Bancassurance in its simplest form is “the distribution of insurance products through a bank’s distribution channels”. In concrete terms Bancassurance, which is also known as Allfinanz – describes a package of financial services that can fulfill both banking and insurance needs at the same time. It takes various forms in various countries depending upon the demography and economic and legislative climate of that country. Demographic profile of the country decides the kind of products Bancassurance shall be dealing in with, economic situation will determine the trend in terms of turnover, market share, etc. , whereas legislative climate will decide the periphery within which the Bancassurance has to operate.

The motives behind Bancassurance also vary. For banks it is a means of product diversification and a source of additional fee income. Insurance companies see Bancassurance as a tool for increasing their market penetration and premium turnover. The customer sees Bancassurance as a bonanza in terms of reduced price, high quality product and delivery at doorsteps. Actually, everybody is a winner here.

Why should banks enter in insurance?

There are several reasons why banks should seriously consider Bancassurance, the most important of which is increased return on assets (ROA). One of the best ways to increase ROA, assuming a constant asset base, is through fee income. Banks that build fee income can cover more of their operating expenses, and one way to build fee income is through the sale of insurance products. Banks those effectively cross-sell financial products can leverage their distribution and processing capabilities for profitable operating expense ratios.

By leveraging their strengths and finding ways to overcome their weaknesses, banks could change the face of insurance distribution. Sale of personal line insurance products through banks meets an important set of consumer needs. Most large retail banks engender a great deal of trust in broad segments of consumers, which they can leverage in selling them personal line insurance products. In addition, a bank’s branch network allows the face to face contact that is so important in the sale of personal insurance.

Another advantage banks have over traditional insurance distributors is the lower cost per sales lead made possible by their sizable, loyal customer base. Banks also enjoy significant brand awareness within their geographic regions, again providing for a lower per-lead cost * when advertising through print, radio and/or television. Banks that make the most of these advantages are able to penetrate their customer base and markets for above-average market share.

The other, the Bank has strengths in its marketing and processing facilities. Banks have extensive experience in marketing both existing customers (cross-selling and retention) and non-customers (acquisition and awareness). They have access to multiple communication channels, such as the statement adds, direct mail, ATMs, telemarketing, etc. Banks technological knowledge led to improvements in transaction processing and customer service.

By successfully mining their customer databases, leveraging their reputation and ‘distribution systems’ (branch, phone, and mail) to make appointments, and utilizing ‘sales techniques’ and products tailored to the middle market, European banks have more than doubled the conversion rates of insurance leads into sales and have increased sales productivity to a ratio which is more than enough to make Bancassurance a highly profitable proposition.

*A cost which is used in creating the awareness of the product and helps in gaining the prospective customers.

Benefits to insurers

Insurers have much to gain from marketing through banks. Personal-lines carriers have found it difficult to grow using traditional agency systems because price competition has driven down margins and increased the compensation demands of successful agents. Over the last decade, life agents have sold fewer and larger policies to a more upscale client base. Middle-income consumers, who comprise the bulk of bank customers, get little attention from most life agents. By capitalizing on bank relationships, insurers will recapture much of this under served market.

Most insurers that have tried to penetrate middle-income markets through alternative channels such as direct mail have not done well. Clearly, a change in approach is necessary. As with any initiative, success requires a clear understanding of what must be done, how it will be done and by whom. The place to begin is to segment the strengths that the bank and insurer bring to the business opportunity.

Collaboration is the key

Bank + Insurer = Benefit to the Customer

In their natural and traditional roles and with their current skills, neither banks nor insurance companies could effectively mount a Bancassurance start-up alone. Collaboration is the key to making this new channel work.

Banks bring a variety of capabilities to the table. Most obviously, they own proprietary databases that can be tapped for middle-market warm leads. In addition, they can leverage their name recognition and reputation at both local and regional levels. Strong players also excel at managing multiple distribution channels, cross-selling banking products, and using direct mail. However, most banks lack experience in several areas critical to successful Bancassurance strategies: in particular, developing insurance products, selling through face-to-face “push” channels underwriting, and managing long-tail insurance products.

Where banks usually fall short, a strong insurer will excel. Most have substantial product and underwriting experience, strong “push” – channel capabilities, and investment management expertise. On the other hand, they tend to lack experience or ability in the areas where banks prevail. They have little or no background in managing low-cost distribution channels; they often lack local and regional name recognition and reputation; and they seldom possess access to or experience with the middle market.

The Bank’s contribution

Contribution of Insurer

* Bank name recognition and reputation

*Managing multiple distribution

*Cross selling banking products

*Using direct mail

*Developing insurance products

*Selling through face-to-face “push” channel underwritings.

* Leadership Long tail insurance.

Bancassurance in India – A SWOT Analysis

Even though, banks and insurance companies in India are yet to exchange their wedding rings, Bancassurance as a means of distribution of insurance products is already in force in some form or the other. Banks are selling Personal Accident and Baggage Insurance directly to their credit card members as a value addition to their products. Banks also participate in the distribution of mortgage linked insurance products like fire, motor or cattle insurance to their customers. Banks can straightaway leverage their existing capabilities in terms of database and face-to-face contact to market insurance products to generate some income for themselves which hitherto was not thought of.

