bancassurance in standard chartered bank
TRANSCRIPT
CHAPTER - 1
INTRODUCTION
1.1 INTRODUCTION TO BANCASSURANCE
Bancassurance in its simplest form is the distribution of insurance
products through a bank's distribution channels. In concrete terms
Bancassurance, which is also known as Allfinanz - describes a package of
financial services that can fulfil both banking and insurance needs at the
same time. It takes various forms in various countries depending upon the
demography and economic and legislative climate of that country.
Demographic profile of the country decides the kind of products
Bancassurance shall be dealing in with, economic situation will determine
the trend in terms of turnover, market share, etc., whereas legislative
climate will decide the periphery within which the Bancassurance has to
operate.
The motives behind Bancassurance also vary. For banks it is a means of
product diversification and a source of additional fee income. Insurance
companies see Bancassurance as a tool for increasing their market penetration
and premium turnover. The customer sees Bancassurance as a bonanza in terms
of reduced price, high quality product and delivery at doorsteps. Actually,
everybody is a winner here. Bank staff and tellers, rather than an insurance
salesperson, become the point of sale/point of contact for the customer. Bank
staff are advised and supported by the insurance company through product
information, marketing campaigns and sales training. Both the bank and
insurance company share the commission. Insurance policies are processed and
administered by the insurance company. The usage of the term picked up as
banks and insurance companies merged and banks sought to provide insurance,
especially in markets that have been liberalised recently. It is a controversial
idea, and many feel it gives banks to a greater control over the financial
industry or creates too much competition with existing insurers. In some
countries, bank insurance is still largely prohibited, but it was recently
legalized in countries such as the United States, when the
GLASS – STEAGALL Act was repealed after the passage of the Gramm-
Leach-Bliley Act.
But revenues have been modest and flat in recent years, and most insurance
sales in U.S. banks are for mortgage insurance, life insurance or property
insurance related to loans. But China recently allowed banks to buy insurers
and vice versa, stimulating the bancassurance product and some major global
insurers in China have seen the bancassurance product greatly expand sales to
individuals across several product lines.
Private Bancassurance is a wealth management process pioneered by Lombard
International Assurance and now used globally. The concept combines private
banking and investment management services with the sophisticated use of life
assurance as a financial planning structure to achieve fiscal deposits.
1.5 BANCASSURANCE = INSURER’S PRODUCT + BANK’S REACH
To put in simple words, bancassurance is the provision of insurance banking
products and services through the distribution channel of a bank or to a common
client base. The usage of the word started picking up when the financial markets
witnessed mergers and alliances between the two booming segments – Banking
and Insurance. According to a recent study, bancassurance is on the rise,
particularly in emerging markets. Worldwide, insurers have been successfully
leveraging bancassurance to gain a foothold in markets with low insurance
penetration and a limited variety of distribution channels.
Banks world over have realized that offering value-added services such as
insurance, helps to meet client expectations & also
Competition in the Personal Financial Services area is getting `hot’ in
India.
Banks seek to retain customer loyalty by offering them a vastly expanded
and more sophisticated range of products.
Customers also want a “one-stop shop” for all their financial needs. Therefore
banks are trying to provide more services and integrate them into their business
model. Bancassurance is one such initiative. Further the risks involved in doing
this business is very low.
Banks are also trying to integrate this business into their own business.
Customers would also get this benefit as these products are offered not only by
their sales force but also by net banking and other IT enabled services like ATM
etc. Insurance companies also have a wide range of insurance products catering
to a wide range of needs. Bancassurance is beneficial for insurance companies
as well as they would be cutting costs and cross-selling apart from the wider
reach of their insurance products. In a country like India, the need of insurance
is not felt by customers
1.6 REGULATORY FRAMEWORK IN INDIA
In India, the banking and insurance sectors are regulated by two different
entities (banking by RBI and insurance by IRDA) and bancassurance being the
combinations of two sectors comes under the purview of both the regulators.
Each of the regulators has given out detailed guidelines for banks getting into
insurance sector. The RBI requires any bank intending to undertake insurance
business to obtain its prior approval RBI guidelines for banks entering into
insurance sector provide three options for banks. They are:
Joint ventures will be allowed for financially strong banks wishing to
undertake insurance business with risk participation.
Any commercial bank will be allowed to undertake insurance business as
agent of insurance companies. This will be on a fee basis with no-risk
participation. Banks are entitled to referral fee on the basis of premium
collected.
The Monetary & Credit Policy of the RBI in October 2002 allowed banks
to undertake referral business through their network of branches subject
to certain restrictions.
The Insurance Regulatory and Development Authority (IRDA) guidelines for
the bancassurance are:
Each bank that sells insurance must have a chief insurance executive to
handle all insurance activities.
Banks are included within the IRDA’s Licensing of Corporate Agents
Regulation 2002. All the people involved in selling should undergo
mandatory training at an institute accredited by IRDA and pass the
examination conducted by the authority.
Commercial banks, including cooperative banks and regional rural banks,
may become corporate agents for one insurance company.
Banks cannot become insurance brokers.
The whole aim of the present regulatory framework is to ensure that any risks
that may arise from insurance business don’t affect banking business. In essence
there should be an “arm length” relationship between the bank and the insurance
company.
1.3THE BANCASSURANCE MODEL IN INDIA
The bancassurance model – an attractive alliance for both the parties, has taken
a flying start in India; but much more needs to be done in order to reach out to
the uninsured Indians.
Bancassurance – selling insurance product under the roof of a bank – had its
humble beginning in 1980s in France and soon spread its wings to different
parts of the world. In the Indian context (post the March 2000 RBI Amendment
and IRDA’s 2002 notification), the very concept provided a ray of hope to a
number of insurance players as culturally, banks are more acceptable than
insurance companies. Add to this the more pragmatic aspect of the penetration
of commercial banks (banking is spread both geographically and across
different socio-economic groups; there are more than 80,000 branches of
scheduled commercial banks), the strategic alliance between a bank and an
insurance company could not have come at a more appropriate time.
Given the number of insurance agents, it would appear that an alternative
distribution model for insurance products is perhaps not apt in the Indian
context. Well perhaps, this is superficially true; dig deep and you realise that the
average number of transactions conducted by the agents is well below the
international standard, and hence the need for an alternative distribution
channel. The truth is that this alternative channel has helped many insurance
companies to do away with the disasters related to agent turnovers. The banks,
in turn, are able to earn fee-based income to supplement their core lending
activities without having to invest in additional resources or infrastructure. As a
matter of fact, private sector banks and private insurers have been
comparatively more active and hence beneficiaries of bancassurance. It is
apparent that there is a natural synergy between banks and insurance companies.
Insurance
At the same time it is important to consider the fact that the bank’s appetite to
derive revenue from sale of insurance and customers propensity to purchase
insurance from banks differ significantly. Interestingly, there is an increasing
focus by major banks on joint ventures and ownership models. But amidst all
this, how does the customer benefit? As far as customers are concerned, the
bancassurance model provides them with a one stop hassle free shopping for all
necessary financial services.
While bancassurance does provide an apparently viable model for product
diversification by banks and a cost effective distribution channel for insurance
companies, there are some potential areas of conflict between the two that need
to be ironed out. The most classic example of conflict of interest is based on the
common perception that insurance is a savings product as against a risk
management product. In such a situation, insurance products compete with
banks’ term deposit facilities and hence clear conflicts of interest arise. The
branch bankers may have a negative incentive in promoting the insurance
product when their focus could be on gaining more commissions through their
cash deposit targets.
1.7 WHY SHOULD BANKS ENTER INSURANCE?
There are several reasons why banks should seriously consider
Bancassurance, the most important of which is increased return on assets
(ROA). The following are the other reasons -
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.
By leveraging their strengths and finding ways to overcome their weaknesses, banks could change the face of insurance distribution. Sale of personal line insurance products through banks meets an important set of consumer needs.
Most large retail banks engender a great deal of trust in broad segments of consumers, which they can leverage in selling them personal line insurance products. In addition, a bank’s branch network allows the face to face contact that is so important in the sale of personal insurance.
