Chapter I

Introduction to the Study

1. Introduction

The Indian economy has travelled a long way from a restricted close economy during 1950s to
an open and liberalized economy as witnessed right now. The change has not happen in one
single day as it took almost 40 years to bring the necessary changes for the bilateral growth of
the Indian economy vis – a – vis world economy. During the restricted close economic phase
most of the industrial growth was in the hand of government and entire focus was given for the
growth of industrial sectors and infrastructure development. It was an era of planned
development and under various planning commissions; the belief was that the growth at the
higher level will ultimately ‘trickle down’ to the lower level of the society and thus this growth
model was known as ‘trickle-down theory.’ But the theory was not sustained as it failed to
provide the desired result. But it was only during late 80s the policy makers decided to accept the
role of other sectors other than industrial sectors for the betterment and overall growth of the
Indian economy. Traditionally, India is a agrarian economy so role of agriculture sector can’t be
underestimated and rightfully cannot be ignored, but along with these known areas the other
major area which started showing its result was the ‘Service sector’. The Service sector due to
its low capital investment and high returns has shown its impact and among various service
sectors in service industries, financial sector made a significant progress in terms of overall
economic development of the country.

The nationalization of banks gave the much needed capital to the industry where flow of fund
was restricted and the industry made a significant impact to build the economy. Although in case
of India, the Banking sector has shown significant progress, but the same has not been witnessed
in case of other major sector i.e. Insurance. The establishment of LIC in the year 1956 was the
first step in this regard, but it was not possible for a single company to cover the geographical
spread of the country. So, the sector has still remained untapped. The opening up of the
insurance sector brought the much needed development and expansion but the sector still not
growing at a desired level. Being in the service industry, it is expected that selling a product

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which is not visible i.e. intangible benefits is very difficult to its target group of consumers. This
bottleneck generated the demand for a value added specialized services where emphasis is given
on personal selling or customized selling. The one to one approach to sell the product is vastly
different from mass selling which is a key point of difference with other industries that basically
deal with tangible or physical products. This clearly indicates that a huge manpower requirement
becomes essential for the growth of the sector. But unfortunately where 70% of the population is
still living in rural areas, reaching to those target consumers with the help of agent based model
becomes quite impossible. So, this raises the issue where demand for an innovative, sustainable
and efficient distribution model becomes the core of discussion.

The entry of private players have made a significant change in the mode of operations and they
have decided to develop a new model of distribution called ‘Bancassurance’ with the help of
which they are able to reach to mass consumers with the help of the banking network i.e bank
branches. Although the concept of bancassurance is not new in most of the developed countries
but the concept was new when it was reinforced by private life insurance companies in India.
The basic motive behind implementation of this distribution strategy was ‘cost’ and ‘trust’. It is
difficult and costs prohibitive for these new players to establish its own branch to expand the
business at one go as the insurance market is not matured enough in India. As, the industry
requires some breathing ground, investing a huge amount of money for branch expansion was
not a very good idea for these new players. So, majority of them decided to capitalize on the
existing bank network which spread across the length and breadth of the country and majority
covered all segments of the society. Insurance thrives on distribution and a readymade
distribution channel like a Bank network was very hard to ignore. But cost of operations is not
the only criteria in this regard, as most of the private players do not enjoy the trust as compared
to other public sector banks. But in insurance business trust is a key and important criterion
which has a lot of weightage. This peculiar situation forces the insurance companies to
piggyback on the goodwill and leverage of trust enjoyed by the banks.

The Bancassurance channel is not benefitting the insurance companies alone. The impact of
financial slowdown has severely impacted the bank business as most of the banks depend on
interest earnings. So, the need arises to diversify the income from non – fee based income to fee
based income. The underutilized staff and resources if used properly then, will surely add more

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productivity and value to bank business and enhance its profitability. This is exactly the main
reason which drives the bank to enter into an agreement with insurance companies to adopt a
suitable bancassurance model for better earnings, diversify its product offerings and increase
wallet maximization of a customer. Fee from insurance is also ‘risk free’ and hence banks can ill
afford to ignore the same. Under a Universal Banking platform, a bank catering to all financial
needs of a customer is desired. The consumers have the preference for this kind of business
model where they can fulfill their most of the financial requirements under one roof. The ‘trust’
reposed on a banker is so much that customers end up buying products of otherwise unknown
entities also if the same gets distributed through the banking network. India’s growth experience
in the post liberalization era is not equal as lots inequality can be visible at each and every sector.
The growth is thus accompanied by widening disparities in inter-regional, intra-regional and
inter-personal inequalities in wealth and income. Although the country is growing at a steady
rate but the recent slow in the world market has affected its growth process to a great extent. But
if we look at the emerging global scenario and its impact on the developed countries, our country
has the potential to become the fastest growing economy in the world in the coming decades and
also emerge as a leader. The economists throughout the world accepted the fact that the potential
for growth in both the Farm & Non-Farm sectors are enormous in India. The major drivers of the
acceleration of growth in India are demographic dividend, greater domestic and international
competition, sharp increase in total factor productivity, blossoming of entrepreneurship and
India’s acceptance of globalization process. But, the inter regional disparity may hamper this
futuristic growth model if proper care has not been taken at the earliest. The case of inclusive
growth which was the basic focal point under 12 th five year plan needs better access to all types
of financial products including insurance. So far the growth story of Indian insurance sector is
not that much solid both in terms of penetration as well as acceptability among the target
segments. The financial inclusion as implemented by the government is not necessarily related to
having bank account only. It should be more than that. A proper development can only be
achieved if the economy is able to do away with this kind of disparities mostly in terms of
accessing various types of financial which becomes the need of the hour. Under these
circumstances, it becomes important to understand the grey areas where the Indian consumers
failed to understand the benefits of financial products and what role the insurance products can
play to improve the lives of the people.

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Thus, overall we can say that bancassurance is a distribution model which has been implemented
in such a manner so that each and every stakeholder will expect to get a positive return of the
same. But the question remains about the effectiveness of the model. Starting from the year 2000
till date, almost each and every literature tries to focus on the advantages and disadvantages of
the model. But the actual beneficiaries, i.e. the consumers view point may not have been touched
upon in that manner. Thus, the present research would like to highlight on that issue about
effectiveness of bancassurance from the view point of consumers.

Banking Industry – A Historical Perspective

The concept of banking is not new and in a country like India the sectoral growth of banking
industry has an immense important. The banking is basically acting as an intermediary where it
plays the role of a lender as well as depositors. Banking industry’s overall importance can be
seen when it started playing an active role in distribution of money in the economy. Out of
various services two major functions that are being played by a bank is depository services and
lending services. The presentation generation banks try to incorporate some more value added
services in the face of stiff competition that the industry is witnessing. The economic growth of
the country is mainly depends on how bank is bringing the much needed capital in the economy
through its depository services. One individual is not going to lend other without knowing the
background of the person. But without flow of capital the desired growth is not possible. Here
when the role of banks becomes important. The deposit collected by banks is re – invested in the
economy in the form of loans and the same is used by the investors in various productivities. In
this way the financial organizations like banks are able to generate employment opportunities.
So, directly or indirectly role of banks can’t be ignored.

In its present form banking has an old history and it origins are traceable to ancient times. The
New Testament mentions about the activities of money changers in the temples of Jerusalem. In
ancient Greece, the famous temples of Delphi and Olympia were used as the depositories for
people’s surplus funds and these were the centres of money lending transactions. Traces of credit
by compensation and by transfer order are found in Assyria, Phoenicia and Egypt before the
system attained full development in Greece and Rome. The ancient Hindu scriptures refer to the
money lending activities in the Vedic period.

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As a public enterprise, banking made its first beginning around the middle of the 12 th century
B.C. in Italy. The Bank of Venice, founded in 1157, was the first public banking institution.
Following its establishment Bank of Barcelona and the Bank of Genoa were established in the
year 1401 and 1407 respectively. With the expansion of trade and business activities in Europe, a
huge amount of private banks were established during this period with an aim to focus on trade
and commerce activities. The modern day banking activities started from this period which at
present transformed into a financial power house where banks are in a position to deal with risk
and offer various kinds of financial products under one umbrella.

