About Bancassurance1. Meaning2. Origin3. Models of Bancassurance

1.1.1. Structural classificationii. Product based classificationiii. Bank ReferralsWhat is BANCASSURANCE?With the opening up of the insurance sector and with so many players entering the Indian insurance industry, it is required by the insurance companies to come up with innovative products, create more consumer awareness about their products and offer them at a competitive price. Since the banking services, insurance and fund management are all interrelated activities and have inherent synergies, selling of insurance by banks would be mutually beneficial for banks and insurance companies. With these developments and increased pressures in combating competition, companies are forced to come up with innovative techniques to market their products and services. At this juncture, banking sector with it's far and wide reach, was thought of as a potential distribution channel, useful for the insurance companies. This union of the two sectors is what is known as Bancassurance.

MeaningBancassurance is the distribution of insurance products through the bank's distribution channel. It is a phenomenon wherein insurance products are offered through the distribution channels of the banking services along with a complete range of banking and investment products and services. To put it simply, Bancassurance, tries to exploit synergies between both the insurance companies and banks. Bancassurance can be important source of revenue. With the increased competition and squeezing of interest rates spread, profits are likely to be under pressure. Fee based income can be increased through hawking of risk products like insurance.Bancassurance if taken in right spirit and implemented properly can bewin-win situation for the all the participants' viz., banks, insurers and the customer.

OriginThe banks taking over insurance is particularly well-documented with reference to the experience in Europe. Across Europe in countries like Spain and UK, banks started the process of selling life insurance decades ago and customers found the concept appealing for various reasons. Germany took the lead and it was called ALLFINANZ. The system of bancassurance was well received in Europe. France taking the lead, followed by Germany, UK, Spain etc. In USA the practice was late to start (in 90s). It is also developing in Canada, Mexico, and Australia.In India, the concept of Bancassurance is very new. With the liberalization and deregulation of the insurance industry, bancassurance evolved in India around 2002.

Models of Bancassurance

I. Structural Classification

a) Referral ModelBanks 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 ban0k 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.

b) Corporate AgencyThe 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, 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.

c) Insurance as Fully Integrated Financial Service/ Joint venturesApart from the above two, the fully integrated financial service involves much more comprehensive and intricate 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 FDIs participation up to 49 per cent.

II. Product based classification

(a) Stand-alone Insurance ProductsIn 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 banks customer, however, the products of banks and insurance will have their respective brands too.

(b) Blend of Insurance with Bank ProductsThis method aims at blending of insurance products as a value addition while promoting the banks 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 banks 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.

III. Bank ReferralsThere 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. In this method also there is a win-win situation every where as the banks get commission, the insurance companies get databases of the customers and the customers get the benefits.

Utilities of Bancassurance(benifts)1. For Banks:i. As a source of fee based incomeii. Product diversificationiii. Building close relations with the customers2. For Insurance Companiesi. Stiff competitionii. High cost of agentsiii. Rural penetrationiv. Multi-channel distributionv. Targeting middle income customers

For Banks As a source of fee incomeBanks traditional sources of fee income have been the fixed charges levied on loans and advances, credit cards, merchant fee on point of sale transactions for debit and credit cards, letter of credits and other operations. This kind of revenue stream has been more or less steady over a period of time and growth has been fairly predictable.However shrinking interest rate, growing competition and increased horizontal mobility of customers have forced bankers to look elsewhere to compensate for the declining profit margins and Bancassurance has come in handy for them. Fee income from the distribution of insurance products has opened new horizons for the banks and they seem to love it. From the banks point of view, opportunities and possibilities to earn fee income via Bancassurance route are endless. A typical commercial bank has the potential of maximizing fee income from Bancassurance up to 50% of their total fee income from all sources combined. Fee Income from Bancassurance also reduces the overall customer acquisition cost from the banks point of view. At the end of the day, it is easy money for the banks as there are no risks and only gains.

Product DiversificationIn terms of products, there are endless opportunities for the banks. Simple term life insurance, endowment policies, annuities, education plans, depositors insurance and credit shield are the policies conventionally sold through the Bancassurance channels. Medical insurance, car insurance, home and contents insurance and travel insurance are also the products which are being distributed by the banks.However, quite a lot of innovations have taken place in the insurance market recently to provide more and more Bancassurance-centric products to satisfy the increasing appetite of the banks for such products.Insurers who are generally accused of being inflexible in the pricing and structuring of the products have been responding too well to the challenges (say opportunities) thrown open by the spread of Bancassurance. They are ready to innovate and experiment and have set up specialized Bancassurance units within their fold. Examples of some new and innovative Bancassurance products are income builder plan, critical illness cover, return of premium and Takaful products which are doing well in the market.

Building close relations with the customersIncreased competition also makes it difficult for banks to retain their customers. Banassurance comes as a help in this direction also. Providing multiple services at one place to the customers means enhanced customer satisfaction. For example, through bancassurance a customer gets home loans along with insurance at one single place as a combined product. Another important advantage that bancassurance brings about in banks is development of sales culture in their employees. Also, banking in India is mainly done in the 'brick and mortar' model, which means that most of the customers still walk into the bank branches.This enables the bank staff to have a personal contact with their customers. In a typical Bancassurance model, the consumer will have access to a wider product mix - a rather comprehensive financial services package, encompassing banking and insurance products.

For Insurance Companies Stiff CompetitionAt present there are 15 life insurance companies and 14 general insurance companies in India. Because of the Liberalization of the economy it became easy for the private insurance companies to enter into the battle field which resulted in an urgent need to outwit one another. Even the oldest public insurance companies started facing the tough competition. Hence in order to compete with each other and to stay a step ahead there was a need for a new strategy in the form ofBancassurance. It would also benefit the customers in terms of wide product diversification.