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 above-average market share. Other bank strengths are their marketing and processing capabilities. Banks have extensive experience in marketing to both existing customers (for retention and cross selling) and non- customers (for acquisition and awareness).
They also have access to multiple communications channels, such as statement inserts, direct mail, ATMs, telemarketing, etc. Banks' proficiency in using technology has resulted in improvements in transaction processing and customer service.
By successfully mining their customer databases, leveraging their reputation and 'distribution systems (branch, phone, and mail) to make appointments, and utilizing 'sales techniques and products tailored to the middle market, European banks have more than doubled the conversion rates of insurance leads into sales and have increased sales productivity to a ratio which is more than enough to make Bancassurance a highly profitable proposition.
1.8 REVIEW OF LITERATURE
Article 1
Bancassurance - A Global Breakdown:
It is important to outline the impact that bancassurance has had on differing
regions around the world, as well as looking at the major regulations that impact
the further growth of bancassurance. Below, is provided with a brief synopsis of
bancassurance markets in certain key areas.
EUROPE:
Bancassurance is a construct of Europe (France in particular) and this perhaps
helps explain why it is such a phenomenal success within certain European
markets. Largely the 1989 Second Banking Coordination Directive motivated
the large influx of banks into insurance within Europe in recent years.
Currently, the penetration levels are fairly stable in Europe, since bancassurance
in the majority of Western European countries (France, Netherlands, Portugal
and Spain) has reached what studies such as Swiss Re. (2002) argue to be
maturity. These penetration levels will only pick up once bancassurance
manages to fully infiltrate Central and Eastern European countries such as
Hungary and Poland, and the Baltic nations. Currently, the final major hurdle
for bancassurance in Western Europe seems to lie in the U.K. where a
predominantly strong insurance board still attempts to resist the bancassurance
trend even in the face of widespread deregulations.
FRANCE:
In France, the success of bancassurance is mitigated by a favourable tax
treatment on life insurance products, lack of competition within the insurance
industry, and an inadequate pension scheme (Bonnet and Arnal (2000). The
pioneer of bancassurance in France is argued to be Credit Mutual, which created
its own life and non-life subsidiaries in the early 1970’s.
Bancassurance has seen the most success in the life insurance market,
something that is true for every nation, increasing from 52% in 1995 to account
for 69% of life insurance business n 2000 (Durand (2003), and Turner (1998)).
However, as of late, the banking networks market share of the life insurance
market has remained fairly stagnant, actually dropping over the years to 66%
market share in 2001 and 61% in 2003 (Falautona and Marsiglia (2003), Data
monitor (2003)). This resulted from a combination of falling stock market prices
and the banking network bearing the brunt of lower transfer prices according to
Benoist (2002).
This means that banking and insurance companies are overseen separately
within the country. For a conglomerate, the regulator will depend on who is the
parent of the two.
UNITED KINGDOM:
Bancassurers have faced a tougher time in trying to penetrate the U.K. market,
thanks in large to a combination of restrictive regulations and a powerful
insurance governing body. The first move for bancassurers came in 1985 when
Standard Life purchased a stake in the Bank of Scotland. Changes in legislation
soon followed in 1986 and 1988, which made it legal for banks to market
insurance products and set up their own insurance subsidiaries (Sakr (2001)).
Even then, the main type of union between the two was a joint venture, since
the banks placed an emphasis on maintaining the knowledge of the insurer.
Twenty years later, researchers argue that bancassurance is still in its infancy
within the U.K., currently accounting for 15% of new insurance premiums
issued (Benoist (2002),
It is argued that restrictive regulations were detrimental to the growth of
bancassurance within the country and that due to the lack of experience the
correct model for the U.K. is still to be found (Hubbard (spring 2001)). Two
benefits of the regulatory system in the U.K. are firstly, that it is based on one
almighty regulator that oversees the different factors of the financial services
industry (the financial Services Authority). This leads to more streamlined
regulations than in other countries that employ functional form regulatory
systems.
SPAIN:
Spain has one of the most developed markets in bancassurance (Data monitor
(2003)). Current penetration of bancassurers is over 75% of life insurance
business and an ever-increasing proportion of the non-life business. In Spain,
the evolution of the bancassurance market is fostered by the phenomenal growth
within the insurance services industry (life insurance alone has seen 30%
growth per annum over the past 15 years (Durand (2003)). The development of
bancassurance in the Spanish market was facilitated by the well-established
network of regional building societies, and also the cultural mentality that it is
correct to take on risks (Goddard (1999)).
BRAZIL:
In Brazil the laws are in the bancassurers favour, and the banks within the
country control more than 65% of the insurance market (Nigh and Saunders
(2003)), a size that rivals the leading bancassurers in Europe. Furthermore, in
Brazil, bancassurers are assisted by regulations that ban the development of
agent networks (Benoist (2002)).
NORTH AMERICA:
The North American financial services market is the largest in the world and
bancassurance has developed in a differing manner in this region depending on
the country in question. In Canada, there has been consolidated regulation for
more than 15 years and banks are legally allowed to own insurance companies,
but limitations are placed on the products that can be provided (Dorval (2002)).
While in Mexico, bancassurance has been a flourishing industry due largely to
the role played by banks in the creation of pension funds since the 1997 pension
reforms.
Bancassurance in the U.S. has, in contrast, faced a very tight regulatory and
legislative environment for many decades. The formation of financial
conglomerates was greatly hindered by the Banking Act of 1933 (Glass-Stegall
Act) and the Bank Holding Company Act of 1956. Only in 1999 did laws
become more favourable to banks offering insurance products, with the passing
of the Gramm-Leach Bliely Act. However, due to the divergence between the
state and federal laws regarding banks offering insurance products, bancassurers
still face a hard time ahead in relation to regulations and attempting to
overcome powerful lobbies that aim to maintain existing hierarchies (Boot
(2003)).
ASIA AND THE PACIFIC:
Bancassurance in the Asian region has been relatively slow to take off, with the
exception of countries such as Australia, Hong Kong and Singapore where
regulations have been considerable lenient (Swiss Re. (2002)). The trend in the
majority of mainland Asian countries has been for a bank to form ties with a
foreign insurer in order to begin bancassurance operations with around 80% of
these being life insurers, and the financial structure of the operation tends to be
in the form of a distributional agreement. Since bancassurance is still in its
infancy in most Asian countries, it is very susceptible to global changes
Most countries within Asia have only recently begun allowing the formation of
bancassurance operations with the main players listed below. Certain countries
within the region are still holding out against the onslaught of the bancassurance
trend. Vietnam still restricts banks from offering life insurance products, while
South Korea has made certain rules that make it difficult to begin a
bancassurance operation within the country
Article 2
Quantitative works of major Researchers related to Bancassurance
Compared to the vast amount of descriptive work that has been published in the
field of bancassurance, there is only a limited amount of empirical studies
conducted on the effects that bancassurance actually has on the company once
implemented. This was largely due to the lack of information that resulted from
poor company disclosure statements and inadequate collections of national
statistics. As these problems are being rectified, researchers into the
bancassurance practice are making more and more empirical research;
nevertheless, it is still in its early stages. The following aims at highlighting the
major quantitative findings of certain researchers that have performed research
into the union of banks and insurers.
The majority of past studies have focused mainly on the risk and profitability
effects resulting from the union of a banking and non-banking firm. One of the
earliest studies in this area was performed by Boyd and Graham (1986). They
conducted a risk-of-failure analysis and looked at two periods around a new
Federal Reserve policy (1974s go-slow policy). they found that bank holding
companies (BHCs) involvement in non-banking activities is significantly
positively correlated with the risk of failure over the period 1971-1977, while
the period 1978-1983 showed no significance, thus indicating that the new
policy had a considerable impact on bank holding company (BHC) expansion
into non-banking activities. Boyd and Graham (1988) followed their 1986
study with a paper that used a simulation approach, whereby they simulated
possible mergers between banking and non-banking companies which were then
compared to existing BHCs in order to determine whether the risk of
bankruptcy will increase of decrease should expansion be allowed in to the non-
banking industry, and also to determine the concurrent effect on company
profitability. Their main finding was that the risk of bankruptcy only declined
should the BHC expand into the life insurance practice. Brewers (1989) study
finds similar risk reduction benefits existing however cannot specify whether
they originate as a result of diversification, regulation or efficiency gains. Boyd,
Graham and Hewitt (1993) build on Boyd et al. (1988) by conducting a
simulation study.
