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EXPERIENCE
A THESIS SUBMITTED TO MADURAI KAMARAJ UNIVERSITY IN PARTIAL FULFILMENT
OF THE REQUIREMENTS FOR THE DEGREE OF
Submitted by
C.CHELLADURAI
Regd. No: 3430
October 2010
Dr. N. ASHOK KUMAR
HEAD & ASSOCIATE PROFESSOR
DEPARTMENT OF COMMERCE
V. H. N. S. N College
Virudhunagar 626 001
CERTIFICATE
partial fulfillment of the requirement for the award of the Degree of Doctor
of Philosophy and that the thesis has not formed the basis for the award
similar titles.
VIRUDHUNAGAR.
C.CHELLADURAI, M.Com.,M.Phil.
HEAD i\c DEPARTMENT OF E-Commerce
V.H.N.S.N. College
Virudhunagar 626 001
DECLARATION
(C.CHELLADURAI)
Countersigned
ACKNOWLEDGEMENTS i
LIST OF TABLES ii
LIST OF FIGURES vi
II BANCASSURANCE A REVIEW 37
BIBLIOGRAPHY 284
APPENDIX
i
ACKNOWLEDGEMENTS
sincere efforts during the course of my research work, which helped me immensely to
make this dream into a reality. He evinced keen interest in rightly guiding me all the
research work. His encouragement and timely suggestions have helped me a lot to
in the analysis.
ii
My thanks are due to Mr. K. VEERAMANI, and Mr. N.KANAGAVEL for
Private Banks and Private Insurance Companies in providing me with the primary
data and the secondary data required for the present study.
I bow my head before God Almighty for showering his blessings on me and
C.CHELLADURAI
iii
LIST OF TABLES
Table Page
Title
No. No.
3.1 NUMBER OF REGISTERED INSURERS IN INDIA 95
iv
5.1 OCCUPATION WISE CLASSIFICATION OF RESPONDENTS 184
v
5.22 BANKERS GIVE EXPERT ADVICE 210
vi
LIST OF FIGURES
vii
CHAPTER I
THE STUDY
1.1 Introduction
For a long time, the insurance industry has been locked in an ice age as
the basic structure of the industry has remained more or less fixed. The
and customer management processes are not proving to be adequate for the
The touch point with the ultimate customer is the distributor and the
who makes the difference in terms of the quality of advice for choice of
with their distinct cultural and social ethos, these conditions will play a
than others and consequently survival of the fittest has come into effect.
1
Insurance companies are also to be competitive by cutting cost and serving
in a better way to the customers. Now the time has come to choose and
companies can get the maximum benefit and serve the customers in
products will be the smart strategy which continues to play an important role
bancassurance will also play a greater role in distribution. The time has
come for the industry to gradually move from traditional individual agents
The Indian insurance sector has undergone a sea change in the last ten
years, ever since the sector was opened up for private players. Traditionally,
insurance products are sold only through agents and they account for a
major chunk of the business in retail segment. With the opening up of this
sector to private players, competition has become more intense and the
public sector major LIC has been challenged with a flood of new products
2
agents for business, new insurance companies have started to experiment
middle, upper middle and elite classes in the major cities. Contrasted with
Public sector insurance companies, with their offices across the country, the
new companies have miles to go before they reach anywhere. They must
overcome the mindset of the customer that life insurance is Life Insurance
have become trusted financial advisors for the clients and trusted business
associates for the insurance companies, so this calls for leveraging multiple
3
Bancassurance is one such distribution channel that offers huge
have kept various financial services separate from each other have vanished.
among them.
thereby allowing banks to sell the insurance products to its customers. This
income is purely risk free for the bank since the bank simply plays the role
4
has grown at different places and taken shapes and forms in different
2000. The present day banks have become for more diversified than ever
into insurance business is only a natural corollary and is fully justified too as
market their products and services. Banking sector with it's far and wide
5
1.2 Statement of the Problem
penetration and a lower insurance density. The penetration level of the life
insurance in Indian market is abysmally low at 2.3 percent of the GDP with
system, which only very few countries in the world could match with. The
experts in the field that almost 90 percent of the share of insurance premium
will come from bancassurance business in future. Almost half of the Indian
big revolution in the banking industry. The business of banking has become
6
retain the customers by providing more value added services under one roof
bancassurance provides the best possible solution to this, most of the banks
now a days have started selling insurance products to its customers. Hence,
there is a need for a study to know whether the banks have been benefited
India is undertaken.
The study under report has been undertaken with the following objectives:
7
1.4 Hypotheses
which have been formulated for the proposed study. They are as follows:
Hypothesis 1
portfolios.
Hypothesis 2
Hypothesis 3
be less likely to get away from core business. On the other hand, a more
profitable bank might be willing to gamble some of its profits to a new line
of business.
Hypothesis 4
For insurance companies, the larger the network of bank branches (for
8
Hypothesis 5
banks in India. The present study analyses the awareness of the customers
bancassurance. The study also measures the initiatives taken by the banks in
endorsing the insurance products of their partners. The study throws light
insurers, and customers. This study mainly covers the perception of their
business. The proposed study however is tilted more on bankers than on the
the banks with their customers as it is the deciding factor for considering the
bank as a one stop shop for all their financial requirement. The study also
9
projects the future direction and growth of bancassurance in India and also
suggests further changes needed to vitalize the bancassurance and sustain its
growth.
understand its concept and characteristics and also to identify the areas
depth.
This was largely due to the lack of information that resulted from the poor
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
firm. One of the earliest studies in this was performed by Boyd and Graham
10
(1986). They conducted an analysis of the risk-of-failure and looked at two
periods around a new Federal Reserve policy (1974s go-slow policy). They
significantly and positively correlated with the risk of failure over the period
showed no such significance. Thus, the study indicated that the new policy
banking activities.
Boyd and Graham conducted another study in the year 1988. The
exercise was done in order to determine whether the risk of bankruptcy will
non-banking industry. The main finding of the study was that the risk of
bankruptcy would only decline when the banking companies were allowed
year 1993. On the basis of the simulation study, they came to the
1
Zhang, H. 1995, Wealth effects of US bank takeovers, Applied Financial Economics VOL.5, PP. 329 -
336.
11
conclusion that mergers of banking companies with insurance companies
might reduce the risk, whereas the mergers of banking companies with
securities or real estate firms will not reduce the risk of the banks2.
In the year 1994, Saunders and Walter conducted yet another study
by using the similar simulation method with more current data. They also
got the same result that the banks entry into the insurance business is more
Lown, Oster, Strahan and Sufi made yet another study in the year
companies4. The major findings of the study indicate that the merger of
his study used market data and a measure of the likelihood of failure that is
2
Pilloff, S.J. 1996, Performance changes and shareholder wealth creation associated with mergers of
publicly traded banking institutions, Journal of Money Credit and Banking VOL.28, PP. 294-310.
3
Saunders and Walter, 1995, Insurance Industry- Ensure Future Secure Journal of Amity Edumedia,
P.12.
4
Moshirian, F. 2004, Financial Services: Global Perspectives, Journal of Banking and Finance, VOL.28,
PP. 269-276.
12
derived through the application of option raising theory to the valuation of
the firm5. His major finding also indicated that both the parties of the
mergers, namely, the banking companies and the insurance companies are
All the major series of studies on bank expansion into non- banking
Ottone and Murgia in their research work carried out in the year 2000
analyzed the stock market valuations of mergers and acquisitions that took
Europe.
5
Amihud, Y., G. DeLong and A.Saunders, 2002, The effects of cross-border mergers on bank risk and
value, Journal of International Money and Finance, VOL.21, PP. 857- 877.
6
DeLong, G.L. 2001, Stockholder gains from focusing versus diversifying bank, mergers, Journal of
Financial Economics. VOL.59, PP. 221-252.
13
Citicorp Travelers Group merger, and discovered that investors expect large
four separate court rulings and discovered that on an average only larger and
riskier banking companies gain the most with the fee based income
conducted in the year 2005 found that the mergers are positive wealth
that scale and scope of economics were the major contributing factors in
these results.
7
Moshirian, F., D. Li, and A. Sim, 2003, The Determinants of Intra-Industry-trade in Insurance
Services, Journal of Risk and Insurance, VOL.70,PP. 269-287.
8
Moshirian, F. 2004, Financial Services: Global Perspectives, Journal of Banking and Finance, VOL.28,
PP. 269-276.
9
Raj Singh D. 2006 Bancassurance: Taking the Lead, Financial Express January 1,
VOL 9, PP. 26-27.
14
According to Amal Barnes, Panetta and Salleo (2004), the
in order to reap the economy subscale, and that there is no clear evidence
efficiencies10.
the past studies have found the risk reduction and wealth creating benefits
which are associated with the expansion of banks into the insurance
industry.
Legrand brings out the bancassurance business models operating across the
world12. The author analyses the strengths and the weakness of each of the
10
Falautano, Isabella and Emanuele Marsiglia, 2006, Integrated Distribution of Insurance and Financial
Services and Value Creation: Challenges ahead, The Geneva papers on Risk and Insurance, Vol. 28, No.
3, PP. 481-494.
11
Romain Durand, 2005, Bancassurance across the Global: Meets with very mixed response, SCOR
technical Newsletters, VOL.12, No. 10, PP. 35-42.
12
Lewis, M. 1990, Banking as insurance, in E. P. M. Gardener, ed., Chapter 13: The Future of Financial
Systems and Services (St. Martins), PP. 123-130.
15
In his book Europe and Bancassurance-A work in Progress
(published in the year 2003) Richard Reed explains the difference between
a distribution channel for life insurance products13. The author identifies the
broad factors that act as business drivers from country and discuss the
Tomorrows leading retail bank by price water house coopers (PWC) and
bank / insurance providers and new entrants. The authors focus on the
published in the year 2004. The work is a regulatory tour of rules in Asia.
13
Hannan, T. H., and S. A. Rhoades, 2004, Acquisition targets and motives: The case of the banking
industry, The Review of Economics and Statistics, PP.67-74.
14
Wepler John M., R. Linn Thomas and T.Patrick Linnet, 2004, Banks in Insurance: A Five-Year
Retrospective since the Passage of GLB, Bank Director Magazine, 3rd Quarter, PP. 78-82.
16
phenomenon15. It is an ongoing process, which is hooked to the emergence
and growth of the sector and the lessons learnt in the interim period. A brief
According to the author, the legal climate in the Middle East is very
important to study the market and evolve a suitable product profile for the
region. He further states that in view of the very low penetration levels of
insurance in the Middle East, the prospects for bancassurance are quite
bright.
15
Amihud, Y., G. DeLong, and A. Saunders, 2005, The effects of cross-border mergers on bank risk and
value, Journal of International Money and Finance, VOL.21, PP.857- 877.
16
Manoj kumar,K. 2006, Development, Growth and Current Scenario of Bancassurance in the Middle
East Region, The ICFAI University Press, PP. 72 -79.
17
In his article entitled, Bancassurance Concept, Framework and
the concerned players and the rational behind the concept. He takes a brief
look at the global experiences and the lessons for India. He analyses the
various entry routes for the prospective players and also describes the
He further discusses the possible bottlenecks and key success factors for
bancassurance in India.
17
Vineet Aggarwal,J. 2006, Bancassurance Concept, Framework and Implementation, The ICFAI
University Press , PP. 106 -141.
18
Gneral & Cologne Re.F, 2004, Bancassurance Concepts, The Journal Of Insurance Institute of India,
Vol. No.XXX, July-December, P.46.
19
Rumeer Shah,A. 2003, What makes Bancassurance Happen, IRDA Juornal, Vol. I, No. 9, PP. 20-23.
20
Tapen Sinha Bancassurance in India: Who is Tying the knot and Why, Insurance Chronicle, July 2005,
Vol.XI, No. 6, pp. 144-149.
18
important component of the insurance companys sales portfolio, especially
for the new insurance companies21. The author then focuses on the various
distribution models and takes up the three main models for analysis namely
and also the advantages of bancassurance22. The author presents the forms
21
Ravi Kumar, V.V. The Emerging Structure of Bancassurance in India ,The ICFAI University Press
Dec ,2006, pp. 170 -175.
22
Prof Chari, V.G. 2006, Bancassurance A Business Sourcing Model to Indian Banks ,The ICFAI
University Press, PP. 152 -159.
19
discusses the benefits of risk transfer and also the economic and social
channels and the cultural issues involved in distribution and presents the
due to their aggressive sales orientation, have been able to do a much better
23
Rachana Parihar,D. 2006, Bancassurance: Challenges and Opportunities in India,The ICFAI University
Press, PP. 176 -184.
24
Kailash Mishra,V. 2006, Training A Critical Component for Bancassurance in India ,The ICFAI
University Press, PP. 157 -169.
25
Ravi Kumar, V.V. 2006, Human Resource and Operational Challenges in Bancassurance : An Indian
Perspective ,The ICFAI University Press, PP. 175 -182.
20
job in this field. Training, compensation, shaping behavior to cross-sell
process of training and licensing. Insurance products are seldom bought and
oriented towards the counter based selling, need to change their mindset.
Pre-sales and post sales service, proper harnessing of the Banks customer
database and leveraging technology to provide better service levels are the
26
Abhishek,T. and M. Jaichandar, 2006, The Issuea related to bancassurance in India, Asia Insurance
Review, PP. 35-37.
21
practices27. Besides covering corporate strategic thinking on the
products are essential for the success of bancassurance in India. The author
27
W y a t t , W. 2006, A Comparative Study of Bancassurance Performance and Practices in India,
Watson Wyatt Limited, PP. 1-4.
28
Ashish Srivastava, D. 2003, The issues and opportunities of bancassurance in India, ICFAi Press,
PP.24-28.
22
the bank staff require extensive training to know the details of the insurance
products on offer.
him, the empirical evidence that are available strongly suggest that the
29
Srinivas Subbarao, P. 2006,Bancassurance in India Challenges and Strategies, Finance Today, PP.
32-33.
30
Manoranjan,S. 2004, Bancassurance in India Building Pathways to Growth, Insurance Professional,
PP. 4-6.
23
conditions31. The study also takes into account the RBI regulations and
understand how integrated the banking and insurance activities are under
products, the relationship between the bank and insurance companies and
survey in the year 200833. The purpose of the survey was to focus and
understand how banks and insurers develop strategies for selling life and
India and the practical issues they face in implementing the sales process.
31
ABHEEK, B. 2005, Bancassurance - New concept catching up fast in India, Center for the Advanced
Study of India, CASI Working Paper, PP. 71-76.