High cost of agentsInsurers have been tuning into different modes of distribution because of the high cost of the agencies services provided by the insurance companies. These costs became too much of a burden for many insurers compared to the returns they generate from the business. Hence there was a need felt for a Cost-Effective Distribution channel. This gave rise to Bancassurance as a channel for distribution of the insurance products.

Rural PenetrationInsurance industry has not been much successful in rural penetration of insurance so far. People there are still unaware about the insurance as a tool to insure their life. However this gap can be bridged with the help of Bancassurance. The branch network of banks can help make the rural people aware about insurance and there is also a wide scope of business for the insurers. In order to fulfill all the needs bancassurance is needed.

Multi channel DistributionNow a days the insurance companies are trying to exploit each and every way to sell the insurance products. For this they are using various distribution channels. The insurance is sold through agents, brokers through subsidiaries etc. In order to make the most out of Indias large population base and reach out to a worthwhile number of customers there was a need for Bancassurance as a distribution model.

Targeting Middle income CustomersIn previous there was lack of awareness about insurance. The agents sold insurance policies to a more upscale client base. The middle income group people got very less attention from the agents. So through the venture with banks, the insurance companies can recapture much of the under served market. So in order to utilize the database of the banks middle income customers, there was a need felt for Bancassurance.

Regulations for Bancassurance in India

1. RBI Norms for banks entering into Insurance sector

2. IRDA Norms for Insurance companies tying up with Banks

RBI Norms for banksRBI Guidelines for the Banks to enter into InsuranceBusinessFollowing the issuance of Government of India Notification datedAugust 3, 2000, specifying Insurance as a permissible form of business that could be undertaken by banks under Section 6(1) (o) ofThe Banking Regulation Act, 1949, RBI issued the guidelines on Insurance business for banks.1. Any scheduled commercial bank would be permitted to undertake insurance business as agent of insurance companies on fee basis.Without any risk participation.

2. Banks which satisfy the eligibility criteria given below will be permitted to set up a joint venture company for undertaking insurance business with risk participation, subject to safeguards. The maximum equity contribution such a bank can hold in the Joint Venture Company will normally be 50% of the paid up capital of the insurance company.

The eligibility criteria for joint venture participant are as under:i. The net worth of the bank should not be less than Rs.500 crore;ii. The CRAR of the bank should not be less than 10 per cent;iii. The level of non-performing assets should be reasonable;iv. The bank should have net profit for the last three consecutive years;v. The track record of the performance of the subsidiaries, if any, of the concerned bank should be satisfactory.

3. In cases where a foreign partner contributes 26% of the equity with the approval of Insurance Regulatory and Development Authority/ForeignInvestment Promotion Board, more than one public sector bank or private sector bank may be allowed to participate in the equity of the insurance joint venture. As such participants will also assume insurance risk, only those banks which satisfy the criteria given in paragraph 2 above, would be eligible.

3. A subsidiary of a bank or of another bank will not normally be allowed to join the insurance company on risk participation basis.

4. Banks which are not eligible for joint venture participant as above, can make investments up to 10% of the net worth of the bank or Rs.50 crore, whichever is lower, in the insurance company for providing infrastructure and services support. Such participation shall be treated as an investment and should be without any contingent liability for the bank.

The eligibility criteria for these banks will be as under:i. The CRAR of the bank should not be less than 10%;ii. The level of NPAs should be reasonable;iii. The bank should have net profit for the last three consecutive years.

5. All banks entering into insurance business will be required to obtain prior approval of the Reserve Bank. The Reserve Bank will give permission to banks on case to case basis keeping in view all relevant factors including the position in regard to the level of non-performing assets of the applicant bank so as to ensure that non-performing assets do not pose any future threat to the bank in its present or the proposed line of activity, viz., insurance business. It should be ensured that risks involved in insurance business do not get transferred to the bank. There should be arms length relationship between the bank and the insurance outfit.

6. Holding of equity by a promoter bank in an insurance company or participation in any form in insurance business will be subject to compliance with any rules and regulations laid down by the IRDA/Central Government. This will include compliance with Section 6AA of the Insurance Act as amended by the IRDA Act, 1999, for divestment of equity in excess of 26 per cent of the paid up capital within a prescribed period of time.

7. Latest audited balance sheet will be considered for reckoning the eligibility criteria.

IRDA Norms for Insurance Companies

The Insurance regulatory development & Authority has given certain guidelines for the Bancassurance they are as follows: -

1) Chief Insurance Executive: Each bank that sells insurance must have a chief Insurance Executive to handle all the insurance matters & activities.2) Mandatory Training: All the people involved in selling the insurance should under-go mandatory training at an institute determined (authorized) by IRDA & pass the examination conducted by the authority. 3) Corporate agents: Commercial banks, including co-operative banks and RRBs may become corporate agents for one insurance company.4) Banks cannot become insurance brokers.Issues for regulation: Certain regulatory barriers have slowed the development of Bancassurance in India down. Which have only recently been cleared with the passage of the insurance (amendment) Act 2002.Prior it was clearly an impractical necessity and had held up the implementation of Bancassurance in the country. As the current legislation places the following:-1) Training and examination requirements: upon the corporate insurance executive within the corporate agency, this barrier has effectively been removed.Another regulatory change is published in recent publication of IRDA regulation relating to the (2) Licensing of Corporate agents(2) Specified person to satisfy the training & examination: According to new regulation of IRDA only the specific persons have to satisfy the training & examination requirement as insurance agent.

