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BANCASSURANCE

While the term ‘Bancassurance’ is a very common and widely used in western countries particularly in developed countries, it is a new concept to Indian market comment Shashank Manish and Kishore Kunal.
Bancassurance is the combination of the terms 'Bank' and 'Insurance'. In this kind of arrangement, the insurance product is sold through banks. It is an agreement between the bank and insurance company for sale of insurance products through a bank.. It is also known as "Allfinanz" means a package of financial services that can fulfill both insurance and banking needs at the same time. In other words, in bancassurance the insurance products are offered to the customers through the distribution channel of the banking services. It tries to exploit synergies between both the banks and insurance companies. This concept got its birth in France and can be divided into two types :-

  • It is a combination of banking and insurance services together.

  • It is a tie-up between banks and insurance companies that which help insurance companies in expanding their distribution network.


Benefits of selling of insurance products through Banks from the view points of banks, insurance companies and customers

  • Benefit to Banks – It is a source of additional income for the bank and it is also a means of product diversification. Besides it, the bank attracts other new customers who are more interested in the insurance product rather than banking activities. It also results in value addition to the banking services. Bancassurance also improve resource utilisation and creates additional cash flow. There are also some other benefit to banks such as :-

    • Improves brand awareness – It increases the brand awareness of the bank in that particular region without spending money on advertising agencies such as print, radio or television.

    • Efficient Communication system – Presently banks are equipped with various communication channels like ATMs, e-banking, online services. Therefore, the insurance company need not further invest in these facilities.

  • Benefit to Insurance Companies – For insurance companies, selling of the product through the market increase their market share which results in increase of its premium turnover.


  • Benefit for consumers – It is consumer who is most happy in this kind of arrangement because he gets a high quality product at a lower price and at his own doorsteps. In addition to it following are the benefits to consumers :-

  • It provide single window clearance for banking and insurance;

  • It saves time and adds convenience to the customers;

  • It provides an opportunity to obtain various products at one shoppers stop.


REASON FOR A NEW RELATION BETWEEN BANKING COMPANIES AND INSURANCE SECTORS

  • It increases the income of the bank which covers their operating expenses.

  • Customers Reliability on Bank is an important factor for this kind of partnership.

  • Banks retain customer trust by offering a wide range of expanded financial products including insurance instead of just the traditional savings.

  • Bank creates a greater trust with the insurance customers in two ways. Firstly, there is face to face deal with the customer. Secondly, customers have faith in the bank because of the past reputation of the bank or the past relations with the bank.

  • Banks are quite experience in marketing to their existing as well as targeting customers.

  • The main reason of insurance companies to work with Bank is to utilise its marketing channels.

  • This kind of tie-up with RRBs and Co-operative banks are very cost-effective vehicle for insurers to tap into rural communities and fulfill their rural sector obligation.

THE MAJOR NEED OF BANCASSURANCE IN INDIA

  • Now banks have realised that by entering into the product value services in insurance sector, they can meet client expectations and earn more profit while carrying on their banking business.

  • In an insurance product there is a periodic nature of premium deposit which is positive for the bank

  • Banks have also realised that customer’s loyalty increases profit..

  • Banks are projected as a ‘shoppers stop’ to provide all kind of financial services;

  • Insurance sector is in the extensive need to use the bank’s distribution network, large client base and huge customer database, which are helpful in selling their products.

  • It reduces the cost of distribution of insurance products in comparison to the traditional agency channel.


OBSTACLES IN THE SUCCESS OF BANCASSURANCE

There are some cultural differences between the bank and insurance company which are hurdle in the way of success of bancassurance. Some of them are as follows

  • There may be a problem at the time of implementation of banassurance partnership.

  • Poor manpower management is one of the biggest hurdles in this area.

  • Lack of sales culture and no involvement of branch manager.

  • Insufficient product promotions and failure to integrate marketing plans.