32
Corinne Legrand, M. 2000, New Trends in World Bancassurance, Journal of Financial and Strategic
Decisions, VOL12, PP.25-32.
33
Graham Morris,T. 2008, Bancassurance in India- A Survey , Journal of Money, Credit and Banking,
PP. 17-21.
24
A total of 25 banks covering PSU, Private, and Foreign banks had
participated in the Survey, along with almost all private life and general
premium income every year from the bancassurance channel, despite the
fact that they consider lack of sales culture on the part of banks branch staff
bancassurance vision on the part of the bank partner is the most visible
reason for the slow progress in cross selling of insurance, despite the bank
The quality of bank customer data is frequently poor and the absence
country, which control more than 90 percent of the total customers, are seem
available information.
unless the perceived lack of sales culture and vision begin to get addressed
25
mutual goal of increasing bancassurance as the leading channel in insurance
office.
The survey conducted by him highlights both bankers and insurers are
About 30 percent of the life insurers have indicated that by the year
penetration and simpler training requirements for the bank staff to qualify as
insurance salespersons.
26
1.7 Research Design and Methodology
every stage of action in the course of research. The research design adopted
Exploratory research aims to gain familiarity and new insights into any
with the research studies with a focus on the portrayal of the characteristics
present.
27
the countries umbrella association of bancassurance. Some data required for
the study especially with regard to the banking sector in India were collected
research files, and pamphlets of Reserve Bank of India. The various reports,
insurers in India were also used in the study. The information was also
insurance and banking companies in India. The secondary data were also
collected from the standard text books of related topics, leading journals and
tests have been carried out to quantify the results. This has made the study
The present study is an essential one based on the survey method. The
first hand data were collected from 300 people who did regular banking
transactions and also had insurance policies. The data were collected
and their perception about the bancassurance were gathered through the
28
interview schedule. A number of discussions were held with knowledge
among a few research scholars and field experts for a critical review with
regards to wordings, format, sequence and the like. It was redrafted in the
interview.
1.9.2 Pretest
The draft schedule for the pretest study deals with the perception of
the customers of bancassurance in Tamil Nadu. The draft schedule for the
present study encompassed three sections. The first section containing the
29
the bancassurance and the third, the suggestion of the customers for the
specimen of the interview schedule used for the present study is shown in
The field work for the present study was carried out personally by the
elicited and recorded at the end of the schedule. Completed schedules were
The period covered by the study extends over SIX years from 2003-
04 to 2008-09.
30
1.11 Sampling Technique
Sampling may be defined as a selection of some part of an aggregate
or totality is made.
using some convenient method without going through the rigor of sampling
method. The researcher may make use of any convenient base to select the
convenience sampling.
data was done. For further processing, the data were completely
31
computerized. In the study, to analyse and interpret the collected data,
tables, Percentage analysis, Trend and Growth Analysis have been primarily
used. The statistical tools are an integral part of any research analysis. The
been used to analyse the compiled data. The Percentage Analysis has been
them are inherent in the research design, while some others become part of
the study during various stage of operations. The present study is subject to
32
2. The data gathering instrument is another source of error. The interview
schedule used for this study despite pre-testing does remain a source of
error.
3. The banks and their insurance partners categorically refused to provide
any financial data particularly relating to the business of bancassurance.
Hence, the researcher could gather the details regarding the insurance
business from the Insurance Regulatory Development Authority (IRDA)
only. The details regarding the volume of business in bancassurance is
confined only to Life Insurance. The researcher could gather some
information regarding the business from business journals and
newspapers published on different dates.
4. As the research contains the secondary data for making an analysis, the
accuracy and reliability of the analysis depends on reliability of data
collected from various sources.
5. Time has played the biggest constraints that the research could not be
carried comprehensively as the duration of the study was a major
limitation.
6. The researcher could not obtain the data regarding the fee based income
on account of bancassurance business for the banks.
7. The study is mainly carried out from the customers view point, because
of time constraints the perception of the bank employees and the
insurance employees could not be studied and hence, they are excluded
from the study.
8. It has been the experience of the researcher that the data collection from
the real customers of bancassurance is very time consuming.
9. The clients are normally co-operative but in many cases they are not in a
position to spare for interview owing to their heavy schedule of
33
engagements. Because of this, it was necessary to make atleast 2 to 3
trips to an individual to collect the required data. Besides, their
responses to the questions were subject to several distractions of an
unavoidable nature. Sometimes, the interview has to be terminated at a
critical stage to be followed up later in the day or the next.
10. The sample size for collecting the primary data was meager as it
includes only 300 respondents. It was infact, a hard task for the
researcher to identify these 300 respondents, because neither the banks
nor the insurance companies could give the complete details of their
customers. Probably they could not provide such data on account of the
confidential nature of the business.
11. Personal biases and prejudices of the customers may also affect the
study.
EXPERIENCE has been organized into SIX chapters. The present chapter
identifies and states the problem of the study with a review of related
literature. It also deals with the research design including the objectives of
the study, scope of the study, collection of data, survey design, data
processing, period of study, problems and limitations of the study and the
34
CHAPTER II titled BANCASSURACE _ A REVIEW presents an
bancassurance. The chapter also covers the various distribution models and
The chapter also highlights the synergy between the commercial banks in
India and their insurance partners for the promotion of bancassurance. The
the country for the successful marketing of this innovative financial product.
in India.
35
CHAPTER V under the heading PERCEPTION OF THE
bancassurance in India.
the questions raised in the statement of the present research problems and by
business model.
36
CHAPTER II
BANCASSURANCE A REVIEW
2.1 Introduction
making delivery of customized products possible, that too all from one
and services by leveraging the vast customer base of a bank and fulfilling
the banking and Insurance needs of the customers at the same time.
1
Murty G.R.K. 2001, Banks foray into Insurance: Adaptation challenges, The ICFAI Journal of applied
finance, VOL.7, No:3, PP. 80 to 97.
37
Banks with their geographical spread and penetration in terms of
customer reach of all segments have emerged as a viable source for the
from the same sources to the same customer base2. Bancassurance takes the
climate of the country3. The demographic climate will determine the kinds
terms of turnover, market shares etc. The legislative climate will decide the
the bancassurance also differs. For banks it just acts as a means of product
tool for increasing their market penetration and for customers it acts as a
2
Hoggarth.G and E.Saportar, 2001, Costs of banking system instability: Some empirical evidence ,
Bank of England financial stability review, June, PP 32 -39.
3
Dasgupta,R. 2001, "RSA, Iffco-Tokio yet to appoint actuaries", Economic Times, January 23, PP 45-
47.
38
door steps. Hence, it is a win-win situation for all the parties involved in
Bancassurance.4
2.2 Benefits
Bancassurance is an important tool in the hands of bankers, insurers
situation of constant asset base, the bank can increase Return on Assets
their own channel. It can cover operating expenses and make operating
capabilities.
The bankers have a branch network to make face to face contact with
the customers and a great deal of trust over the customers. By leveraging
the facilities, the bankers can guess the attitude and diverse needs of the
4
Kumari,V. A.Vaswati, 2001, "India Insurers Seek Perfect Partners." National Underwriters, March 5,
PP. 38-39.
39
customers and could change the face of insurance distribution to personal
line insurance.
region providing for a lower per head cost5. The advantage of a bank over
the traditional distributors of insurance is the lower cost per sales head,
which is made possible by their sizeable loyal customer base. Banks have
channels such as statement inserts, direct mail, ATMS, telemarketing etc for
share of the customers wallet through insurance cross sell. Banks may also
5
Berman, P. 1996, "Rethinking Health Care Systems: Private Health Care Provision in India.", Harvard
School of Public Health Working Paper, November, PP. 62-64.
6
Mitra, Sumit,D. and H.Nayak, Shilpa, 2001,"Coming to Life.", India Today, May 7, PP 12-13.
40
hook. Bancassurance enables a Bank to satisfy the risk protection needs of
new challenges and enhanced skills, thus improving their productivity and
It can solve the difficulties arising out of price competition which has driven
41
far-flung areas would be prohibitive, and Bancassurance offers an ideal
Banks have warm customer bases, which expect the banks to sell
insurer can only sell fewer and large policies to a more upscale client. The
middleclass income holders who comprise the bulk of bank customers get
very little attention from the agents. By using bank channel, the insurer can
which assists greatly in identifying and filling financial need gaps and
customer needs. By cutting cost, insurer can serve better to the customers in
terms lower premium rate and better risk coverage through product
7
Roy, A. 1997, "Pension fund business in India.", The Hindu, July 16, PP. 25.
8
Sinha, Tapen.R and D.Sinha, Dipendra, 1997, "A Comparison of Development Prospects in India and
China.", Asian Economies, Vol. 27(2), June, PP. 5-31.
9
Business Today. 2000,"The Monitory Group Study on Insurance I and II." , March 22 and April 7, PP.11-
12.
42
Existing operations and service infrastructure and expertise of banks provide
Bancassurance channel.
where most adult family members are working and leisure time is at a
premium, customers are even willing to pay more for a one-stop shop.
insurance through the bank offers a more credible solution. Customers also
benefit from service convergence between the Bank and insurer through a
All life insurance products are by nature products which belong to the
sell is very closely bound up with the methods of distribution which it plans
43
to use. This is because the effort and expertise needed to sell a given
product must be appropriate to the skills and cost base of the chosen
Depositors products
10
Sinha, Tapen,R. 2000, Pension Reform in Latin America and Its Implications for International
Policymakers,Boston, USA, Kluwer Academic Publishers, Huebner Series, Volume No. 23, PP 76- 79.
11
Patel, F. 2001 ,"Centre wants GIC to merge unviable outfits before recast.", Business Standard, April 13,
PP 12-13.
44
2.3.1 Finance and repayment products
outstanding loan or credit amount may not be recoverable. Along with the
financial loss, the lender also runs the risk of damaging its reputation among
unfortunate death of its clients, and the harassment of the unfortunate spouse
and family. The borrower, on the other hand, has similar concerns. He does
not wish to leave an outstanding loan to be repaid by his family after his
death. He is also concerned about his possible inability to repay the loan or
that can satisfy both the parties is the finance and repayment product, the
2.3.1.1Credit insurance
customer and serves as additional security for the bank and financial
45
term life cover with an initial sum insured equal to the amount of the loan12.
The sum insured would decrease in line with the repayment of the loan
amount. Upon the death of the insured person, the amount payable would be
equal to the outstanding loan amount, with or without the accrued interest at
that time13.
the loan was granted. In cases where the loan amount fluctuates according
in cases where the loan amount at all periods can be predetermined. Where
the loan amount can fluctuate, single premiums are not permitted. In the
added to the loan amount. Almost all loans covered under credit insurance
12
Sigma, 2000,. "World Insurance in 1999.", Published by SwissRe, July, PP. 32-46.
13
Crooks Gora, J. 1997, "Bancassurance: positioning for affiliations - lessons from Europe, Canada, and
the United States", LOMA Publications, Atlanta, May, PP. 64-78.
14
Raje, Pradeep,K. 2000, Where Did India Miss a Turn in Banking Reform? Is there a comeback?,
Center for the Advanced Study of India, CASI Working Paper, December, PP. 214-216.
46
It is also possible for a bank to pay the premiums, which are very low,
and use this as a marketing tool in order to attract new customers and sell its
products more easily. The marketing tool is to offer free protection in the
case of death or permanent total disability. The bank will include the cost of
Business loans, Personal loans, and Hire purchase arrangements. This cover
can also be issued as a group policy covering all customers. The master
policy remains with the bank and a certificate of insurance is given to each
customer.
2.3.1.2Overdraft insurance
amount is usually two or three times their monthly salary. This facility has
no repayment term, provided the salary is deposited in the bank and the
In the case where the customer who was using the credit facility dies,
this amount has to be repaid by the heirs of the deceased. This practice
usually creates problems for both the heirs and the bank. Overdraft
47
insurance is a real solution to this problem. Overdraft insurance can be
a) The cover is equal to the credit facility used and a monthly premium is
paid according to this amount. In the case where the customer dies and
this credit facility has been used, the outstanding amount due will be
repaid to the bank by the insurance company.
according to the age of the customer. A maximum age for this benefit
usually exists. The premium can be paid by the customer or by the bank as
48
customer is granted the loan and he pays to the bank only the loan interest.
He also takes out an endowment that has a cover equal to the loan amount
and with a duration equal to the repayment period of the loan. The premium
is selected so that the maturity payout is very likely to be able to cover the
full loan amount. The policy is always assigned to the bank and serves as a
repayment tool whether the customer survives or not. These products have
lenders on loans repaid by insurance policy proceeds are lower than for
for such products are much higher than those of the credit and overdraft
insurance.
bank products and are sold with primary products such as mortgages, credit
cards, auto loans and personal loans. These products are cheaply priced and
guarantee repayment of the debt should the insured event occur. Being
49
2.3.2 Depositors products
The second category of these special products consists of the so-
case is usually paid by the bank but it can also be paid by the depositor with
the cash balance in the deposit account. In the case of death of the
are set regarding maximum age and maximum amounts of coverage, this
disability, the difference between his objective amount and the cash balance
50
the cash balance. In cases where the deposit amounts are not predetermined,
customer to increase the account balance rapidly and gain significant life
traditionally been the domain of banks, but in some countries they enjoy
These products are usually group policies which combine covers and
which cost the customer less than if they are bought individually16. These
products are usually sold over the counter by bank employees, so they need
so as to enable the sales people to select the most suitable plan for each
15
Kaminsky, G. and S.Schmukler, (2002), "Short-Run Pain, Long-run Gain: The Effects of Financial
Liberalization, World Bank Working Paper, P.145.
16
Krishnamurthy, R. 2003, "Bancassurance in India", paper presented at the CEO Summit of Swiss
Reinsurance Company, April, PP. 45-48.
51
customers specific needs. A further range of products which the
Whole life
Endowment
Unit-linked products
Waiver-of-premium benefit
Hospitalization products
Pension products
require little consultation in the sales process, e.g., tax hedge plan. These
52
products can be effectively sold through the direct mail route and also across
these pose little complexity in the sales process, and can be sold effectively
client and are a logical extension of other investment products sold by the
bank. They involve a need based selling exercise, and the sales process
follows a more complex and consultative approach. These products are best
sold through trained financial planners who are able to identify a complex
17
Sigma, 2002, "Bancassurance Development in Asia," Swiss Reinsurance Company, Augest, PP. 79-80.