Benefits of Bancassurance1. To Banks2. To Insurance companies3. To Customers To BanksFrom the banks point of view:(A)By selling the insurance product by their own channel the banker can increase their income.(B) Banks have face-to-face contract with their customers. They can directly ask them to take a policy. And the banks need not to go any where for customers. (C) The Bankers have extensive experience in marketing. They can easily attract customers & non-customers because the customer & non-customers also bank on banks.(D) Banks are using different value added services life-E. Banking tele banking, direct mail & so on they can also use all the above mentioned facility for Bancassurance purpose with customers & noncustomers.(E) Productivity of the employees increases.(F) By providing customers with both the services under one roof, they can improve overall customer satisfaction resulting in higher customer retention levels.(G) Increase in return on assets by building fee income through the sale of insurance products.(H) Can leverage on face-to-face contacts and awareness about the financial conditions of customers to sell insurance products.(I) Banks can cross sell insurance products E.g.: Term insurance products with loans.

To InsurersFrom the Insurer Point of view:(A) The Insurance Company can increase their business through the banking distribution channels because the banks have so many customers. (B) By cutting cost Insurers can serve better to customers in terms lower premium rate and better risk coverage through product diversification.(C)Insurers can exploit the banks' wide network of branches for distribution of products. The penetration of banks' branches into the rural areas can be utilized to sell products in those areas.(D)Customer database like customers' financial standing, spending habits, investment and purchase capability can be used to customize products and sell accordingly.(E)Since banks have already established relationship with customers, conversion ratio of leads to sales is likely to be high. Further service aspect can also be tackled easily.(F)The insurance companies can also get access to ATMs and other technology being used by the banks.(G)The selling can be structured properly by selling insurance products through banks.(H) The product can be customized as per the needs of the customers.

To CustomersFrom the customers' point of view :(A) Product innovation and distribution activities are directed towards the satisfaction of needs of the customer. (B) Bancassurance model assists customers in terms of reduction price, diversified product quality in time and at their doorstep service by banks.(C)Comprehensive financial advisory services under one roof. i.e., insurance services along with other financial services such as banking, mutual funds, personal loans etc.(D) Easy access for claims, as banks are a regular visiting place for customers.(E) Innovative and better product ranges and products designed as per the needs of customers.(F)Any new insurance product routed through the bancassuranceChannel would be well received by customers.(G) Customers could also get a share in the cost savings in the form of reduced premium rate because of economies of scope, besides getting better financial counseling at single point.

Distribution Channels:1. Career agents2. Special advisers3. Salaried agents4. Bank employees5. Corporate agency & Brokerage firm6. Direct response7. Internet8. E- Brokerage9. Outside lead generating techniques (xplntn in detail )

Distribution ChannelsTraditionally, insurance products were promoted and soldprincipally through agency systems only. The reliance of insuranceindustry was totally on the agents. Moreover with the monopoly ofpublic sector insurance companies there was very slow growth in theinsurance sector because of lack of competition. The need for innovativedistribution channels was not felt because all the companies relied only25BANCASSURANCEupon the agents and aggressive marketing of the products was also notdone. But with new developments in consumers behaviours, evolution oftechnology and deregulation, new distribution channels have beendeveloped successfully and rapidly in recent years.Recently Bancassurers have been making use of variousdistribution channels, they are: Career Agents:Career Agents are full-time commissioned sales personnelholding an agency contract. They are generally considered to beindependent contractors. Consequently an insurance company canexercise control only over the activities of the agent which are specifiedin the contract. Many bancassurers, however avoid this channel, believingthat agents might oversell out of their interest in quantity and not quality.Such problems with career agents usually arise, not due to the nature ofthis channel, but rather due to the use of improperly designedremuneration and incentive packages. Special Advisers:Special Advisers are highly trained employees usuallybelonging to the insurance partner, who distribute insurance productsto the bank's corporate clients. The Clients mostly include affluentpopulation who require personalised and high quality service. UsuallySpecial advisors are paid on a salary basis and they receive incentivecompensation based on their sales. Salaried Agents:Salaried Agents are an advantage for the bancassurers becausethey are under the control and supervision of bancassurers. Theseagents share the mission and objectives of the bancassurers. These aresimilar to career agents, the only difference is in terms of theirremuneration is that they are paid on a salary basis and career agentsreceive incentive compensation based on their sales.26BANCASSURANCE Bank Employees / Platform Banking:Platform Bankers are bank employees who spot the leads inthe banks and gently suggest the customer to walk over and speakwith appropriate representative within the bank. The platform bankermay be a teller or a personal loan assistant. A restriction on theeffectiveness of bank employees in generating insurance business isthat they have a limited target market, i.e. those customers whoactually visit the branch during the opening hours. Corporate Agencies and Brokerage Firms:There are a number of banks who cooperate with independentagencies or brokerage firms while some other banks have foundcorporate agencies. The advantage of such arrangements is theavailability of specialists needed for complex insurance matters andthrough these arrangements the customers get good quality ofservices. Direct Response:In this channel no salesperson visits the customer to induce asale and no face-to-face contact between consumer and seller occurs.The consumer purchases products directly from the bancassurer byresponding to the company's advertisement, mailing or telephoneoffers. This channel can be used for simple packaged products whichcan be easily understood by the consumer without explanation. Internet:27BANCASSURANCEInternet banking is already securely established as an effectiveand profitable basis for conducting banking operations. Bancassurers canfeel confident that Internet banking will also prove an efficient vehicle forcross selling of insurance savings and protection products. Functionsrequiring user input (check ordering, what-if calculations, credit andaccount applications) should be immediately added with links to theinsurer. Such an arrangement can also provide a vehicle for insurancesales, service and leads. E-Brokerage:Banks can open or acquire an e-Brokerage arm and sellinsurance products from multiple insurers. The changed legislativeclimate across the world should help migration of bancassurance inthis direction. The advantage of this medium is scale of operation,strong brands, easy distribution and excellent synergy with the internetcapabilities. Outside Lead Generating Techniques:One last method for developing bancassurance eyesinvolves "outside" lead generating techniques, such as seminars, directmail and statement inserts. Great opportunities await bancassurancepartners today and, in most cases, success or failure depends onprecisely how the process is developed and managed inside eachfinancial institution.28

Marketing & Distribution Channels in BancassuranceOne of the most significant changes in the financial services sector over the past few years has been the growth and development of bancassurance. Banking institutions and insurance companies have found bancassurance to be an attractive and profitable complement to their existing activities. The successes demonstrated by various bancassurance operations particularly in Europe have triggered an avalanche of mergers and acquisitions across continents and efforts are on to replicate the early success of bancassurance in other parts of the world as well.