1.1.1. Functions of Commercial Banks

A bank is usually thought of as a reliable agency with which money is deposited. The idea is
wanting in precision. Banks do receive valuables for safe custody and undertake to return them,
but that is only a subsidiary function. These kinds of service as provided by the banks are one of
the many functions that the modern day banks are providing through a host of services. The new
age banking concept has changed to internet based banking i.e. pocket/ m- banking and e-
banking where addition of modern facilities separates it from its competitors. The lists of these
various kinds of services that the modern banks are providing are discussed in the subsequent
chapters.

a) Deposit of Money: The most important function that any commercial banks play is
deposit of money. As banks play an important intermediary to bridge the gap between
demands and supply of money in the economy its depository role become important for
the smooth functioning of the economy. Banks normally deposit money in the form of
fixed deposit, savings account deposit and current account deposit. In all the cases the
bank acting as a trustee to protect the money of the depositor and in return they are liable
to pay the principal amount along with the interest at a pre – defined rate as mentioned in
the terms of contract. These funds are not kept as unutilized in the safe deposits of banks.
Since banks do not have their own source of money, this depository instrument is used by
the banks to generate enough capital to lend it for some productive purposes. The
differential interest rate that they are providing as credit and the return that they are
providing to its consumers is ultimately becomes the profit of the respective banks. Thus,
this kind of interest income becomes the main source of earnings of the banks.

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 b) Lending of Money: This function is not only important but is also the main source of
profit to most of the banks. When a bank agrees to discount a bill or gives funds in
exchange for a promissory note, the transaction is known either as a discount or a loan. In
either case, the bank agrees to place funds at the disposal of the borrower in exchange for
a promise of payment at a future date. The source of fund is very important as it helps the
business community enough fund for their business operations. Sometimes, it can be
observed that common people are not in a position to generate enough cash to achieve the
entire desired requirement as creation of wealth is not an easy task and it takes lots of
time. The lending activity of banks helps the individuals to achieve the desired goals if
they are shortages of fund. So, it not only serves the purpose of business community it
also helps to serve the individual need of the common individuals. This circulation of
money helps to create wealth for individuals, for business communities and for the banks
also.
c) Transfer of Money: Banks often engage in international and national trade where they
acting as a guarantors on behalf of the merchants. They are doing this by way of
purchasing bills of exchange or through, drafts or cheques. Transferring money from one
place to other helps the banks to earn commission which added to their net profit. Also
since the banks enjoy greater regulatory control and reputation for international trade and
commerce it role becomes immensely important.
1.2. History of Indian Banking Industry

The business of banking can’t be compared with any other forms of business operations atleast in
the financial sector where greater caution is required to run the banking business so that solvency
can be maintained. If the motive of the banking is to gain profit for other business activities
where role of bank merely becomes a funding agency then surely it will bound to fail in its
respective business. The initial starting of commercial banking business had started with this
phenomenon. The Calcutta Agency Houses first undertook the banking operations for the benefit
of their own business and established Bank of Hindustan in the year 1829. But the same was not
able to sustain and went into liquidation as its parent company failed to maintain the profitability
of their businesses. During those times banks were merely acted as a special department of the
parent company with no regulatory supervision. The same case was happened with Sholapur

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Bank Ltd. Which went into liquidation in 1918 due to the main condition as discussed above.
Thus, the initial starting of banking operations were not that much impressive from India’s point
of view.

The first comprehensive bank was established in the year 1809 with a capital of Rs. 50 lakhs and
one fifth of which was contributed by the government. This has started the role of government in
banking business as its investment brought the right of voting and direction. The bank demand
for rate of interest was fixed to 12% and till 1823 it was not given permission to issue notes. In
1839, the bank was given permission to open branches in various parts of India. Bank of Bombay
and Bank of Madras were established in the year 1840 and 1843 respectively.

In the year 1921, these three banks were merged and a new entity was created in the name of
Imperial Bank of India. The bank was not given any permission to issue notes and thus had
limited role to dictate the monetary policy of the country. The same bank was again transformed
into a better entity and established as State Bank of India (SBI) by passing State Bank of India
Act, 1955. The bank was initially acted as an agent of Reserve Bank of India, which was
established in the year 1935 and enjoyed the full power to control the banking regulations in
India.

India witnessed a mixed growth of banking business and during 1913 to 1948; the country
witnessed around 1100 banks with various business operations. Most of the banks were small in
nature and were doing business with lesser regulatory control. The lesser regulatory control
became a concern as most of the banks, mostly owned by private organizations failed to perform
and thus become insolvent leading to erosion of trust in the banking industry. This created a huge
setback for banking industry and this got the policy makers to develop a comprehensive policy to
regulate the banking business in India. In this regard, the Government of India established the
Banking Companies Act, 1949, which subsequently amended in the year 1965 to include all
cooperative banks. This was the first comprehensive act which gave extensive power to Reserve
Bank of India (RBI) to control the banking business in an effective manner. RBI becomes the
central bank of India with full autonomy to run the banking business. Till date with lots of
economic crises that various financial institutions faced but the role of RBI is so strong that the
Indian banking sector is able to withstand the threats. In today’s globalized environment this
kind of control is surely appreciable. The second phase has witnessed the phase of

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nationalization where with the help of two nationalization attempt, total 20 banks were directly
brought under the control of the Central government. 14 banks were nationalized in the first
phase, i.e. during 1969 and 6 banks were nationalized in the 1980s. The major objective of bank
nationalization was to provide banking finance to unbanked areas. The implementation of
various planned development schemes which were introduced during various planning period
required huge amount of financial support which the government aimed to implement through
banking activities. The objective was to shift the focus of banks from profit orientation to nation
building where certain priority sector had been created for distribution of required credit amount
as per the government policies. The third phase basically witnessed the full circle of Indian
banking sector. The nationalization attempts and its subsequent impact made most of the banks
vulnerable financially and less competitive. Because of this loss of trust and less significant
impact on the economy, government has decided to open up the banking sector during early
1990s as per the recommendations of Narsimhan Committee. The committee emphasized on the
opening up of the sector for foreign as well as private sectors again so that competitive position
can be increased and a level playing field can be created. The introduction of private banks thus
changed the entire environment of banking business of India.

1.3. Recent Trends of Banking Business in India

The Indian banking system has come a long way and the introduction of new age banking system
has introduced various facilities for greater transparency and convenience of the consumers.
During this entire journey the Indian banks not only changed the business operations but also the
direction of business. Traditionally it is a common belief that banks are in credit business and
interest earnings are their main source of income. But this particular myth has changed
dramatically and most of the present day banks right now engage in non interest based earnings
so as to expand the business and are able to survive in the competitive environment. The
expansion of bank branches also indicates the growing nature of business. The recent grants of
licence by RBI to ‘IDFC Limited’ and ‘Bandhan financial services’ is another positive to foray
into non banked areas of India. The regulator has also granted in principle approval to over 10
applicants to set up ‘Payment Banks’. There has been considerable innovation and diversification
in the business of major commercial banks. Products like debit /credit cards, forex, merchant
banking, leasing and offering wealth products are all being done to increase customer loyalty and

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diversify source of income. But the banking business in India lacks uniformity as different
categories of banks do not shows similar kind of result. May be the way of operations and
variation in profit motives is one of the primary reason for this kind of changing nature of
business. The recent 2 flagship social schemes aimed at the weaker and unorganized sections of
the society namely Pradhan Mantri Jiwan Jyoti Bima Yojana (PMJJBY)and Pradhan Mantri
Suraksha Bima Yojana (PMSBY) were sold to close to 10 Crore bank account holders. This was
a social cause of the Central government discharged primarily through the muscle of the PSU
Bank set up. PMJJBY & PMSBY are insurance policies, life and accidental respectively,
offering to cover individuals at Rs 330/- for PMJJBY and Rs 12/- for PMSBY. The revenue
earned by banks was not substantial but the drive was more towards a social cause which shows
the demarcation in approach of a public sector bank vs its private counterpart where the motive is
primarily earning profit for its shareholders.

It is being observed that most of the public sector banks failed to perform at par but private and
foreign banks are in a much better position in terms of most of the important parameters. A bank
group wise comparison may give a clear picture in this regard.