18
Theron, M. 2003, "Insurance in India", paper presented at the CEO Summit of Swiss Reinsurance
Company, November, PP. 11-14.
53
2.7 Universal protection plans
These products address the risk protection needs of customers and
aim to adequately provide for the family of the insured should the insured
event occur. These products are also based on the individual financial needs
of the client, and are best sold through trained financial planners in a
consultative setting19.
distribution channels:
2.8.1Career Agents
Career Agents are full-time commissioned sales personnel holding an
over the activities of the agent which are specified in his contract. Despite
19
Roy, S. 1999, "Insurance Sector: India.", Industry Sector Analysis, National Trade and Development
Board, US Department of State, Washington, DC, December, PP. 45-47.
54
and motivation can be highly productive and cost effective. Moreover, their
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
personalised and high quality service. Usually Special advisors are paid on a
salary basis and they receive incentive compensation based on their sales.
20
Houston, J. and M. Ryngaert, 1994, The overall gains from large bank mergers, Journal of Banking
and Finance 18 (6), PP. 115-117.
21
Houston, J. F., C. M. James, and M. D. Ryngaert, 2001, Where do merger gains come from? Bank
mergers from the perspective of insiders and outsiders, Journal of Financial Economics 60, PP. 285-331.
55
2.8.3 Salaried Agents
The salaried agents are being fully under the control and supervision
remuneration is that they are paid on a salary basis and career agents receive
Platform Bankers are bank employees who spot the leads in the banks
and gently suggest the customer to walk over and speak with appropriate
company23.
Platform Bankers can usually sell simple products. However, the time
which they can devote to insurance sales is limited due to limited opening
22
Todd, J., and M. Murray, 1988, Banks in insurance: Increase or reduce competition?, Journal of
Insurance Regulation, PP. 518-537.
23
Carow, Kenneth A, 2001, Citicorp-Travelers Group Merger: Challenging Barriers Between Bank and
Insurance, Journal of Banking and Insurance, PP. 115-120.
56
hours and to the need to perform other banking duties. A further restriction
that they have a limited target market, i.e. those customers who actually visit
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
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.
57
2.8.6 Direct Response
In this channel no salesperson visits the customer to induce a sale and
used for simple packaged products which can be easily understood by the
2.8.7 Internet
banking will also prove an efficient vehicle for cross selling of insurance,
the affluent population will find banks with household name brands and
products.
24
Rose Lawrence, C. and Dean G. Smith, 1995, Expansion into Insurance Product-lines and Bank
Shareholder Returns, Journal of Financial and Strategic Decisions, VOL 8, PP.13-25.
58
2.8.8 E-Brokerage
products from multiple insurers. The changed legislative climate across the
a small group of business people, field questions on the topic, and then
To make the overall sales effort pay anticipated benefits, insurers also
need to 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
59
2.9 Distribution Models
Bancassurers have developed three basic distribution models:
One Stop Banking and requires extensive training to branch staff. Bank
staffs are supposed to know the details of all the insurance products on offer.
support the referral process. This model may not meet all of customers
25
Todd, J. and M. Murry, 1992, Bancassurance Is Strength To The Country?, Journal of Insurance
Regulation, PP.18-37.
26
Berger, A. N., D. B. Humphrey, and L. B. Pulley, 1996, Do consumers pay for one-stop banking?
Evidence from an alternative revenue function, Journal of Banking and Finance, PP.160-201.
60
needs since it lengthens the process of sale of even a simple insurance
location in the cycle of life27. This process is beneficial for the customer, the
bank and the insurer. 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.
financial planning model, the banks sales force first has to be taught how to
qualify prospects and make referrals and properly approach the customer.
This process will include and actively involve the bancassurers project in
charge who is best acquainted with pertinent regulations for the banks
27
Focarelli, D., F. Panetta, and C. Salle, 2002, Why do banks merge? Journal of Money, Credit and
Banking, PP. 47-66.
28
Ranade, A. and R. Ahuja (1999), Life Insurance in India : Emerging Issues, Economic and political
Weekly, January 16-22, Vol XXXIV, Nos 3 and 4. Mumbai, PP. 23-29.
61
2.9.4 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
buy it if the product, the distribution system and the channel are compatible.
62
Relationship between product complexity and required sales effort
63
As products become more customized, the complexity of the product
planning cannot succeed via direct mail, and it's not economically feasible to
sales environment, neither the company nor the agent can earn adequate
costs are too high. Conversely, a direct mail company can be enormously
channels all should complement each other. Bancassurers can tap all the
driven by customers and channels and will leverage the bank's competitive
strengths.
64
A customer and channel driven bancassurance strategy finds and
trapped: they create a product with features attractive to agents (such as high
commissions), and then let the agents find appropriate target markets. This
channel requires an analysis of the market that starts at the bottom, with the
of trust and familiarity between the banker and branch customer and the
these contacts are more frequent and personal and often come in the form of
withdrawals.
29
Swiss Re, 2002, Bancassurance developments in Asia-shifting into a higher gear, Sigma
No.7/2002.
65
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
out by selling simple products which could be sold in large volumes but
though, they realized that they could gain market share if they expanded
needs31.
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
30
Moshirian, F., 2001, International Investment in Financial Services, Journal of Banking and Finance,
PP. 317-337.
31
Carow, K. A., 2001, The Wealth Effects of Allowing Bank Entry into the Insurance Industry, Journal
of Risk and Insurance, PP. 129-150.
66
fundamental importance that to ignore any one of them could be fatal to the
Consumers throughout the world rate bankers higher than insurance agents
2.10.2 Distribution
One of the key economic advantages of bancassurance is the savings
through lower premiums, or the bank can maintain the premiums at market
32
Carow, Kenneth A, 2001, Citicorp-Travelers Group Merger: Challenging Barriers Between Bank and
Insurance, Journal of Banking and Insurance, PP. 115-117.
67
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 desirable33.
2.10.3 Technology
Bancassurers should plan a technological infrastructure that will
The information that the banks have about their customers' buying habits,
unavailable, but even when known, can only be employed by agents (who
33
Fields,S., L. Paige, Donald, R. Fraser, and James W. Kolari, 2005, Whats Different About
Bancassurance? Evidence of Wealth Gains to Banks and Insurance Companies, PP.134-138.
68
have an economic interest in thwarting a direct relationship between the
Buying insurance in the traditional way means dealing with agents and the
eliminate. Branch customers are usually in a hurry and don't want to wait, so
customers should be able to buy policies in a short time and leave the bank
2.10.4 Culture
cultural conflict between the bank and the insurance company by aligning
the bank's interests with those of the insurance company36. Without the
34
Lawrence C. and Dean G. Smith, 1995, Expansion into Insurance Product-lines and Bank Shareholder
Returns, Journal of Financial and Strategic Decisions, VOL 8, N0. 2, 13-25.
35
Wepler, John M., Thomas R. Linn and Patrick T. Linnet (2004), Banks in Insurance: A Five-Year
Retrospective since the Passage of GLB, Bank Director Magazine, 3rd Quarter, P 45.
36
Sreedevi Lakshmikutty and Sridharan Baskar, 2004, Insurance distribution in India- a
perspective, Insurance Chronicle, Domain Competency Group (Insurance), Infosys
Technologies Limited, PP. 25-26.
69
bank's total commitment to the insurance strategy, any bancassurance
program is doomed to fail. One of the more effective ways to achieve this
company. With a stake in the financial results of the insurance operation, the
In any given situation, one of the four value drivers may greatly
outweigh the importance of the others. In some cases, solving the cultural
value to the overall customer experience and exploits the respective skills of
the partners, thereby ensuring the longevity of the partnership37. The choice
37
Houston, J.F., C.M. James, and M.D. Ryngaert, 2001, Where do merger gains come from? Bank
mergers from the perspective of insiders and outsiders, Journal of Financial Economics, PP. 285-331.
70
the Bank, cultural differences between the two entities and the extent of
between the staff of the partners and merely utilizes the customer database
This model entails the sales force of the insurer utilizing the resources
of the Bank, such as the customer base, branch infrastructure and bank staff
expertise in the selling process. The bank employees sell simple packaged
products, but act as introducers in the case of more complex products. The
final lead closure. This model exploits the client relationships and customer
information present with the banks employees and also leverages the
38
Thompson, S., 1997, Takeover activity among financial mutuals: An analysis of target characteristics,
Journal of Banking and Finance, PP. 37-53.
71
selling skills inherent in the sales staff of the insurer. It requires higher
The insurance sales process is wholly owned by the Bank staff, while
the insurer acts only as a product and service provider. This model
maximizes the exploitation of the Banks strengths, but does not utilize the
flow between the Bank and the insurer become the key drivers to the success
of this model. With little direct contact with the end customer, the insurance
business model and only under this model do banks achieve a dominant
model, bancassurers take full advantage of banks loyal customer bases and
72
Sales are based more on branch staffs sales objectives than on an
limited. Products are sold using simplistic sales messages. This could lead to
market. It also makes it harder to sell more complex, higher added value
products.
activities.
needs and to sell higher value added products with higher margin.
73
2.11.5 Open Architecture Model
position to select the best insurance partners for each type of products, and
in some cases to have products specifically tailored to their needs and white-
This model is less efficient than the integrated models in terms of costs as
the level of integration between the banks and the insurance companies
74
2.12 Ensuring Success
reasons for failure vary greatly, there are a few critical success factors that
from the alliance, which leads to early fallout in case the objectives are not
with clearly laid out business goals and milestones. Top management
There should not be wide disparity in the core values of partners that
39
Fama, E. F., 1985, Wha ts different about banks?, Journal of Monetary Economics, PP. 29-36.
75
focus with no price-cutting could be divergent strategic alignments that may
bank and insurance cultures. Banks generally have a service oriented culture
successful.
organizational structure and culture of the Bank and insurer. Further, roles
Often, the absence of role clarity and cultural conflict undermine the
effectiveness of the sales model and lead to the failure of the venture.
on the existing structures of the Bank and insurer that defines roles,
40
Carow Kenneth .A, 2001, Citicorp-Travelers Group Merger: Challenging Barriers Between Bank and
Insurance, Journal of Banking and Insurance, PP.155-157.
76
responsibilities and reporting relationships of all people involved in
Insurance provision.
Partners must counter channel conflict that arises out of the Banks
positioned towards satisfying needs that are not met by other bank products.
that they have been used to in their interactions with the Bank. The Insurer
must gear up its service infrastructure and effectively integrate its processes
41
Carow Kenneth.A, 2001, The Wealth Effects of Allowing Bank Entry into the Insurance Industry,
Journal of Risk and Insurance, 68(1), PP. 129-150.
77
and systems with the Bank to deliver a similar customer experience. In a
because the bank refers its customers to the insurer, and the banks
relationship with the customer can be damaged by poor service from the
insurer.
areas.
2.13.1 Europe
Directive motivated the large influx of banks into insurance within Europe
in recent years. Currently, the penetration levels are fairly stable in Europe,
78
infiltrate Central and Eastern European countries such as Hungary and
Poland, and the Baltic nations. Currently, the final major hurdle for
2.13.2 France
Mutual, which created its own life and non-life subsidiaries in the early
Bancassurance has seen the most success in the life insurance market,
something that is true for every nation, increasing from 52 percent in 1995
share of the life insurance market has remained fairly stagnant, actually
42
Ray, S. 2002, Bancassurance: The Revolution That Hasnt Come , Insurance Profewssional ,
PP. 45-47.
43
DeLong. G.L., 2001, Stockholder gains from focusing versus diversifying bank mergers, Journal of
Financial Economics Vol 59, PP. 221-252.
79
dropping over the years to 66 percent market share in 2001 and 61 percent
resulted from a combination of falling stock market prices and the banking
(2002)44.
separately within the country. For a conglomerate, the regulator will depend
powerful insurance governing body. The first move for bancassurers came
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
44
Houston, J.F., M.D. Ryngaert , 2004, The overall gains from large bank mergers, Journal of Banking
and Finance Vol 18, PP. 115-117.
80
bancassurance is still in its infancy within the U.K., currently accounting for
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)).
The benefits of the regulatory system in the U.K. are, that it is based on one
regulatory systems.
2.13.4 Spain
(life insurance alone has seen 30 percent growth per annum over the past 15
81
societies, and also the cultural mentality that it is correct to take on risks
(Goddard (1999)).
2.13.5 Brazil
In Brazil the laws are infavour of bancassurers and the banks within
the country control more than 65 percent of the insurance market (Nigh and
consolidated regulation for more than 15 years and banks are legally
has been a flourishing industry due largely to the role played by banks in the
46
Andrade, G., M. Mitchell, and E. Stafford, 2004, New evidence and perspectives on mergers?, Journal
of Economic Perspectives, Vol 15, PP. 103-120.
82
United States
(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
U.S47.
47
Fuller, K., J. Netter, and M. Stegemollar, 2003, What do returns to acquiring firms tell us?Evidence
from firms that make many acquisitions, Journal of Finance , Vol.57, PP 1763-1793.
83
2.13.7 Asia and the Pacific
off, with the exception of countries such as Australia, Hong Kong and
(2002)). The trend in the majority of mainland Asian countries has been for
operations with around 80 percent of these being life insurers, and the
Most countries within Asia have only recently begun allowing the
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
48
Focarelli, D., F. Panetta, and C. Salle, 2002, Why do banks merge? , Journal of Money, Credit and
Banking Vol. 34, PP. 1047-1066.
84
CHAPTER - III
BANCASSURANCE IN INDIA
3.1 INTRODUCTION
British company called the Oriental Life Insurance Company in the year
1818, followed by The Bombay Assurance Company in the year 1823 and
the Madras Equitable Life Insurance Society in 18291. They were insuring
the lives of Europeans living in India. Some of the companies that started
later did provide insurance for Indians. But, they were treated as
Company Ltd., was established in the year 1850. It was owned and operated
by the British.
The first Insurance Company that had policies that could be bought
by Indians with "fair value" was the Bombay Mutual Life Assurance Society
was the Indian Mercantile Insurance Company Limited which was set up in
Bombay in the year 19072. By1938, the insurance market in India was
1
Krishnapani Kesiraj,L. (2003), Bancassurance an introduction, ICFAI Press, Hyderabad, June,Vol. XI,
PP. 45-52.
2
Krishnamurthy, R. 2003, Blueprint for Success Bringing bancassurance to India Irda Journal, New
Delhi ,December,Vol IX, PP. 20-23.
