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Bancassurance; Universal Banking
"Bancassurance" in French and "All Finanz" (Universal Banking) in German refers to a tie up arrangement of banks with insurance companies for selling the insurance products in life and non life segments as corporate agents for fee based income.This income is risk-free,as the bank plays a role of a intermediary for souring business to insurance company. Bancassurance is a package of banking and insurance service at one roof.The introduction of Bancassurance has broadened the scope of retail banking.
Origin and Global Scenario:
Bancassurance has grown in different places in different forms based on the demographic,economic and legislative condition of the country.This concept has been successful in Europe,France (from where it originated),Italy,Belgium and Luxembourg.Bancassurance was not much popular in USA as Steagall Act,1933 prevented banks of USA from entering into alliance with financial service providers,therefore putting a ban on bancassurance.As a result of this,Life insurance was primarily sold by insurance agents,who focused mainly on wealthier class of people, which lead to majority of American middle class households uninsured.With US government repealing the act,and after the passage of Gramm-Leach Bliley Act,1999,the concept of Bancassurance started gaining momentum in USA also.
Reasons of Banks to enter into Insurance Business:
Banking industry has seen a long change since the era of Globalization, Liberalization and Finance sector Reforms.The following are some of the reasons of banks to enter into insurance business:
1.Deregulation of banking industry has given each banking an opportunity to differentiate its products and service and promote its strength and remove its weakness.
2.Technology has enabled the banks to design the innovative products that need to be promoted and marketed.
3.Growing Competition has induced the banks to create niche for itself by giving importance and highlighting the areas of their expertise and excellence.
4.Growth of market segments which provide opportunities for the banks that need to be marketed.For example,banks are offering various financial services in addition to the normal banking services to attract the customers.
5.Banks are expecting to increase its fee based income, overall productivity, customer satisfaction and loyalty by leveraging the branch network,the brand image and clientele base.They are aiming to obtain extensive experience in marketing by using value-added services like e-banking,tele-banking and direct mail in order to woo their customers. Bancassurance provides an opportunity to the banks to have face to face contact with the customer and provide multiple services at one place which enhances customer satisfaction.For example,if a person gets home loan,he can insure it also at same place as a combine product.
6.Life insurance is basically a savings market.It is one of the method to increase the deposits of the banks.
7.Insurers look to the Bancassurance as an alternative and consider it as a cost-effective mode of distribution as against costly agency services.As for the Insurance Companies,they can increase their business through banking distribution channel as banks have large and extensive customer base.By cutting the cost of Insurance products,Insurance can serve the customers at over premium rates and have better risk coverage through diversification of their products.
8.Customers need innovative products in terms of price,diversified product quality and doorstep services.Bancassurance addresses the needs of portfolio diversification and integrates the marketing activities.
Bancassurance Business Models:
The banks associate themselves with insurance companies by becoming a distributor or strategic investor or developing joint venture or becoming a promoter.
1.Distribution of agreements:
Banks act as a tied agent and sells the insurance products of one insurer extensively in standalone basis or bundled with other bank products.
In this case,Banks are indulged in high degree of intervention in product development, providing services and channel management in insurance business without any contingent liability.
Here a large bank with well-developed customer database partners with a large insurance companies with strong product and channel experience.This is done in order to develop a powerful distribution model.Alternatively, a bank and insurance company may agree to have cross holdings between them to share the profits.
4.Financial Service Group:
Under further integration between the bank and insurer, an insurance company can either build or buy a bank or build or buy an insurance company.
Here the banks instead of issuing policies to the customers,they give the database to the insurance companies. These insurance companies issue the policies to the customers and pay commission to banks for referral.
Bancassurance in Indian Context:
In India,Bancassurance is a novel concept. Insurance and Banking are two different sectors and are regulated by different entities :
(1)All Banks come under the control of Reserve Bank of India (RBI)
(2)Insurance sector follow the guidelines of Insurance Regulatory Development Authority (IRDA)
Hence ,the banks entering into Insurance business has to follow the norms of both RBI and IRDA.
1. Any Commercial Bank can undertake insurance business as an agent of insurance company on fee basis.There is no risk participation for such banks.