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 Table 1.1. Bank Group Wise Performance Analysis

Bank Group Wise Analysis (Amount in Million), 2012 - 13

Nationalized
New Pvt. Old Pvt.
Foreign Banks SBI &
Parameter Sector Sector
Banks (Including Associates
Banks Banks
IDBI)
No. of Banks 43 20 7 13 6
No. of Offices 334 54478 9718 6283 21301
No. of Employees 25384 507694 203733 66208 293965
Business Per Employee 217.33 142.23 93.03 97.24 101.97
Profit Per Employee 4.56 0.65 1.18 0.75 0.60
Interest Income 422486 3911088 1265589 399275 1637677
Other Income 112127 370370 256475 41452 197442
Net NPA Ratio 1.01 2.00 0.45 0.77 2.04
Wages as % of total Expenses 18.22 11.81 11.4 12.28 16.20
Source: Branch Banking Statistics, 2012 – 13, RBI

The table 1.1 above gives a comparative analysis about the major banks groups that are operating
in the Indian market. It is visible that out of these five groups, foreign banks and private sector
banks are in a better position in terms of profitability. If we look at the penetration level of these
five banking groups, nationalized banks have the largest number of bank branches and
employing about 5 lakhs employees followed by SBI and its associates, new private sector banks
and old private sector banks. Foreign banks are not that much effective in terms of branch
operations as they are mostly concentrated in metropolitan areas and targeting an affluent groups
of consumers only. For them, the business strategy is not mass banking but tailored made
banking where products are produced and delivered as per the maximum benefits of the
consumers in a hassle free manner and obviously by maintain the regulatory rules and
regulations of the country. Unlike public and private sectors banks where along with profit social
aspects of the business or social dimensions of the banking business also taken into
considerations. The case is more relevant for government owned scheduled commercial banks
where most of the banks look into the social aspects along with business. As a result of this, most

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of the banks become less competitive and underperformer as compared to its counterparts and it
has directly affected the profitability.

In case of factors like business per employee and profit per employee, again the foreign and
private sectors banks are the clear winner in comparison to the number of employees that they
are recruiting and branch expansion. With a less number of employees these banks are able to
generate sufficient business for profitability purposes.

But the parameters like, interest income and other income, tells a different story where public
sector banks are able to perform better as compared to its foreign and private banks. Here the
volumes of business that the public sector banks are able to earn because of extensive branch
network and customer base, surely able to help the banks to increase their earnings. The mass
banking concept works perfectly for these banks. It is interesting to see that the growing nature
of other income has contributed significantly towards the income growth of most of the banks
but it has created larger impact on the growth prospect of the banks with a huge network of bank
branches. The nature of NPA that these banks have (as indicated in table 1.1 above), it is possible
that the banks try reduce the burden of NPA by focusing on other income generating
opportunities which give them sufficient earnings without participating in risk. Broadly banks
make earnings through interest spread margins for various types of loans, swipe and late
payment charges on cards, value added services viz NEFT/RTGS/SMS alerts etc , usage of
branch banking network for any third party distribution or collection viz mutual funds, insurance,
application forms, fees and gold etc. Out of various other income opportunities that the present
day banks are enjoying, earnings from insurance premium sales through bank branches becomes
primary one due to longevity of the contract i.e effect of annuity/trail income is realized. As long
as the insurance policy will be in – force the earnings from these policies will keep on adding to
the banks overall revenue. This new trend is witnessed by most of the banks and its impact will
be analyzed in subsequent sections of this research.

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Table 1.2. Bank Group Wise & Population Group Wise Presence of Bank Branches (March
2009)

Population Group Total

Bank Group
Rural Semi – Urban Urban Metro Branches
SBI & Its Associates 5560 4835 3043 2624 16062
Nationalized Banks 13381 8669 8951 8375 39376
Foreign Banks 4 4 52 233 293
Regional Rural Banks 11626 2746 667 88 15127
Other Scheduled Commercial Banks 1113 2638 2715 2411 8877
All Scheduled Commercial Banks 31684 18892 15428 13731 79735
Source: Bank Group Wise & Population Group Wise Presence of Bank Branches, March 2009, RBI Data

The table 1.2 shows bank group wise and population group wise distribution of bank branches.
The table gives a clear indication that nationalized banks and regional rural banks have the clear
advantage in terms of branch coverage. As compared to approximately 13, 000 branches of
nationalized banks in rural areas foreign and other scheduled commercial banks (including
private sector banks) have less number of branches and the business opportunity is basically for
urban centric than rural centric. Considering 70% of the Indian population is living in rural areas,
in terms of providing banking facilities, government owned banks are in a better position in
terms of coverage as well as banking penetration.

The Indian banking system is developed keeping in mind both the profitability and social aspect.
From the beginning the trend has shown a more inclination towards social aspect and in this
process profit aspect has been ignored over the years. As a result of this most of the banks
become less competitive. Some of the banks are not able to take the competitive pressure of
liberalized economy and forced to merge with some financially strong banks, either in the private
sector or in the public sector. This merger was inevitable as the economy is also looking for a
financial consolidation. The performance of private and foreign banks also make the nationalized
banks more competitive and because of the trust that these banks are enjoying from the day one,
sustaining in this competitive environment become easier for them. Although, private and
foreign banks mainly concentrated in urban and metro areas a vast majority of India remains
untapped it becomes a level playing field for public sector banks in a competitive environment.
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This continuous discrimination creates a pressure of earnings on public sector banks vis – a – vis
private and foreign banks. Moreover, these new generation banks do not depend on interest
earnings only to increase its profitability. The innovation of more reliance on non interest income
makes a significant contribution on its overall earnings. Today banks become a financial super
power where offering a banking product is not the only options available for banks, at present
banks are selling a portfolio of financial products which includes mutual funds, life and general
insurance, gold etc. Not only that various services like e –ticket, tax submission, internet
banking, mobile banking etc. are some of the services which the banks are offering to retain the
customers in their own fold. As the level of competition increases the nature of business
opportunities are also changing day by day. Thus, a bank becomes a global financial set up
where a customer is in a position to avail a single window policy related to all its financial
matters. The present study thus, would like to focus on one particular dimension of bank’s
various sources of earnings i.e. selling of insurance products through bank’s own network. The
subsequent portion of this chapter will deal with this particular issue.

1.4. Insurance – An Idea

Insurance is a financial instrument which protects the individuals or its family members from
various types of uncertainties which are unknown to individual human beings. Financial security
is very important in one’s life as it directly related to human being’s standard of living. Higher
the level of income higher will be the standard of living. But maintaining same standard of living
may not be possible all the time if certain uncertain events affect the earnings of the individuals.
Insurance helps to protect from these uncertainties to a great extent. The basic concept of
insurance is nothing but to share the risk. The insurance companies are developing a common
pool of fund where individuals in a specific age bracket contribute in that common pool. Now it
is very much unlikely that all the individuals are going to face similar kind of risk at the same
time unless and until it is a natural disaster. Thus, some of the affected individuals will be given
the coverage from this common pool. This is a classic of risk sharing which makes the insurance
company to run its business. To understand the basic operation of insurance let us take a small
example:

Suppose in a village 100 houses are there and cost of development of each house is Rs. 1 lakh.
There are 100 houses are there in that village. Now due to some uncertainty if a house gets
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destroyed then the owner of the house has to spend Rs. 1 lakh to re – build the house. In any case
the amount is huge. Instead of that the village members decide to constitute a common fund by
contributing Rs. 1000 each whenever an event occurs. Thus, instead of spending Rs. 1 lakh right
now they are only paying Rs. 1000 as re – building the house. This is called “pooling of risk”.

In insurance term this small contribution is known as premium. The premium is the price of the
insurance products that individuals are purchasing. Although, there are various types of
insurance products are available but the rate of premium varies mainly due to the age of the
prospective policy holders. It is a common understanding that as the age of the individual
increases their chances of mortality risk increases substantially. As rate of premium mainly
depends on the mortality rate of the individuals fall under one specific group, the same policy
may charge different premium rates.

