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GLASS – STEAGALL Act was repealed after the passage of the Gramm-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.