2. Joint Ventures will be allowed for financially strong banks who are wishing to undertake insurance business with risk participation if they satisfy the following criteria:
- Net worth of the bank should be not less than Rs.500 crore.
- Capital Adequacy Ratio should be not less than 10% in the bank.
- There should be reasonable level of Non Performing Assets(NPA)
- The bank should have earned net profit continuously for last three years.
- If there is any subsidiary, in such cases,the performance of subsidiaries
should be satisfactory.
3.Banks which are not eligible for joint venture participation can opt up to
- 10% of the net worth of bank (or)
- Rs.50 Crores whichever is lower.
Besides this,the requirements relating to the Non Performing Assets,Capital Adequacy Ratio and Net Profit maintained has to be followed as per the rules mentioned in the participation of banks in Joint ventures.
According to IRDA,a private sector participant has to fulfill the following requirements to enter into the insurance business:
1.Banks should have a minimum paid up capital of Rs.100 Crores
2.Investments has to be made in the policyholder funds only in India.
3.There is a restriction of international companies to the minority equity holdings up to 26%.
4.Each bank selling insurance should have a Chief Insurance Executive to handle all the activities and matters relating to the insurance.
5.Commercial Banks,Co-operative Banks and Regional Rural Banks may become the corporate agents for one insurance company.
6.Banks can act as a corporate agent for any one of life or non life insurers.But, cannot become insurance brokers for many life or non life insurers.
IRDA has also notified regulations relating to registration of insurers,their assets and liabilities,conduct of business,licensing of insurance agents etc.
Relevance of Bancassurance in Indian Financial Sector:
In India,the concept of Bancassurance appears to be growing more rapidly both through commission based agents and Joint Ventures between banks and insurance companies. Indian Banks have immense reach to the households.
-There are around 65,700 branches of Commercial banks .Each bank has average of 15,000 people
-India's rural market has huge potential that is still untapped by insurance companies.In rural region,there are 32,600 branches and 14,400 semi-urban branches where insurance has become most buoyant.
-There are 196 exclusive Regional Rural Banks in remote areas.
These help bank to enjoy considerable goodwill and access to the target customers. This also helps the banks to pay a major role in developing insurance products including health care and pension sector too.
Few Tie-ups in India:
1.Life Insurance Corporation (LIC)has a tie up with Corporation Bank,Indian Overseas Bank,Sahara Development Central Co-operative bank,and Vijaya bank.
2 State Bank of India has tie up with State Bank of India Insurance Company.State Bank Insurance Co is starting and running insurance business with the help of State Bank of India.
3.Bajaj Allianz General Insurance Company has tie up with Karur Vysya Bank and ord Krishna Bank.
4.Bira Sunlife Insurance Co td has tie up with the following banks for the purpose of Insurance such as - Bank of Rajasthan, Andhra Bank,Citi Bank,Bank Of Muscat,Development Credit bank and Dutch bank
5.HDFC bank with Chubb,USA and Standard ife,UsA
6.ING Vysya Bank has tie up with Royal sundaram and ING life Insurance,Canada
7.ICICI bank has tie up with Lombard insurance,England and Prudential life, England
Implementation of Bancassurance-Key challenge to India:
At present ,the Bancassurance is facing problems such as poor management,lack of call centres, no personal contact,inadequate infrastructure, inadequate incentive to agents and in complete fulfillment of other essential requirements. Hence following points can taken into consideration for proper implementation of Bancassurance:
1.There should be involvement of top management in banks.
2.The banks should motivate and develop the skills of staffs at the operating level
3.If there is any possible conflicts of interest between banker and insurer.That has to be resolved.
4.Banks have to set up a consistent Distribution procedure with manual manual systems in banks.
5.Service level agreements between banker and insurer should be established.
6.High Capital investment in Information and Technology and Telecommunication.
7.Study about low income groups,middle and upper class of the society and their eagerness to adopt insurance policies and provide favourabe policies to people.
8.Establishment of Research And Development Cell for adaptive task.
With the opening up of insurance sectors and other players entering into insurance business,the insurance companies have to come up with well established infrastructure facilities,with good call center services,services which attracts and provides information to customers regarding different good policies and their premium pay plans.Hence,the success of the bancassurance depends on the understanding of insurer and the bank by capturing the opportunity and providing better services to the consumers.
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