Broadly, the insurance products are categorized under two groups – life insurance and general
insurance. Other than life everything under the sun is insurable if it is falls under the purviews of
respective insurance companies. The life insurance business mainly deals with various types of
insurance products but the basic insurance product is termed as term insurance. The product is
often called a true insurance product as it covers the risk of life of the insured person only. Since,
it covers risk only its rate of premium is also substantially low as compared to other life
insurance products. The other types of life insurance products are mainly focusing on investment
option of the individuals rather than the risk part. Since, investment is the major thrust area of the
individual policy holders the rate of premium is also high. As individual consumers do not
traditionally prefer insurance as their first choice of investment product, for maintaining the
acceptability of the product the insurance companies forced to sell it as an investment product
rather than an insurance product. The other emerging areas of insurance sector are health and
medical insurance where increasing cost of medical expenditure is one of the primary reasons for
this growth. The general insurance segment of the business by far was neglected and not seen
that much growth as compared to life insurance segment. The typical demand and lack of
awareness and benefit programmes may be the primary reason for this kind of outcome. As the
scenario is changing at a faster rate and potential areas are emerging which makes the industry; a
sunrise industry. The goal of insurance was to insurance people in good health without any
adverse medical history or personal habits so as to ensure ‘anti-selection’ i.e. insuring a

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substandard life at the cost of standard life did not take place. This formed the basic principles of
insurance which is listed as under;

The basic principles of Insurance

 Insurable Interest

 Principle of utmost Good faith (Uberrima Fides)

 Material Facts Disclosure

 Principle of Indemnity

1.5. Story of Indian Insurance Industry

Insurance in its present form was first discovered during 13 th century in Mediterranean areas.
The earliest references to insurance have been found in Babylonia, Greece and Rome. Although
life insurance market is very strong at present compared to general insurance market, but the
history tells that the oldest form of insurance is marine insurance which is part of general
insurance category. In India the first life insurance company was established in the year 1818 and
it was named as Oriental Life Insurance Company. The company was established in Calcutta
during that time as the city was the main business area under British rule. Subsequently some
other insurance companies are also established in life insurance segment. Bombay Life Insurance
Company was established in the year 1823and Tritron Insurance Company for General Insurance
was established in the year 1850. Although, few more companies were established during this
time period, but all the insurance companies were operated by the private organizations and as
such no regulatory environment or norms were there to control and manage the business. As the
level of competition increases the unfair practices became more relevant. Not only have that to
attract business providing exceptionally high amount commission become a norm. As a result of
this most of the insurance companies become insolvent. Because of these irregularities insurance
regulations formally began in India through the passing of two acts, The Life Insurance
Companies Act of 1912 and the Provident Fund Act of 1912.

Although, these two acts played a positive role to deals with the situation but these two acts were
not strong enough to bring back the situation under control. This created the need of a more
stringent act and The Insurance Act, 1938 was emerged as the first comprehensive regulation in

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this regard with direct state control over insurance business in the country. In 1968 the Insurance
Act was amended to allow for Social Control over the general insurance business. Subsequently
the general insurance business nationalized with the act of General Insurance Business
(Nationalization) Act, 1972 was promulgated.

1.5.1. Insurance under Globalized Environment

Just like banking sector, the insurance sector also witnessed several changes and comes into full
circle after the introduction of IRDA Act, 1999, which allowed the entry of private players in the
Indian insurance market. Thus, the industry once started by the private players moved to
government sector and then again the sector has opened for private sectors along with
government sector. The basic objective of giving emphasis on insurance sector is to generate
long term fund for various government infrastructure projects and providing security to
prospective policy holders in case of any kind of contingency. But the sector does not witness the
desired goal due to the vast nature of the market and low awareness of the insurance as a
product. Furthermore covering the entire market with the help of one life insurance Company
and four general insurance companies is not an easy task and because of this restrictive policy
the outcome was low penetration level of insurance business. It only remains urban dominated
matter and rural and backward regions remain untapped even after establishment of separate
company in two broad areas of insurance business. Looking at this negative growth trajectory,
government of India was established a committee under the chairmanship of R. N. Malhotra in
April, 1993 to suggest the reforms of insurance sector in India. The committee submitted its
report in the year 1994 and suggested that the sector should be open up for private and foreign
players so that the penetration level can be increased so as the level of investment. The increased
flow of FDI in insurance sector will create the job opportunities in the Indian market, able to
reach to a mass consumer base because of the volume of business, can bring expertise and
technology and most importantly it will able to bring innovation in products, distribution and
service. The government made some modifications in the recommendations and introduced the
IRDA Act, 1999, the first comprehensive law after independence which ensures the entry of
private players in the Indian insurance market.

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1.6. Indian Insurance Industry – An Overview

Insurance business is a combination of savings and investment which serves the dual purpose
during the life span of a single individual policy. It not only protects the individuals or their
family members from any kind of unforeseen events it also helps to generate enough capital to
fund the growth of the Indian economy. The importance of the sector is so strong that overall
growth of GDP affects due to change in insurance and pension funds. The vast nature of Indian
economy and its huge untapped population base gives immense opportunity for every player to
grow and sustain and as the nature of market is changing its business mechanism is also keep on
changing. But the insurance market, at present is not showing that much growth as it used to. The
Year 2010-11 marks a drastic change where the regulatory impact is seen to impact the whole
insurance industry where the biggest stake holders were the ‘individual agents’. With IRDA
capping the charges on ULIPs ,as the same was sold without any proper need assessment and
promising high returns keeping the applicable high charges under wraps, the agents no longer
found ULIPs attractive as the commissions were brought down from as high as 40% to single
digits. The ‘agents’ found it difficult to quickly adapt to the new regime. This resulted in
insurance companies being compelled to introduce simple products and asked to ensure ‘need
based sales’ is done by the licensed intermediary.

The global slowdown and relatively low growth in US market, the year on year growth in terms
of new premium generation is not that much attractive. Basically it remains flat over the time
period. The emerging economies are showing some movements but that is not sufficient to pull
back the economy in the growth path. The table below is an indication regarding this:

Table 1.3. Total Real Premium Growth Rate in 2013 (in Percent)

Region/Countries Life Non – Life Total

Advanced Countries -0.20 1.10 0.30
Emerging Markets 6.40 8.30 7.40
Asia -6.50 2.20 -4.10
India -1.10 2.50 -0.40
World 0.70 2.30 1.40
Source: IRDA Annual Report, 2013 – 14

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The table 1.3 above indicates that growth in life insurance segment is remains stagnant as
compared to non – life segment in most part of the regions. The emerging has shown some
improvement in terms of growth in life insurance segment as well as non – life insurance
segment. The growth of insurance business in India is not upto the mark as life insurance
segment showing a negative growth path and overall growth (both life and non – life) has not
depict a positive return. Although, the market is not attractive at present but the nature and
opportunity of the market may give positive outcome provided it can be captured in an effective
manner.

1.6.1. Indian Insurance Sector – Global Point of View

Although in most of the advanced economies growth of both life and non life insurance business
is at par but in case of India, the story is not same. Here the growth is very high in case of life
insurance segment as compared to non – life segment. The IRDA report, 2013 -14, suggests that
the share of life insurance business in total premium is 56% but the same is reportedly as high as
80% in case of India. The contribution of non – life segment is merely 20% approximately. This
differential picture vis – a vis global scenario is showing the skewed nature of insurance business
in Indian market. This gap needs to be reduced so as to get an overall growth of the industry.
According to Swiss Re World Insurance Report, 2013, India positioned in 11 th place out of 88
countries in terms of life insurance business and India’s contribution in overall life insurance
market is only 2% which is below normal as compared to other emerging countries and actually
if we go for a year on year comparison, the contribution actually declined by 0.50% in 2013 as
compared to 2012.1 But during the same time the world insurance premium has increased by
0.70%. This is not a good indicator in terms of growth prospects. As compared to this the trend is
quite impressive in case of non – life segment, as the industry witnessed a growth of 4.1% as
compared to global growth of 2.3% during the year 2013. Although, the growth is higher than
the global average still its overall contribution in global market is only 0.66% and India is ranked
in 21st position for this non life insurance segment. 2

1
Swiss Re World Insurance Report, 2013
2
IRDA Annual Report, 2013 - 14

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 1.6.2. Insurance Penetration & Density in India

Insurance penetration and density is two important ingredients to understand the level of growth
that the industry is achieving over the time period. The insurance penetration is calculated as a
percentage of insurance premiums to GDP and insurance density is calculated as a premium to
population. Over the years as the market becomes matured lots of players have entered in the
market and expanded their business in specific segment. Before opening up of the economy the
market was operated by public owned companies and as a result of this the growth was not that
much impressive. It was not possible to capture the entire market where potential is there with
the help of some of the companies. The apparent need for the opening up of the sector has
brought lots of level playing players in the Indian insurance market. But the story does not
change to a great extent. The growth of the insurance industry in terms of penetration and density
has remained quite stagnant even after the economy was opened up. Although, there was a slight
progress in middle of the last decade but the industry is failed to sustained growth momentum.
The table 1.4 below can explain the situation in this regard.

