1.

1 INTRODUCTION TO BANCASSURANCE
With the opening up of the insurance sector and with so many players entering the Indian insurance industry, it is required by the insurance companies to come up with innovative products, create more consumer awareness about their products and offer them at a competitive price. Since the banking services, insurance and fund management are all interrelated activities and have inherent synergies, selling of insurance by banks would be mutually beneficial for banks and insurance companies. With these developments and increased pressures in combating competition, companies are forced to come up with innovative techniques to market their products and services. At this juncture, banking sector with its far and wide reach, was thought of as a potential distribution channel, useful for the insurance companies. This union of the two sectors is what is known as Bancassurance.

1.1.2 MEANING

Bancassurance is the distribution of insurance products through the bank's distribution channel. It is a phenomenon wherein insurance products are offered through the distribution channels of the banking services along with a complete range of banking and investment products and services. To put it simply, Bancassurance, tries to exploit synergies between both the insurance companies and banks. Bancassurance can be important source of revenue. With the increased competition and squeezing of interest rates spread, profits are likely to be under pressure. Fee based income can be increased through hawking of risk products like insurance. Bancassurance if taken in right spirit and implemented properly can be win-win situation for the all the participants' viz., banks, insurers and the customer. Bancassurance Strategy The Concept Bancassurance, i.e., banc + assurance, refers to banks selling the insurance products.

Bancassurance term first appeared in France in 1980, to define the sale of insurance products through banks distribution channels (SCOR 2003). This term is extremely familiar among the

European countries as banks selling insurance products in most of these countries are a common feature. Banks are being used as an effective alternate channel to distribute insurance products either as stand-alone insurance products or add-ons to the bank products by way of combining the insurance with typical banking products/services. According to IRDA, bancassurance refers to banks acting as corporate agents for insurers to distribute i n s u r a n c e p r o d u c t s . L i t e r a t u r e o n b a n c a s s u r a n c e d o e s n o t differentiate if the bancassurance refers to selling of life insurance p r o d u c t s o r n o n - l i f e i n s u r a n c e p r o d u c t s . A c c o r d i n g l y, h e r e bancassurance is defined to mean banks dealing in insurance products of both life and non-life type in any forms. Banks in Europe though predominantly deal with life insurance products, they are also channeling the non-life insurance products. It is also important to clarify that the term bancassurance does not just refer specifically to distribution alone. Other features, such as legal, fiscal, cultural and/or behavioural aspects also form an integral part of the concept of bancassurance (SCOR 2003). Quite reverse of the concept of bancassurance, there is also a concept known as assure banking which refers to the provision and distribution of financial and banking services by insurance companies

1.2. HISTORY OF BANCASSURANCE

The banks taking over insurance is particularly well-documented with reference to the experience in Europe. Across Europe in countries like Spain and UK, banks started the process of selling life insurance decades ago and customers found the concept appealing for various reasons. Germany took the lead and it was called ALLFINANZ. The system of bancassurance was well received in Europe. France taking the lead, followed by Germany, UK, Spain etc. In USA the practice was late to start (in 90s). It is also developing in Canada, Mexico, and Australia. In India, the concept of Bancassurance is very new. With the liberalization and deregulation of the insurance industry, Bancassurance evolved in India around 2002.

There are many definitions of Bancassurance and in essence depends upon the type of model and the stage of development that insurance companies are already into. However the most commonly used definition is: Production and distribution of Insurance, Banking and other financial products to a common customer base. Bancassurance does not mean just selling insurance products through banks but in full holistic form tries to exploit synergies between insurance companies and banks and thus realizes the full potential of customer database of banks to develop excellent customer centric service and generate highest quality returns for insurance companies and banks. The Birth of Bancassurance Bancassurance began in the European Continent in second half of the 20th century, when banks sought to capture the manufacturing income from insurance products as well to supplement the commission income earned from their sales. By doing so, they sought to leverage their customer list and the related customer information that would enhance their ability to sell insurance products to their largely mid-market customers. These early efforts were based on the advantages that are still recognized as accruing to banks in the insurance business:

The banks' brand name and reputation The productivity levels of branch staff and in-house agents, which can reach three to four times that of the traditional agency force.

Bancassurance is also known as the Bank Insurance Model or BIM. Bancassurance is an organizational strategy that allows a bank to offer various types of insurance. The model is created by establishing ongoing relationships with one or more insurance providers. Those providers are then able to utilize the banks staff and resources to sell the policies.

