bancassurance model

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New concept
catching up
fast in India

 One of the more recent examples of financial diversi-
 fication is ‘bancassurance’, the term given to the dis-
 tribution of insurance products through branches or
 other distribution channels of the banks. The concept
 that originated in France, now constitutes the domi-
 nant model in a number of European and other coun-
 tries and the same is fast catching up in India as well.

       he strategy for using the portfolios, using established
       established, entrenched dis- ‘incumbent’ networks to promote
       tribution network for one and distribute new product lines.
product to market other new prod-         Banks, too, have in the recent
                                                                         security broking facilities and mutual
ucts has long existed in the con- past adopted this strategy both in
                                                                         funds. This is the phenomenon of
sumer goods sector. Thus the net- India as well as internationally. They
                                                                         ‘universal banking’ that builds on the
works for soaps and detergents have have moved away from the classical
                                                                         principle of leveraging existing net-
been used by companies to distrib- model of deposit taking and credit
                                                                         works to broaden portfolio offerings.
ute newly launched food products, disbursal through their branch net-
                                                                         Change in regulatory regimes has
the distribution channel for Rados works and have begun to offer a wide
                                                                         also facilitated this diversification.
has been used to market televisions range of products and services like
                                                                             The famous Glass Steagall Act in
and so on. Of course, the basic
                                                                             the US that restrained bans from
premise for this kind of cross- In India the concept of bancassur-
                                                                             diversifying into related areas
selling is the fact that companies     ance appears to be gaining
                                                                             was effectively rendered obsolete
keep diversifying their product ground quite rapidly both through
                                                                             by the late 1990s.
                                     commission based arrangements
                                                                                 This diversification of banking
The author is senior economist, with and joint ventures between banks services has been driven by a num-
CRISIL Ltd. He can be reached at        and insurance companies
                                                                             ber of factors, all of which have                                                            threatened bank profitability.

THE CHARTERED ACCOUNTANT                             1348                                            JUNE 2004
Growing disintermediation by corpo-
rate borrowers (direct borrowings by               Modus Operandi of Bancassurance
firms from the debt market for both                 here are various models through which bancassurance
working capital and term loans), better
inventory practices that have reined in
                                             T             operates internationally. In the so called integrative
                                                    model, branch bankers themselves directly sell insurance
working capital needs and a liberalised
external borrowing regime coupled            products. In the specialist model, specialised personnel of the
with dwindling international rates have       bank or the insurance company have specific knowledge and
all eaten into ‘fund incomes’ of banks.          training of insurance to sell these products Bancassurance
In short, the margins or spreads that          could operate through ‘strategic alliance’ models involving a
banks make between the cost of funds              simple ‘marketing’ tie-up or through ‘full integration’ where
(deposits plus borrowings) and the               the bank sells insurance products under its own brand and
returns on funds (interest earnings on              undertakes all other functions associated with insurance.
loans).                                          In India, this scheme, until now, operates largely through
        Diversification                      strategic alliances or joint ventures. Under RBI regulations,
                                                     the maximum equity that a bank can hold in JV with an
     Banks have felt the need to offset
                                                insurance company is 50 per cent, subject to the fact that
these through growing fee incomes
                                               bank has a net worth of Rs 500 crore, its Capital adequacy
particularly from the retail side. To
target the retail segment, banks have             ratio is 10 per cent or more and has a reasonable level of
felt the need to offer a more diversi-               non performing assets. The insurance Regulatory and
fied product range to appeal to a              Development Authority also sets guidelines regarding eli-
diverse range of risk profiles.                    gibility of corporate agents. Banking personnel who sell
     On the other hand, stand-alone                insurance products have to satisfy the same training and
financial product providers (NBCs,                           examination requirements as insurance agents.
mutual funds etc.) have faced crip-
pling distribution costs that in the face
of growing competition, they have                                               cent in Spain and so on. Projections
not been able to pass on as ‘load’ on                                           by insurance giant Aviva peg the dis-
this product. Thus as far as banks and                                          tribution share of bancassurance at
other financial services providers are                                          33 per cent by 2010, making it the
concerned, there has been a ‘double                                             single largest distribution channel. In
coincidence’ of needs that has led                                              Asia, the share of this network is
them to collaborate either through                                              small but growing rapidly. In China
direct equity participation or owner-                                           for instance,this accounts for more
ship by banks or strategic alliances.                                           than 20 per cent of the urban market
     One of the more recent examples                                            in insurance in 2003. (It is, however,
of financial diversification is ‘ban-                                           interesting to note that in some coun-
cassurance’, the term given to the dis-                                         tries bank regulations prohibit ban-
tribution of insurance products                                                 cassurance and it is this regulatory
                                            According to the SBI Life           diktat rather than conscious strategic
through branches or other distribu-
                                              insurance estimates,              choice that has harnessed the growth
tion channels of banks. The concept
                                               about 15 per cent of             of this marketing channel.)
that originated in France now consti-
                                               the gross premium                     In India the concept of bancas-
tutes the dominant model in a number
of European countries.In France 70              of new insurance                surance appears to be gaining ground
per cent of new business premiums              players in financial             quite rapidly both through commis-
come through this distribution chan-        year 2003 came through              sion based arrangements and joint
nel, 69 per cent in Portugal, 63 per             bancassurance                  ventures between banks and insur-