85
buzzing with 176 companies (both life and non-life)3. However, the industry
Insurance Act, 1938] was put in place to stem this problem. By 1956, there
and 75 provident societies that were issuing life insurance policies. Most of
these policies were centered in the cities (especially around big cities like
Bombay, Calcutta, Delhi, and Madras).In the year 1956, the Government of
counts. (1) It was perceived that private companies would not promote
channel resources for savings and investment by taking over the business of
big problem (at the time of takeover, 25 insurance companies were already
3
Karunagaran, A. 2005, Towards Universal Banking in India Some Regulatory and Supervisory
Issues, IBA Bulletin, Special Issue 2005, January, Vol XXVII No 1, PP. 156-165.
4
Malpani Sudarshan,D. 2004, Many Roads to bancassurance IRDA Journal, IRDA, New Delhi,
August , Vol. I. No 9, PP. 26-27.
86
3.2 Life Story of the Life Insurance Corporation
The life insurance industry was nationalized under the Life Insurance
Corporation (LIC) Act of India 1938. In some ways, the LIC has become
million, the LIC has managed to capture about 30 percent of it6. Market
the customers of the LIC are from rural and semi-urban areas7. This
probably would not have happened had the charter of the LIC not
One exogenous factor that has helped the LIC to grow rapidly in
recent years is the high saving rate in India. Even though, the saving rate is
development), Indians exhibit high degree of risk aversion. Thus, nearly half
of the investments are in physical assets (like property and gold). Around
twenty three percent are in (low yielding but safe) bank deposits. In
5
Krueger, O .A. 2004, Banking Needs of Global Economy, Keynote Address, IBA Bulletin, Special
Issue 2005, January, Vol XXVII No 1, PP. 123- 145.
6
Ahuja Rajeev,C. 1999, Life Insurance in India : Emerging Issues, Economic and political Weekly,
Mumbai, January, Vol XXXIV, Nos 3 and 4, PP.16-22/ 23-29.
7
Rao, G .V. 2003, What Brokers Are ?, Irda Journal, IRDA, New Delhi, March, Vol. I. No 4,
PP. 43 -51.
87
addition, some 1.3 percent of the GDP are in life insurance related savings
vehicles8.
subsidiaries: New India, Oriental, United India and the National Insurance
companies would compete with one another in the market. It did not happen.
They were supposed to set up their own investment portfolios. That did not
happen either. It began to happen after 29 years. The NOUN has kicked off
GIC in the year 200110. The GIC has a quarter of a million agents. It has
8
Krishnamurthy, R. 2001, Bancassurance in Insurance Distribution: Key Issues in the Indian context,
FICCI seminar, October, Vol.X, PP. 23-27.
9
Rudolf Enz, H. 2000 ,The S-curve relation between per-capita income and insurance penetration,
Geneva Papers on Risk and Insurance: Issues and Practice, Volume 25, No 3, July, PP. 396-406.
10
Rajagopalan, R. 2004, Valuing the Term Insurance Products in the Indian Market, Paper presented at
the Fifth Global Conference of Actuaries, 25 January, New Delhi.
88
more than 2,500 branches, 30 million individual and group insurance
policies and assets of about USD 1,800 million at market value (at the end
of 2007)11. The GIC has so far been the holding company and re-insurer for
pressure from the opposition, the government (at the time, dominated by the
Malhotra (the former Governor of the Reserve Bank of India) to look into all
suggest the structure of the insurance industry, to assess the strengths and
11
Kumari,B., P.Vaswati, 2001,"India Insurers Seek Perfect Partners." National Underwriters, March 5,
2001ol 23 (1), PP. 38-39.
12
Mitra,A., F.Sumit and R.Nayak, 2001,"Coming to Life." India Today, May 7, Vol XXIV No.35, PP 7- 8.
89
and to develop an effective instrument for mobilization of financial
framework etc, (c) to take specific suggestions regarding LIC and GIC with
surveyors, intermediaries like agents etc. in the insurance sector, and (f) to
a) The LIC should be selective in the recruitment of LIC agents. Train these
people after the identification of training needs.
13
Berman, P. 1996,"Rethinking Health Care Systems: Private Health Care Provision in India." Harvard
School of Public Health Working Paper, November , Vol. 22 (3), PP. 23-34.
90
b) The committee suggested that the Federation of insurance Institute,
Mumbai, should start new courses and diploma courses for
intermediaries of the insurance sector.
c) The LIC and GIC should use the services of an MBA specialized in
Marketing.
d) It suggested that settlement of claims were to be done within a specific
time frame without delay.
e) The committee has several recommendations on product pricing,
vigilance, systems and procedures, improving customer service and use
of technology.
f) It also made a number of recommendations to alter the existing structure
of the LIC and the GIC.
g) The committee insisted that the insurance companies should pay special
attention to the rural insurance business.
h) In the case of liberalization of the insurance sector, the committee made
several recommendations, including entry to new players and the
minimum capital level requirements for such new players should be Rs.
100 crores (About USD 24 million). However, a lower capital
requirement could be considered for the entry of co-operative sectors' in
the insurance business.
i) The committee suggested some norms relating to promoters equity and
equity capital by foreign companies, etc14.
14
Roy, S. 1999, "Insurance Sector: India- Industry Sector Analysis, National Trade and Development
Board, US Department of State, Washington, DC, December, Vol No.XXX (2) PP. 168-184.
91
3.5 Mukherjee Committee
made public. But, from the information that filtered out, it became clear that
insurance sector. The bill was awaiting ratification by the Indian Parliament.
However, the then BJP Government fell in April 1999 and the deregulation
15
Sinha, T., and S. Dipendra, 1997, "A Comparison of Development Prospects in India and China." Asian
Economies, June, Vol. 27(2), PP. 5-31.
92
was put on hold once again. On December 7, 1999, the new government
authority created by the Act is now called IRDA. New licenses are being
given to private companies. IRDA has separated out life, non-life and
for each line of business. Each license has its own capital requirements
(around USD24 million for life or non-life and USD48 million for
reinsurance)17.
16
Graham, M., and R. Krishnamurthy, 2001, The Emergence of Alternative Distribution in India, Watson
Wyatt Worldwide, September, Vol. VXX, PP. 23-27.
17
Gurunath Singh,G. 2004, Emerging trends in banking and insurance sector Journal of Insurance
Professional , AUG, Vol. VII, PP. 26.
18
John O. Nigh and Mark V.T. Saunders, 2004, Bancassurance Around the World ,
Journal of Financial Services, PP. 34-37.
93
Innovative products, imaginative marketing, and aggressive
Indian customers faster than anyone expected. While at the time of opening
avenues which are offering products which suit their specific requirements,
By the end of March 2009, there are twenty two life and twenty one
India is the only public sector company playing a predominant role in the life
insurance sector. However, there are twenty one private sector players who
are also actively involved in the life insurance business. There are twenty one
India. Of the non life insurance companies, six are in the public sector and
the remaining fifteen are in the private sector. Among the public sector non-
94
insurance. There is only one company in India that too in the public sector,
Table-3.1
Number of Registered Insurers in India as On 31.03 2008
General Insurance 6* 15 21
Re-insurance 1 0 1
Total 8 36 44
Source: IRDA Annual Report 2008-09
increases, particularly life insurance. India, with its huge middle class
markets in many developed economies has made the Indian market even
more attractive for global insurance majors. The insurance market has
95
Table-3.2
Life Insurance Companies Operating in India as on 31st March,
2009
Public Sector Private Players
1. Life Insurance 1. Bajaj Allianz Life Insurance Co. Ltd.
Corporation of
2. Birla Sun Life Insurance Co. Ltd. (BSLI)1
India (LIC)
3. HDFC Standard Life Insurance Co. Ltd. (HDFC STD LIFE)
4. ICICI Prudential Life Insurance Co. Ltd. (ICICI PRU)
5. ING Vysya Life Insurance Co. Ltd. (ING VYSYA)
6. Max New York Life Insurance Co. Ltd. (MNYL)
7. MetLife India Insurance Co. Pvt. Ltd. (METLIFE)
8. Kotak Mahindra Old Mutual Life Insurance Co. Ltd.
9. SBI Life Insurance Co. Ltd. (SBI LIFE)
10. TATA AIG Life Insurance Co. Ltd. (TATA AIG)
11. Reliance Life Insurance Company Ltd.
12. Aviva Life Insurance Co. Pvt. Ltd. (AVIVA)
13. Sahara India Life Insurance Co. Ltd. (SAHARA LIFE)
14. Shriram Life Insurance Co. Ltd (SHRIRAM LIFE)
15. Bharti AXA Life Insurance Company Ltd. (BHARTI
AXA)*
16. Aegon Religare Life Insurance Co. Ltd.
17. Canara HSBC Oriental Bank of Commerce Life Insurance
Co. Ltd.
18. DLF Pramerica Life Insurance Co. Ltd.
19. Future Generali India Life Insurance Co. Ltd.
20. IDBI Fortis Life Insurance Co. Ltd.Star Union Dai-ichi Life
Insurance Co. Ltd.
96
Table-3.3
Non-life insurers Insurance Companies Operating in India as on
31st March, 2009
97
The passage of the IRDA Act paved the way for a number of
partners. The table exhibited below portrays the list of Indian companies
India20.
20
Tyler, J. and H. Leverty, 2006, Are synergies between banks and insurers huped? Evidence from
Citigroup-Travelers Divestiture, Virginia Commonwealth University, July, Vol.9 (2), PP. 109-111.
98
Table-3.4
99
3.7 Life Insurance Business in India
The total business done by the life insurers in terms of the number of
of this, Life Insurance Corporation of India, the only public sector Life
insurer has issued more than 88 percent of the policies. There are as many as
21 Private players in Life Insurance business, but all of them have issued
business in the country. The table below highlights the total business of the
Table-3.5
In (`000)
accounting for almost 23percent of the total number of policies issued by the
100
private insurers. This is followed by ICICI Prudential, which accounts for
little more than 19percent of the number of policies issued by the private
players.
Table-3.6
Life insurance Business in Force (Number of Policies)
(Private Insurers)
(In`000)
Total Business
Sl.No Name of insurers In Force As At % to Total
31.03.2009
1. BAJAJ ALLIANZ 7542 22.32
2. RELIANCE LIFE 3313 9.80
3. AVIVA 886 2.62
4. BSLI ( Birla SunLife) 2423 7.17
5. HDFC STD LIFE 2744 8.12
6. ICICI PRUDENTIAL 6449 19.08
7. ING VYSYA 1014 3.00
8. MNYL (Max NewYark Life) 2575 7.62
9. MET LIFE 645 1.90
10. KOTAK LIFE 951 2.81
11. SBI LIFE 2642 7.82
12. TATA AIG 1627 4.81
13. SAHARA 238 0.71
14. SHRIRAM LIFE 266 0.79
15. BHARATI AXA 226 0.67
16. FUTURE GENERALI 98 0.29
17. IDBI FORTIS 81 0.24
18. CANARA HABC 36 0.11
19. AEGON RELIGARE 23 0.07
20. DLF PRAMERICA 03 0.01
21. STAR UNION DAI-LCHI 13 0.04
Total 33795 100.00
Source: IRDA Annual Report 2008-09
101
The situation is almost similar when we analyze the Life Insurance
business in terms of the sum assured by the players. The private players
have issued little less than 12percent of the total number of policies issued
by the Life Insurers, and their share in terms of the Sum Assured is also
13percent. Similarly, the only public sector Life Insurer (LIC) has assured
87percent of the total Sum Assured in the Life Insurance business as on 31st
march, 2009.
Table-3.7
(Rs. in Crore)
102
The table furnished below gives an account of the business done by the
Table-3.8
Life insurance Business In Force (Sum Assured) (Private Insurers)
(Rs.In Crore)
Total Business
Sl.No Name of insurers In Force As At % to Total
31.03.2009
1. BAJAJ ALLIANZ 198477 22.65
2. RELIANCE LIFE 39431 4.5
3. AVIVA 24889 2.84
4. BSLI ( Birla SunLife) 84551 9.65
5. HDFC STD LIFE 69640 7.95
6. ICICI PRUDENTIAL 161595 18.44
7. ING VYSYA 18380 2.10
8. MNYL (Max New YarkLife) 82914 9.46
9. MET LIFE 36768 4.20
10. KOTAK LIFE 33874 3.87
11. SBI LIFE 55441 6.33
12. TATA AIG 44209 5.05
13. SAHARA 4013 0.46
14. SHRIRAM LIFE 6710 0.77
15. BHARATI AXA 5462 0.62
16. FUTURE GENERALI 2933 0.33
17. IDBI FORTIS 2682 0.31
18. CANARA HABC 2521 0.28
19. AEGON RELIGARE 1261 0.14
20. DLF PRAMERICA 78 0.01
21. STAR UNION DAI-LCHI 343 0.04
Total 876172 100.00
Source: IRDA Annual Report 2008-09
103
Bajaj Allianz Ltd., is the leading player in the private sector doing life
insurance business. The company alone accounts for more than 22 percent
31st march 2009. This is followed by ICICI Prudential which accounts for
little more than 18 percent of the business in terms of sum assured. The
Birla Sun Life Insurance Company and MNYL jointly share between
insurers.
private life insurers during a three year period commencing from 2006-07 to
104
Table-3.9
Total life Insurance Premium (Private Insurers)
(Rs. In Crore)
It is clear from the above table that the ICICI prudential tops the list
105
rupees 7912.99 crores as the premium for insuring the lives of their
customers. The premium amount for the company has increased to rupees
13561.06 crores for the year 2007-08. During the year 2008-09, the
premium amount that the company has received increased from rupees
4302.7 crores in the year 2006-07 to rupees 10624.52 crore in the year 2008-
09. HDFC Standard life and SBI Life are the other two companies which
During the year 2006-07 the SBI Life received a sum of rupees 2928.49
crores as life insurance premium, whereas for the same period HDFC
companies is very marginal during the period 2006-7. When we look at the
amount of premium received by the same two companies during the year
2008-09, a considerable gap is noted. For the period, SBI Life has received a
sum of rupees 7212.10 crores which is more than almost 1750 crores of
106
The highlight of the table is that the premium received by all the 21
private insurers show a definite increasing trend during the three year
period. More than 100 percent growth is registered in many of the private
Birla Sun Life, Max Newyark Life, Tata AIG, Aviva, Reliance Life
are the other leading private insurers who also receive a considerable
done by the Non-Life Insurance players are measured only in terms of the
During the year 2006-07, the share of the private players in the Non-
life insurance business is little when compared to that of the public sector
undertakings. All the private players put together had received a Gross
their business over a period of time and by the year ending 2008-09, the
107
Table-3.10
(Rs. In Crore)
following table.