They once again conclude that mergers of BHCs with insurance companies may
reduce risk, whereas those with securities or real-estate firms will not. Saunders
and Walter (1994) and Lown, Osler, Strahan and Sufi (2000) use a similar
method to Boyd and Graham (1988) and obtain similar results with more
current data. Estrella (2001) examines diversification benefits for banks by
using proforma mergers. In contrast to previous studies that incorporate
accounting data, Estrella uses market data and a measure of the likelihood of
failure that is derived through the application of option pricing theory to the
valuation of the firm. the findings indicate that banking and insurance
companies are likely to experience gains on both sides in the majority of the
cases.
The other major series of studies on banks expansion into non-banking activities
focus on the wealth effects of such a move. Cybo-Ottone and Murgia (2000)
analyzed the stock market valuations of mergers and acquisitions in the
European banking industry over the period 1988-1997, and found the existence
of significant positive abnormal returns associated with the announcement of
product diversification of banks into insurance. Furthermore, they found that
country effects do not significantly affect their overall results, suggesting a
homogeneous stock market valuation and institutional framework across
Europe.
Carow (2001) looked at the abnormal returns of bank and insurance companies
following the changing legislation brought about as a result of the Citicorp-
Travelers Group merger, and discovered that investors expect large banks and
insurance companies to gain significantly from the legislation removing barriers
to bancassurance. In an event study released later in the same year, Carow (Mar
2001) found in support the contestable market theory that insurance companies
became worse off and banks had no long-term gains following legislations
further supporting bancassurance within the U.S.Cowan, Howell and Power
(2002) conducted a similar event study surrounding four separate court rulings
and discovered that on average only larger, riskier BHCs with fee-based income
gain the most, while smaller, riskier insurers sustain the highest wealth losses.
Fields, Fraser and Kolari (2005) find that bancassurance mergers are positive
wealth creating events by examining abnormal return data. They further
deduced that scale and scope economies were a contributing factor in these
results.
As always, the opponents are there. Amel, Barnes, Panetta and Salleo (2004)
and Strioh (2004) found that consolidation in the financial sector is beneficial
up to a relatively small size in order to reap economies of scale, and that there is
no clear evidence supporting cost reductions stemming from improvements in
managerial efficiencies. Strioh (2004) finds non-banking income volatile and
that there is little evidence of diversification benefits existing. But, the majority
of the past studies have found risk reduction and wealth creating benefits
associated with the expansion of banks into the insurance industry.
Article 3
Insurers up beat on Bancassurance Channel
Bancassurance is likely to generate approximately 35% of private insurers’
premium income by 2008, according to an analysis of India’s bancassurance
sector by Watson Wyatt Worldwide, a leading global insurance consulting firm.
‘India Bancassurance Benchmarking Study- 2006/7’ is the first of its kind
survey in the Indian market, and part of an Asia-wide analysis focused on
bancassurance distribution. It sets out to define bancassurance performance
standards and benchmarks against a cross section of industry practices,
processes and productivity indicators. Watson Wyatt has analyzed the
bancassurance channel from the perspective of banks, life insurers and non-life
insurers separately in the report.
Mr Graham Morris, Director, Watson Wyatt Worldwide said: “the purpose of
the survey was to focus and understand how banks and insurers develop
strategies for selling life and non-life insurance products through the vast
network of bank branches in India and the practical issues they face in
implementing the sales process”. Watson Wyatt had chosen India as the first
country in Asia to do the Benchmarking Survey considering the vibrant growth
of this alternative channel in the country compared to the other Asian markets.
A total of 25 banks covering PSU, Private, and Foreign banks had participated
in the Survey, along with almost all private life and general insurers licensed in
the country.
Source: “Business line” dated Wednesday, 19 December 2008
1.9 ADVANTAGES OF BANCASSURANCE
ADVANTAGES TO BANKS
Productivity of the employees increases.
By providing customers with both the services under one roof, they can
improve overall customer satisfaction resulting in higher customer
retention levels.
Increase in return on assets by building fee income through the sale of
insurance products.
Can leverage on face-to-face contacts and awareness about the financial
conditions of customers to sell insurance products.
Banks can cross sell insurance products E.g.: Term insurance products
with loans.
ADVANTAGES TO CONSUMERS
Comprehensive financial advisory services under one roof. i.e., insurance
services along with other financial services such as banking, mutual
funds, personal loans etc.
Enhanced convenience on the part of the insured
Easy access for claims, as banks is a regular go.
ADVANTAGES TO INSURERS
Insurers have much to gain from marketing through banks. Personal-lines
carriers have found it difficult to grow using traditional agency
systems because price competition has driven down margins and
increased the compensation demands of successful agents.
Over the last decade, life agents have sold fewer and larger policies
to a more upscale client base. Middle-income consumers, who
comprise the bulk of bank customers, get little attention from most life
agents. By capitalizing on bank relationships, insurers will recapture
much of this underserved market.
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. In their natural and traditional roles
and with their current skills, neither banks nor insurance companies
could effectively mount a Bancassurance start-up alone.
Collaboration is the key to making this new channel work. Banks bring a
variety of capabilities to the table. Most obviously, they own proprietary
databases that can be tapped for middle - market warm leads.
OTHER BENEFITS
Better customer retention and stronger relationships.
Clear competitive advantage in the rural areas.
Possibility that the insurer’s account as well as the accounts from the
claimants will remain with the bank.
Insurance products can augment the value of the banking products and
services.
Banks are in better position to offer complete integrated financial
solutions.
1.10 SWOT ANALYSIS
Even though, banks and insurance companies in India are yet to exchange their
wedding rings, Bancassurance as a means of distribution of insurance products
is already in force in some form or the other. Banks are selling Personal
Accident and Baggage Insurance directly to their Credit Card members as a
value addition to their products. Banks also participate in the distribution of
mortgage linked insurance products like fire, motor or cattle insurance to their
customers. Banks can straightaway leverage their existing capabilities in
terms of database and face to face contact to market insurance products to
generate some income for themselves which hitherto was not thought of.
Once Bancassurance is embraced in India with full force, a lot will be
at stake. Huge capital investment will be required to create infrastructure
particularly in IT and telecommunications, a call centre will have to be
created, top professionals of both industries will have to be hired, an R & D cell
will be needed to create new ideas and products. It is therefore essential to
have a SWOT analysis done in the context of Bancassurance experiment
in India.
The sale of insurance products can earn banks very significant commissions
(particularly for regular premium products). In addition, one of the major
strategic gains from implementing bancassurance successfully is the
development of a sales culture within the bank. This can be used by the bank to
promote traditional banking products and other financial services as well.
Bancassurance enables banks and insurance companies to complement each
other’s strengths as well.
STRENGTHS
In a country of 1 Billion people, sky is the limit for personal lines
insurance products. There is a vast untapped potential waiting to be mined
particularly for life insurance products. There are more than 900 Million
lives waiting to be given a life cover (total number of individual life
policies sold in 1998-99 was just 91.73 Million).
There are about 200 Million households waiting to be approached for a
householder's insurance policy. Millions of people travelling in and out of
India can be tapped for Overseas Mediclaim and Travel Insurance
policies. After discounting the population below poverty line the
middle market segment is the second largest in the world after
China.
The insurance companies worldwide are eyeing on this, why not we
pre-empt this move by doing it ourselves? Our other strength lies in a
huge pool of skilled professionals whether it is banks or insurance
companies who may be easily relocated for any Bancassurance
venture.
LIC and GIC both have a good range of personal line products already
lined up; therefore R & D efforts to create new products will be minimal
in the beginning. Additionally, GIC with 4200 operating offices and LIC
with 2048 branch offices are almost already omnipresent, which is so
essential for the development of any Bancassurance project.
WEAKNESSES
The IT culture is unfortunately missing completely in all future
collaborators i.e. banks, GIC & LIC. A late awakening seems to have
dawned upon but it is a case of too late and too little. Elementary IT
requirement like networking (LAN) is not in place even in the headquarters
of these institutions, when the need today is of Wide Area Network
(WAN) and Vast Area Network (VAN).