Distribution is the key issue in bancassurance and is closely linked to the regulatory climate of the country. Over the years, regulatory barriers between banking and insurance have diminished and has created a climate increasingly friendly to bancassurance. The passage of Gramm-Leach Bliley Act of 1999 in US and IRDA Bill in India in 2000 have stimulated the growth of bancassurance by allowing use of multiple distribution channels by banks and insurance companies.

Bancassurance experience in Europe as well as in other select countries offers valuable guidance for those interested in insurance distribution through the banking channel in developing markets. Many banks and insurers are looking with great interest at building new revenue through bancassurance - including large, traditional companies that wouldn't have considered such an approach about a decade ago. Of particular interest, many believe, is the potential for bancassurance in developing economies such as those of Latin America and Southeast Asia.

Distribution channels in Bancassurance

Traditionally, insurance products have been promoted and sold principally through agency systems in most countries. With new developments in consumers behaviors, evolution of technology and deregulation, new distribution channels have been developed successfully and rapidly in recent years. Bancassurers make use of various distribution channels:

-Career Agents-Special Advisers-Salaried Agents-Bank Employees / Platform Banking-Corporate Agencies and Brokerage Firms-Direct Response-Internet-e-Brokerage-Outside Lead Generating Techniques

The main characteristics of each of these channels are:

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 his contract. Despite this limitation on control, career agents with suitable training, supervision and motivation can be highly productive and cost effective. Moreover their level of customer service is usually very high due to the renewal commissions, policy persistency bonuses, or other customer service-related awards paid to them.

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/or incentive packages.

Special Advisers:

Special Advisers are highly trained employees usually belonging to the insurance partner, who distribute insurance products to the bank's corporate clients. Banks refer complex insurance requirements to these advisors. 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.

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. Some bancassurers, concerned at the bad publicity which they have received as a result of their career agents concentrating heavily on sales at the expense of customer service, have changed their sales forces to salaried agent status.

Platform Bankers:

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 tarined 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.

In many set-ups, the bank employees are assisted by the bank's financial advisers. In both cases, the bank employee establishes the contact to the client and usually sells the simple product whilst the more affluent clients are attended by the financial advisers of the bank which are in a position to sell the more complex products. The financial advisers either sell in the branch but some banks have also established mobile sales forces.

If bank employees only act as "passive" insurance sales staff (or do not actively generate leads), then the bancassurer's potential can be severely impeded. However, if bank employees are used as "active" centres of influence to refer warm leads to salaried agents, career agents or special advisers, production volumes can be very high and profitable to bancassurers.

Set-up / Acquisition of agencies or brokerage firms:

In the US, quite a number of banks cooperate with independent agencies or brokerage firms whilst in Japan or South Korea banks have founded corporate agencies. The advantage of such arrangements is the availability of specialists needed for complex insurance matters and -in the case of brokerage firms - the opportunity for the bank clients to receive offers not only from one insurance company but from a variety of companies. In addition, these sales channels are more conceived to serve the affluent bank client.

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 bancassurer by responding to the company's advertisement, mailing or telephone offers. This channel can be used for simple packaged products which can be easily understood by the consumer without explanation.

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, 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.

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.

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 counselor 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 counselor 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.

Distribution ModelsBancassurers have developed three basic distribution models: Integrative, Specialist and Financial Planning model.

Integrative / Generalist Model:

The integrative model distributes products through existing bank channels, and in its most well-known European version, branch bankers themselves sell insurance products to customers. Theoretically, this offers One Stop Banking and requires extensive training to branch staff. Bank staff are supposed to know the details of all the insurance products on offer. Telemarketing and direct mail are also examples of integrative approaches.

Specialist Model:

The specialist model distributes investment or other complex insurance products through product experts who are generally employees or representatives of the insurance company. Platform bankers help identify prospects who are then contacted by an insurance professional. This process requires less training bur requires higher compensation to support the referral process. This model may not meet all of customers needs since it lengthens the process of sale of even a simple insurance product which can otherwise be sold across the counter.

Financial Planning Model:

The financial planning model is the only team approach. This method offers each customer and prospect a full financial planning package addressing all of the individual's financial concerns, risk tolerances and location in the cycle of life. This process is beneficial for the customer, the bank and the insurer, as the customer is viewed outside the numbers. Bancassurers convey the message that they want to know all about the customer in relation to their current and future financial needs and want to assist them on all those aspects of their life.

To move a bank in the direction of becoming an effective user of the financial planning model, the banks sales force first has to be taught how to qualify prospects and make referrals and properly approach the customer/prospect. This process will include and actively involve the bancassurers project incharge who is best acquainted with pertinent federal and state regulations for the banks geographic market area.