108
Table-3.11
(Rs in crores)
109
During the year 2008-09, New India insurance company is the leading
player in the public sector doing the nonlife insurance business in India. The
company alone accounts for about 34 percent of the total business in force
during the period. All other companies share the remaining business almost
in equal proportion. The total Gross Direct Premium received by all the four
shows an increasing trend. However, the growth is very marginal during the
first two years i.e., during the year 2006-07 the total premium was rupees
17283.45 and the same has increased to rupees 17813.71 crores in the next
year. The percentage increase was little higher in the next year from an
amount of rupees 17813.71 crores during the year 2007-08,the premium has
110
The Non-life insurance business in force in terms of Gross Direct
Table-3.12
Non-Life Insurance Business in Force
In Terms of Gross Direct Premium (Private Sector)
(Rs. In Crore)
111
The non-life insurance business in force for the private sector insurers
shows an upward trend during the period of study. In the year 2006-07, the
total business in force for the private insurers in the non-life sector was
rupees 8646.57 crores. The amount has increased to Rs 1099.89 crores in the
next year and for the year 2008-09, the total business in force for the private
Rs 12321.09 crores.
Among all the private sector players, ICICI Lombord, Bajaj Allianz,
IFCO-TOKIO, Reliance and Royal Sundram are the major players doing
good business.
decades in the global markets. Actually, a fact that many do not know is that
112
insurance business), though these were mainly general insurance products.
The product development and risk underwriting was done by their group
insurance companies (most of these banks were the old private sector banks
where the industry group they belonged to also had insurance companies in
their fold). And though bankers say that it is too much in the remote past to
quantify how lucrative this fee-based business actually was for them, it is
not too difficult to hazard a guess. Many of these products were sold on the
primarily financed by the banks themselves. It was only after the non-life
business was nationalized in 1972 and general insurance became the sole
and globalization ,the banking system in India has been exposed to tough
have all along been functioning strictly on a traditional banking style with
113
more of structural freedom exposing themselves to non traditional
possibility of migration of risks from the rest of the activities to the banking
demanding new realism on the part of the regulator and supervisor for
entering into insurance sector, given the size of the transactions in general
insurance transactions, coupled with the type of built-in risks on the one
side and that the banking system being the focal point of the payment and
settlement on the other, any migration from the former to the latter will have
checks and balances are required to be put in place in time by all regulatory
authorities concerned.
Banks are regulated by the Indian central bank, the Reserve Bank of India
(RBI).Therefore, the RBI has set down the rules for the entry of banks in the
22
Raje, P. 2000, Where Did India Miss a Turn in Banking Reform? Is there a comeback? Center for the
Advanced Study of India, CASI Working Paper, December Vol. XXV (3), PP. 78-83.
114
whereby a bank could undertake the insurance business. The Act may have
banks could take any other form of business which the central government
insurance business takes a longer time to breakeven. Banks dont have the
the initial losses. Therefore, the Reserve Bank of India issued a set of draft
regulations to all the commercial banks and select financial institutions for
3.10 RBI Guidelines for the Banks to enter into Insurance Business
that could be undertaken by banks under Section 6(1) (o) of the Banking
23
Krishnamurthy, R. 2003, "Bancassurance in India," CEO Summit of Swiss Reinsurance Company, Vol
25, PP. 45-47.
115
Regulation Act, 1949; RBI issued the guidelines on Insurance business for
banks.
2. Banks which satisfy the eligibility criteria given below will be permitted
contribution such a bank can hold in the joint venture company will
i. The net worth of the bank should not be less than Rs.500 crore;
ii. The Capital Adequacy Ratio of the bank should not be less than 10 per
cent;
116
iii. The level of non-performing assets should be reasonable; i.e the level
iv. The bank should have net profit for the last three consecutive years;
assume insurance risk, only those banks which satisfy the criteria given
5. Banks which are not eligible for joint venture participants as above, can
117
crore, whichever is lower, in the insurance company for providing
bank.
prior approval from the Reserve Bank. The Reserve Bank will give
any future threat to the bank in its present or the proposed line of activity,
business do not get transferred to the bank and that the banking business
does not get contaminated by any risks which may arise from insurance
business. There should be arms length relationship between the bank and
The banks (includes SCBs and DCCBs) need not obtain prior
conditions:
118
i. The bank should comply with the IRDA regulations for acting as
companies.
ii. The bank should not adopt any restrictive practice of forcing its
with the insurance company concerned for allowing use of its premises
and making use of the existing infrastructure of the bank. The agreement
should be for a period not exceeding three years at the first instance and
the bank should have the discretion to renegotiate the terms depending on
the initial period. Thereafter, the bank will be free to sign a longer term
contract with the approval of its Board in the case of a private sector
sector bank.
119
iv. As the participation by a banks customer in insurance products is purely
Some confusion arose about interpreting these rules for all types of
financial institutions from the circular. Therefore, the RBI proposed a series
also laid down a set of guidelines for the entry of Non-Bank Financial
Companies (NBFC) into insurance business (June 30, 2000)24. There were
First, the capital adequacy ratio of the NBFC (applicable only to those
24
Karunagaran, A. 2005, Towards Universal Banking in India Some Regulatory and Supervisory
Issues, IBA Bulletin, Special Issue 2005, January, Vol XXVII No 1, PP. 145-160.
120
Second, the level of nonperforming assets should be no more than 5
November 28, 2001, the same rules were extended to cover All India
Financial Institutions. Specifically the rules for these institutions were set at
financial institutions to accept fees for their services directly or not. The RBI
cleared their position in two separate circulars: one for the scheduled
commercial banks and the other for the other institutions. It also stated that
financial institutions should not adopt any restrictive practice of forcing its
In the 2001 Report on Currency and Finance, the RBI laid down its
25
Krishnapani, K. 2003, Bancassurance an introduction, ICFAI Press, Hyderabad, Vol . XX, PP. 24-45.
121
with risk participation. The third route, due to its risk aspects, involves
arms length relationship between its banking business and its insurance
outfit. For banks entering into insurance business with risk participation, the
avoid possible regulatory overlaps between the Reserve Bank and the
circulars in January and February 2003 setting out the ground rules for
bancassurance. Now, the IRDA has also come up with guidelines pertaining
through their network of branches for selling insurance products with prior
permission of IRDA and RBI, the insurance regulatory authority has been
the subject. All insurers entering into agreements/ arrangements with banks
26
Krueger, O. A., 2004, Banking Needs of Global Economy, Keynote Address, IBA Bulletin, Special
Issue 2005, January, Vol XXVII, PP. 12-15.
122
under the referral fee model or renewing such agreements / arrangements
may take note that the following points form part of any agreements /
arrangements:-
1. The referral fee shall be for access to banks customer database and it
under the Insurance Act, 1938 and the IRDA regulations and shall
form part of acquisition cost of business and shall not form part of
account holders.
123
5. Any administrative \ management expenses to be incurred for
exclusively for the promotion of the business and not for any other
6. The bank will not be paid any referral fee for promotional campaigns.
7. The insurance company shall not provide any details of its customers
8. The insurance company and the bank shall enter into a referral fee
9. The bank which enters into referral fee arrangements should not be
permitted to enter into any similar arrangements with more than one
10. The insurance company should enter into a separate agreement with
the bank for allowing the use of premises and the use of existing
infrastructure of the bank and a copy of the same should be filed with
the authority. In no case the fee for such services rendered \ offered
124
by the bank should be linked to premium and it should be on a flat
basis. Such fee shall not form part of acquisition cost of business.
11. All agreements should be for fixed period and should be with prior
approval of the boards of both the insurance company and the bank.
13. The referral arrangement may be entered into with a bank for access
to its data base, the provision of physical infrastructure and for the
14. All publicity material distributed by the bank and the Insurer has to
ii) The Insurance contract is between the Insurer and the Insured, not
125
16. The Bank can have only one referral arrangement with a life Insurer
cost.
For single premium policies the referral fee is to be 10% of the single
premium.
126
20. Every referral agreement is to be for a fixed period.
21. The bank should comply with IRDA regulations for acting under
the referral fee arrangement and IRDA shall have the discretion to
The new regulations in India may not allow all banks and finance
situation for the customer in a liberalized regime, who can then issue
instructions to his bank to debit his premium directly from his account, or,
brings these partners together as the examples above suggest there is much
more to it that keeps these alliances going for the most part. Ask any insurer
27
Rao, G. V. 2003, What Brokers Are ?, Irda Journal, March 2003, IRDA, New Delhi, Vol 7 No.3 Pp
56-61.
127
about the attractions of joining up with a bank and chances are that he would
apart from large databases is the personal contact they have with their
knowledge about a housing loan taken from a bank or its housing finance
subsidiary can trigger off mortgage insurance, which is also the case in, say,
an auto loan. So, with such major strengths as these, storming the insurance
Of course, the mere fact that banks are in personal contact with their
clients and can access them, unlike insurance companies who typically
expect that bank customers are inevitably going to walk up to the insurance
28
Burdon, V. 2002, Profiting from bancassurance: choosing the right route , Britannia Life Limited ,
October, Vol.67, PP. 25-31.
29
Ansari, H. 2000, India: An Industry in Transition, Asia Insurance Review, January, Vol XX, PP. 56-
74.
30
Kumar,V. and K. Manoj, 2000, Bancassurance, A New Buzzzword, Financial Express April ,
Vol.25, PP. 17-19.
128
So, if bank techies have put their heads close together, there is also a
flurry of activities amongst insurance project heads to plan for better co-
ordination between the product division, marketing and treasury than banks
companies rake in their profits not from premium, but from investment. For
would the product division have to analyze the premium expected over a 10
year period in co-ordination with marketing; the treasury would also have to
know about cash flows, a major challenge for Indian banks. The prospects
fee-based incomes makes the game seem worth much more than the
candle31.
joint venture partnership with Cardif SA (the insurance arm of BNP Paribas
Bank). This partnership won over several others (with Fortis and with GE
Capital). Many experts in the industry have awaited the entry of the SBI. It
was well known that the SBI has long harbored plans to become a universal
31
Kumar,V. and K. Manoj, 2003, Bancassurance, A House of Journal Of Oman Insurance Company,
Dubai, December, Vol.XXVI, PP. 56-87.
129
For a bank with more than 13,000 branches all over India, this would be a
natural expansion.
In the first round of license issue, the SBI was absent. There were
several reasons for this delay:- First, the SBI was seeking a foreign partner
to help with new product design. Second, it did not want the partner to
become dominant in the long run (when the 26 percent foreign investment
cap is eventually lifted). It wanted to retain its own brand name. Third, it
wanted a partner that is well versed in the universal banking business. This
business by banks has been strictly forbidden by law (although with the
before). Cardif is the third largest insurance company in France. More than
60 percent of life insurance policies in France are sold through the banks.
Fourth, the Reserve Bank of India (RBI) needed to clear the participation by
the State Bank Of India (SBI) because in India banks are allowed to enter
The entry State Bank Of India (SBI) was groundbreaking for several
reasons. This was the first for an Indian bank to enter the insurance market.
Second, even though the regulators have said that banks would not
130
company, the SBI was allowed to do so (with a promise that its share would
be eventually diluted)32. Ever since the entry of the SBI, a number of other
process, both life and non-life companies have tied up with banks. These
32
Reserve Bank of India, 2001, Report of the committee On Customer Service in Banks, Indian Banks
Association, Mumbai, Vol. XXXIV, PP.156-172.
131
TABLE 3.13
BANCASSURANCE ALLIANCE
132
Sl.No. Nonlife Insurance Banking Partner
Company
1. Bajaj Allianz Bank of Punjab, Bank of Rajasthan, Jammu
& Kashmir Bank, Karur Vysya Bank, Lord
Krishna Bank, Punjab & Sind Bank,
Shamrao Vithal Co-operative Bank,
Karnataka Bank.
Information updated from newspaper sources and websites of the respective banks and
insurance companies (March 11, 2008).
A number of interesting facts emerge from the table. The first obvious
HDFC Life Insurance is tied with HDFC Bank, ICICI Prudential with ICICI
Bank and so on. The second striking feature of the table is the proliferation
of banks partnering with single insurance companies. Given that there are
133
only two dozen insurance companies and hundreds of banks, this outcome is
market segments by affiliating with banks that do niche banking. Take the
layer is a tie-up with ABN Amro and American Express. It caters to high net
worth urban customers. The second layer is a tie up with Canara Bank.
across the length and breadth of the country. The third layer, at a regional
level, a tie-up with Lakshmi Vilas bank focuses on the region specific
customers. This tie-up helps them reach customers in rural and semi-urban
centers in Tamil Nadu and Andhra Pradesh. The third feature is best
partners for the life sector as in the non-life sector. These two lists do not
match. The same is true for several other companies. Fourth, some banks
insurance company lists. This fact will become important as the warning of
the RBI that banks should not adopt any restrictive practice of forcing its
134
customers to go in only for a particular insurance company become an
policies through the post offices after it announced a joint venture with the
Department of Posts. Given that the post offices have unprecedented reach
around the country with 155,600 branches, it could distribute policies to the
customers even in very remote areas34. The Department of Posts is the only
There are several other banks in the pipeline for the approval of the
IRDA. They include the Punjab National Bank, the Principal Group and
Vijaya Bank. Two of them are well-established banks in India. The Principal
33
Raj Singh, H. 2002, Report of the Committee on Banking Sector Reforms, Government of India ,June
Vol. XXXXI PP. 234-251.
34
Meera Sharma, R. 2001, NPA Management Redefined, Indian Management, February, Vol. 40 (2), PP.
63-70.
35
Barman, R.B. and G.P Samanta, 2001, On efficiency of Indian stock market: A Statistical
reevaluation, IJAF, July, Vol. 7, PP.17-28.
135
The latest group to receive an outright charter for operating insurance
operation is Sahara Group (on March 5, 2004). Saharas entry is notable for
two important reasons36. First, Sahara is the only company to enter the
Indian market without any foreign partner. It thus becomes the only purely
distribution of its product not the least through its NBFC capacity.
Agreements.
36
Murty, G. R .K. 2001, Banks Foray in to Insurance: Adaption Challenges, The ICFAI Journal Of
Applied Finance, Vol. 7 (3) , PP. 80-97.