Internet connection is not available even to the managers of
operating offices. The middle class population that we are eyeing at are
today overburdened, first by inflationary pressures on their pockets and
then by the tax net. Where is the money left to think of insurance?
Fortunately, LIC schemes get IT exemptions but personal line
products from GIC ( Mediclaim already has this benefit) like
householder, travel, etc. also need to be given tax exemption to
further the cause of insurance and to increase domestic revenue for
the country. Another drawback is the inflexibility of the products i.e. It
cannot be tailor made to the requirements of the customer.
For a Bancassurance venture to succeed it is extremely essential to
have in-built flexibility so as to make the product attractive to the
customer.
OPPORTUNITIES
Banks' database is enormous even though the goodwill may not be the
same as in case of their European counterparts. This database has to be
dissected variously and various homogeneous groups are to be churned
out in order to position the Bancassurance products.
With a good IT infrastructure, this can really do wonders. Other
developing economies like Malaysia, Thailand and Singapore have
already taken a leap in this direction and they are not doing badly.
There is already an atmosphere created in the country for
liberalisation and there appears to be a political consensus also on
the subject. Therefore, RBI or IRA should have no hesitation in allowing
the marriage of the two to take place.
This can take the form of merger or acquisition or setting up a joint
venture or creating a subsidiary by either party or just the working
collaboration between banks and insurance companies.
This is perhaps the precursor of a trend we have seen in the United
Kingdom and elsewhere where banks started off as distributors of
insurance but then moved to a manufacturing role with fully owned
insurance subsidiaries.
THREATS
Success of a Bancassurance venture requires change in approach, thinking
and work culture on the part of everybody involved. Our work force
at every level are so well entrenched in their classical way of
working that there is a definite threat of resistance to any change
that Bancassurance may set in.
Any relocation to a new company or subsidiary or change from one work
to a different kind of work will be presented with vehemence.
Another possible threat may come from non-response from the target
customers. This happened in USA in 1980s after the enactment of
Garn - St Germaine Act. A rush of joint ventures took place
between banks and insurance companies and all these failed due to
the non-response from the target customers.
The investors in the capital may turn their face off in case the rate of
return on capital falls short of the existing rate of return on capital.
Since banks and insurance companies have major portion of their
income coming from the investments, the return from Bancassurance
must at least match those returns.
Also if the unholy alliances are allowed to take place there will be
fierce competition in the market resulting in lower prices and the
Bancassurance venture may never break-even.
CHAPTER - 2
RESEARCH METHODOLOGY
Research is an academic activity and as such the term should be used in
technical sense. According to Clifford Woody, “Research comprises defining
and redefining problems, formulating hypothesis or suggested solutions,
collecting, organizing and evaluating data; making deduction and reaching at a
conclusion; and at last carefully testing the conclusions to determine whether
they fit the formulating hypothesis.”
The main aim of the research is to find out the truth which is hidden and which
has not been discovered as yet.
2.1 OBJECTIVES OF RESEARCH:
Primary Objective of my study on the topic “ Bancassurance” is that this is
relatively a new concept in India and thereby I would like to enhance my
understanding and improve my knowledge regarding this topic & above all I
would definitely want to apply this information so gathered in my future career
prospects. Whereas the main objective of making this thesis stands to is
research on the Bancassurance strategy adopted by the banking companies i.e
the banks sell insurance products. Today the customer is the king of the market
and to satisfy his wants and needs the industry has to adopt many strategies. The
customer wants everything under, one roof, by thinking of this point the
banking industry tied up with insurance and came up with
BANCASSURANCE.
2.2 RESEARCH DESIGN:
Research design is the arrangement of conditions for collection and analysis of
data in a manner that aims to combine relevance to the research purpose with
economy in procedure of data. It is a blue print specifying every stage of action
in the course of research.
The research design adopted in this study for secondary data is exploratory and
analytical in nature. Exploratory research aims to gain familiarity and new
insights into any phenomenon while analytical research aims at analyzing the
current scenario and thereby using that to project the future performance. This
research aims at studying the historical performance of the company in
Bancassurance and it also evaluates the future prospects of the company.
Descriptive research design is used for collecting secondary data. It is
concerned with the research studies with a focus on the portrayal of the
characteristics of a group or individual or a situation. The main objective of
such studies is to acquire knowledge. The major purpose of Descriptive research
is description of the state of affairs, as it exists at present. It is concerned with
the research studies with a focus on the portrayal of the characteristics of a
group or individual or a situation. The main objective of such studies is to
acquire knowledge. The major purpose of Descriptive research is description of
the state of affairs, as it exists at present.
Therefore, their entering into insurance business is only a natural corollary and
is fully justified too as ‘insurance’ is another financial product required by the
bank customers.
2.3 HYPOTHESES
The two hypotheses which are proposed to be verified are
1. The new insurance products offered by the Standard Chartered Bank acts
as a tool for improving the performance of the Bank.
2. The Standard Chartered Bank has obtained new techniques for marketing
of insurance products to the customers.
2.4 METHODS OF DATA COLLECTION:
1. PRIMARY DATA
2. SECONDARY DATA
PRIMARY DATA:
Primary data is the data collected for the first time through field survey. Some
data is collected from company staff and from customers also.
SECONDARY DATA
It refers to the information or facts already collected. Such data are collected
with the objective of understanding the past status of any variable. Here,
secondary data has been used for making a financial analysis.
METHOD OF SECONDARY DATA COLLECTION:
Annual reports
Journals and Magazines
Internet
Various Sites
CHAPTER – 3
OVERVIEW OF STANDARD CHARTERED
BANK
3.1 HSTORY OF STANDARD CHARTERED BANK
1969 to 2000
Both banks had acquired other smaller banks along the way and spread their
networks further. In 1969, the banks decided to merge, and to counterbalance
their existing network by expanding in Europe and the United States, while
continuing their expansion in their traditional markets in Asia and Africa.
In 1986 Lloyds Bank of the United Kingdom made a hostile takeover bid for the
Group. The bid was defeated however it spurred Standard Chartered into a
period of change, including a series of divestments notably in the United States
and South Africa. In 1987 Standard Chartered sold its remaining interests in the
South African bank, and since then the Standard Bank Group has been a
separate entity.
In 1992, scandal broke when banking regulators charged several employees of
Standard Chartered in Mumbai with illegally diverting depositors’ funds to
speculate in the stock market. Fines by Indian regulators and provisions for
losses cost the bank almost 350 million pounds, a third of its capital.
Scandal erupted again in 1994, when the Sunday Times of London wrote that
an executive in the bank’s metals-trading arm had bribed officials in Malaysia
and the Philippines in order to win business. The bank, in a statement on 18 July
1994, said there were “discrepancies in expense claims” that “included gifts to
individuals in certain countries to facilitate business, a practice contrary to bank
rules.'
In 1997, Standard Chartered sold its metals trading arm to Toronto-based Scotia
bank for $26 million. In 1994, the Hong Kong Securities and Futures
Commission found that Standard Chartered Asian investment bank had illegally
helped to artificially support the price of new shares they had underwritten for
six companies from July 1991 to March 1993. The bank admitted the offense,
apologized and reorganized its brokerage units. The commission banned the
bank from underwriting IPOs in Hong Kong for nine months. Standard
Charterer’s Asian investment banking operations never recovered, and in 2000
the bank closed them down. The bank fully recovered in late '90s, during this
time, the bank sold off holdings in continental Europe and the Americas, sold
the headquarters building (lease-back) and branch properties in Hong Kong. In
2000, Standard Chartered acquired Grind lays Bank & Chase Manhattan Bank
Hong Kong retail banking business.
The ethics issues and financial losses triggered turmoil in Standard Charterer’s
London executive suite. The bank went through three CEOs in three years:
Malcolm Williamson was replaced in 1998 by Rana Talwar, who was in turn
unseated by Mervyn Davies in 2001. By the time Davies took over, his
predecessors had systematically sold off the bank’s holdings in continental
Europe and the Americas.