Insurers' bank partners must then learn how to spot existing depositors/borrowers' life triggers, i.e., milestones in a life that represent insurance opportunities. Although bank representatives have always done this in conjunction with bank products, it is new to them to apply this concept to insurance products as well. For example, a younger depositor mentions he is withdrawing part of his savings to purchase his first car. Knowledgeable bank representatives or platform bankers would immediately understand the requirement for the car insurance and may be personal accident insurance. These bank staff functioning now as financial services representatives can provide such sound practical advice, i.e., aninsuranceproduct to fit customer current and future needs.

In general, a well-trained sales person can always count on certain life triggers -birth, death, divorce, career change or other catastrophic eventto lead his or her regular bank customers to new insurance products. If the banks personnel are shown how to capitalize upon these triggers using insurance products, they will automatically provide referrals to the insurance group and insurance sales will follow.

Either of these distribution models works under the right circumstances. What's most important is whether the model is compatible with the bank's customer base and the insurance company's strategic objectives. European bancassurance experience shows that the Financial Planning Model is an extremely productive way to reach a large number of bank customers.

Key Value Drivers

Which distribution model to use is a tactical decision secondary to more basic strategic concerns. Bancassurance strategies should be driven by markets and channels, encompass a broad range of tactics and practices, and leverage the competencies of the bank and the insurer. They should identify and build upon a discrete set of value drivers, those factors of such fundamental importance that to ignore any one of them could be fatal to the success of the project. The following four value drivers should be considered in a bancassurance strategy:

Brand equity. The strategy should leverage the bank's brand equity with consumers. Consumers throughout the world rate bankers higher than insurance agents in terms of such criteria as objectivity of advice and product knowledge. A rationalized bancassurance strategy will build on the superior brand equity of banks by integrating insurance into the bank product portfolio and distribution infrastructure. For many customers, banks can become the primary providers of financial services by supplying personal risk management along with more traditional banking services. Lloyds TSB has been using its own brand name for a long time and have only recently indicated rebranding after acquiring Scottish Widow. Halifax and Abbey National continue to use their own brand names despite acquiring Clerical Medical and Scottish Mutual.

Distribution. The distribution model should accomplish the following objectives:

- It should cater to all segments of the banking population- It should work as a single shop for all financial requirements for the bank customer- It should effectively utilize the existing branch banking platform- It should take advantage of the multiple sales opportunities afforded by the bank's other distribution channels- It should strive for congruence between product characteristics and channel.

One of the key economic advantages of bancassurance is the savings achieved through efficient utilization of the bank's existing distribution channels. At some point in the development of a bancassurance operation, the marginal cost of adding one more customer becomes negligible. Bancassurers can reduce significantly the costs of agent recruitment, selection and conservation. These savings can be passed on to consumers through lower premiums, or the bank can maintain the premiums at market level in order to increase profitability. Because the lower and middle segments of the life market are not price-sensitive, the second option is often more desirable.

Technology:

Bancassurers should plan a technological infrastructure that will exploit customer information found in the bank's database to uncover sales opportunities and produce transactional simplicity for insurance customers.

The information banks have about their customers' buying habits, economic status and money management practices constitutes a valuable asset often unrecognized even by large, sophisticated banking institutions. Using technology to order information about the economic behavior of customer segments can provide valuable insights about insurance-selling opportunities. For instance, customers buying a home through a bank mortgage can be approached for a variety of insurance products. With a traditional insurer, behavioral information about policyholders is usually unavailable, but even when known, can only be employed by agents (who have an economic interest in thwarting a direct relationship between the company and the client).

Bancassurers should use technology to simplify the insurance purchase as much as possible, thereby making the purchase an easier, more pleasant experience and further differentiating themselves in the process. Buying insurance in the traditional way means dealing with agents and the complications of the underwriting process, which bancassurance can eliminate. Branch customers are usually in a hurry and don't want to wait, so banks will serve them best by simplification. With point-of-sale technology, customers should be able to buy policies in a short time and leave the bank with coverage in hand. Particularly with an intangible such as an insurance policy, the buying experience itself is a key part of the purchase. Bancassurers should make the experience as positive as possible, and technology can contribute greatly to this effort.

Culture:

An effective bancassurance strategy acknowledges the fundamental cultural conflict between the bank and the insurance company by aligning the bank's interests with those of the insurance company. Without the bank's total commitment to the insurance strategy, any bancassurance program is doomed to fail. One of the more effec-tive ways to achieve this commitment is for the bank to have an equity interest in the insurance company. With a stake in the financial results of the insurance operation, the bank has a powerful in-centive to support the insurance strategy. The alternative approach, buying "shelf space" in the bank to sell insurance products, will rarely be as effective.

In any given situation, one of the four value drivers may greatly outweigh the importance of the others. In some cases, solving the cultural problem may loom especially large, while in others building an effective technology platform may be paramount. Bancassurers will need to consider all four, however, to achieve successful balance.

Trends in Mature Markets

Bancassurance has blossomed across Europe with penetration rates ranging from 20 percent of pensions and life premiums in Germany to 73 percent in spain, according to Datamonitor. In the UK, around 10 percent of life insurance premium income is generated regularly through bancassurance channel.

The success of bancassurance in European countries to date and its projected future growth are eagerly trumpeted by investment bankers, particularly to clients considering entering the market. In their view, bancassurance is one of the primary beneficiaries of the global movement toward liberalization and subsequent integration of financial services. Clearly, the concept of one-stop shopping, orallfinanz, is more advanced in some European markets where the process of integration of financial services is further along.

European experience shows that tax-advantaged insurance products with an emphasis on savings accumulation can be successful in the banking channel under certain circumstances. Protection products, such as pure term insurance, are rarely promoted, and the big sellers are investment products with an insurance wrapper. These products tend to compete with banking or investment products rather than other insurance products.