Table 1.4. Insurance Penetration & Density in India

Life Non – Life Industry

Year
Density ($) Penetration (%) Density ($) Penetration (%) Density ($) Penetration (%)
2001 9.1 2.15 2.4 0.56 11.5 2.71
2002 11.7 2.59 3.0 0.67 14.7 3.26
2003 12.9 2.26 3.5 0.62 16.4 2.88
2004 15.7 2.53 4.0 0.64 19.7 3.17
2005 18.3 2.53 4.4 0.61 22.7 3.14
2006 33.2 4.10 5.2 0.60 38.4 4.80
2007 40.4 4.00 6.2 0.60 46.6 4.70
2008 41.2 4.00 6.2 0.60 47.4 4.60
2009 47.7 4.60 6.7 0.60 54.3 5.20
2010 55.7 4.40 8.7 0.71 64.4 5.10
2011 49.0 3.40 10.0 0.70 59.0 4.10
2012 42.7 3.17 10.5 0.78 53.2 3.96
2013 41.0 3.10 11.0 0.80 52.0 3.90
Source: IRDA Annual Report, 2013 - 14

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In case of India both the density as well as penetration is substantially high for life insurance
segment as compared to non – life insurance segment. But the alarming part is that the density
which was as high as 56% during the year 2010 in life insurance segment is steadily decreasing
in the subsequent years. Same case can be witnessed in case of insurance penetration also. In
case of non – life segment, although it is increasing but the rate of increasing is not that much
attractive. The problem is not with the market size, it is basically depends on how effectively the
insurers are able to tap that market. Lack of planning and innovation in case of distribution of
insurance products may be the primary reason for this kind of dismal performance.

1.6.3. Channel Wise Distribution of Insurance Products

Since insurance is an intangible product involvement of human being is very crucial to distribute
the insurance products. The service provided by the insurance companies basically depends on
the trust factor and higher the level of trust higher will be the acceptability of insurance products
and the insurers selling these products. The typical psychology of Indian consumers are that
insurance is a product which basically taxing them instead of providing the benefits. Since, the
investment is long term in nature and return is not that much attractive most of the prospective
buyers do not find the reasons to purchase an insurance policy. Lack of awareness in this regard
is another problem area which the industry is facing at present. In some cases where awareness
level is high due to various factors penetration level is also very high. In other cases the basic
objective of buying an insurance product is to save tax. In case of non – life segment, although
the tax benefits are not available unless it’s a mediclaim product, in some cases people are
purchasing the non – life insurance products because of compulsory need of the same. The
classic example in this regard can be sited as motor insurance. Since, motor insurance is
mandatory people are purchasing the products but since third party insurance is not mandatory
which is a add - on product people are not interested to purchase the same. Thus it can be said
that since the true nature of benefits are beyond the acceptability and understanding of the
consumers, most of the time distribution partners of the insurance companies play an active role
to sell the insurance products. Traditionally, most of the insurance companies are depend on
agent based distribution model but after introduction of new age private insurance companies,
the scenario has changed drastically as these private players are in urgent need to reach out to its
target group of consumers at a very short interval. Since cost of expansion is very high and the

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market is still not matured enough investing in infrastructure development at the first instance is
not a feasible idea. This forced these companies to focus more on two areas, viz. innovation in
product and innovation in distribution. The strategy works in favour of private players and the
market expansion has seen tremendous growth with the help of nontraditional distribution
channel and innovative products. The figure 1.1 below will give an understanding about the
channel wise generation of new business premium of various insurance companies.

Figure 1.1. Channel Wise New Business Premium

Source: Handbook on Indian Insurance Statistics, 2013 – 14, IRDA

The table depicts the present status of distribution of insurance products through various formats.
At present in Indian market most of the insurance players are using the various combinations of
these five distribution channels. Although it is not mandatory to follow a specific distribution
channel still most of the insurers are preferred to follow a combination of these channels just to
increase the reach. It can be visible that out of these five distribution options ‘individual
segment’ surely dominates the market and from the inception of the insurance business these
segment surely play most important role to generate the volume of business. As discussed above
that since the insurance is part of service related product and the actual product is intangible, the
greater dependency on human being is most crucial as they are the face of the insurer. The next
mode of distribution is termed as Corporate Agent – Banks. The insurers have divided the

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corporate agent structured into two different areas. One area is exclusively under the purview of
banks where the insurance companies tries to capitalize the existing branch network and second
are the standalone corporate agents selling the insurance product of any one company. Under this
model the corporate agents are entitled to sell the life and general insurance products of only one
company not multiple companies. It can be visible that out of these two models, bank based
corporate agents which we often term as ‘Bancassurance model’ is successful as compared to
standalone ‘corporate agent’. The reason for this differentiation is because of the customer base,
trust and brand name that the bank is enjoying. But unlike other distribution model,
bancassurance model may not be that much successful. The opening up of the sector and
subsequent entry of private players along with their foreign partners (26% share) may bring
innovation in the Indian insurance market, but it is still remains to be seen the effectiveness of
that model. The fourth model, i.e. selling of insurance products through a brokerage house is also
witnessed but the rate of new premium generation is not up to the mark. The main difference
between a broker based insurance distribution channel and corporate based insurance model is
that the later one can’t sell more than one insurance company’s products but the brokerage firms
do not have any such restrictions. They are free to sell the insurance products of more than one
company, both under life as well as non – life segment. So, the financial product portfolio is
much larger than corporate agent. Although the facility is better as compared to corporate agent,
still the performance is not up to the mark as it will often lead to miss selling of financial
products. The same has been rampant in India as many Multi level marketing (MLM) companies
flouted norms of IRDA’s corporate agency and were seen to distribute complicated and high
commission insurance products through their network of ‘chain marketing’. Many of the major
players were suspended and licenses revoked. It is often witnessed that the employees and
agents of these firms often try to sell the product of those insurance companies where the rate of
commission is high. Not only that, most of the prospective consumers sometimes have less
information about the brokerage houses which often discourages them about not to purchase the
same. The last distribution channel which normally used by most of the private insurance
companies is direct selling. As the role of IT becomes important in every day life and
prospective consumers are also tech savvy, this helps the new age insurance companies to sell
the insurance products through online or over phone. Since, its cost effective and able to reach a
wider segment of the consumers, its acceptability is increasing day by day. Since consumers are

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also more informative, some websites are there which helps to choose the best product that suits
the individual’s personal requirement.

1.6.4. Profitability of Insurance Sector

The trends in Indian insurance sector gives a mix picture where initial performance was
outstanding just after opening up of industry for private players. Previously, because of
monopoly market enjoyed by government owned companies the market has not grown as
expected. That is the reason why although the sector plays a very influential role in to build
financial security of the individuals, still the importance has not been reflected in terms of true
growth what the industry should expect. As compared to most of the developed country,
insurance sector’s growth and its nature of business widely varies. This is due to typical
psychology of the Indian consumers along with the taxable aspect of the product. Given the vast
untapped area, it is now remained challenge that how far the industry will grow. The figure 1.2
below gives an overall idea that the insurance companies are managing assets, starting from the
opening up of the sectors for private players.

Figure 1.2. Assets under Management by the Insurance Companies in India

Source: Handbook on Indian Insurance Statistics, 2013 – 14, IRDA

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The chart is a clear indication that the industry has shown a steady improvement in terms of three
main areas like life fund, pension & general annuity and group fund and ULIP fund. It is
interesting to see that at the beginning of the liberalization phase, life insurance was the single
most players and other segment of the industry was contributing in an insignificant way. Greater
usage of ULIP policy by the private players showed a further improvement in life insurance
business. But the contribution of general insurance, pension and group fund has shown a steady
increase over the years. The improvement is slow and not upto the industry standard. The
increasing importance of life fund in total insurance business thus shows that purpose of
purchasing insurance is something else and definitely not covering the very basic purpose of
purchasing an insurance policy.

Figure 1.3. Profitability of the Sector

Source: Handbook on Indian Insurance Statistics, 2013 – 14, IRDA

The profitability of the sector is another important criterion which determines the performance of
the industry. It is important to note the number of companies making losses is steadily decreases
over the time period. The breakeven period is longer for insurance companies as during the
initial years when most of the private players had just entered in the Indian market, it is quite
expected that due to high gestation period, the profitability would affect the performance. Here

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also the same picture can be witnessed and as the industry grows the profitability of most of the
companies have increased substantially.