Former CEO Talwar traces Standard Charterer’s troubles over the years to its
failure to hire local talent. The Indian-born Citigroup Inc. veteran became the
bank’s first non-British CEO when he was appointed in 1998.
2000 to present
In 2000, Standard Chartered acquired Grind lays Bank from ANZ Bank,
increasing its presence in private banking and further expanding its operations in
India and Pakistan. Standard Chartered retained Grind lays' private banking
operations in London and Luxembourg and the subsidiary in Jersey, all of which
it integrated into its own private bank. This now serves high net worth
customers in Hong Kong, Dubai, and Johannesburg under the name Standard
Chartered Grind lays Offshore Financial Services.
In India, Standard Chartered integrated most of Grind lays' operations, making
Standard Chartered the largest foreign bank in the country. In 2004, Standard
Chartered Bank and Astra International (An Indonesian conglomerate, a
subsidiary of Jar dine Matheson Group) took over Permata Bank and in 2006,
both shareholders increased their joint ownership to 89.01%. With 276 branches
and 549 ATMs in 55 cities throughout Indonesia, Permata Bank has the second
largest branch network in Standard Chartered organization.
On 15 April 2005, the bank acquired Korea First Bank, beating HSBC in the
bid. Since then the bank has rebranded the branches as SC First Bank. Standard
Chartered completed the integration of its Bangkok branch and Standard
Chartered Nakornthon Bank in October, renaming the new entity Standard
Chartered Bank (Thailand). Standard Chartered also formed strategic alliances
with Fleming Family & Partners to expand private wealth management in Asia
and the Middle East, and acquired stakes in ACB Vietnam, Travelex, American
Express Bank in Bangladesh and Bohai Bank in China.
On 9 August 2006 Standard Chartered announced that it had acquired an 81%
shareholding in the Union Bank of Pakistan in a deal ultimately worth $511
million. This deal represented the first acquisition by a foreign firm of a
Pakistani bank and the merged bank, Standard Chartered Bank (Pakistan), is
now Pakistan's sixth largest bank. On 22 October 2006 Standard Chartered
announced that it had received tenders for more than 51 per cent of the issued
share capital of Hsinchu International Bank (“Hsinchu”), established in 1948 in
Hsinchu city in Taiwan. Standard Chartered, which had first entered Taiwan in
1985, acquired majority ownership of the bank. Prior to the merger, Hsinchu
was Taiwan's seventh largest private sector bank by loans and deposits as at 30
June 2006, but had suffered extensive losses on defaulted credit card debt.
Standard Chartered merged its existing three branches with Hsinchu's 83, and
then delisted Hsinchu International Bank, changing the bank's name to Standard
Chartered Bank (Taiwan) Limited. Today Standard Chartered is the largest
foreign bank in Taiwan in terms of branch network.
In 2007, Standard Chartered opened its Private Banking global headquarters in
Singapore. On 23 August 2007 Standard Chartered entered into an agreement to
buy a 49 per cent share of an Indian brokerage firm (UTI Securities) for $36
million in cash from Securities Trading Corporation of India Ltd., with the
option to raise its stake to 75 per cent in 2008 and, if both partners agree, to 100
per cent by 2010. UTI Securities offers brokering, wealth management and
investment banking services across 60 Indian cities.
On 29 February 2008, Standard Chartered PLC announced it had received all
the required approvals leading to the completion of its acquisition of American
Express Bank Ltd (AEB) from the American Express Company (AXP). The
total cash consideration for the acquisition is US$823 million.
3.2 INTRODUCTION TO STANDARD CHARTERD BANK
Standard Chartered PLC (LSE: STAN, SEHK: 2888, NSE: STAN) is a British
multinational banking and financial services company headquartered in London,
United Kingdom. It operates a network of over 1,700 branches and outlets
(including subsidiaries, associates and joint ventures) across more than 70
countries and employs around 87,000 people. It is a universal bank and has
operations in consumer, corporate and institutional banking and treasury
services. Despite its UK base around 90% of its profits come from Africa, Asia
and the Middle East.
Standard Chartered has a primary listing on the London Stock Exchange and is a
constituent of the FTSE 100 Index. It had a market capitalisation of
approximately £33 billion as of 23 December 2011, the 13th-largest of any
company with a primary listing on the London Stock Exchange. It has
secondary listings on the Hong Kong Stock Exchange and the National Stock
Exchange of India. Its largest shareholder is the Government of Singapore-
owned Temasek Holdings.
The name Standard Chartered comes from the two original banks from which it
was founded and which merged in 1969 – The Chartered Bank of India,
Australia and China, and The Standard Bank of British South Africa. In the
new millennium the bank acquired Grind lays Bank from the ANZ Group and
the Chase Consumer Banking operations in Hong Kong in 2000. Since 2005, the
bank has achieved several milestones with a number of strategic alliances and
acquisitions that will extend their customer or geographic reach and broaden our
product range.
3.2.1 THE CHARTERED BANK
Founded by James Wilson following the grant of a Royal Charter by Queen
Victoria in 1853. Chartered opened its first branches in Mumbai (Bombay),
Calcutta and Shanghai in 1858, followed by Hong Kong and Singapore in 1859
Traditional business was in cotton from Mumbai (Bombay), indigo and tea
from Calcutta, rice in Burma, sugar from Java, tobacco from Sumatra, hemp in
Manila and silk from Yokohama. Played a major role in the development of
trade with the East which followed the opening of the Suez Canal in 1869 and
the extension of the telegraph to China in 1871. In 1957 Chartered Bank bought
the Eastern Bank together with the Ionian Bank's Cyprus Branches. This
established a presence in the Gulf.
3.2.2 THE STANDARD BANK
Founded in the Cape Province of South Africa in 1862 by John Paterson.
Commenced business in Port Elizabeth, South Africa, in January 1863. Was
prominent in financing the development of the diamond fields of Kimberley
from 1867 and later extended its network further north to the new town of
Johannesburg when gold was discovered there in 1885.
Expanded in Southern, Central and Eastern Africa and by 1953 had 600 offices.
In 1965, it merged with the Bank of West Africa expanding its operations into
Cameroon, Gambia, Ghana, Nigeria and Sierra Leone.
In 1969, the decision was made by Chartered and by Standard to undergo a
friendly merger. All was going well until 1986, when a hostile takeover bid was
made for the Group by Lloyds Bank of the United Kingdom. When the bid was
defeated, Standard Chartered entered a period of change. Provisions had to be
made against third world debt exposure and loans to corporations and
entrepreneurs who could not meet their commitments. Standard Chartered
began a series of divestments notably in the United States and South Africa, and
also entered into a number of asset sales. From the early 1990s, Standard
Chartered has focused on developing its strong franchises in Asia, the Middle
East and Africa using its operations in the United Kingdom and North America
to provide customers with a bridge between these markets. Secondly, it would
focus on consumer, corporate and institutional banking and on the provision of
treasury services - areas in which the Group had particular strength and
expertise.
3.3 GLOBAL NETWORK
Standard Chartered has a network of over 1,700 branches and outlets in more
than 70 countries and territories across the globe, making us one of the world's
most international banks. Listed on both the London Stock Exchange and the
Hong Kong Stock Exchange, Standard Chartered PLC is consistently ranked in
the top 25 FTSE [FINANCIAL TIMES STOCK EXCHANGE] 100 companies
by market capitalization.
ASIA PACIFIC UK/EUROPE
Afghanistan
Australia
Bangladesh
Brunei Darussalam
Switzerland
Turkey
United Kingdom
America
3.4 SERVICES PROVIDED BY STANDARD CHARTERED BANK
We can ensure our peace of mind with a wide range of General Insurance
products available conveniently at Standard Chartered Bank in association with
Bajaj Allianz Life Insurance.
SCB protects us and our family, as well as our hard earned assets and future
earnings. To take care of all our insurance requirements, SCB bring you a
variety of products from Bajaj Allianz Life Insurance Company. SCB offers:
One-stop shopping for both life and general insurance protection
Comprehensive range of products to suit every stage of your life...
from childhood to retirement
Trained & certified professionals guide us in ascertaining our
insurance needs and assist us in making an insurance plan that is
just right for us.