  • The most important in all of them is the negative attitude of the bank staff towards insurance and unwieldy marketing strategy.

    Besides that, following are the specific cultural differences between both of them

  • Banks provides tangible services whereas an insurance company provides intangible services.

  • Banks sell its product on good-faith. On the other hand, insurance companies sell their products on utmost good-faith.

  • Banks provided services are 'immediate' whereas insurance provided services are 'futuristic'.

  • Bank provides short term finance whereas insurance companies provide long term Finance.

  • Banks generally deal with their customers directly whereas insurance companies deals with their customers through intermediaries.

  • Bank customers have their accounts in banks whereas insurance customers unaware of their accounts.

  • Dealing with banks is highly personal whereas dealing with insurance is less personal.


The Reserve Bank of India in its 2009-2010 circular made it mandatory for bank to disclose in the "Notes to Accounts" from the year ending March 31, 2010, the details of fees or remuneration received in respect of bancassurance business undertaken by them.

NEED OF BANK EMPLOYEE TRAINING

The above stated obstacle and cultural differences can be removed or reduced over a period of time by training the bank employees. The training program has following benefits:-

  • It encourages bank employees to learn the technical qualification regarding insurance sector. Particularly, their training shall assist them in identifying profitable customers, features of products, customer service, handling basic operations etc.

  • It requires imparting training to the employee to learn how to identify and approach a potential customer.

  • The basic need of insurance must be understood by the bank employees.

  • The bank needs to improve the quality of customer service.

  • There is need of regular training programs for bank employees in insurance and selling concepts and about products.

  • It also requires the training to the insurance company’s employee to provide right product to right customers.

  • Since data plays a very significant role in this kind of arrangement, therefore data management training is also important in this arrangement.


BANCASSURANCE TIE UP IN INDIA

Following are some existing tie-up in bancassurance in India :-

  • The LIC has the following tie up for the purpose of the bancassurance:-

    • Corporation Bank

    • Indian Overseas Bank

    • Centurion Bank

    • Sahara District Central Co-operative bank

    • Janta Urban Co-operative bank

    • Yeotmal Mahila Sahakari Bank

    • Vijaya Bank &

    • Oriental Bank of Commerce

  • State Bank of India has made tie up with State Bank of India Insurance Company.

  • HDFC Bank has tie up with Chubb and Standard life, USA.

  • ICICI Bank with Lombard Insurance and Prudential life, England.

  • Birla Sunlife Insurance Company Ltd has tied up with various Banks for its insurance business. They are :-

    • Bank of Rajasthan;

    • Citi Bank, Bank of Muscat;

    • Dutch Bank;

    • Development Credit Bank;

    • Andhra Bank.

  • Bajaj Allianz General Insurance Company has tie up with Karur Vysya Bank and Lord Krishna Bank.

  • ING Vysya Bank tied up with Royal Sundaram and ING life Insurance.


REGULATION OF BANKING COMPANIES INDULGING IN INSURANCE SERVICES

The Banking and Insurance sectors are regulated by two different entities in India:-

  • Banking sector is regulated by Reserve Bank of India; and

  • Insurance Sector is regulated by the Insurance Regulatory and Development Authority (hereinafter IRDA).

In India, the Government of India through its Notification dated August 3, 2000, specified ‘Insurance’ as a permissible form of business that could be undertaken by banks under section 6(1)(o) of the Banking Regulation Act, 1949. The notification declared that any bank intending to undertake insurance business has to follow guidelines issued under the master circular set out in Annex-3 of the said circular. In addition, the bank has to obtain prior approval of Reserve Bank of India before entering such a business. Paragraph 12 of the said master circular provides the further formalities to be followed by the bank . Further, the circular provides that banks need not obtain prior approval of the RBI for engaging in insurance agency business or referral arrangement without any risk participation, subject to certain conditions (Annex-4 ).