37
Tapen Sinha, S. 2002, Bancassurance in India: Who is tying the knot and why, SSRN Publication,
Vol. XXXIV, PP. 24-27.
136
3.11.1 Referral Model
Banks intending not to take risk could adopt referral model wherein
they merely part with their client data base for business lead for
model is done by the staff of the insurance company either at the premise of
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 is passed on.
begin with. This model would be suitable for almost all types of banks
including the RRBs and 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, resorts to this model and then move on to
corporate agency, wherein the bank staff is trained to appraise and sell the
agent for the insurance products for a fee/ commission. This seems to be
137
more viable and appropriate for most of the mid-sized banks in India as also
handle totally new service/product could not be ruled out. This could,
products in the initial stage. This model is best suited for majority of banks
infrastructure and yet could be a good source of income. Bajaj Allianz stated
mainly due to bancassurance strategy and around 40% of its new premiums
developed country like US, banks stated to have preferred to focus on the
38
Tapen Sinha, S. 2002, Privatisation of the Insurance Market In India: From the British Raj to Monopoly
Raj To Swaraj, CRIS, June, Vol. XXXI, PP.45-87.
138
business. This model of bancassurance worked well in the US, because
Apart from the above two, the fully integrated financial service
insurer and bank, where the bank functions as fully universal in its operation
and selling of insurance products is just one more function within. Where
internal part of its rest of the activities. This includes banks having a wholly
case, ICICI bank and HDFC banks in private sector and State Bank of India
in the public sector, have already taken a lead in resorting to this type of
market, also made a big stride within a short span of time. The great
advantage of this strategy being that the bank could make use of its full
scope. This may be suitable to relatively larger banks with sound financials
39
Krishnamurthy, R. 2001, Bancassurance in Insurance Distribution- Key Issues In The Indian Context,
FICCI Seminar, October, Vol. 27, PP. 51-53.
139
and has better infrastructure. Internationally, the fully integrated
holding company, this could be classified under this category, so long as the
bank is selling the insurance products along side the usual banking services.
For Insurers based on the business strategy and the number of tie-ups,
The bancassurance channel accounts for about 35 percent of the total new
and Aviva Life Insurance are the two major players with nearly a two third
business. Out of the new business premium of Rs.482 crore, during the year
bancassurance. The SBI Life Insurance could manage the same level of
business through bancassurance even during the financial year 2008 2009,
40
Rajmohan, S. 2008, Bancassurance in Emerging Markets Building Perspective Partnerships,
Insurance Chronicle, Vol. XXVI, PP. 23-31.
41
Bala Krishna,P. 2001, Banks Get Into Insurance, Indian Infrastructure, ICFAI PRESS, March, Vol. 3,
PP. 21- 25.
140
wherein almost 69 percent of the new premium come from the
bancassurance channel.
rural banks. With these tie-ups supplementing their own branches, Aviva
customers and is present in close to 3000 locations in more than 1100 towns
of the companys total new business premium of Rs192 crore, during the
the total new business premium of the company in the year 2008 2009.
Birla sunlife Insurance Company has six banking partners and the
be noted that the first bancassurance policy in India was sold by Birla Sun.
Insurance companys annualized premium for the year 2008 2009. The
new business premium increased from Rs.621 crore in the year 2004-2005
42
Dutta Sonali,D. 2001, SBI Life Insurance Company -Indian Perspective Insurance Chronicle, June ,
Vol. 34 (2), PP. 61-63.
43
Indian Institute of Bankers, 2002, Bancassurance in India Background Materials , Indian Banks
Association, Mumbai, Vol. 5 (1), PP.134-152.
141
to Rs.803 crore in the financial year 2008 2009. However, the
partners for selling their products. The company has recruited a large
Bank, Indian Bank and Bank of Baroda and many co-operative banks. Of its
channel during the year 2008 2009, marginally increased from 37 percent
almost 30 percent of the total new business premium of Tata Aig Life
Insurance company for the year 2004-2005 and the share remains almost
intact even for the financial year 2008 2009. Bajaj Allianz Life Insurance
44
Krishnamoorthy,R. 2002, Bancassurance: A SWOT Analysis, Financial Express,April, Vol. XV, PP.
17-19.
142
company gains almost 28 percent of their new business premium through
bancassurance. During the four year period between 2004 2005 and 2008
2 commercial banks and 16 co-operative banks and the company sells the
products through 2900 branches across the country. For the financial year
total business during the year 2004-2005 and the share has increased
Mahindra Life Insurance in 2008 2009. This business has come through
one private bank, 22 co-operative banks and the 400 branches pan-India.
143
bancassurance channel is very limited or even negligible (1 percent) in
in India.
45
Reserve Bank Of India ,2000, Insurance and Banking Issuea Of Overlap, report on Trend and Progress
of Banking in India Reserve Bank Of India Publication, April, Vol. 3 No. 3, PP 68-91.
144
Table-3.14
BANCASSURANCE BUSINESS IN INDIA
Percentage of
Sl No Name of the Insurance Company New Business Premium Business Through
Bancassurance
LIFE INSURANCE
9. CORPORATION OF INDIA 15840 20006 1 1
145
It can be observed from the above table that private Life Insurance
Companies have gained the most from the bancassurance tie-ups and that
46
Reserve Bank Of India, 2003, Insurance: The Indian Experience, Reserve Bank of India Occasional
Papers, June, Vol. 9 No. (2), Pp 112- 120.
146
Table 3.15
LIFE INSURANCE
10 0.7% 1% 1.1% 1.2%
CORPORATION OF INDIA
Source: Newspaper reports, various dates
147
There is a general consensus that bancassurance is indeed bringing in
customers of higher value. The concrete numbers are not available industry
wide to prove this point. However, Birla Sun life insurance Company alone
bancassurance channel. The data provided by the company clearly state that
the average size of the policy for the agency channel is Rs.19, 500 and for
the bancassurance channel it is Rs.39, 000 per policy. This can be taken as
148
CHAPTER - IV
A SWOT ANALYSIS OF
BANCASSURANCE IN INDIA
4.1 Introduction
centre will have to be created, top professionals of both industries will have
to be hired and R&D cell will have to be created to generate new ideas and
the expertise on the financial needs, saving patterns and life stages of the
customers they serve. Banks also have much lower distribution costs than
insurance companies and thus are the fastest emerging distribution channel.
is the logical route for insurers to take1. The customer sees Bancassurance as
1
Rao, G .V. 2003, What Brokers Are? , IRDA, Irda Journal, New Delhi. March, Vol. 5 (1), P 56.
149
a bonanza in terms of reduced price, high quality product and delivery at
4.2 Strengths
In a country with more than one Billion people, sky is the limit for
to be mined particularly for life insurance products. There are more than
1000 Million lives waiting to be given a life cover. There are about 200
policy. Millions of people travelling in and out of India can be tapped for
population below poverty line, the middle market segment is the second
India, the bank branch net work encompasses nearly 75,000 branches
inclusive of public sector and private sector banks. Close to 1 lakh branches
Each branch serves an average of 12,000 people. Banks have not only been
150
successful in the urban areas; it has also grown tremendously in rural areas.
The only other national institution with a bigger reach is the postal service.
is also exhibiting an upward trend. The bank deposits are growing at a rate
much faster than the gross domestic product. The level of growth in bank
percent GDP in 20102. Banks have become the main saving vehicle in the
economy. Thus, banks can prove to be an ideal vehicle for selling insurances
products due to their existing wide net work of branches all over the country
There are two serious problems that banks suffer from. First, banks
have been saddled with bad loans in the early 1990s. Second, banks are
2
Raje, P. (2000) Where Did India Miss a Turn in Banking Reform? Is there a Comeback? Center for the
Advanced Study of India, CASI Working Paper, December 2000.
3
Ranade, A and R. Ahuja, 1999, Life Insurance in India: Emerging Issues", Economic and political
Weekly, January 16-22/ 23-29, Vol XXXIV, PP. 124-132.
151
In India, during the period 1991-92 many a number of banks were
infusing more money to these public sector banks. The total amount of
money exceeded eight percent of the GDP. Ever since the recommendations
The union Budget 2000-01 announced that the Government would consider
norms.
The subsequent economic boom and the stringent RBI norms have
continue to comedown for banks in India. Thus, the commercial banks will
feel more comfortable to get into the insurance business more directly.
152
4.2.3 Over-Staffing
for the bancassurance business. There have been numerous committees set
up in India and by international organizations like the World Bank and the
especially the government owned banks. The general consensus among the
experts is that the public sector banks needed to shed at least 10 percent of
their workforce. Unfortunately, this was not possible because the banks have
one of the most militant and politically powerful unions in the country. To
manage this problem, the banks have taken some alternative steps. They
have reduced the cost of operations from around 3 percent of total deposits
in the early 1990s to around 2.5 percent by 2000. The cost of operation is not
uniform across all types of banks. The reduction of cost of operation has not
been uniform either. Therefore, the commercial banks have taken additional
steps. One of the much vaunted efforts in banks in India, in recent years, has
employees over the age of 40, who have served the banks for ten years or
retirement scheme does not involve coercion; it has the blessings of the
relevant union. The much talked about voluntary retirement scheme almost
153
backfired. The problem has been that whenever the offers were made, the
most productive and most employable workers took up the offer. This
scheme of banks. Only the workers who could not be employed elsewhere
are more likely to stay with the banks4. This has the problem of lowering
necessary.
banks. It has been estimated that they have spent about sixty million rupees
headcount, the exercise has produced the desired reduction in the number of
work force. Through this process even the initial target of 10 percent was
the process, the major takers of voluntary retirement scheme turned out to be
154
especially the State Bank of India, have been exposing another alternatives
scheme or any other scheme that have adverse effects on the productivity of
the banks5. The commercial banks can redeploy some of their existing staff
for selling insurance products. Thus, the excess staffing problem may turn
problem and the reduction in the Nonperforming assets motivate the Indian
4.2.4Bank Culture
The Indian banking sector does not have the same stigma that life and
other insurance carries. The banks are culturally more acceptable to the
society than the insurance companies. Once the commercial banks start
marketing the insurance products both the life and non-life, the customers
are more likely to acquire them. This unique status of the commercial banks
will definitely trigger as a boost for marketing the insurance products. This
more educated.
5
Dasgupta, S. 2001, Iffco-Tokio yet to appoint actuaries", Economic Times, January 23, Vol XI (4) P 12.
6
Yiannis, V. 1999, Bancassurance: Present and Future, Insurance and Reinsurance Conference October,
Vol. XXX, P 67.
155
4.2.5 Fee Based Income
Banks can earn fee based income for insurance sales. The fee based
income for the banks varies based on whether they operate as a corporate
agent these banks will earn higher commission than for referral agents
present, however, banks are prohibited from offering commission and other
incentives for selling insurance products. But, the banks have found ways to
circumvent the problem by offering car allowances and other allowances for
those employees selling the product. The fee based income that the
motive for the banks to enter into the bancassurance business7. The other
bancassurance venture.
4.2.6 CustomerLoyalty
and more sophisticated range of products than simple bank deposits of few
7
Roy, S. 2001, "Insurance Sector: India." Industry Sector Analysis, National Trade and Development
Board, US Department of State, Washington, DC, December, Vol IX, PP. 17-19.
156
varieties. The Life Insurance Companies and other General Insurance
offer these innovative products over and above the conventional activities to
retain the customer base. This is a key driver for raising the motivation of
bankers8.
than selling to a group of unknown customers. Experience all over the world
has shown that the bancassurance firms have a lower expense ratio. This
benefit could go to the insured in the form of lower premiums. The ratio of
low. This is because the banks and the insurance companies are benefiting
from the same distribution channels and people. Insurers who operate
Insurers found that direct relationships with customers gave them greater
control of their business at low cost. Insurers who operate through the
8
Manoj Kumar ,R. 2000, Bancassurance: A SWOT Analysis, Journal of Banking Finance, July, Vol
XXI, PP 46-47.
157
agency relationship are hardly having any control on their relationship with
their clients.
estimated that the Life Insurance premium is more than half of the total
premium collected by the whole insurance sector both the life and non-life
insurers. Therefore, the banks can take this opportunity and through
This is will be another key factor for the success of bancassurance in India.
9
Vaidyanathan, R. 2001, convergence in the financial services: Role of insurance industry in emerging
markets. Paper presented at the 5th Apria conference on risk and insurance at Bangalore.
158
4.2.10 Pension Reforms
pave the way for the banks to play an important role in that sector. Banks
also play a major role in developing a viable health care program in India in
4.3 Weakness
weaknesses. These weaknesses may become real hurdles for the progress of
(GIC) & Life Insurance Companies (LIC). A late awakening seems to have
dawned upon them but it is a case of too late and too little. In the age of
Wide Area Network Internet (WAN) and Vast Area Network (VAN), simple
LAN has not yet been introduced even in many of the offices these
159
managers and operating offices. In spite of growing emphasis on total
This is, perhaps, the major hurdle for the success of bancassurance as a
business model11.
class who constitutes the bulk of this market is today burdened under
middle class for investing in future security, the ability to save is very
nominal12.
11
Rajiv, K. 2003, Bancasurance in india A Special Reference, ICFAI Press, Vol. XXVI No.12, PP. 45-
48.
12
Lskshmi, R. 2005, Indian Insurance sector merger to financial sector, IIM, Vol.12, PP. 21-27.
160
to succeed, it is extremely essential to have an in-built flexibility so as to
schemes get Tax exemptions on maturity, also the payment on such policy
are tax exempted. There is also a small tax relief for premiums paid in
certain kind of polices. But personal line products like householder; travel
policies, etc., do not enjoy the tax benefits. The absence of tax exemptions
4.4 Opportunities
The data base of the commercial banks is enormous. This data base
13
Rajesh, R. 2003, Bancassurance- For life, ICFAI press, Vol. XXVII, PP. 45-56.
161
system and utilizing the marketing techniques and the products tailored to
the middle markets, the Indian banks have the opportunity to almost double
the conversion rates of insurance leads into sales and have increased sales
lines carriers have found it difficult to grow using traditional agency systems
because price competition has driven down margins and increased the
agents have sold fewer and larger policies to a more upscale client base.
Middle income consumers; who comprise the bulk of bank customers get
have formidable agent network. This formidable agent network will pose
162
provides a great opportunity for those private sector insurance companies to
sell the insurance products with proper tie-ups with the commercial banks.
channels such as direct mail have not done well. Clearly, a change in
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 banks and insurers bring to
insurance products, it appears that it is yet to attain critical mass. Out of the
total 1.75 lakh branches of commercial and co-operative banks, hardly one
15
Dr. Rajendra Singh, S. 2006, Bancassurance-A SWOT Analysis IIBM, Vol. 16,
(7), PP. 34.