At Standard Chartered Bank they have a comprehensive range of products &
services to protect your world
Life Insurance
General Insurance
Standard Chartered offers us a wide range of Life Insurance Products
from Bajaj Allianz Life Insurance Company, one of India's leading Insurance
companies.
At Standard Chartered, we can avail of the services of trained& certified
professionals, who can guide us in ascertaining our insurance needs, and assist
us in making an insurance plan that is just right for us.
3.5 SOME OF THE KEY LIFE INSURANCE PRODUCTS
UNIT LINKED INSURANCE PLANS
Market linked insurance plans invest the premium in to the equity, debt and cash
markets by the way of allocating units, which like any other mutual fund have a
NAV and the customer is free to switch between one fund class to another
depending on the risk factor he wishes to be in. ULIPs offer a better return than
the traditional endowment plans and offer a great deal of flexibility along with
great returns making them the finest product offering. Bajaj Allianz Life
Insurance have developed a number of Unit Linked Insurance ULIP products
which range from single premium to a regular premium option along with
investment funds ranging from index funds to mid-cap funds and debt market
linked funds.
Regular Premium
I Gain III
Max Advantage Insurance Plan
Money Secure Insurance Plan
Assured Protection Insurance Plan
Single Premium
Guaranteed Maturity Insurance Plan
Wealth Insurance Plan
Shield Insurance Plan
Flexi Advantage Insurance Plan
TRADITIONAL PLANS
Saving Plans that offer bonus are completely safe and are ideal for long term
investments. Our products offer additional benefits including 4 times life cover
at little extra costs, limited premium payment terms and compounded
reversionary bonuses. These features make our traditional plans excellent long
term saving instruments.
Endowment
Invest Gain
Save Care Economy SP
Life Time Care
Super Saver
Money Back
Cash Rich Insurance Plan
Super Cash Gain Insurance Plan
Cash Gain
Child Gain
PENSION PLANS
Bajaj Allianz Life Insurance offer Pension Plans which will make sure that we
are there to support you in every stage of your life and your savings in pension
plan insurance today become your wealth and support for your future years to
come.
LIFE + HEALTH INSURANCE FOR HOSPITALIZATION
At Bajaj Allianz Life Insurance we offer unique hospitalisation-cum-insurance
plan that takes care of your hospitalization bills and also provides crucial
financial support to your dependents in case of your unfortunate death.
Our health insurance plans offer a sound protection to safe guard your family
from any medical emergencies and will make sure that financial problems are
least of your worries in trying to get yourself treated.
We offer cash less Mediclaim facility across 2000 hospitals in over 300 towns
and provide best treatment in the finest hospitals with our health insurance
products.
Health Care
Family CareFirst
TERM INSURANCE PLANS
The sole objective of Term insurance policy is to serve the protection needs of
the customers and by doing so, safeguard one's family from the financial
implications of unfortunate circumstances that one cannot foresee.
These term insurance plans are pure risk cover plans with or without maturity
benefit. These pure risk plans cover your life at a nominal cost and you may
want to take this term insurance plan to cover your outstanding debts like a
mortgage, a home loan etc.
Protector
Term Care
New Risk Care II
iSecure Insurance Plan
iSecure Loan Insurance Plan
WOMEN INSURANCE PLANS
To cater to women's special needs we offer innovative women
specific plans which provide investment benefits, savings, retirement solutions
and medical insurance? Our special plans help mothers plan for their children’s
education saves for the future and take care of all medical emergencies in the
family.
Regular investment and savings plan, offer:
Investments along with critical illness benefits which provide good
returns, long term saving and protection in case of a medical
emergency
Investment plans with accidental coverage
Children's education planning
Specialized retirement income plans for homemakers to provide a
secure and financial future
CHAPTER - 4
MODELS OF BANCASSURANCE & CHANNELS
THE MODELS
MODELS
STRUCTURAL CLASSIFICATION
REFERRAL MODEL
CORPORATE AGENCY
INSURANCE AS FINANCIAL
SERVICE
PRODUCT BASED
STAND ALONE
PRODUCTS
BLEND OF INSURANC
E
BANKREFERRALS
4.1 STRUCTURAL CLASSIFICATION
4.1.1 REFERRAL MODEL
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 bank 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.
4.1.2 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, and 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.
4.1.3 INSURANCE AS A FULLY INTEGRATED FINANCIAL SERVICE
Apart from the above two, the fully integrated financial service involves much
more comprehensive and complicated 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 FDI’s participation up to 49 per cent.
4.2 PRODUCT BASED CLASSIFICATION
4.2.1 STAND ALONE 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 bank’s customer, however, the
products of banks and insurance will have their respective brands too.
4.2.2 BLEND OF INSURANCE WITH BANK PRODUCTS
This method aims at blending of insurance products as a ‘value addition’ while
promoting the bank’s 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 bank’s 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.
4.3 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.
4.4 DISTRIBUTION CHANNELS
Traditionally, insurance products were promoted and sold principally through
agency systems only. The reliance of insurance industry was totally on the
agents. Moreover with the monopoly of public sector insurance companies
there was very slow growth in the insurance sector because of lack of
competition. The need for innovative distribution channels was not felt because
all the companies relied only upon the agents and aggressive marketing of the
products was also not done. But with new developments in consumers’
behaviours, evolution of technology and deregulation, new distribution channels
have been developed successfully and rapidly in recent years.
DISTRIBUTION CHANNELS DIAGRAM
4.5 CAREER AGENTS
Career Agents are full-time commissioned sales personnel holding an agency
contract. They are generally considered to be independent contractors.
Consequently an insurance company can exercise control only over the
activities of the agent which are specified in the contract. Many bancassurers,
however avoid this channel, believing that agents might oversell out of their
interest in quantity and not quality. Such problems with career agents usually
arise, not due to the nature of this channel, but rather due to the use of
improperly designed remuneration and incentive packages.
4.6 SPECIAL ADVISORS
Special Advisers are highly trained employees usually belonging to the
insurance partner, who distribute insurance products to the bank's corporate
clients. The Clients mostly include affluent population who require personalised
and high quality service. Usually Special advisors are paid on a salary basis and
they receive incentive compensation based on their sales.
4.7 SALARIED AGENTS
Having Salaried Agents has the advantages of them being fully under the
control and supervision of bancassurers. These agents share the mission and
objectives of the bancassurers. Salaried Agents in bancassurance are similar to
their counterparts in traditional insurance companies and have the same
characteristics as career agents. The only difference in terms of their
remuneration is that they are paid on a salary basis and career agents receive
incentive compensation based on their sales.
4.8 BANK EMPLOYEES / PLATFORM BANKING
Platform Bankers are bank employees who spot the leads in the banks and
gently suggest the customer to walk over and speak with appropriate
representative within the bank. The platform banker may be a teller or a
personal loan assistant and the representative being referred to may be a trained
bank employee or a representative from the partner insurance company.
Platform Bankers can usually sell simple products. However, the time which
they can devote to insurance sales is limited, e.g. due to limited opening hours
and to the need to perform other banking duties. A further restriction on the
effectiveness of bank employees in generating insurance business is that they
have a limited target market, i.e. those customers who actually visit the branch
during the opening hours.
4.9 CORPORATE AGENCIES & BROKERAGE FIRMS
There are a number of banks who cooperate with independent agencies or
brokerage firms while some other banks have found corporate agencies. The
advantage of such arrangements is the availability of specialists needed for
complex insurance matters and through these arrangements the customers get
good quality of services.
4.10 DIRECT RESPONSE
In this channel no salesperson visits the customer to induce a sale and no face-
to-face contact between consumer and seller occurs. The consumer purchases
products directly from the bancassurers by responding to the company's
advertisement, mailing or telephone offers.
4.11 INTERNET
Internet banking is already securely established as an effective and profitable
basis for conducting banking operations. The reasonable expectation is that
personal banking services will increasingly be delivered by Internet banking.
Bancassurers can also feel confident that Internet banking will also prove an
efficient vehicle for cross selling of insurance savings and protection products.
It seems likely that a growing proportion of the affluent population, everyone's
target market, will find banks with household name brands and proven skills in
e-business a very acceptable source of non-banking products.