The above master circular provides three options for banks to enter the insurance Sector. They are as follows:-

  • Permission with Risk participation – A bank which wishes to undertake insurance business can be permitted provided joint ventures must be allowed for financially strong banks with risk participation . Provided that such bank further satisfy the following conditions :-

    • The minimum net worth of the bank must not be less than Rs.500 crore.

    • The minimum level of Capital Adequacy Ratio must not be less than 10% in the bank.

    • Non Performing Assets (NPA) should be reasonable in the bank.

    • The bank should have been earning a net profit continuously for last three years.

    • In case of any subsidiary, the performance of subsidiary should be satisfactory . For example in India, ICICI Bank and HDFC Bank in private sector and State Bank of India in the public sector has taken its shape by following this model . The main benefit of this model is that the foreign insurance company can enter into the Indian market through a joint venture.

  • Permission without Risk Participation – A bank which is not eligible for joint venture participation can make investment upto

    • 10% of the net worth of bank or

    • Rs.50 crores, whichever is lower, in the insurance company for providing infrastructure services support. Such participation is treated as investment and does not hold any contingent liability of the bank.

  • Referral Model – This model of Bancassurance India is regulated by Insurance Regulatory and Development Authority (Sharing of Database for Distribution of Insurance Products) Regulations, 2010 . Any commercial bank can undertake insurance business as an agent of insurance company on fee basis . The bank does not participate in risk under this category. This is also known as referral model. In this model, a ‘referral arrangement’ is done between ‘referral company’ and insurer for selling of insurance products. The referral company only shares the database of its customers and does not directly indulge in soliciting or selling of insurance product through agent or corporate agent or insurance intermediaries. In other words, the actual transaction is done by the staff of the insurance company either at the bank premise or elsewhere. The bank charges only fees or commission for every business from their customers.


REGULATING GUIDELINES OF IRDA

Insurance Regulation and Development Authority Act 1999 provides the entry norms for any new company for operation in insurance sector. Any such new company must have:-

  • Minimum paid up capital of Rs. 100 crores;

  • Investment of policy holders fund only in India;

  • Restriction of foreign companies to minority equity holding of 26%.

Following are Bancassurance Models approved for business:-

  • Insurance business carried out by banks

    It allows any scheduled bank to undertake life or non-life insurance business on specified fee bases but without any risk participation.

  • Joint venture by Bank

    Banks after satisfying required criteria are allowed to set up a joint venture company for undertaking insurance business with risk participation subject to certain safeguards. The maximum equity which a bank is allowed to hold in such joint venture is 52% of the paid up capital of the insurance company on a selective basis. However, in certain cases with the permission of RBI the bank can initially invest more than 52% but there must be reduction of equity to the statutory level. Eg: - ICICI Prudential Life Insurance company does nearly 20% of the life insurance sale through the Bancassurance channel. SBI, HDFC, ICICI Banks are the subscribers of their respective holding companies. Banks are also tying up with regional rural banks to make the benefit out of rural and semi-urban region . Similarly, AVIVA Indsurance has its tie-up with more than 21 banking companies which includes private, public and foreign sector banks.

  • Restriction on subsidiaries

    A subsidiary of a bank or another bank shall not normally be allowed to join the insurance company on risk participation basis . Subsidiaries means and includes here bank subsidiaries undertaking merchant banking securities, mutual fund, leasing finance and housing finance business, etc

  • Investing in an Insurance company

    Banks which are not eligible for joint venture can invest in an Insurance company without risk participation. Currently, banks can invest up to 10% of the net worth of the bank, or Rs. 50 crores, whichever is lower.

  • Merger & Acquisition

    This model is not very popular in India due to various national laws forbidding mergers between banks and insurance sectors. In this model either a bank acquires the insurance company or merges with it or vice versa .

  • Organic start up

    Under this model instead of merger or acquisition of the bank or insurance company believe in building skills organically . The advantage of this model is that it reduces the chance of cultural differences between the Bank and insurance company.