163
and (b) insurance density, i.e., premium per capita. The penetration of life
of 2.3 percent and insurance density of $8 belongs to one of the lower rungs.
These indicate that a lot of potential does exist in both life and non-life areas
particularly the middle class, which no doubt wants return but safety and
liquidity first and foremost, finds it difficult to save money. The stock
markets have become highly unreliable and are tainted with scams, and
mutual funds have moved in tandem with stock markets. Money market
instruments are still undeveloped. Many urban banks in various parts of the
country have failed or become fragile. Against this backdrop, life insurance
products, at least, give tax benefits and future security. In fact, taking tax
benefits into account, the return on certain life products are more than on
164
stipulated sum, is taxed at source, like dividends earned on shares. Thus, the
moral of the story is that life insurance products still have a bright future
even though there are several competing products from banks and other
financial intermediaries. Further, the gap between bank savings products and
Today, life in general, has become more uncertain and risky. Not only
etc.) on the rise but natural catastrophes (earthquake, flood, cyclone, etc.) are
also becoming more frequent. One certainly does not welcome such
uncertain times, but these uncertain times create opportunities for insurance
nuclear families are coming up, and with this, the demand for life-cover for
the head of the family and family members is also rising. An outcome of the
one way or the other by their children. Thus, the future older generation has
to plan for their financial safety and security in their old age, and the
16
Raju, S. K. 2006, Impact of Bancassurance in India, Insurance Professional, PP.42 46.
165
awareness is also increasing in this regard. This speaks well for life
insurance products17.
In urban and metro areas, where the customers are willing to get
many services like lockers and safe deposit systems and other products and
related general insurance policies like fire insurance, burglary insurance and
finance in the form of loans for cars, or for buying a house to clients etc.
They can take advantage of this by cross-selling the insurance products and
combine it as a package18.
In most cases banks provide salary disbursement and loan facilities but here
17
Dr. Hassan, A. 2004, Impact of marketing insurance products through banks: Indian perspective, IBA
Bulletin, Special Issue 2004, June, Vol XXVII No 4, PP. 45-47.
18
Amitesh, C. 2002, Bancassurance The most challenging insurance distribution channel, Journal of
Risk and Insurance, Vol. 68, PP. 489-506.
166
especially in a regime of falling interest rates and low levels of credit off-
including hidden and creeping costs to arrive at the net benefit. Initial
business and such other issues need to be gone into thoroughly. In short, an
in-depth analysis of the value chain should be done in order to draw valid
While the above points are from the macro level view, there are
some micro aspects that need to be focused upon. Micro insurance which is
at a miniscule level to the over all businesses, may also undergo dramatic
seeing the apparent benefits, but to translate them into reality; the challenge
19
Krishnamoorthy, R. 2004, Bringing Bancassurance to India , IRDA Journal, Vol.6 (3), PP. 73-75.
167
into partnerships, but the same enthusiasm and direction from the top to
only at the branch. The other streams such as out of branch models and
extent20.
level agreements between the bank and the insurer, parking of funds and
During the last couple of years, banks have been flush with deposits,
whereas credit deployment has been slow - both due to several socio-
products instead. Some areas with good potential for bancassurers are health
20
Naveen, S. 2002, Bancassurancce A SWOT Analysis, IBEXI Press Release, Vol. 5, PP 4-9.
168
market-related insurance and pension. It is one of the basic ways to increase
return on assets (ROA) because they can increase their fee income through
4.5 Threats
thinking and work culture on the part of everybody involved. The work force
at every level are so well entrenched in their classical way of working that
set in. Any relocation to a new company or subsidiary or change from one
employees. The difference in working style and culture of the banks and
bancassurance is not simply about selling insurance but about changing the
169
sector is in public sector and which has been widely disparaged for the
of banks and insurance companies and the perception of customers about the
targeted customers. If many joint ventures took place between banks and
insurance companies then it may happen that the customers may not respond
a saving option than providing risk cover. So this may create an adverse
feeling in the minds of the bankers that such products may lessen the sales of
regular bank saving products. Also selling of investment and good return
viz., term deposits and other products which are mainly aimed at long term
170
Banks could as well feel apprehension about the possibility of substitution
effect between its own products and insurance products and more so, as a
incentives22.
institution, it is suitable only for larger banks. However, it has other allied
22
Jayshree, B. 2006, Bancassurance New avenues for banks, Financial Express Front Page, Vol.xxx, P
25.
171
each products intricacies is a prerequisite. Moreover, insurance products
marketing by the bank staff. These can result in resistance to change and
were no occasions in the past for the bankers to deal in insurance products;
therefore they require strong motivation of both monetary and non monetary
23
Pushpa Veni, V. 2006, Bancassurance An emerging Trends In India, The insurance Journal,
January- June, Volxx, PP. 36-41.
172
linkages, inadequate incentives, resistance to change, negative attitudes
roadblock than the lack of sales skills in the employees. Banks are generally
used to only product packaged selling and hence selling insurance products
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
The private sector insurance firms are finding it very difficult to cope
with the frequent change management in the public sector banks. State-
owned banks get a new chairman, often from another bank, almost every
change. This will disturb the on-going bancassurance business of the banks.
24
MUKUL, K. 2003, Bancassurance: Taking the lead, ICFAI Press, September, Vol. XXVIII, PP.124-
127.
173
The banks also have fear that at some point of time the insurance
possibility of conflict if both the banks and the agent target the same
efforts to market the former will be less cumbersome for the bancassurance
banking products and are far too complex, with high counter-party and
LIC and the four subsidiaries of GIC are well established in their
awakened them, and being old players, they would like to take their
competitors, who are new, by the horns. Thus, they will strive to become
strength, including the lobbying power. This would pose a threat to the new
25
Manojit, S. 2005, Multiple Bancassurance tie-ups may get nod, The Financial Express, Vol No. 9, PP.
23-24.
174
adverse selection and moral hazard problems, which may ultimately prove
India have to learn to avoid. One of the methods of limiting this is to insist
core competence. Banks have to take good care to avoid these pitfalls when
depositors does provide a huge and useful database for selling insurance. But
this is only one aspect of insurance business. The way a bancassurer handles
the funds received and invests them properly to achieve a good return is
bancassurer27.
26
Manoj Kumar,R. 2002, Marketing and Distribution Channels in Bancassurance Insurance professional,
Vol. 5(1), PP 17-19.
27
Rao, C.S. 2001, EMERGENCE OF BANCASSURANCE IN INDIA, The Hindu Express, Vol. 7(3),
PP. 41-43.
175
While there are great hopes that the new brand of bancassurers and
non-banks handling insurance will offer a better service than the earlier
India's new policy on insurance has been one of the most hotly
result of the latest round of reforms, succeeds in giving both better service
and larger spread of insurance benefits without leaving any loopholes for
and supervision28.
28
Ajay, K. Y. 2003, A Report on Impact of Bancassurance on Indian Insurance Market, Insurance
journal, Vol.XX, PP 34-37.
176
Banks have not covered themselves with glory when they have
entered the securities business, such as mutual funds. It is ultimately the test
of the quality of management which banks bring to bear upon the new
There was also the related issue of oversight and regulation. The UK
definitely both worthwhile and necessary. There is, therefore, need for a
high level Steering Group, consisting of the RBI Governor, SEBI Chairman
29
Pradhan, S. 2003, BANCASSURANCE IN INDIA : A SWOT ANALYSIS, Journal of Insurance,
Vol. 10, PP. 11-13.
177
and IRDA Chairman for the successful functioning of bancassurance. The
RBI suggested recently that it might well be possible to give legal sanctity to
such an umbrella organization. Such a body will include not only the
the financial sector ultimately revolve around the effective functioning of the
Payment and Settlement System run by the banks. It should, therefore, be the
path of wisdom not to dislodge the central bank from its supervisory and
Although IRDA has done appreciable work within the short period,
possibility for regulatory arbitrage could not be ruled out. Presently there is
no statutory compulsion that the regulators should part with each other the
30
Narayanan, K. 2004, Bancassurance- Cheaper Cover, Out Look Money, Vol.24(4), PP. 23-24.
178
In India all insurance companies in private sector are of recent origin
and are in the process of stabilising, also highly aggressive due to tough
competition. The over ambitiousness should not smack their own limitation,
uncertainty in the cash flows and that has to be recognized and appropriately
handled. The insurers internal risk management and control systems for
managing their asset market activities, and credit risk seems to be relatively
less transparent unlike the banking system as also the prudential regulatory
and supervisory system towards insurance is relatively recent one and less
31
Ramesh, M. 2002, Aviva Life bet on bancassurance pays off, The Hindu Business, Vol 21(4), PP 12-
14.
179
rigor as compared with the banking system, especially in the context of the
their will need to be guarded, which RBI has been already emphasizing in its
circular33. Possibility of banks using the long term insurance funds to meet
their short term liquidity and the problem of asset liability management
tested.
portfolios.
32
Rajesh, S. 2004, Bancassurance In India Insurance Professional, Vol. 9, PP. 3-24.
33
Rathur, S. 2005, Bancassurance A Emerging Trends In India, Insuurance Profeesional , Vol 12, PP.
13-17.
180
Hypothesis 2: For insurance companies, non-performing assets of a bank
distribution.
could be less likely to get away from core business. On the other hand, a
more profitable bank might be willing to gamble some of its profits to a new
line of business.
branches (for banks with national presence), the more the likelihood of a
some instruments are needed. For the first hypothesis the variable business
banks.
181
For the third hypothesis, the return on assets (ROA) of
For the fourth hypothesis, the volume of business done by the banks is
considered as the size variable. All of these variables have been collected
from the banking report of the Reserve Bank of India 2008-09 for each of
the 95 banks operating at the time (some of them have since merged with
others).
182
The method used is Maximum Likelihood - Binary Logit. (The results
are very similar for Probit and extreme value methods). Convergence
bancassurance = 0 is 53.
For the results which are reported in the above Table it is noted that
our first Hypothesis that for banks, if the business per employee is low. it is
their portfolios.
10per cent). Thus, we find qualified support for the second Hypothesis.
The third hypothesis did not have any support from the results.
level).
183
CHAPTER - VI
SUMMARY OF FINDINGS,
than others and consequently survival of the fittest has come into effect.
in a better way to the customers. Now the time has come to choose and
companies can get the maximum benefit and serve the customers in
growth in this sector. The time has come for the industry to gradually move
Indian insurance sector has undergone a sea change in the last ten
years, ever since the sector was opened up for private players. Instead of
falling back on the individual agents for business, new insurance companies
industry brokers.
247
In today's scenario, insurance companies must move from selling insurance
become trusted financial advisors for the clients and trusted business
associates for the insurance companies, so this calls for leveraging multiple
undergo a tie-up, thereby allowing banks to sell the insurance products to its
customers. This is a system in which a bank has a corporate agency with one
insurance company to sell its products. It has its origin decades ago in
branch network of banking system, which only very few countries in the
248
world could match with. The bancassurance has not yet fully blossomed as
far as India is concerned, nevertheless they have started yielding the results.
It is predicted by the experts in the field that almost 90 percent of the share
With enormous benefits for banks like increase in revenue, return on assets,
big revolution in the banking industry. The business of banking has become
much more diversified. The customer preferences have shifted from deposits
to investments. Thus, it has become imperative for the banks to retain the
customers by providing more value added services under one roof as well as
provides the best possible solution to this, most of the banks now a days
need for a study to know whether the banks have been benefited out of
undertaken.
249
Bancassurance a term coined by combining the two words Bank and
time. In a situation of constant asset base, the bank can increase Return on
through their own channel. The advantage of a bank over the traditional
distributors of insurance is the lower cost of sales per head, which is made
banks in India. The present study analyses the awareness of the customers
bancassurance. The study also measures the initiatives taken by the banks in
endorsing the insurance products of their partners. The study throws light on
insurers, and customers. This study mainly covers the perception of their
250
customers in relation to their bankers with regard to the bancassurance
chapter is as follows;
employees with new challenges and enhanced skills, thus improving their
agents, the insurer can only sell fewer and large policies to a more upscale
clients. The middleclass income holders who comprise the bulk of bank
customers get very little attention from the agents. By using bank channel,
251
For customers, Bancassurance provides the convenience of dealing
with one financial institution for all financial needs. Apart from the
products in order to fulfill certain needs the customers which emanate from
banking transactions.
A category of product that can satisfy both the bankers and customers
is the finance and repayment product, the best known of which are the
to the customer and serves as additional security for the bank and financial
a) The cover under the overdraft insurance is equal to the credit facility
case where the customer dies and this credit facility has been used, the
company.
252
b) The cover equals the maximum pre-agreed credit facility. In case of
due, this amount will be paid to the heirs of the customer. Premiums in
The customer is granted the loan and he pays to the bank only the loan
interest. He also takes out an endowment that has a cover equal to the loan
amount and with a duration equal to the repayment period of the loan. The
premium in this case is usually paid by the bank. The amount of cover is
usually a multiple of the cash balance in the deposit account. In the case of
253
Objective achievement insurance policy can be offered to special
amount and the cash balance of the account is paid to the depositor or the
The banks can also offer simple standardized package products. These
products are usually group policies which combine covers and which cost
These products are parameterized and require little consultation in the sales
process, e.g., tax hedge plan. Group products are packaged for specific
Unit linked products primarily aim to satisfy the investment needs of the
client and are a logical extension of other investment products sold by the
bank. Products under the Universal protection plans address the risk
protection needs of customers and aim to adequately provide for the family
254
Distribution Channel
Career Agents
contractors.
Special Advisers
advisors.
Salaried agents
The salaried agents are being fully under the control and supervision
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
255
representatives within the bank. Platform Bankers can usually sell simple
products. The bank employees are assisted by the bank's financial advisers.
The bank employee establishes the contact to the client and usually sells the
simple product.
Direct Response
mailing or telephone offers. This channel can be used for simple packaged
explanation.
Electronic Media
operation, strong brands, easy distribution and excellent synergy with the
internet capabilities.
256
insurance counsellor can make a presentation to a small group of business
people, field questions on the topic, and then collect business cards.
product, the distribution system and the channel are compatible. Low
design, but a failure of the distribution system. Bancassurers can tap all the
financial advisors.