Reasons for growing phenomena of Bancassurance:The opening up of the insurance industry to private sector participation in December 1999 has led to the entry of 20 new players, with 12 in the life insurance sector and eight in the nonlife insurance sector. Almost without exception these companies are seeking to utilize multiple distribution channels such as traditional agency, bancassurance, brokers and direct marketing. Bancassurance is seen by many to be a significant or even the primary channel (the latter being the case for at least SBI Life). In other Asian markets we have seen bancassurance make significant headway in recent times. For example, bancassurance accounted for 24% of new life insurance sales by weighted premium income* in Singapore in 2002. This is a significant increase on the equivalent 2001 statistic of 15% and is as a result of growth in significant bank-centric bancassurance operations. In Hong Kong the figure for 2002 is expected to be at the 20% level for the same basic reasons. 1. Life insurance premium represents 55% of the world insurance premium, and as the life insurance is basically a saving market. So it is one of the methods to increase deposits of banks. 2. In non-life insurance business banks are looking to provide additional flow of revenues from the same customers through the same channel of distribution and with the same people. 3. Insurers have been turning in ever-greater numbers to alternative modes of distribution because of the high costs they have paid for agent services. These costs became too much of a burden for many insurers compared to the returns they generated. 4. Insurers operate through bancassurance own and control relationships with customers. Insurers found that direct relationships with customers gave them greater control of their business at a lower cost. Insurers who operate through the agency relationship are hardly having any control on their relationship with their clients. 5. The ratio of expenses to premiums, an important efficiency factor, it is noticed very well that expenses ratio in insurance activities through bancassurance is extremely low. This is because the bank and the insurance company is benefiting from the same distribution channels and people.

6. It is believed that the prospects for increased consolidation between banking and insurance is more likely dominated and derived by the marketing innovations that are likely to follow from financial service modernization. Such innovations would include cross selling of banking, insurance, and brokerage products and services; the increased use of the Internet by consumers; and a melding of insurance and banking corporate cultures. 7. One of the most important reason 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 products can leverage their distribution and processing capabilities for profitable operating expense ratios. 8. Another advantage banks have over traditional insurance distributors is the lower cost per sales lead made possible by their sizable, loyal customer base. Banks also enjoy significant brand awareness within their geographic regions, again providing for a lower per-lead cost when advertising through print, radio and/or television. Banks that make the most of these advantages are able to penetrate their customer base and markets for aboveaverage market share. 9. Other bank strengths are their marketing and processing capabilities. Banks have extensive experience in marketing to both existing customers (for retention and cross selling) and non-customers (for acquisition and awareness). They also have access to multiple communications channels, such as statement inserts, direct mail, ATMs, telemarketing, etc. Banks' proficiency in using technology has resulted in improvements in transaction processing and customer service. 10. By successfully mining their customer databases, leveraging their reputation and 'distribution systems (branch, phone, and mail) to make appointments, and utilizing 'sales techniques and products tailored to the middle market, European banks have more than doubled the conversion rates of insurance leads into sales and have increased sales productivity to a ratio which is more than enough to make bancassurance a highly profitable proposition.

11. Most insurers that have tried to penetrate middle-income markets through alternative channels such as direct mail have not done well. Clearly, a change in approach is necessary. As with any initiative, success requires a clear understanding of what must be done, how it will be done and by whom. The place to begin is to segment the strengths that the bank and insurer bring to the business opportunity.

1.3 OBJECTIVES To understand the concept of bancassurance. To study the contractual relationship between bank and the insurer. To study the various distribution channels of bancassurance. To find the problems faced by the financial institutions due to bancassurance

1.4 Utilities of Bancassurance

FOR BANKS 1.As a source of fee income - Banks traditional sources of fee income have been the fixed charges levied on loans and advances, credit cards, merchant fee on point of sale transactions for debit and credit cards, letter of credits and other operations. This kind of revenue stream has been more or less steady over a period of time and growth has been fairly predictable. However shrinking interest rate, growing competition and increased horizontal mobility of customers have forced bankers to look else where to compensate for the declining profit margins and Bancassurance has come in handy for them. Fee income from the distribution of insurance products has opened new horizons for the banks and they seem to love it. From the banks point of view, opportunities and possibilities to earn fee income via Bancassurance route are endless. Atypical commercial bank has the potential of maximizing fee income from Bancassurance up to 50% of their total fee income from all sources combined. Fee Income from Bancassurance also reduces the overall customer acquisition cost from the banks point of view. At the end of the day, it is easy money for the banks as there are no risks and only gains.

2.Product Diversification - In terms of products, there are endless opportunities for the banks. Simple term life insurance, endowment policies, annuities, education plans, depositors insurance and credit shield are the policies conventionally sold through the Bancassurance channels. Medical insurance, car insurance, home and contents insurance and travel insurance are also the products which are being distributed by the banks. However, quite a lot of innovations have taken place in the insurance market recently to provide more and more Bancassurance-centric products to satisfy the increasing appetite of the banks for such products.Insurers who are generally accused of being inflexible in the pricing and structuring of the products have been responding too well to the challenges (say opportunities) thrown open by the spread of Bancassurance. They are ready to innovate and experiment and have setup specialized Bancassurance units within their fold. Examples of

some new and innovative Bancassurance products are income builder plan, critical illness cover, return of premium and Takaful products which are doing well in the market.

