Such strategic actions require the senior management support not only during the decision stage but also at the time of implementation. Their active participation in the process is very much necessary for the success of such initiatives.

The employee base that would be interacting with the insurance customers should also be properly trained in order to equip themselves with the skills required in selling insurance products. The bank employees would not be aware of these selling skills if proper training is not given.

Bancassurance and pension sector: Pension sector is at the verge of being deregulated. Once this sector is deregulated, banks would get the dual benefits of managing these huge pension funds and the opportunity to sell mainly health insurance products to these pension sector customers.

Low cost of collecting pension contributions is the key element in the success of developing the pension sector. Money transfer costs in Indian banking are low by international standards. Portability of pension accounts is a vital requirement which banks can fulfill in a credible framework. f. Focus on Group insurance schemes: Considering the behavior of the Indian customers, group insurance is the way to go about. As joint accounts or individual accounts of families are very prominent, we will have to sell these insurance products to these members of the family as a group.

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

Targeting frequent travelers (travel insurance): In India, though some of the airlines have travel insurance, there is no income from these frequent travelers. As frequent travelers are targeted by these airlines by giving concessional fares, banks can sell them travel insurance at some concessional premiums. This would be additional revenue to the insurance company as well.

Tie-ups with residential complex builders (householder’s insurance): House loans and householder’s insurance can be linked. Banks have huge exposures to house loans. Now as far as the customers are concerned, they would prefer householder’s insurance also as a package along with the house loans.

The collection of premiums would also not be a problem. Normally these customers give post-dated cheques. Therefore premiums can also be collected in the similar fashion. Some concessions to the customers can be given like extension of payment period etc. Insurance in business activities can also be targeted as banks have considerable exposure to corporate loans.

National level healthcare programme: Banks can play a major role in developing a viable healthcare programme in India. Only 2. 5 million people have access to healthcare facilities. There is a growing demand for healthcare products which banks can distribute (and facilitate administration). Banks would be the best medium to distribute health insurance plans and create awareness amongst the people. The Government of India and its planning commission can leverage this bancassurance concept to launch a nation wide healthcare programme.

References

1. R. Krishnamurthy, SBI Life Insurance, “Bancassurance in Insurance Distribution: Key Issues in the Indian context”, FICCI seminar, October 2001
2. Watson Wyatt Bancassurance Benchmarking Study™ – India 2006
3. Stephen Clinton, “Bancassurance and worksite marketing: Developing alternate distribution channels”, Montego Bay, June 2006
4. SCOR technical newsletter, “Bancassurance across the globe Meets with very mixed response”, February 2003
5. Tapen Sinha, “Bancassurance in India: Who is tying the knot and why”; “Privatization of the Insurance Market in India: From the British Raj to Monopoly Raj to Swaraj”, CRIS, 2002
6. Bancassurance in Emerging Markets -“Building Perspective Partnerships” Jan 15, 2008 – Jan 16, 2008, Budapest, Hungary
7. Business of Insurance Information in Canada (www. insurance-canada. ca)
8. Sigma report, “Bancassurance: emerging trends, opportunities and challenges”, Swiss Re, 2007
9. PriceWaterhouseCoopers report – “ Emerging trends and strategic issues in South African Insurance”, 2006
10. Graham Morris, Watson Wyatt, “Bancassurance in the Indian Environment”
11. Annual report, Insurance Regulatory and Development Authority, India (IRDA), 2005-2006
12. J. Tyler, Leverty, “Are synergies between banks and insurers hyped? Evidence from Citigroup-Travelers divestiture, Virginia Commonwealth University (2006)
13. Exhibits: Exhibit 1: Fee based income to total income for banks Exhibit 2: New Business (Life) Undertaken under various intermediaries (2005-2006) InsurersIndividual agentsCorporate AgentsBrokersReferralsDirect Business BanksOthers