THE CHARTERED ACCOUNTANT                                 1349                                             JUNE 2004
ance companies. According to SBI Life insurance esti-
mates,about 15 pr cent of the gross premium of new
players in FY 2003 came through bancassurance and                   Why insurers are
is estimated to grow further.
     While we have examined the motivations that                    turning to banks?
banks have for taking insurance products on board,
the incentives for insurance companies to run to
banks for marketing and distribution support partic-
ulary in India need to be examined. Before that it is
useful to review the traditional channels of insurance
distribution. Internationally and in India, the bulk of
distribution is done through the direct sales force
(DSF) of insurance provides followed by insurance
brokers. Direct marketing and more recent innova-
tion such as internet marketing constitute only a
minor fraction of the total distribution effort.                 ne of the key factors is that banks continue to

     Impact on retail customer
                                                           O     command the highest trust among Indian
                                                           savers and investors and of the total pool of finan-
                                                           cial savings of households, 3 per cent (the largest
     While banks and insurance companies stand to
                                                           share) goes to bank deposits (RBI annual Report
gain, what impact does it have on the retail cus-
tomer? Retail saving choices are getting increas-          2002).
ingly complex internationally and Idea is no excep-
                                                               or any providers of new financial products,
tion. There is growing need for more divers instru-
ments and avenues of investment. This coupled with         F   banks are the fastest and most ‘trusted’ chan-
                                                           nel to reach households. Besides, the bank branch
need of integrated financial ‘one stop shops’ to
reduce the transaction costs associated with diversi-      network of 62000 is virtually impossible to replicate
fication. Globally, insurance products are a major         and would be indispensable in penetrating newer
internment savings and this is likely to be the case in    markets such as rural markets. Bank assurance
India as well as insurance penetration gathers steam.      also leads to a significant lowering of distribution
     The issue of building brand equity is critical for    costs for insurers.
new entrants into the insurance market. However, ,
                                                               wiss Re estimates for the UK for instance peg
tying up with a bank might provide counter-pro-
ductive if this objective is to be achieved. A number      S   average costs through bank assurance at
                                                           roughly 25 per cent of the cost of selling through a
of surveys in the European market have shown, for
instance, that in bancassurance partnerships, it is        direct sales force.
the bank’s rather than the insurers brand that domi-
                                                               he cost reduction is the corollary of a sharp rise
nates and insurance brands often get stifled.
     The issue of integrating the bank’s IT and other
support systems also needs to be emphasized. if these
                                                           T   in the numbers of policies sold per employee
                                                           that follows from enhanced customer access that
are not dovetailed, the possibility of serious systems     bancassurance fosters.
failure becomes real. Often this issue is relegated to
the background and the obvious synergies between
                                                                 Bancassurance addresses twin
banks and insurers get more than their due emphasis.
                                                                 needs of portfolio diversifica-
          Regulatory perspective                                  tion by retail customers and
                                                                    integration of marketing.
     From a regulatory perspective, bancassurance
raises some key questions regarding anti-competitive