Thus, the overall analysis of the insurance sector in India has given a picture that the potential is
there and will remain for a long term perspective. The financial requirement and protection are
becoming the utmost criterion for most of the individuals in near future. The rising cost of living
and uncertainty of human lives can affect the future of the family and thus, insurance market is
able to foray into individual’s household. At this juncture what is required is a concrete strategy
which can help to expand the awareness level of insurance products among the mass consumers.
Most of the insurers are yet to enter in rural market which is the next big untapped market lying
without served by most of the insurers. But only creation of awareness will not be sufficient.
Along with this reach should be designed so that consumers are in a position to avail the
financial products in a hassle free manner. The nature of distribution that has been witnessed
shows that still most of the insurance companies are depend on agents based system where cost
of maintaining the same will be very high. This is a high time to start moving in the market along
with some alternative channels which are being utilized but may not be utilized as per its
capacity. Thus, the present study would like to focus on bancassurance as an alternative
distribution channel for effective distribution of insurance products.

Bancassurance – Historical Perspective

The original concept of bancassurance is developed in European countries and Spain and France
are the two countries where this particular model had been implemented in a successful manner.
In the early 70s two companies, viz. ACM and Vie et IARD, were the two companies engaged in
banking and insurance business together had for the first time came into an agreement to protect
the interest of the bank customers against the loan that they were taking. That was the first time
the association between these two companies selling different financial products had came into
existence and the same had been termed as ‘bancassurance’. The development initiative of
bancassurance model was started in Spain in the late 80s when Banco De Bilbao Group acquired
a majority stake in EUROSEGUROS SA. But their transaction was restricted to financial aspect
only as during that time banks were not allowed to sell insurance products through bank
networks a barrier which was subsequently removed during the year 1990s. Since then most of
the players started involving in bancassurance model heavily and today the bancassurance plays
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a dominant role in selling the insurance products. Today the same model, which was initially
only acted as a distribution channel has integrated the service of various financial products and at
present ultimately looking for a customized approach as per the plan and requirement of the
consumers. The model since then has travelled in various countries and each of the country the
model has got its own shape due to various legal and regulatory rules and practices. The same
model has its own sets application which is best suitable in one specific country. The success of
the model is also depends on the level penetration that the country witnessing in both insurance
as well as banking business. A country where branch banking expansion is not that much strong
then surely bancassurance model will not be able to get the desired result as expected. Secondly,
if the insurance market is stronger than the banking market, like in most of the developed
countries, then surely insurance companies do not need the help of banking sectors to sell their
insurance products. So, it all depends on the strategy and its implementations.

1.7. Models of Bancassurance

Although, the models of bancassurance varies country wise but the basic bancassurance model
remains same in most part of the world. Since it’s a tie up between two different players its pros
and cons need to be analyzed first. Since, both the companies are looking for profit orientation
developing a successful model has utmost importance. Traditionally the model can be grouped
under three different groups which can be summarized below:

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Table 1.5. Bancassurance Models

Model Description Advantages Disadvantages Country

Adopted the
Model
Distribution Bank act as an Operations start Lack of USA, Germany,
Agreement intermediary for quickly and less flexibility to UK, Japan
an insurance costly launch new
company product and
possibility of
difference in
corporate culture
Joint Venture Bank in Transfer of Difficult to Italy, Span,
partnership with expertise manage in the Portugal
one or more long run
insurance
companies
Full Integration Creation of a Same corporate Substantial France, Spain,
new subsidiary culture investment Belgium, UK,
Ireland
Source: Analysis of Bancassurance & its Status Around the World, Focus, 2005 Report, pp 5

These models are the most comprehensive model adopted by most of the developed countries.
The application of the same model in developing countries or in emerging countries may not be
same. In case of India, if we look at the nature of bancassurance business, then clearly it has
created a hybrid model where almost all the models are visible. But the application first two
models, i.e. distribution agreement and joint venture model are widely visible and acceptable
among the prospective stakeholders.

1.7.1.1.Bancassurance Business Models Around the World

Normally, the bancassurance distribution model follows the broad areas as discussed above, but
country or region wise there may be some differences according to the viability of the business

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model. Here an attempt has been made to understand the business model as witnessed in
different parts of the world so as to get an overall idea about the business model.

European Model

In Europe bank plays an important role to sell the insurance products through its own banking
network. Infact the entire business model is integrated with the banking facilities mostly in case
of life insurance products. Countries like, France, Spain, Italy etc. have an agreement with the
banks to sell the insurance products either through joint venture or by establishing a fully owned
insurance subsidiary. The important part is that the insurance asset is managed by the banks and
almost all the insurance products are distributed by the bank staffs. For this they have undergo
proper product training. Sometimes, some banks engage staffs who are exclusively deals with the
bancassurance business transactions. In some cases where the insurance products are more
complicated and may not have a direct integration with the banking products, a specialized
insurance representative may help the bank staffs to sell the same. The commission earned by the
banks can be retained by them or sometimes to improve the performance and motivation a
portion of the commission thus earned by selling of insurance products can be distributed among
the designated staffs in the form of commission or bonus, provided they meet the target. The
main characteristics of insurance products that are sold through bancassurance model are
simplicity and direct integration of banking products so that consumer’s acceptability increases.
Since, the primary target is the bank’s own consumers, the product integration need to be very
strong. But over the years the bank staffs are becoming trained enough to sell various non –
traditional products like health insurance, motor insurance etc. The simplicity of the insurance
products is the primary importance for this kind of distribution model that most of the European
countries are follows. To understand the risk associated with the consumers sometimes, the
banks keep their own captive insurance underwriter to price the products according to the type of
risks faced by the banks from the consumers. This is important, because for some insurance
products like loan protection, banks repayment behaviour is very important to determine the risk
associated with the consumers. So, this forces the bank to establish a separate underwriter for
this job. For rest of the products, where direct banking products are not integrated with insurance
products, the banks may take the underwriting proposals of insurance companies.

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Hong Kong Model

The bancassurance model is a growing trend in Hong Kong where at present the model is able to
generate 35% of the total business volume. The banks and the insurance companies are most
likely to follow wholly owned subsidiaries or joint ventures or try to set up an exclusive
bancassurance agreement with only one insurance service providers. The tough competition
among the various players may be the primary reason for this kind of agreement. The insurance
products are mainly deals with the help of bank staffs and in some cases if required a
representative designated in one specific branch to sell the insurance products on behalf of the
bank as well as the insurance companies. Since, the consumer satisfaction is more important the
insurance company’s employees are in a better position to understand the risk that are being
faced by the consumers or decision dilemma. Any wrong product offering may dilute the entire
business opportunities which can be tackled with the help of designated employees of the
insurance companies. Sometimes, they are also able to offer the customized products depending
on the requirement of the consumers. Since, the insurance products are of both long term as well
as short term type, customer’s requirement may vary. The banks here sometimes develop their
own wealth management services and may not go into direct agreement with any specific
insurance companies. Rather, they prefer to choose the insurance products that best suit the
requirement of the individual or that may give best return. This model gives them the flexibility
to go for a product which maximizes the benefit of the consumers.

Bancassurance Business Model in Latin America

Although most of the Latin American countries are part of emerging countries, the success of
bancassurance business model is quite attractive. The main reason is that most of the insurance
companies have decided to enter in this market because the insurance penetration is typically low
as compared to rest of the world. This surely presents them with huge market opportunities. The
banks have a strong business network and most of the foreign insurance companies have come
into an agreement with the banks or they simply purchase the banks to strengthen the distribution
network of the insurance company. In Brazil, the regulatory requirement mentions that an
approved broker should deal with all kind of insurance sales and this made these financial
organizations to have their own brokers who would deal with the products of that particular
insurance company only. In case of Argentina, most of the foreign banks that are operating in the

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country, decided to purchase a stake in some of the prominent insurance companies to increase
their source of income by selling insurance products. The direct control in this regard helps them
to achieve the desired result and a proper expansion of business. In countries like Chile, the
regulatory norms tell that an insurance agent should deal with any kind of insurance sales even
under bancassurance model. So, the banks either train their employees to get appropriate
permission from regulatory authority or they simply depute the representative of insurance
companies who have the authority to sell the insurance product on behalf of the banks.