Once Bancassurance is embraced in India with full force, a lot will be at stake. Huge capital investment will be required to create infrastructure particularly in IT and telecommunications, call centers will have to be created, top professionals of both industries will have to be hired, an R & D cell will need to be created to generate new ideas and products. It is therefore essential to have a SWOT analysis done in the context of Bancassurance experiment in India.

Strengthen

In a country of 1 Billion people, sky is the limit for personal lines insurance products. There is a vast untapped potential waiting to be mined particularly for life insurance products. There are more than 900 Million lives waiting to be given a life cover (total number of individual life policies sold in 1998-99 was just 91. 73 Million). There are about 200 Million households waiting to be approached for a householder’s insurance policy. Millions of people travelling in and out of India can be tapped for Overseas Mediclaim and Travel Insurance policies. After discounting the population below poverty line the middle market segment is the second largest in the world after China. The insurance companies worldwide are eyeing on this, why not we preempt this move by doing it ourselves?

Our other strength lies in a huge pool of skilled professionals whether it is banks or insurance companies who may be easily relocated for any Bancassurance venture. LIC and GIC both have a good range of personal line products already lined up, therefore R & D efforts to create new products will be minimal in the beginning. Additionally, GIC with 4200 operating offices and LIC with 2048 branch offices are almost already omnipresent, which is so essential for the development of any Bancassurance project.

Weaknesses

The IT culture is unfortunately missing completely in all of the future collaborators i. e. banks, GIC & LIC. A late awakening seems to have dawned upon but it is a case of too late and too little. Elementary IT requirement like networking (LAN) is not in place even in the headquarters of these institutions, when the need today is of Wide Area Network (WAN) and Vast Area Network (VAN). Internet connection is not available even to the managers of operating offices.

The middle class population that we are eyeing at are today overburdened, first by inflationary pressures on their pockets and then by the tax net. Where is the money left to think of insurance ? Fortunately, LIC schemes get IT exemptions but personal line products from GIC (mediclaim already has this benefit) like householder, travel, etc. also need to be given tax exemption to further the cause of insurance and to increase domestic revenue for the country.

Another drawback is the inflexibility of the products i. e. it can not be tailor made to the requirements of the customer. For a Bancassurance venture to succeed it is extremely essential to have in-built flexibility so as to make the product attractive to the customer.

Opportunities

Banks have a huge database, but not the same as for the goodwill of partners. This database must be dissected more homogeneous groups of different OS that they can be churned out the location of the bank’s insurance products and a good IT infrastructure, it can really wonders.

Other developing economies like Malaysia, Thailand and Singapore have already taken a leap in this direction and they are not doing badly. There is already an atmosphere created in the country for liberalisation and there appears to be a political consensus also on the subject. Therefore, RBI* or IRDA**should have no hesitation in allowing the marriage of the two to take place. This can take the form of merger or acquisition or setting up a joint venture or creating a subsidiary by either party or just the working collaboration between banks and insurance companies.

*Reserve Bank of India

**Insurance Regulatory and Development Act

Threats

Success of a Bancassurance venture requires change in approach, thinking and work culture on the part of everybody involved. Our work force at every level are so well entrenched in their classical way of working that there is a definite threat of resistance to any change that Bancassurance may set in. Any relocation to a new company or subsidiary or change from one work to a different kind of work will be resented with vehemence.

Another possible threat may come from non-response from the target customers. This happened in USA in 1980s after the enactment of Garn – St Germaine Act. A rush of joint ventures took place between banks and insurance companies and all these failed due to the non-response from the target customers. US banks have now again (since late 1990s) turned their attention to insurance mainly life insurance.

Investors’ capital may be from his face, and return on capital employed to ensure the existing return on equity. As banks and insurance companies a lot of their income from investments, then bank the insurance proceeds, which returns at least equal. Unholy alliances, even if there may be a highly competitive market, lower prices and the bank’s insurance venture may never make up.

Looking Around

Hardly 20% of all US banks were selling insurance in 1998 against almost 70% to 90% in many W. European countries. Market penetration of Bancassurance in new life businesses in Europe ranges between 30% in U. K. to nearly 70% in France. Almost 100% banks in France are selling insurance products. In 1991 Nationale Nederlanden of Netherlands merged with Post Bank, the banking subsidiary of the post office to create the ING Group – a new dimension to the Bancassurance i. e. harnessing the databank of the post office as well. CNP, the largest independent insurance company in France has developed its product distribution through post offices. The merger of Winterthur, the largest Swiss insurance company with Credit Suisse and Citibank with Travellers Group have resulted in some of the largest financial conglomerates in the world.

Despite the phenomenal success of Bancassurance in Europe, property and casualty products have not made much inroads. In Spain, Belgium, Germany and France where more than 50% of all new life premium is generated by Bancassurance, only about 6% P & C business comes from banks in Spain, 5% in Belgium, 4% in France and Italy.

A recent study by Boston Consulting Group (BCG) and Bank Administration Institute in USA claims that if banks made a major commitment to insurance and a more narrowly targeted commitment to investors, within 5 years they could increase retail revenues by nearly 50%. It further states that

CONCLUSION:

In light of the issues discussed, there remains no doubt about the fact that the concept of Bancassurance has got a lot of potential and in case the customer gives a proper response it would be win-win situation for all the concerned parties i. e. -bank, customer, and insurer.


Article Source:China Sourcing Blog

Popularity: unranked [?]