Traditional life insurers are often trapped: they create a product with
features attractive to agents (such as high commissions), and then let the
companies.
257
Strategy
insurance into the bank product portfolio and distribution infrastructure. One
fundamental cultural conflict between the bank and the insurance company
Bancassurance Models
258
Separate sales force
between the staff of the partners and merely utilizes the customer database
Hand in Glove
This model entails the sales force of the insurer utilizing the resources
of the Bank.
Fully Integrated
Under this model, the insurance sales process is wholly owned by the
Bank staff, while the insurer acts only as a product and service provider. The
and only under this model do banks achieve a dominant market share.
Non-integrated Model
This model is usually implemented when either regulation or tax
activities.
analysis.
259
Open Architecture Model
partners for each type of product. This model is less efficient than the
Indian Scenario
The first Insurance Company in India that had policies that could be
bought by Indians with "fair value" was the Bombay Mutual Life Assurance
company was the Indian Mercantile Insurance Company Limited which was
set up in Bombay in the year 1907. In the year 1956, the Government of
India announced the nationalization of the life insurance business. The life
(LIC) Act of India 1938. The general insurance industry was nationalized in
company. It has four subsidiaries: New India, Oriental, United India and the
260
number of sectors in 1991, insurance remained out of bounds on both
came in the year 1999. On March16, 1999, the Indian Cabinet approved an
the insurance sector. On December 7, 1999, the new government passed the
and the General Insurance Corporation in 1972. The authority created by the
Act is now called IRDA. By the end of March 2009, there are twenty two
life and twenty one non life Insurance Companies in India. The passage of
the IRDA Act paved the way for a number of Indian companies to seek the
leading player.
Bancassurance in India
existed in a rather limited form in India, well before the general insurance
261
nationalization of banks in 1969. Before this, a large number of banks used
were mainly general insurance products. The product development and risk
banking, etc., there is possibility of migration of risks from the rest of the
activities to the banking system. Thus, the increased market integration and
globalization are demanding new realism on the part of the regulator and
The RBI has set down the rules for the entry of banks in the field of
insurance. The Reserve Bank of India issued a set of draft regulations to all
insurance business.
262
regarding this. IRDA has made it mandatory for every insurer who started
prescribed levels of business from rural and social sectors. The guidelines in
this connection indicate that the life insurer must cover a minimum rural
business of five per cent in the first financial year; seven per cent in the
second financial year, ten per cent in third financial year; twelve per cent in
the fourth financial year and fifteen per cent in the fifth year of total policies
written during that year. In respect of a general insurer, the prescribed limit
is - two per cent in first financial year, three per cent in second financial
year and five per cent thereafter of total gross premium income of that year.
In respect of social sector, all insurers are supposed to cover five thousand
lives in the first financial year, seven thousand five hundred lives in second
financial year, ten thousand lives in third financial year; fifteen thousand
lives in fourth financial year and twenty thousand lives in the fifth financial
year.
It is very difficult to identify their need and design products that are viable
263
substantial amount of money by way of marketing research to identify their
banks and insurance can provide substantial synergy here. The banks
already have a massive infrastructure spread across the width and breadth of
264
In the 2001 Report on Currency and Finance, the RBI laid down its
with risk participation. The third route, due to its risk aspects, involves
2003 setting out the ground rules for bancassurance. Now, the IRDA has
banks.
joint venture partnership with Cardif SA (the insurance arm of BNP Paribas
Bank). This partnership won over several others (with Fortis and with GE
Capital). Many experts in the industry had awaited the entry of the SBI. It
was well known that the SBI has long harbored plans to become a universal
265
For a bank with more than 13,000 branches all over India, this would be a
natural expansion.
The entry State Bank of India (SBI) was groundbreaking for several
reasons. This was the first for an Indian bank to enter the insurance market.
Second, even though the regulators have said that banks would not
company, the SBI was allowed to do so (with a promise that its share would
process, both life and non-life companies have tied up with banks.
Agreements.
Referral Model
Banks intending not to take risk could adopt referral model wherein
they merely part with their client data base for business lead for
commission. This model would be suitable for almost all types of banks
266
including the Regional Rural Banks and cooperative banks and even
Corporate Agency
corporate agency, wherein the bank staff is trained to appraise and sell the
agent for the insurance products for a fee/ commission. 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
Apart from the above two, the fully integrated financial service
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
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Bancassurance business in India
accounts for about 35 percent of the total new premiums collected by the
Industry in India. SBI Life Insurance Company and Aviva Life Insurance
are the two major players with nearly a two third or more of their premiums
premium of the company in the year 2008 2009. Birla Sunlife Insurance
Company has six banking partners and the Insurance product are sold
through 1000 branches. Incidentally, it may also be noted that the first
the total new business premium of Tata AIG Life Insurance company for the
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financial year 2008 2009. Bajaj Allianz Life Insurance company gains
SWOT Analysis
Strength
additional fee income for the banks. Banks have the expertise on the
financial needs of customers and also have lower distribution cost. Thus,
they are the fastest emerging distribution channel for insurance products.
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In India, there is a vast untapped potential waiting to be mined for
been quite extensive. Banks can prove to be an ideal vehicle for selling
insurance products due to their existing wide net work of branches all over
the country including the rural areas. The stringent RBI norms have helped
assets. Thus, the commercial banks will feel more comfortable to get into the
banks can redeploy some of their existing staff for selling insurance
products. Thus, the excess staffing problem may be a blessing in disguise for
The banks are culturally more acceptable to the society than the
boost for bancassurance. The fee based income that the commercial banks
earn through bancassurance will supplement their core lending activities and
boost their profitability. Banks can retain the customer base by offering
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Insurers who operate through bancassurance own and control relationships
with customers. Banks have vast experience in marketing and this will be
Weakness:
is one of the hurdles for the success of bancassurance in India. Low savings
rate, especially among the middle income group is another drawback for the
for the success of bancassurance. The tax structure in the country may
Opportunities:
databases. Middle income consumers get little attention from the traditional
under served market. The formidable agent networks of the public sector
this challenge, the private Insurance companies can make use of the wide
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distribution network of commercial banks through bancassurance. Hardly
rural areas. The financial environment in India has become uncertain and
fragile. Against this backdrop, the life Insurance products still have a bright
future even though there are several other competing products from banks.
Today, the life has become more uncertain and risky and these uncertain
this business model will further go heights. Out of branch models will
Threats:
and insurance companies and the perception of customers about the poor
saving option than providing risk cover. This may create an adverse feeling
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in the minds of the bankers that such products may lessen the sales of
complex insurance products add more difficulties for the bank staff. Bankers
experience to deal with them. The private insurance firms find it difficult to
cope with the frequent change in the management of the public sector banks.
of reforms should not leave any loopholes for abuse of financial powers
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Perception of Consumers
majority of the respondents are business men. Fifty one percent of the
respondents are male. Majority of the sample customers are married. The
lakh Rupees per annum. The majority of the respondents are the customers
Savings Bank Account and or Current Account with their banks. Only two
percent of the sample respondents in the study area has more than 7 years of
continuous association with their banks. All the 300 respondents in the study
area are holding life insurance policies and 98 among them are holding
percent of the samples agree that the insurance is an absolute necessity for a
have a fair idea about bancassurance and the related products offered by the
banks. It is an important fact that out of the total 300 sample respondents,
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only 114 respondents are the real customers of bancassurance and majority
of them are business people. The banks themselves are the major sources of
agents still play a very important role in the distribution of insurance policies
to the customers. It will take some time for the banks to replace them. It is
observed during the study that 45 percent of the respondents agree that the
to purchase the insurance products from their banks. Fifty three percent
the customers are more than that of the websites of the respective banks.
Majority of the respondents agree that the bank employees take sincere
275
efforts to familiarize various products of their insurance partners among
A vast majority of the respondents are of the view that the modern
This perception of the respondents really gives a strong phillip to the growth
agree that the banks are more reliable institutions for buying the insurance
products.
6.2 SUGGESTIONS
business. In this context, one viewpoint is that the bank employees by their
But if we look at the developments taking place over the last few years, we
can say with confidence that bank employees in the public sector banks have
through competition by private sector banks. It implies that given the chance
and requisite training, they can also become successful in insurance sector.
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The road to Bancassurance has been laid. A few Bancassurance
vehicles have started their journey on the road; but they have miles to go.
customer service provides one with the necessary cutting edge to remain
bancassurers, at least for some time to come, will concentrate on urban and
India and this would be the right time for banks to resorting to
regulatory authorities and the Government. The fact that the banking
banking channels, viz., internet banking, ATMs, etc. are all the more
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conducive for flourishing of bancassurance. Regulators could explore the
possibility of allowing banks having tie-up arrangements with more than one
in India and will take equity stakes in insurance companies, in the long run.
problems such as, poor manpower management, lack of sales culture with in
towards insurance etc. In order to get the full benefit of it the following steps
should be taken:-
278
i) Service delivery mechanism should be strengthened.
v) Bank's data base system should be made flexible to cope with the
change.
new ideas and new thinking approach, and work culture to dominate the
world of tomorrow.
The RBI has their own guidelines and the IRDA has its own set of
banks can educate the customers by sending frequent emails with attractive
synopsis to the e-mail IDs of the customers about the various insurance
policies with the link carrying them to the bank website. More popup
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window and frequent play of geographical displays can also attract the
option as most of the respondents are uncertain about it. This will also help
agents. The bank should also provide after sales services to the customers for
distributing through banks. Trying to sell traditional products may not work
specifications. Banks and Insurance companies should apply all the skills
and potential in this area and take advantage of the same and they should
improve the products from time to time according to the needs of the
customers.
280
The employees of the banks who are selling insurance products must
be given proper training so that they can answer to any queries of the
Banks should also do the settlement of claims which will increase the
which has been widely responsible for the lethargic attitude and poor quality
case of possible conflicts, the bank management and the management of the
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6.3 CONCLUSION
changing the mind sets of doing a plain vanilla banking. The time has come
for banks to move beyond their traditional business to turn into a financial
super mall; of course with necessary safeguards and after a meticulous due
iron out the differences and seize the emerging opportunities. It is the need
of the hour for the bancassurance venture to include new ideas, and new
distribution channel and will change the way insurance is sold in India.
Bancassurance in India has just taken a playing start, but it has a long way to
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6.12 AREA OF FURTHER STUDY:
on bancassurance will be complete only if the insurers are also taken into the
explored.
283
BIBLIOGRAPHY
284
Dr. N.Neelmegam, , Insurance Distribution in India, Journal of Insurance
Professional, Vol. XIV, May,2006.
285
Krishnamurthy, R., "Bancassurance in India", paper presented at the CEO
Summit of Swiss Reinsurance Company, April, 2003.
286
Mathur S B Strategies Irda Journal, pp29-30, IRDA, New Delhi,
December 2003.
Mukul, K., Bancassurance: Taking the lead, ICFAI Press, Vol. XXVIII,
September, 2003.
Ranade Ajit and Ahuja Rajeev Life Insurance in India: Emerging Issues,
Economic and political Weekly, 16-22/ 23-29, Vol XXX IV, Nos 3 and 4.
Mumbai, January, 1999.
287
Rao, C.S., EMERGENCE OF BANCASSURANCE IN INDIA, The
Hindu Express, Vol. 7(3), March, 2001.
Rao, G .V. What Brokers Are?, IRDA, Irda Journal, New Delhi,
Vol. 5 (1), March, 2003.
Roy, A., "Pension fund business in India.", The Hindu, July 16, 1997.
Roy, S., "Insurance Sector: India- Industry Sector Analysis, National Trade
and Development Board, US Department of State, Washington, DC,
Vol No.XXX (2), December, 1999.
Roy, S., "Insurance Sector: India." Industry Sector Analysis, National Trade
and Development Board, US Department of State, Washington, DC,
Vol IX, December, 2001.
Rudolf Enz, H., The S-curve relation between per-capita income and
insurance penetration, Geneva Papers on Risk and Insurance: Issues and
Practice, Volume 25, No 3, July, 2000.
288
Sigma, "World Insurance in 1999. Published by SwissRe, July, 2000.
Tapen Sinha, S., Privatisation of the Insurance Market In India: From the
British Raj to Monopoly Raj To Swaraj, CRIS, Vol. XXXI, June, 2002.
Tyler, J. and H. Leverty, Are synergies between banks and insurers huped?
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289
II Webliography:
1. www.wikipedia.com
2. www.books.iupindia.org
3. www.indiabschools.com
4. www.rbi.org.in
5. www.irdaindia.org
6. www.southindianbank.com
7. www.bimaonline.com
8. www.insurancepost.com
9. www.insuranceworld.com
10. www.insuremagic.com
11. www.google.com
12. www.sbilife.com
290
III. PROJECTS AND REPORTS:
Practice Germany.
291
BANK/INSURANCE MERGERS OUTSIDE CANADA: THE
Pacific Insurance Group San Diego CEO & Managing Director Security
292
IV BOOKS:
293
APPENDIX
APPENDIX
PERSONAL INFORMATION
1 Name :
2 Residential Address :
3 Age : Years
7 Educational Qualification :
SSLC
GRADUATE
POST GRADUATE
PROFESSIONAL DEGREE
OTHERS
-2-
8 Occupation :
Salaried
Business Man
Retired
Others
15 Please Indicate your views based on your experience and expertise by placing a [ ]
mark at the appropriate column in the five point response scale given below:
1) Strongly Agree : (SA)
2) Agree : (A)
3) No Opinion : (NO)
4) Disagree : (DA)
5) Strongly Disagree : (SDA)
SA A NO DA SDA
Insurance Provides Protection
Insurance is an absolute necessity
Insurance (Life) is an investment option
Please indicate your views based on your experience and expertise by placing a [ ]
mark at the appropriate column in the five point scale given below:
1) Strongly Agree : (SA)
2) Agree : (A)
3) No Opinion : (NO)
4) Disagree : (DA)
5) Strongly Disagree : (SDA)
22 The following are the important Advantages of buying the Insurance Products
through banks.
SA A NO DA SDA
Bankers give Expert Advice
It is convenient to buy Insurance products
through banks
Banks are easily accessible
-5-
23 The following are the major initiatives taken by the bankers in promoting
Bancassurance:
SA A NO DA SDA
Frequent displays made by the respective
banks familiarize the Insurance products
among the customers
24 Do you plan to take any life Insurance Policy in the near future?
Yes No
25 Assume you plan to take a Life Insurance Policy in near future, your preferred
channel for acquiring the Insurance Product:
Bancassurance
Other Channel