Bancassurance Business Model in South Korea

Introduction of bancassurance as a model was launched in the year 2003 and since then the
model has been able to generate a substantial increase in the business volume. The market has a
strong base of direct sales agent; still the introduction of bancassurance model has significantly
impacted the nature of the business. Considering the present globalized environment and impact
of liberalization the market will see a further improvement as the financial integration will surely
bring lots more positive changes in the existing business model in near future.

Bancassurance Business Model in China

In China the insurance regulatory law brought some meaningful changes in the year 2003 which
permitted the banks to sell insurance products of multiple insurance companies. Earlier, the bank
was simply acting as an insurance agent where banks were permitted to sell the insurance
products of only one insurance company. The regulatory change in 2003 that enabled banks to
represent multiple insurers allowed the “many-to-many” model to arise, and the result has been a
jumble of products and brands being offered in bank outlets. For instance, the products of the top
two insurers are sold by nine of the top ten Chinese banks. Although, the banks are selling only
non – sophisticated products, the changes in the regulatory environment may encourage the
banks to go for more sophisticated products. Since, the banks are not restricted to sell the
insurance products of any particular insurance companies; they have the freedom to provide the
best insurance product that is available in the market. The China Insurance Regulatory
Commission also proposed to take a decision regarding the choice of business model under
bancassurance domain and suggests that the banks and the insurance companies can go for any
one of the four distribution model, viz. exclusive distribution model, joint venture model,

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establishment of a financial holding company and development of integrated lines of business.
Based on these proposed changes the model said to become a stronger player in the Chinese
insurance market. The market has the potential as the population size is huge and most of the
market is untapped. The only requirement is successful implementation of the model.
Bancassurance Business Model in India

The story of bancassurance business model in India is relatively new and got its momentum after
the opening up of the sectors for private and foreign players. The business experiences of foreign
players in other markets give them enough exposure in this regard and they started implementing
the same in case India as well. The vast branch network of Indian banks along with the huge
untapped market, give them an ideal ground to operate in this particular business model. The
initial model was only referral type where banks refer the prospective customers of insurance
products to an insurance company where final transactions take place. The banks earned ‘referral
fees ’ which was higher than an ‘agents commission’. The model was banned by the regulators 5
years back and all banks were asked to become ‘corporate agents’ under the Corporate Agency
guidelines of the regulator. But the model has developed further and active involvement of banks
started playing an active role using their branch network. The joint venture and distribution
agreement of one life insurance products is also witnessed during this time. The business
opportunity basically created a win – win situation for both the banks as well as insurance
companies as both of them is in a position to capitalize the existing resources for better
expansion of insurance business using their existing expertise. The entire business operations are
monitored by IRDA, the regulatory authority which controls it. The IRDA has the authority to
change the rules and regulations of various business operations under various modes and to
protect the interest of the policy holders. In India, selling life insurance products are more
acceptable than non – a life insurance product as the same has the proper matching with the
various banking products.

Some changes were proposed in bancassurance regulations with the help of IRDA (Licensing of
Bancassurance Agents) Regulations, 2011 to make it more comprehensive and business oriented.
Under this agreement the banks need to train its employees, who deal with the bancassurance
products and the employees need to clear the relevant examination conducted by the regulatory
authority to deal with the bancassurance business on behalf of the bancassurance agent, i.e. bank.

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The regulations also restricted the banks to establish tie ups with not more than one life and one
non – life and one standalone health insurance company in any of the states of India. In case, if
the general insurance company is not dealing with health insurance products, the bank can
establish tie ups with one more general insurance companies to deal with the health insurance
business only. The authority also divided the country into three zones and it is specified that no
insurance companies are able establish tie up with any bancassurance agents in more than nine
states or union territories in zone A and six states or union territories in zone B. The regulations
also mentioned that insurance companies can use the logo and name of the bancassurance agents
while selling the insurance products. This particular change has brought lots of positive response
as in India banks enjoys tremendous trust and faith among the consumers. However, the above
proposal did not see the light of the day and was finally replaced by banks being allowed to
become brokers by RBI in 2015 without any risk participation. This could be done by allowing
the banks to set up their own subsidiaries and also undertake referral services for multiple
companies. However, the same is optional as they can continue to work as Corporate Agent
without seeking any prior approval of RBI. The objective behind this move by the Government
was to leverage the bank branch network and increase insurance penetration. The pre-requisites
for setting up a subsidiary /JV as specified by RBI is minimum net worth of INR 1000 Crores ,
NPA being less than 3% and Capital Adequacy Ratio should not be less than 10%.

The table 1.6 below gives the current Bancassuance partners of major Life Insurance companies
in India. The list excludes tie ups with RRB and Cooperative Banks:

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Table 1.6.Some Major Bancassurance Partnerships in India

S.No Name of the Life Insurer Partner Bank

1 Aviva Life Insurance RBS,DBS, Indusind Bank
2 Canara HSBC Life Insurance Canara Bank, OBC Bank , HSBC Bank
3 HDFC Life Insurance HDFC Bank, RBL Bank,Saraswat Bank
ICICI Prudential Life
4 ICICI Bank, Standard Chartered Bank
Insurance
5 Indiafirst Life Insurance Bank of Baroda, Andhra Bank
Allahabad Bank, UCO Bank, Dena Bank, Syndicate
6 LICI
Bank, United Bank of India,Vijaya Bank
7 Max Life Insurance Axis Bank, YES Bank
9 PNB Metlife Insurance PNB Bank, Karnataka Bank, J & K Bank
10 SBI Life Insurance SBI & Associate SBI Banks
Star Union Daichi Life
11 Union Bank of India, Bank of India
Insurance
12 Tata AIA Life Insurance Citibank
Source- Insurance Company Website

The table 1.7 would like to give a detailed understanding about different country wise variation
of regulatory environment which compels the bancassurance model to take different formats. It is
very difficult to create a unique environment as the economic developments of various countries
are not same and they are not in a same growth path. In some countries the penetration of
insurance is high whereas in other countries the penetration of banking sector is high. Thus, what
is required is to understand the socio economic position of the country and accordingly develop a
model best suitable in that particular environment. The comparison in this regard helps to
determine the same and accordingly the business model can be modified and implemented which
best suits the local requirement.

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Table 1.7. Country Wise Comparison of Regulatory Environment

Name of the
Regulatory Process
Country
The Bancassurance channel was introduced in 1992. Regulator monitors
Singapore sales practices through mandatory fact finding processes, mystery
shopping exercises etc.
The Bancassurance channel was introduced in 1996. Regulator monitors
Malaysia sales practices through fact-finding processes, mystery-shopping
exercises etc. Fact-finding guidelines are part of regulatory guidelines.
The Bancassurance channel was introduced in late 90s. The sales
processes are governed through the central bank. Mystery shopping
Indonesia exercises are undertaken. The insurers file with the regulator, details of
the arrangement entered into with the bank. Banks act as brokers for
distribution of life insurance products.
The Bancassurance channel was introduced in 2001. Banks are allowed
to tie up only with two life insurers. Sales control processes are
Hong Kong
generally conducted by the insurers themselves. The regulator conducts
occasional onsite checks.
The Bancassurance channel was introduced in 2003. There was phase-
wise de-regulation process, and now is fully deregulated. The regulator
South Korea
keeps a check on sales practices through regular bank auditing
procedures.
The sale of insurance through banks was initiated in 2001. The regulator
exercises regular monitoring through compliance visits etc. The sale of
life insurance products by bank staff has been limited by regulatory
constraints since authorized financial advisers who have obtained a
UK
minimum qualification can only sell most Investment-based products.
Following the reform of the polarization regime, banks will have the
possibility to become multi-tied distributors offering a range of products
from different providers.