THE CHARTERED ACCOUNTANT                                  1350                                          JUNE 2004

  While bancassurance does provide an apparently                              Potential areas of conflict
 viable model for product diversification by banks
 and a cost-effective distribution channel for insur-
   ers, there are some potential areas of conflict
    between the two that need to be ironed out.

behaviour. It is a basic tenet of com-      insurers. This might warrant
petition law and regulation that the        regulatory intervention.
ownership of large networks is a sig-            Thus, while bancassur-
nificant barrier to entry. thus insurers    ance does provide an appar-
who tie up with ones with large net-
works could effectively keep out
                                            ently viable model for prod-
                                            uct diversification by banks
                                                                              W      hile the benefits of bancassur-
                                                                                     ance appear somewhat clear,
                                                                               prima facie to all participants, the
potential entrants. This might not          and a cost-effective distribu-     potential areas of conflict should not
have a immediate impact on the pric-        tion channel for insurers,         be glossed over. Recent surveys of
ing of premium. The need to pene-           there are some potential areas     Indian savers show that they perceive
trate the untapped Indian market            of conflict between the two        insurance as a ‘savings’ product rather
might keep premiums low at this             that need to be ironed out. The    than as a risk management product
state. However, over the medium to          success of the partnership         There lies the rub. If insurance is
long term this could lead to monop-         between the two entities           indeed viewed as a savings instru-
oly power and high premiums.                depends on the right’ model’       ment, the insurer’s products compete
     This is a regulatory issue that        partnership. It is vital for this  directly with term deposits facilities
needs to be addressed as bancassur-         model to ensure that banks         that banks offer and there could be
ance gets under way in India either         remain fully committed to          conflict of interest. Thus branch-
                                                                               bankers might not have any incentive,
through the competition commission          promoting and distributing
                                                                               indeed have a negative incentive, in
or through the insurance regulator’s        insurance products. This           promoting insurance products. Even if
office. This is by no means an issue        commitment has to come             there is no direct competition between
that is unique to bancassurance -- the      from both senior manage-           the banks and the insurance product
regulation of ATM networks and other        ment in terms of strategic         portfolios, bankers under the current
payment systems in Europe has been          inputs and the operations staff    structure might not find it in his inter-
a hotly debated issue. A possible solu-     who would provide the front-       est to hard-sell insurance. Lack of
tion is to have an arrangement by           end for these products.Prima       familiarity with insurance products
which all entrant insurers have access      facie, a formal collaboration      could be another deterrent.
to bank networks.                           between banks.                          Another potential source of con-
     Another regulatory issue related            There are costs associated    flict arises in a configuration where
to ‘binding’ or the phenomenon              with setting up a successful       the insurance company is promised
                                                                               by an international bank that might
through which banks offer a consoli-        bancassurance network. The
                                                                               have non-insurance business inter-
dated package of products at a single       proper training of bank person-    est in India. In such an instance the
rate. This often involves cross-subsi-      nel to understand and market       domestic partner bank of the insur-
dization within the package. Thus a         insurance schemes is vital to      ance company might find it strategi-
bank could charge an artificially low       the success of these ventures.     cally necessary to hold bank sensitive
premium for an insurance product and        There is also a need to invest     customer information.
subsidize it through a relatively high      extensively in IT and other
charge on say a credit card. This form      support systems that would                ularly with respect to competition and
of ‘bundling’ not only impedes trans-       provide an integrated ‘back-end’ for market structure problems. Given
parency of pricing but could also lead to   banking and insurance services these changes, bancassurance and col-
‘unfair’ advantage for banks offering       Regulatory issues need to be addressed laboration between banks and insurers
bancassurance vis-a-vis stand-alone         comprehensively and sorted out partic- has a long way to go in India.          ■

THE CHARTERED ACCOUNTANT                                    1351                                                JUNE 2004

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