In some countries, such as France and Spain, favorable tax treatment affords bancassurance products competitive advantages. On certain pension products sold in Europe through banks, the tax advantages are substantial, sometimes even including deductible premiums. In the United States, where bancassurance has achieved more modest success, it is openly acknowledged that the market for annuities sold through banks and insurance agents would evaporate if the government withdrew the favorable tax treatment of these products. However, annuities continue to enjoy tax advantages, and the market for these products through the bank channel is booming.

Distribution Strategies in an Emerging Market

The business model for bancassurance in Europe does not necessarily transfer to the regulatory and economic environment of a developing market. To succeed in emerging markets, bank marketers will have to develop unique strategies consistently attuned to local customer expectations and consistent with bank distribution capabilities. The biggest challenge is determining how to reach the middle and lower-middle economic classes, which comprise the largest group of bank customers in such countries.

A frequent mistake made by many bankers and insurers is their failure to develop unique strategies specifically for bancassurance. Instead, they simply extend their traditional agency distribution approach, because they view bancassurance as just another means of reaching their existing market of affluent consumers. Agents typically target the affluent because the average revenue per customer is sufficient to support the fixed and variable costs of the distribution system. The agency channel thus perpetuates itself: commissioned agents sell to affluent customers because they generate enough revenue to make it profitable to sell to other affluent customers. Because agents are the insurance company's true customers, insurers provide them with products suitable for sale to the affluent.

In developing markets, affluent populations are much smaller than their counterparts in North America or Europe. Although distribution models geared to wealthier bank customers exist, Bancassurers who pursue this segment of the market are forced to compete directly with traditional insurers. In a developing market, a strategy focused solely on affluent customers ignores the largest group of bank customers.

A successful bancassurance strategy focused on middle and lower-middle income segments of the bank marketplace requires insurers to rethink assumptions. To fully exploit the potential of the mass-market banking channel, insurers need new types of distribution, underwriting, administration, policy issue and delivery, premium collection procedures, customer service strategies and sales approaches. In bancassurance, technology must be combined with fundamental knowledge of insurance to develop processes unique to the banking environment.

Distribution Channels and Product Complexity

The design and implementation of the distribution model is as important, if not more so, than product design in bancassurance (except for the few clients who require customized product solutions for individual financial planning needs). If an insurance or investment product offers basic protection or the promise of reasonable return at a fair price, consumers will buy it if the product, the distribution system and the channel are compatible. Low penetration of insurance in emerging markets is not a failure of product design, but a failure of the distribution system.

The diagram below demonstrates that products at varying levels of complexity require different distribution channels and cost structures. As products become more customized, the complexity of the product and the cost of distribution (expressed as the cost-per-customer contact) increases. As a result, the product and distribution system must also change. Complicated estate or retirement planning cannot succeed via direct mail, and it's not economically feasible to sell only accidental death through an external agency force. In a traditional sales environment, neither the company nor the agent can earn adequate profits selling a low-premium product (such as accidental death) because costs are too high. Conversely, a direct mail company can be enormously successful selling an accident product with an average premium of only $100 because the cost per solicitation can be kept low.

To be successful, the components of a distribution model must work together; product features and benefits, distribution costs and marketing channels all should complement each other. Bancassurers can tap all the channels identified in the model: direct mail, telemarketing, platform bankers, Internet, in-house specialists, Career Agents or professional financial advisors. The most effective bancassurance strategies will be driven by customers and channels, not products, and will leverage the bank's competitive strengths.

A customer and channel driven bancassurance strategy finds and engages buyers where they are found. No attempt is made to impose a preconceived product driven strategy. Traditional life insurers are often trapped: they create a product with features attractive to agents (such as high commissions), and then let the agents find appropriate target markets. This is a type of "top-down" product development approach. However, the bank channel requires an analysis of the market that starts at the bottom, with the customers, and works up.

A "bottoms-up" approach in bancassurance works differently. A customer and channel-driven strategy capitalizes on the existing relationship of trust and familiarity between the banker and branch customer and the frequency of branch visits. In emerging markets, the lower-income customers found in bank branches are usually wage-earners or small-business owners - the same type of customers ignored by most insurance agents.

Visiting local branches frequently, these customers often develop close relationships with branch managers or tellers. (Relatively few insurance agents achieve similar levels of trust with their customers.) Even in the United States, where Internet banking and automatic teller machines (ATMs) are omnipresent, 50 percent of bank customers have monthly contact with their local bank branch. In developing markets, these contacts are more frequent and personal and often come in the form of visits to a branch to perform simple transactions such as funds deposits or withdrawals.

The type of distribution channels that a company uses affects the design and pricing of its products, as well as the way in which the products are promoted and perceived in the marketplace. Some bancassurers started out by selling simple products which could be sold in large volumes but which usually had low margins to cover expenses and profits. If we compare how products and distribution are related to the profits of an organization, we will come to the conclusion that the more complex the products sold are, the higher the required margins will need to be.

Many banks entered bancassurance with a defensive strategy in their attempt to avoid market share erosion by insurance companies. Very soon, though, they realized that they could gain market share if they expanded their product range, developed a sales culture within their organizations, created a multi-channel distribution structure and exploited the potential of the customer information that can enable the identification of customer needs.

Cultural Issues in Distribution

The managers of banks and of life insurance companies can come from quite different cultures. There may be differences in the way of thinking and business approaches of bankers and managers of insurance companies. These differences create a communication and implementation problem in bancassurance operations. Banks are traditionally demand-driven organizations with a reactive selling philosophy. Life insurance organizations are usually need-driven and have an aggressive selling philosophy.

It has been observed that this friction at the level of bank employees and life insurance salespeople arises from differing philosophies towards selling, the jealousies of bank employees regarding remuneration of life sales staff and fears of "cannibalization" of deposits, e.g. the bank employee fears that the salesperson encourages withdrawal of bank deposits, putting the bank employee's job in greater jeopardy. As a result the team spirit is negatively influenced and, since this is a crucial factor for the success of any operation, it has to be confronted.