3.Building close relations with the customers - Increased competition also makes it difficult for banks to retain their customers. Banassurance comes as a help in this direction also. Providing multiple services at one place to the customers means enhanced customer satisfaction. For example, through bancassurance a customer gets home loans along with insurance at one single place as a combined product. Another important advantage that Bancassurance brings about in banks is development of sales culture in their employees. Also, banking in India is mainly done in the 'brick and mortar' model, which means that most of the customers still walk into the bank branches. This enables the bank staff to have a personal contact with their customers. In a typical Bancassurance model, the consumer will have access to a wider product mix - a rather comprehensive financial services package, encompassing banking and insurance products

FOR INSURANCE COMPANIES

1. Stif Competition- At present there are 15 life insurance companies and 14general insurance companies in India. Because of the Liberalization of the economy it became easy for the private insurance companies to enter into the battle field which resulted in an urgent need to outwit one another. Even the oldest public insurance companies started facing the tough competition. Hence in order to compete with each other and to stay a step ahead there was a need for a new strategy in the form of Bancassurance. It would also benefit the customers in terms of wide product diversification.

2. Rural Penetration - Insurance industry has not been much successful in rural penetration of insurance so far. People there are still unaware about the insurance as a tool to insure their life. However this gap can be bridged with the help of Bancassurance. The branch network of banks can help make the rural people aware about insurance and there is also a wide scope of business for the insurers. In order to fulfill all the needs bancassurance is needed.

3. Multiple distribution channels- Now a days the insurance companies are trying to exploit each and every way to sell the insurance products. For this they are using various distribution channels. The insurance is sold through agents, brokers through subsidiaries etc. In order to make the most out of Indias large population base and reach out to a worthwhile number of customers there was a need for Bancassurance as a distribution model.

4. Targeting Middle income Customers - In previous there was lack of awareness about insurance. The agents sold insurance policies to a more upscale client base. The middle income group people got very less attention from the agents. So through the venture with banks, the insurance companies can recapture much of the under served market. So in order to utilize the database of the banks middle income customers, there was a need felt for Bancassurance.

1.5 MODELS OF BANCASSURANCE

1. STRUCTURAL CLASSIFICATION a) Referral Mode - Banks intending not to take risk could adopt referral model wherein they merely part with their client data base for business lead of commission. The actual transaction with the prospective client in referral model is done by the staff of the insurance company either at the premises of the ban0k or elsewhere. Referral model is nothing but a simple arrangement, wherein the bank, while controlling access to the clients data base, parts with only the business leads to the agents/ sales staff of insurance company for a referral fee or commission for every business lead that was passed on. In fact a number of banks in India have already resorted to this strategy to begin with. This model would be suitable for almost all types of banks including the RRBs /cooperative banks and even cooperative societies both in rural and urban. There is greater scope in the medium term for this model. For, banks to begin with can resort to this model and then move on to the other models. b) Corporate Agency - The other form of non-sick participatory distribution channel is that of Corporate Agency, wherein the bank staff as an institution acts as corporate agent for the insurance product for a fee/commission. This seems to be more viable and appropriate for

most of the mid-sized banks in India as also the rate of commission would be relatively higher than the referral arrangement. This, however, is prone to reputational risk of the marketing bank. There are also practical difficulties in the form of professional knowledge about the insurance products. This could, however, be overcome by intensive training to chosen staff, packaged with proper incentives in the banks coupled with selling of simple insurance products in the initial stage. This model is best suited for majority of banks including some major urban cooperative banks because neither there is sharing of risk nor does it require huge investment in the form of infrastructure and yet could be a good source of income. This model of bancassurance worked well in the US, because consumers generally prefer to purchase policies through broker banks that offer a wide range of products from competing insurers. c) Insurance as fully integrated financial service/ Joint Ventures - Apart from the above two, the fully integrated financial service involves much more comprehensive and intricate relationship between insurer and bank, where the bank functions as fully universal in its operation and selling of insurance products is just one more function within. This includes banks having wholly owned insurance subsidiaries with or without foreign participation. The great advantage of this strategy being that the bank could make use of its full potential to reap the benefit of synergy and therefore the economies of scope. This may be suitable to relatively larger banks with sound financials and has better infrastructure. As per the extant regulation of insurance sector the foreign insurance company could enter the Indian insurance market only in the form of joint venture, therefore, this type of bancassurance seems to have emerged out of necessity in India to an extent. There is great scope for further growth both in life and non-life insurance segments as GOI is reported have been actively considering to increase the FDIs participation up to 49 per cent.