RECOMMENDATIONS OF COMMITTEE CONSTITUTED BY IRDA ON BANCASSURANCE

As we have discussed earlier that banks are not allowed to sell insurance products of more than one insurance company. But due to persistent request from the side of various life and general insurance companies from the IRDA led to formation of a seven-member committee in the mid of 2009 to look after the matter . The committee had to submit its report and to examine the desirability for a differential treatment of insurance intermediation by banks under the Bancassurance model consistent with intermediation best practices and modified suitably to meet domestic regulatory requirements . The committee submitted its recommendation on 26th May, 2011.

Following are some of the recommendations of the Committee :- channel and therefore there is need to enact a comprehensive legislation to cover all aspects of the working of the Bancassurance activities.

  • Banks should be allowed to tie up with any of the following two sets of insurers:-

    • Two in life insurance sector
      The committee admitted that at present there is ambiguity on the organization and practices of the Bancassurance.

    • Two in non-life insurance sector excluding health

    • Two in health insurance sector

    • ECGC and AIC.

  • Efforts should be made to more use of information technology which would reduce the manpower requirement and would increased more structured, transparent and efficient organization.

  • The tenure of the agreement between the banker and insurer is normally one to three year at present. This makes the relationship between the two unstable, therefore the minimum period of the agreement between the banker and the insurer shall not be less than five years. Here, the committee also made a very significant point that the responsibility of servicing of the policies issued already through the bank or subsidiary or special purpose vehicle shall remain with the bancassurance partner even if the tie-up ends and the said partner shall receive the renewal commission on per renewed policy basis. For all this purpose there is need of proforma for memorandum of agreement between bank and insurer with minimum requirement.

  • As far as inspection and supervision is concerned, the proposed regulation must contain separate provision which empowers IRDA and RBI to inspect any of the Bancassurance partner.

  • The regulation must have provisions of maintaining accounts and certification which should be furnished in periodicals returns to the authority. Corporate governance norms regarding disclosure should be complied by the banks treating bancassurance as integral part of bank’s business operation.

  • Regulations should made it mandatory that the bank staff be fully trained in handling insurance products so that the sale process is transparent and the policyholder gets full disclosure of the features of the product.

  • The committee gave the green light for multiple insurers but only if a bank fulfills all other conditions specified in the committee’s recommendations.

  • The Committee recommended abolition of the referral system of bancassurance because it is costlier than corporate agent model. The reason behind the high cost is that the insurer has not only to pay the higher amount of first year premium as referral fee but also has to deploy staff and infrastructure in the bank premises.


CONCLUSION

India has a potential market for insurance companies particularly in rural areas. Setting up a network and creating infrastructure for doing business attracts a huge investment by the insurance companies. Bancassurance is a better alternative in this area where insurance companies without investing on advertisement, market channels, infrastructure etc does business. The database shared by the bank in this regard help the insurance companies to target the customers easily.

Banks are having the database of their customers and besides it the reputation and recognition of the bank also help in the selling of insurance products by the insurance companies. But we would like to state at this stage that bancassuance would not be successful to the extent it should be due to the poor manpower management, untrained bank staffs in selling the insurance products, lack of incentives to agents, lack of accountability of bank managements for their customer complaints, ambiguity regarding grievance redressal forum etc.

In addition to it, there are also certain issues which need to be clarified by the authorities such as the jurisdiction and interference of RBI and IRDA. We would rather suggest that there should be a separate regulator for regulating Bancassurance and provide remedy for any grievances. It is very important that insurer and bankers must have a good understanding of each other and proper strategy to capture the opportunity and service for their customers. Finally, we appreciate the concept of Bancassurance and feels it is an efficient and cost effective measures for the insurance companies.

SHASHANK MANISH is a Law Clerk cum Research Assistant in the Supreme Court of India and KISHORE KUNAL is an LLM candidate at the National Law School of India University, Bangalore.
 
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