There is now the Internet, which looms large as an effective source of
information for financial product sales. Banks are well advised to make their
new websites as interactive as possible, providing more than mere standard bank
data and current rates. Functions requiring user input (check ordering, what-if
calculations, and credit and account applications) should be immediately added
with links to the insurer. Such an arrangement can also provide a vehicle for
insurance sales, service and leads.
4.12 E- BROKERAGE
Banks can open or acquire an e-Brokerage arm and sell insurance products from
multiple insurers. The changed legislative climate across the world should help
migration of bancassurance in this direction. The advantage of this medium is
scale of operation, strong brands, easy distribution and excellent synergy with
the internet capabilities.
4.13 OUTSIDE LEAD GENERATING TECHNIQUES
One last method for developing bancassurance eyes involves "outside" lead
generating techniques, such as seminars, direct mail and statement inserts.
Seminars in particular can be very effective because in a non-threatening
atmosphere the insurance counsellor can make a presentation to a small group of
business people (such as the local chamber of commerce), field questions on the
topic, then collect business cards. Adding this technique to his/her lead
generation repertoire, an insurance counsellor often cannot help but be
successful.
To make the overall sales effort pay anticipated benefits, insurers need to also
help their bank partners determine what the “hot buttons” will be for attracting
the attention of the reader of both direct and e-mail. Great opportunities await
bancassurance partners today and, in most cases, success or failure depends on
precisely how the process is developed and managed inside each financial
institution. This includes the large regional bank and the small one-unit
community bank.
CHAPTER – 5
SCENARIOS, TRENDS & CHALLENGES OF
BANCASSURANCE
5.1 INDIAN SCENARIO
The business of banking around the globe is changing due to integration of
global financial markets, development of new technologies, universalization of
banking operations and diversification in non-banking activities. Due to all these
movements, the boundaries that have kept various financial services separate
from each other have vanished. The coming together of different financial
services has provided synergies in operations and development of new concepts.
One of these is bancassurance.
Bancassurance is a new buzzword in India. It originated in India in the year
2000 when the Government issued notification under Banking Regulation Act
which allowed Indian Banks to do insurance distribution. It started picking up
after Insurance Regulatory and Development Authority (IRDA) passed a
notification in October 2002 on 'Corporate Agency' regulations. As per the
concept of Corporate Agency, banks can act as an agent of one life and one
non-life insurer. Currently bancassurance accounts for a share of almost 25-30%
of the premium income amongst the private players in India.
Traditionally, the banks and financial institutions are the key pillars of India’s
financial system. Public have immense faith in banks. Share of bank deposits in
the total financial assets of households has been steadily rising (presently at
about 40%). Indian Banks have constantly proven their capability reach the
maximum number of households. In India at present there are total of 65700
branches of commercial banks, each branch serving an average of 15,000
people. Out of these are 32600 branches are catering to the needs of rural India
and 14400 to semi-urban branches, where insurance growth has been most
buoyant. (196 exclusive Regional Rural Banks in deep hinterland)
5.1.1 REASONS FOR BANKS ENTERING INSURANCE IN INDIA
Indian insurance market is a hidden goldmine – an estimated Rs. 1,
80,000 crore in terms of annual insurance premium.
Sale of insurance through banks will meet an important set of consumer
needs.
Bank’s branch network allows face to face contact that is so important in
the sale of insurance.
Bank channel can also boost sales productivity.
Banks are best qualified to sell insurance products. They have a wide
distribution reach. Because of the strong ties with the customers they are
in a better position to sell insurance products to them.
Banks can provide integrated financial services under one roof to their
customers.
Another main advantage in tapping the bank’s retail distribution network
is cutting the cost of distribution by almost 30%. As some of the studies
revealed that 50% of an insurer’s cost structure is directly or indirectly
related to distribution.
Though insurance companies are good underwriters of risk, they are not
too well known for their expertise in investment management. On the
other hand, banks are generally perceived to be not good at managing risk
but they are perceived to be better at investment management.
Bancassurance is about bringing the two attributes together.
According to reliable research sources, bancassurance salesman has a
much faster learning curve, usually around two years as compared with
four and a half years in an insurance company. In that sense, the cost of
training is amortized over a shorter period of time and therefore turns-out
cheaper.
Valid reasons why banks should allow insurance salesman to sell
insurance products in their premises:
a. Bank gets a royalty or a commission for every insurance policy sold.
b. The bank gets an investment management fee for managing the
insurer’s investment.
c. Insurance products, like retirement and pension plans, are growth
areas for banks.
With greater need to downsize - banks can utilize their existing surplus
manpower – reducing costs and optimum use of infrastructure.
Instant access to 60,000 + bank branches including in remote areas.
Availability of insurance in rural areas, through cost effective banking
channels.
As banks are increasingly resorting to alternate delivery channels, surplus space
would be available to distribute insurance products.
5.2 GLOBAL SCENARIO
Bancassurance has seen tremendous acceptance and growth across nations.
Although it enjoys a penetration rate in excess of 50% in France, Spain, Italy
and Belgium, other countries have opted for more traditional networks. The Life
insurance market in the UK is largely in the hands of the brokers. With advent
of bancassurance, their market share has increased from 40% in 1992 to 54% in
1999. Sales agents also play an important role on a market entirely regulated by
the Financial Services & Markets Act (FSMA) which imposes very strict
marketing conditions. In Germany, the market continues to be dominated by
general sales agents, even if their market share has declined from 85% in 1992
to 54% in 1999. In Asia, there is a need for financial institutions to be proactive
and interact with regulator in order to explore the potential that bancassurance
has a complementary distribution channel. Market share per distribution
network for insurance products across various countries has been detailed in the
below diagram.
Bancassurance recorded huge growth in Europe but not in USA and Canada. In
the US, there were hurdles till recently banks were not allowed to do insurance
business and vice versa. In several countries in Latin America, banks have
benefited from recent reforms – financial deregulation, among others – by
selling insurance products across the country.
Bancassurance has seen tremendous acceptance and growth across nations.
Although it enjoys a penetration rate in excess of 50% in France, Spain, Italy
and Belgium, other countries have opted for more traditional networks. The Life
insurance market in the UK is largely in the hands of the brokers. With advent
of bancassurance, their market share has increased from 40% in 1992 to 54% in
1999.
5.2.1 BANCASSURANCE BUSINESS CONDUCTED BY COs
In several countries in Latin-American, banks have benefited from recent
reforms – financial deregulation, among others – by selling insurance products
across the counter. An example is the Brazilian market where private pension
products are marketed. Bancassurance also took advantage of the large number
of national and especially international partnerships which took place in the
1990s. In some countries, bancassurance is still largely prohibited. Even in
United States, it was legalized in after much deliberation, when the Glass-
Stegall Act was repealed after the passage of the Gramm-Leach-Bliley Act.
5.2.2 Bancassurance in India vs. Bancassurance in Asia & Europe
The following table compares the issues related to bancassurance
in India with Europe and Asia (general):
Europe Asia (general) India Regulation Liberalized Ranging from Supportive
liberalized to forbidden
Market Mature markets but pension
High growth potential High growth
growth reforms can spur growth in thelife insurance sector
Bancassurance model
Highly integrated models
Mostly distribution alliances and joint ventures
Distributive
Major driversTax concessions for life
Squeeze on bank Margins.
Tax free status on maturity
insurance premium paid
Insurers’ growing cost pressure and desire to expand distribution capability.
Financial deregulation Foreign companies use
Small tax relief on premium.
Narrowing bank margin
Squeeze on bank margins
Bancassurance to enter Asian Markets
Products
Europe
Mainly life insurance products to maximize tax benefits
Asia (general)
Mainly life insurance products linked to bank services and increasingly, products geared towards managed
India
Mainly non- unitized
SavingsMostly single premium
Regular premium
Distribution Multi-bank branches
Mainly bank branches Bank branches
Major players Domestic banks and insurers
Foreign companies are playing an important role.
NA
Sophistication High Varied Low
In several countries in Latin-American, banks have benefited from recent
reforms – financial deregulation, among others – by selling insurance products
across the counter. An example is the Brazilian market where private pension
products are marketed. Bancassurance also took advantage of the large number
of national and especially international partnerships which took place in the
1990s. In some countries, bancassurance is still largely prohibited. Even in
United States, it was legalized in after much deliberation, when the Glass-
Stegall Act was repealed after the passage of the Gramm-Leach-Bliley Act.