2. PRODUCT BASED CLASSIFICATION

a) Stand-alone Insurance products -.In this case bancassurance involves marketing of the

insurance products through either referral arrangement or corporate agency without mixing the insurance products with any of the banks own products/ services. Insurance is sold as one more item in the menu of products offered to the banks customer, however, the products of banks and insurance will have their respective brands too.

b) Blend of insurance with bank products - This method aims at blending of insurance products as a value addition while promoting the banks own products. Thus, banks could sell the insurance products without any additional efforts. In most times, giving insurance cover at a nominal premium/ fee or sometimes without explicit premium does act as an added attraction to sell the banks own products, e.g., credit card, housing loans, education loans, etc. Many banks in India, in recent years, has been aggressively marketing credit and debit card business, whereas the cardholders get the insurance cover for a nominal fee or (implicitly included in the annual fee) free from explicit charges/ premium. Similarly the home loans / vehicle loans, etc., have also been packaged with the insurance cover as an additional incentive.

3. BANK REFERRALS There is also another method called 'Bank Referral'. Here the banks do not issue the policies; they only give the database to the insurance companies. The companies issue the policies and pay the commission to them. That is called referral basis. In this method also there is a winwin situation every where as the banks get commission, the insurance companies get databases of the customers and the customers get the benefits.

REGULATIONS FOR BANCASSURANCE IN INDIA

RBI NORMS FOR BANKS

RBI Guidelines for the Banks to enter into Insurance Business Following the issuance of Government of India Notification dated August 3, 2000, specifying Insurance as a permissible form of business that could be undertaken by banks under Section 6(1)(o)of The Banking Regulation Act, 1949, RBI issued the guidelines on Insurance business for banks. 1. Any scheduled commercial bank would be permitted to undertake insurance business as agent of insurance companies on fee basis. Without any risk participation

2. Banks which satisfy the eligibility criteria given below will be permitted to set up a joint venture company for undertaking insurance business with risk participation, subject to safeguards. The maximum equity contribution such a bank can hold in the Joint Venture Company will normally be50% of the paid up capital of the insurance company.

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v. The track record of the performance of the subsidiaries, if any, of the concerned bank should be satisfactory. 3. In cases where a foreign partner contributes26% of the equity with the approval of Insurance Regulatory and Development Authority/Foreign Investment Promotion Board, more than one public sector bank or private sector bank may be allowed to participate in the equity of the insurance joint venture. As such participants will also assume insurance risk, only those banks which satisfy the criteria given in paragraph 2 above, would be eligible. 4. A subsidiary of a bank or of another bank will not normally be allowed to join the insurance company on risk participation basis. 5. Banks which are not eligible for joint venture participant as above, can make investments up to10% of the net worth of the bank orRs.50crore, whichever is lower, in the insurance company for providing infrastructure and services support. Such participation shall be treated as an investment and should be without any contingent liability for the bank.

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in view all relevant factors including the position in regard to the level of non-performing assets of the applicant bank so as to ensure that non-performing assets do not pose any future threat to the bank in its present or the proposed line of activity, viz., insurance business. It should be ensured that risks involved in insurance business do not get transferred to the bank. There should be arms length relationship between the bank and the insurance outfit. 7. Holding of equity by a promoter bank in an insurance company or participation in any form in insurance business will be subject to compliance with any rules and regulations laid down by the IRDA/Central Government. This will include compliance with Section6AA of the Insurance Act as amended by the IRDA Act,1999, for divestment of equity in excess of 26 per cent of the paid up capital within a prescribed period of time. 8. Latest audited balance sheet will be considered for reckoning the eligibility criteria.

IRDA NORMS FOR INSURANCE COMPANIES

The Insurance regulatory development & Authority has given certain guidelines for the Bancassurance they are as follows: 1) Chief Insurance Executive: Each bank that sells insurance must have a chief Insurance Executive to handle all the insurance matters & activities. 2) Mandatory Training: All the people involved in selling the insurance should under-go mandatory training at an institute determined(authorized) by IRDA & pass the examination conducted by the authority 3) Corporate agents: Commercial banks, including co-operative banks and RRBs may become corporate agents for one insurance company. 4) Banks cannot become insurance: brokers. Issues for regulation: Certain regulatory barriers have slowed the development of Bancassurance in India down. Which have only recently been cleared with the passage of the insurance (amendment) Act 2002.Prior it was clearly an impractical necessity and had held up the implementation of Bancassurance in the country. As the current legislation places the following:-

1) Training and examination requirements: upon the corporate insurance executive within the corporate agency, this barrier has effectively been removed. Another regulatory change is published in recent publication of IRDA regulation relating to the (2) Licensing of Corporate agents (2) Specified person to satisfy the training & examination: According to new regulation of IRDA only the specific persons have to satisfy the training & examination requirement as insurance agent.