Cultural differences between the banking and the insurance industries must be understood, respected and lived with in order for the bancassurance venture to succeed. The development of a single culture is another possible solution but this requires a very strong commitment from the top management. This commitment must be continuously conveyed to all bank employees and life insurance agents. One way of achieving this is to develop a "statement of mission" for the new organization and to get the staff to commit to fulfilling this statement. This can help to ensure that there is a common path for the bank and the life insurer.

Integration of Various Distribution Channels

It seems very difficult for a single distribution channel to successfully reach the bancassurer's goals and specific target markets. Many bancassurers are using multiple distribution channels. This way they avoid becoming locked into one channel and they can offer services to a greater number of target markets. Multiple distribution channels provide another valuable feature. They enable the enterprise to offer customers multiple options for access. Therefore, if a customer wants to see someone about a particular service on one day but wants to transfer funds at a later date, e.g. on a Sunday night, the availability of both branch office and 24-hour telephone access increase the service value to that customer.

However, conflicts may arise among the various channels and also within channels under a multi-channel system. To avoid this it is necessary to ensure the following:

- colleagues within a channel are motivated to cooperate- there is communication of the importance of every link in the distribution process- cultural differences are communicated and respected- the goals of every partner in the distribution process can be fulfilled by the process- the specific role and performance expectations of each channel member are clearly stated, understood and accepted- communication between channels is encouraged- channel leadership is strong and committed to success.

By completely integrating their distribution channels in accordance with an established model, companies can achieve substantial cost savings, improve productivity and ensure that all stakeholders, shareholders, customers and staff are satisfied.

The future of integrated distribution calls for the customer to be placed at the heart of the distribution network. The call centre and the agency no longer operate as separate channels. Rather a synergy is realised through realignment of roles and responsibilities and the creation of a new sales integrated sales process, maximising lead generation activity. Whatever the combination of distribution channels, the financial services company must seek to always improve the customer experience and deliver the service more cost effectively. http://www.einsuranceprofessional.com/artsing.html

Various Trends

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 favour 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 inIndia. Banks by and large are resorting to either referral models or Corporate agency model to begin with. Banks even offer space in their own premises to accommodate the insurance staff for selling the insurance products or giving access to their clients database for the use of the insurance companies. As number of banks in India have begun to act as corporate agents to one or the other insurance company, it is a common sight that banks canvassing and marketing the insurance products across the counters.

Challenges

Increasing sales of non-life products, to the extent those risks are retained by the banks, require sophisticated products and risk management. The sale of non-life products should be weighted against the higher cost of servicing those policies. Bank employees are traditionally low on motivation. Lack of sales culture itself is bigger roadblock than the lack of sales skills in the employees. Banks are generally used to only product packaged selling and hence selling insurance products do not seem to fit naturally in their system. 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.So because of this there is distinction created between public and private sector banks.The banks also have fear that at some point of time the insurance partner may end up cross-selling banking products to their policyholders. If the insurer is selling the products by agents as well as banks, there is a possibility of conflict if both the banks and the agent target the same customers.

SWOT Analysis (detail)

Indian scenario Global scenario Future scope of Bancassurance Other tie ups Survey Analysis

Bancassurance: A Feasible Strategy forBanks in India ?

Bancassurance in India Scope for Bancassurance in India Bancassurance What is in store for Customers ?

Othr doc. RELEVANCE OF BANCASSURANCE IN THE INDIAN FINANCIAL SECTOR REASONS FOR BANKS TO ENTER INTO BANCASSURANCE WHY IS BANCASSURANCE MORE SUITED TO LIFE INSURANCE PRODUCTS? Factors that appear to be critical for the success of bancassurance Bancassurance training for bank employees: Remuneration of bank employees:________________________________________________________2.1 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 favorable 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 1970s (Sakr (2001)).

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), Datamonitor (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 overseas 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 (Datamonitor (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 favor, 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 favorable 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)). Currently, only around 7% of Americans purchase their insurance products through bank branches (Thomson (summer 2002b)). However, with the ever-continuing regulatory changes such as the demutualization of insurance companies coupled with an ageing population, it is widely believed that there will be strong growth potentials for bancassurers in a mature market such as the U.S.

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 changesMost 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

2.2 Quantitative works of major Researchers related to bancassuranceCompared 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 sale, 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.

Why should banks enter ininsurance?Bancassurance could be major revenue stream for local banks

towerswatson.comAn insightful study of bancassuranceperformance and practices that describes,analyses and forecasts trends in IndiaIndia Bancassurance Benchmarking survey2009-10The growth of bancassurance in India

REASONS FOR BANKS TO ENTER INTO BANCASSURANCE

The main reasons why banks have decided to enter the insurance industry area are the following:

Intense competition between banks, against a background of shrinking interest margins, has led to an increase in the administrative and marketing costs and limited the profit margins of the traditional banking products. New products could substantially enhance the profitability andincrease productivity. Financial benefits to a bank performance can flow in a number of ways, as briefly outlined below: Increased income generated, in the form of commissions and/or profits from the business (depending upon the relationship) Reduction of the effect of the bank fixed costs, as they are now also spread over the life insurance relationship. Opportunity to increase the productivity of staff, as they now have the chance to offer a wider range of services to clients Customer preferences regarding investments are changing. For medium-term and long-term investments there is a trend away from deposits and toward insurance products and mutual funds where the return is usually higher than the return on traditional deposit accounts.This shift in investment preferences has led to a reduction in the share of personal savings held as deposits, traditionally the core element of profitability for a bank which manages clients money. Banks have sought to offset some of the losses by entering life insurance business.Life insurance is also frequently supported by favourable tax treatment to encourage private provision for protection or retirement planning. This preferential treatment makes insurance products more attractive to customers and banks see an opportunity for profitable sales of such products. Analysis of available information on the customer financial and social situation can be of great help in discovering customer needs and promoting or manufacturing new products or services.Banks believe that the quality of their client information gives them an advantage in distributing products profitably, compared with other distributors (e.g. insurance companies). The realization that joint bank and insurance products can be better for the customer as they provide more complete solutions than traditional standalone banking or insurance products. Banks are experiencing the increased mobility of their customers, who to a great extent tend to have accounts with more than one bank. Therefore there is a strong need for customer loyalty to an organization to be enhanced. Client relationship management has become a key strategy. To build and maintain client relationships,banks and insurers are forming partnerships to provide their clients with a wide range of bank and insurance products from one source. It is believed that as the number of products that a customer purchases from an organization increases the chance of losing that specific customer to a competitor decreases.

Broader bancassurance favors all playersBy Ted P. Torres(The Philippine Star) Updated March 23, 2010 12:00 AMComments (0)

MANILA, Philippines -Expanding the scope of bancassurance to include the countrys thrift banking system means creating a win-win situation, according to industry players.It is good for the thrift bank sector as it offers another income-generating business activity, while it offers the life insurance industry a dedicated and professional distribution network.Opening the practice of bancassurance to thrift banks means more chances that the population can get a life insurance policy. And the increase in business activity means more revenues for the national government.Based on the definition of the Bangko Sentral ng Pilipinas (BSP), cross-selling or bancassurance allows a subsidiary of a commercial bank to market or cross-sell its products within the banks branch network as well as tap its clientele base.But the BSP requires that the commercial bank must own at least five-percent equity in the life insurance company before they are allowed to practice bancassurance. In more advanced countries like Singapore, life insurance companies is allowed to sell its products in any bank after entering into a business arrangement, and exclusivity is not an issue.Recently, the thrift banks expressed their desire to practice bancassurance, and not just market low-cost, simple and limited coverage micro-insurance products.Life insurance policies allowed under bancassurance include whole life insurance, endowment, term insurance (including mortgage redemption insurance), health and accident policies, life annuities and variable life insurance contracts.There are 73 thrift banks operating 1,333 branches nationwide while there are 32 life insurance companies. But some of the insurers have existing relationships with several commercial banks. There are 38 licensed universal (expanded commercial) and commercial banks operating in the country.The Philippine American Life and General Insurance Co. (Philamlife) works exclusively with the Bank of the Philippine Islands (BPI), Insular Life Assurance Co. (Insular Life) with the Union Bank of the Philippines (UBP), AXA Life Assurance Philippines (AXA Philippines) with the Metropolitan Bank & Trust Co. (Metrobank), the Manufacturers Life Insurance Co. (Manulife) with the China Banking Corp. (China Bank), the United Coconut Planters Life (Cocolife) with the United Coconut Planters Bank (UCPB), Great Pacific Life (Grepalife) with the Rizal Commercial and Banking Corp (RCBC), Generali Pilipinas Life Assurance (Generali Pilipinas) with Banco de Oro Unibank Inc. (BDO), and Beneficial PNB Life Insurance with the Philippine National Bank (PNB).Some of these commercial banks have thrift banks as affiliates or subsidiaries, such as the Metropolitan Bank & Trust Co. (Metrobank) and the Philippine Savings Bank (PSBank). Thus, it is likely that if the BSP allows thrift banks to practice bancassurance, PSBank would most likely ally with AXA Philippines, or BPI and BPI Family Savings Bank with Philamlife.Expanding bancassurance to include thrift banks will bring life insurance to a wider segment of the population as thrift banks are consumer or retail-oriented by nature, focused on the Class B and C segments of the population. Insurance penetration in the Philippines is one of the lowest in the region.Commercial banks tend to belittle the average individual bank client, favoring the high-networth individual as well as corporate accounts, although they would gladly take the deposits of the individual bank client anytime.Bancassurance offers thrift banks with another bank product to offer its clients, another source of fee-based income. Commercial banks obviously find some profit in the practice, and their bottomline can attest to it.Chamber of Thrift Banks (CTB) executive director Suzanne Felix said that they want the same privilege as commercial banks.And thrift banks are fully aware that additional opportunities, and risks, does not come without the additional responsibilities, Felix said, adding that it is similar to the privilege of opening letters of credit (L/C), derivatives and FCDU foreign currency, which come with the equivalent capital, skills and reportorial requirements.For insurers, an alliance would mean two things. One is that having a thrift bank acquiring five-percent equity means additional capital for the insurer. And two, it will be an established and dedicated distribution channel for the insurer.Philippine Prudential Life Insurance Co. (Philippine Prudential Life) president and chief executive officer Gregorio D. Mercado said that bancassurance means an additional source of capital and a new distribution channel.What we can give is another bank product and the expertise of personal client care, Mercado said.For insurers that may be too expensive for one thrift bank, it could consider a pool of thrift banks acquiring the minimum five-percent equity requirement.Grepalife Financial Inc. (formerly the Great Pacific Life Assurance Corp. or Grepalife) president and chief executive officer Victor Quisumbing applauded the BSP decision to seriously look into expanding the scope of bancassurance.Quisumbing said that it would allow smaller insurance firms an opportunity to participate in bancassurance. But regulators must put a minimum capital requirement to minimize risk for banks, insurers and maximum protection for the public.Whats critical is the collaboration of the bank and the insurer to make bancassurance work, he added."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.

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.

RBI Guidelines:

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 subsidiariesshould 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.

IRDA Norms:

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 th