5.3 CURRENT SCENARIO
While bancassurance is a success story in Europe and other offshore markets, it
is still in its nascent stage in India. We examine the challenges and opportunities
for these products in India.
In its simplest form, bancassurance is distribution of insurance products through
a bank’s branch network. Hence, there is a room for bancassurance where
banking and insurance congregate with each other. To be clear, a bank selling
insurance products, and an insurance company, which is involved in banking
activity can get into bancassurance. To symbolize this congregation
bancassurance is also referred to as Allfinanz. Bancassurance assumes different
forms in different countries based on the demographic factors of the country. In
a way these demographic factors are the key variables that create challenges and
opportunities in each country.
Why congregate? Banks over a period of time might have developed a
relationship with the customers and have unique identification in the minds of
people. Also, banks have a wide branch network, spreading across the nook and
corner. Banks have got a huge database of customers spread across the
geographic region, in which they operate. If an insurance company had to
develop all these strengths it would consume a large amount of resources and
time. Hence, the best option for these companies would be to get in touch with
these banks. It is beneficial even for banks as it brings in a new source of
income in the form of service charges.
Over the years, the regulatory glitches in the process of amalgamation of bank
and insurance have reduced in number. These regulatory and other monetary
benefits for the parties involved have ensured a rise in the use of bancassurance.
As of 2004, bancassurance represented over 65% of the total life insurance
premium in Spain, 60% in France and 50% in Italy and Belgium. Nevertheless,
in comparison with life insurance products, non-life products, especially
Property and Casualty (P&C) products are yet to pick up speed. In the
aforementioned countries, a negligible amount of business comes from
bancassurance. For instance, in Spain, just 6% of P&C business comes from
bancassurance. In Belgium and France 5% and 4% is respectively contributed
by bancassurance.
5.4 TRENDS
The Trends which were seen in Bancassurance are:-
Though bancassurance has traditionally targeted the mass market, but
bancassurers have begun to finely segment the market, which has resulted
in tailor-made products for each segment.
Some bancassurers are also beginning to focus exclusively on
distribution. In some markets, face-to-face contact is preferred, which
tends to favor bancassurance development.
Nevertheless, banks are starting to embrace direct marketing and Internet
banking as tools to distribute insurance products. New and emerging
channels are becoming increasingly competitive, due to the tangible cost
benefits embedded in product pricing or through the appeal of
convenience and innovation.
Bancassurance proper is still evolving in Asia and this is still in infancy in
India and it is too early to assess the exact position. However, a quick
survey revealed that a large number of banks cutting across public and
private and including foreign banks have made use of the bancassurance
channel in one form or the other in India.
Banks even offer space in their own premises to accommodate the
insurance staff for selling the insurance products or giving access to their
client’s database for the use of the insurance companies.
5.5 CHALLENGES
Banks could be more enduring than individual agents when selling insurance,
but bancassurance relationships are not. Since the opening up of the insurance
sector in ’2000, as many as six bancassurance alliances have ended in divorce
says Economic Times.
If bancassurance was termed as marriage between banks and insurance, then the
probability of divorces can’t be ruled out. Critics opine that bancassurance is a
controversial idea, and it gives banks too great a control over the financial
industry. The challenge to sustain such alliances could be immensely daunting.
The difference in regulation, not only across countries but between banks and
insurance industry as well has been cited as the primary reason. The difference
in trade customs, work culture in these industries is another impediment.
Human Resource Management has experienced some difficulty due to such
alliances in financial industry. Poaching for employees, increased work-load,
additional training, maintaining the motivation level are some issues that has
cropped up quite occasionally. So, before entering into a bancassurance alliance,
just like any merger, cultural due diligence should be done and human resource
issues should be adequately prioritized.
Private sector insurance firms are finding ‘change management’ in the public
sector a major challenge. State-owned banks get a new chairman, often from
another bank, almost every two years, resulting in the distribution strategy
undergoing a complete change. In the private sector, the M&A activity is one of
the causes for change.
5.6 FUTURE SCOPE FOR BANCASSURANCE
By now, it has become clear that as economy grows it not only demands
stronger and vibrant financial sector but also necessitates providing with more
sophisticated and variety of financial and banking products and services. The
outlook for bancassurance remains positive. While development in individual
markets will continue to depend heavily on each country’s regulatory and
business environment, bancassurers could profit from the tendency of
governments to privatize health care and pension liabilities.
India has already more than 200 million middle class population coupled with
vast banking network with largest depositors base, there is greater scope for use
of bancassurance. In emerging markets, new entrants have successfully
employed bancassurance to compete with incumbent companies. Given the
current relatively low bancassurance penetration in emerging markets,
bancassurance will likely see further significant development in the coming
years.
In India the bancassurance model is still in its nascent stages, but the
tremendous growth and acceptability in the last three years reflects green
pasture in future. The deregulation of the insurance sector in India has resulted
in a phase where innovative distribution channels are being explored. In this
phase, bancassurance has simply outshined other alternate channels of
distribution with a share of almost 25-30% of the premium income amongst the
private players.
CHAPTER - 6
FINDINGS, RECOMMENDATIONS &
CONCLUSION
6.1 FINDINGS
Although the concept is simple enough in theory, but in practice it has
been found to be far from straightforward.
Almost many people have a fair idea about Bancassurance and that their
banks sell various insurance products. But still few people don’t know
about Bancassurance as a concept.
It has been also found out that the banks have various opportunities to
cross sell insurance products. The insurance companies also have the
opportunity to take advantage of the bank’s network and other avenues.
It is also seen that customers have a lot of trust on the banks, and because
of that trust the customers will take the insurance products from banks.
As the brand name of the banks is important so is the brand image of the
insurance companies. So the banks and the insurance companies must tie-
up with the right partners. This will help them to create a better image in
the minds of the customers.
It has also clear from the study that the private sector and the foreign
banks have better future in Bancassurance. But the public sector banks are
also trying to give them a tough competition e.g. SBI Life Insurance Co.
6.2 RECOMMENDATIONS
The Insurance companies need to design products specifically for
distributing through banks. Trying to sell traditional products may not
work so effectively.
The employees of the banks who are selling insurance products must be
given proper training so that they can answer to any queries of the
customers and can provide them products according to their needs.
Banks should also provide after sales services and they should be more
aggressive in selling the insurance products.
Banks should also do the settlement of claims which will increase the
trust and reliability of the customers on the banks.
In India, since the majority of the banking sector is in public sector which
has been widely responsible for the lethargic attitude and poor quality of
customer service, it needs to rebuild the blemished image. Else, the
bancassurance would be difficult to succeed in these banks.
A formal and standard agreement between these banks and the insurance
companies should be taken up and drafted by a national regulatory body.
These agreements must have necessary clauses of revenue sharing.
6.3 CONCLUSION
The life Insurance Industry in India has been progressing at a rapid growth since
opening up of the sector. The size of country, a diverse set of people combined
with problems of connectivity in rural areas, makes insurance selling in India a
very difficult task. Life Insurance Companies require good distribution strength
and tremendous man power to reach out such a huge customer base.
The concept of Bancassurance in India is still in its nascent stage, but the
tremendous growth and the potential reflects a very bright future for
bancassurance in India. With the coming up of various products and services
tailored as per the customer’s needs there is every reason to be optimistic that
bancassurance in India will play a long inning.
But the proper implementation of bancassurance is still facing so many hurdles
because of poor manpower management, lack of call centers, and no personal
contact with customers, inadequate incentives to agents and unfulfillment of
other essential requirements.
I have experienced a lot during the preparation of the project. I had just a simple
idea about Bancassurance. But after a detailed research in this topic I have
found how important bancassurance can be for bankers, insurers as well as the
customers. I am contented that all my objectives have been met to its fullest.
I have also experienced that though Bancassurance is not being utilized to its
fullest but it surely has a bright future ahead. India is at the threshold of a
significant change in the way insurance is perceived in the country.
Bancassurance will definitely play a defining role as an alternative distribution
channel and will change the way insurance is sold in India.