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 The Bancassurance channel was introduced in 2000. The regulator
France exercises regular monitoring. Banks act as brokers for distribution of life
insurance products
The Bancassurance channel was introduced in 2001 and the Insurance
Law was revised in 2003 to lift restrictions stating that banks were no
longer limited to being agents for one insurance firm. According to the
China
CIRC, in the first three quarters of 2007, banks channeled more than 100
billion Yuan in premiums, accounting for 61 percent of the total income
for insurers from institutional agencies.
The Bancassurance channel was opened in 2001 and is fully de-
regulated. Banks usually have non-exclusive distribution agreements
Japan
with several companies, but the regulation imposes restrictions to
protect consumers, respect privacy and security of data.
Source: Report of the Committee on Bancassurance, 2011, IRDA, pp 8

1.7.2. Reasons for going into Bancassurance Business Model

Bancassurance is a distribution channel through which insurance companies sells their portfolio
of products using bank’s network. It is assumed that bancassurance channel is a win – win
situation for each and every stakeholder. For banks, it is expected to give some extra earnings
without having any risk exposure. The present financial conditions in most of the developing
countries urges bank to give more focus approach in other income generating activities as the
bank’s main source of earnings are not that much lucrative unless and until there is a drastic
improvement in economic conditions of that country where it operates. The changing economic
condition is not in the hand of banks thus to sustain in this environment they need modify or
search for some alternatives avenues where the banks can compensate their loosing income. The
advantages that the banks are enjoying are mainly related to consumer trust and existing branch
network. The age old banking operations in India and its social angle of business forced them to
open up branches in some of the remotest corner of the country where normal financial
transactions may not be possible. The involvement of government and proper banking
regulations also help them to earn the trust that the banks are enjoying over the years. When a
consumer deposit it’s hard earned money in any specific bank, then this trust plays a crucial role.

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So, by getting a product offering from their own banks make the purchasing decision of
insurance product easier.

The success is not lying with the banks only as the insurance companies first time realize the
potential to use the bank as a distribution partner to sell the insurance products. The main
advantage that the new age insurance companies are getting is in terms of coverage. After
opening up of the Indian insurance market, these private players realize that to get hold of the
market, the best way is to expand the business as fast as possible as the entire market is open to
all and there are huge areas are there which are still remains untapped. This untapped regions
may give them cost advantage and at the same time market coverage. But implementation of this
programme is a cumbersome task as it requires a huge amount of investment. Not only that the
new entrants are not at the top of the consumer’s mind as the brands are new in the market
people has a strong recall of the brand call LIC. So, initially they are lacking trust. On the one
hand they are unknown and on the other hand insurance is not product which the consumers are
going to purchase without any interference of a person having good knowledge and convincing
power to sell the insurance product. This sees an opportunity by establishing a tie ups with the
existing banks to sell the insurance products through bancassurance model. The collaboration
gives the insurance company the much needed expansion base without investment large amount
of money to develop their own branch network. Along with this the insurance companies are also
able to get hold of a readymade consumer base which otherwise they need to develop of their
own. The low brand recalls of most of the insurance companies are tackled by using the brand
reputation of the banks with which the insurance company is able to establish a tie ups. By
providing a proper training, thus the insurance companies are able to expand their business in a
rapid manner. But the statistics shows that out of the total five distribution channels the
bancassurance channel failed to achieve the desired level.

Normally a consumer visits bank branches to meet its financial requirements. Normal banking
products like loan, opening a bank account, recurring deposits etc. are some of the important
products which are demanded by the consumers of a bank. In any case the consumers have to get
the advice of the bank staffs for any of the financial products that they would like to avail. Since,
the bank employees are directly interacting with the consumers there is a chance that they would
be able to play the role of financial advisers for selling a wider range of financial products to its

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consumers. For a consumer it is also feasible as he or she do not have to move from one place to
other to purchase the different types of financial products. Since, the awareness level of
insurance products are very low, sometimes the consumers are also not in a position to
understand the exact requirement of the same as well as amount of coverage that they should go
for. Thus, an expert advice is highly desirable in any of these circumstances. Considering this,
the bank employees can play an active role to facilitate the right need of the consumers.

The biggest problem that the insurance industry is facing is lack of understanding about the
specific requirement of the consumers. It is not an issue where market potential is not there. It is
an issue where even if the potential is there the industry failed to capitalize the same in an
effective manner. One thing the industry failed to understand is that the product itself part and
parcel of service industry and the consumer is not in a position to understand the true benefits of
the same during his or her life time. This becomes a crucial issue for overall expansion of the
market. Without realizing this, the industry also tries to push sell the product and the ultimate
result is the rejection from target consumers. Thus, the discussion opens up the debate that
although, the model is proved to be effective in various parts of the world (both in developed as
well as developing country), perhaps in case of India, the implementation of the same model
without any modification has not been justified. The effort has not been made to realize the
requirements of the consumers. Both the industries, i.e. banking industry as well as insurance
industry only seen it as a profit making opportunity with less focus on consumer orientation and
this surely failed to provide the desired result. It is quite obvious that to come to conclusion that
both the industries joined hands for their own benefits as it helps to utilize their resources in a
better manner with little orientation towards customer needs and requirements. Thus, the study
aims to deals with the issues that are linked with bancassurance model which has a consumer
touch. Unless and until the consumers’ concern are not being addressed the model may not
become a substantial growth model for the industry as a whole. (Observation 2 & 3)

The study has its own relevance as the present day economic growth is mostly depends on the
service industry and financial sectors are one of the major contributors for this kind of desirable
growth. Any developed country is more dependent on service sector as the capital investment is
low but the return is high. Not only that, the industry has the ability to generate lots of direct as
well as indirect employment opportunities. Country like India, also looking to get more

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contribution from service industries and for this reason various avenues are being taken by the
government do the necessary improvements. But the sector has its own area of operations. As the
industry is entirely depends on the kind of deposit made by the individual citizens of the country,
increased amount of savings thus become crucial in this aspect. Not only that the nature of the
savings should long term in nature. The present area of study deals with these two avenues where
opportunities are there for long term savings but the same needs to be generated from the
prospective consumers. As far as banking sector is concerned, the sector has already developed
and right now enjoying tremendous amount of trust. But the same is not the case in case of
insurance sector. Apart from LIC, other players are doing business in Indian sub – continent but
the in terms of economic contribution, the same is not at par with other players. LIC is the player
which actively participates in nation building as it invests heavily in various infrastructures
which is essential for nation building. This amount the company is able to generate through
premiums paid by the policyholders. As the nature of the investment is long term in nature, it
gives ample opportunity to utilize the fund to a great extent. So, it can be said that the insurance
sector alone can create a fund for nation building as it covers only 10% of the entire eligible
insurable population. Thus, we can imagine if the sector is able to tap the rest of the 90% of the
uninsured people what amount of benefit the country can get from one sector only. Thus, instead
of ignoring the sector, approach needs to be developed to do the necessary upliftment of the
industry. If bancassurance is proved to be effective in other parts of the world, the same may be
worked in India as well, provided suitable modification can be incorporated.

1.8. Conclusion

The above discussion shows a clear understanding of both the banking and the insurance sectors.
The sectors obviously play an important role to shape the future of Indian economy to a great
extent. Direct involvement of financial obligation and to meet the financial requirement of
individuals as well as business organizations become the utmost criteria. With proper monitoring
of RBI, surely Indian banking sector evolved as sound player in the financial market. On the
other hand slowly but steadily the insurance sectors also shows its importance and the level of
awareness about various insurance related products also keep on increasing. Only thing is that
the industry is not able to achieve the desired growth as expected even after opening up of the
economy. The initial growth which the industry showed during 1999 – 2000, is at present

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decreasing. The much awaited FDI hike in Insurance to 49% in 2015 which includes FII
investment as well has met with tepid response from all major companies as issues regarding
voting rights and valuation of Indian Insurance companies are still very much in the nascent
stage .Only positive aspect is that still a majority of the Indians are uninsured which means a
greater part of the market is yet to capitalize. If that is possible then surely the industry will able
to get the much needed boost in coming years. The discussion above is conclusive enough to
understand that the problem is not lying with product offerings or stringent regulatory issues; the
problem has two dimensions, viz. lack of capital and second lack of distribution strategy. Even if
the private players have adopted some innovative distribution channels, still that is not enough, if
we look at the volume of the market. The case is more pathetic in case of general insurance
segment, as most of the people believe that general insurance means medical insurance. Since,
the cost of treatment is kept on rising; people started realizing the importance of mediclaim.
Other than that and motor insurance (which is mandatory under Motor Vehicle Act) other
general insurance product’s awareness level is very low. Now the way out could be to give more
integrated approach to develop or modify the existing distribution network in such a manner so
that the market can be revived. But before doing so, the consumers who are the actual
beneficiaries of these value added distribution channels, there opinion need to be taken. The
acceptability and effectiveness of various insurance distribution channels should be analyzed
from consumer’s point of view and based on the feedback the same can be modified or re –
introduced in a different formats, if it looking for those changes. Thus, the present study would
like to focus on this particular issue and try to judge the effectiveness of bancassurance as an
alternative distribution channel from the point of view of consumers.

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