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Bancassurance, a French term, simply denotes using banking channels to sell insurance products. Bancassurance is yet another manifestation of the convergence process in the financial services industry. Bancassurance benefits all the three key parties, i.e., the insurer, the bank and the customer. The insurer can access a client base, which is normally not available to it through other means or without cost. By allying with a bank of good repute, the insurer can improve its own public image. Bancassurance enables the insurer to establish a relationship early in a customer's life, as individuals open bank accounts at a much earlier age than they buy insurance. The insurer gains business at a lower acquisition cost than usual due to the bank's easy access to its client base and strong relationships with its clients.

Bancassurance helps increase the overall productivity of the bank's client relationships. It helps increase profitability, or return on asset o
r equity of the bank by virtue of generating extra income, particularly fee-based income. It can help banks increase their branch productivity. In addition to benefits that a bank can derive from its branch network, bancassurers can have a competitive advantage over traditional insurers (non-bancassurers) through their ATMs. Bancassurance helps the customer to pay a lower price for insurance products because of lower acquisition costs. The customer gets the convenience of one-stop shopping for financial services products and easier way to make payments (through the bank). The customer also enjoys better client service because of the bank's expanded relationship with the customer.

Reasons for Banks' Eagerness to Collaborate with Insurance Companies
  • Attraction of fee income
  • Diversion of surplus workforce
  • Development of product range
Reasons for Insurance Companies' Eagerness to Collaborate with Banks
  • Reliance on wide network
  • Attraction of strong clientele base
  • Aggressive marketing strategies
Reasons for Consumers' Eagerness to Welcome Bancassurance

Consumer perception is itself a very dynamic phenomenon. Today's customer is very demanding and sensitive too. Customer expectations in respect of service quality are quite high. Consumers insist on respectable behaviour from their banker. Now, when there are so many operators, they can always switch over their loyalty at any moment. Thus, there is a challenge before service providers that their clientele base is retained. In regard to quality of service, our public sector banks are certainly required to redefine their priorities and strategies because very often they are labeled as poor. The competitive state of market suits the consumer as customer care is always better. The customer will be benefited the most if the market is developed and competition is aroused to a greater extent.

International Scene

'Bancassurance' is a term, which first appeared in France after 1980 to define the sale of insurance products through banks. In France, banks were facing a mature and highly competitive market, and their subsequent entry into insurance provided them with a new source of profit, which served to diversify their banking activity and optimize their choice of products. In 2000, bancassurance accounted for 35 percent of life insurance premium, 60 percent of savings premium, 7 percent of property insurance and 69 percent of new premium income in individual savings.

Spain, like France is among the most developed markets in bancassurance. In 2002, bancassurance represented over 65 percent of life insurance premium income. Portugal has the highest penetration in bancassurance with 82 percent of market share. In Italy share of bancassurance in the business increased from 8 percent in 1992 to 50 percent in 2002, representing over 60 percent of new life insurance business, including more than 70 percent of saving products. The appeal to clients of buying transparent, unit linked savings products frequently through banking channels has led to further rapid growth throughout Europe. In Netherlands such products account for over 50 percent of all life sales and in Sweden, bancassurance growth has been swift via unit linked policy sales and now account for 25 percent of all life sales. In Belgium also bancassurance has enjoyed rapid growth in recent years. In U.K. life insurance market continues to be dominated by independent financial advisors (IFAs). The IFAs have increased their share of premium by 25 percent since 1995. Till 2001, bancassurance managed to increase only by 6.5 percent. In the United States, bancassurance is also in its infancy. Banks’ entry into insurance was not allowed due to Glass-Steagall Act of 1933 and the Bank Holding Companies Act of 1956. Enactment of Grammleach-Bailey Act (GLBA) in 1999 has opened the doors for bancassurance. A recent study by Boston Consulting Group and Bank Administration Institution in USA claims that if banks made a major commitment to insurance and a more narrowly targeted commitment to investors within five years they could increase retail revenues by nearly 50 per cent.

Indian Scene

In India, the concept of bancassurance has been recognized with its inclusion in the broader ambit of universal banking. The RBI guidelines for banks' entry into insurance business, issued on August 9, 2000, provide for banks (a) entering into insurance business with risk participation and (b) carrying out insurance as a fee-based activity like insurance agents. Earlier, the Government of India had also issued a Notification specifying 'Insurance' as a permissible form of business that could be undertaken by banks under Section 6(l)(o) of the Banking Regulation Act, 1949.

The RBI guidelines for banks would lead to emergence of three different bancassurance models:

(a) A bank can act as a corporate agent (as distinguished from a corporate broker) for distributing insurance products of an insurer. There will be no risk participation in this model;
(b) A bank can form a joint venture with an insurance company for doing bancassurance business. There will be risk participation in this model, i.e., through joint venture the bank can underwrite or perform the principal function of insurance. Multiple numbers of banks can participate in cases where a foreign partner contributes 26% of the equity, i.e. the maximum foreign investment permitted, as per IRDA norms; and
(c) A bank that is not eligible to form a joint venture can invest in the insurance company to provide infrastructure and service support. The RBI has stipulated stringent norms pertaining to equity participation, CRAR and NPA of banks so that the system remains, ab initio, safe and sound.

RBI guidelines regarding eligibility of the banks for applying for permission to enter insurance business are broadly as under

1) Banks fulfilling the following eligibility criteria (as on 31st March, 2000) will be allowed to set up a joint venture company for undertaking insurance business with risk participation, subject to safeguards:
  • Minimum net worth Rs.500 crores
  • Minimum CRAR 10%
  • Reasonable level of NPAs
  • Continuous net profit for the last three years
  • Satisfactory past performance of the subsidiaries, if any.
  • Such a bank may be allowed to contribute upto 50 percent of the paid-up capital of the joint venture.
In select cases and on the condition of divestment of excess investment within a prescribed period, higher equity participation may be allowed.

2) Foreign equity will be restricted to 26 percent of the total paid-up capital of the Insurance Company. If this condition is fulfilled, more than one bank in private or public sector fulfilling the eligibility criteria may be allowed to participate.

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

4) Any scheduled commercial bank or subsidiary of a bank can take up insurance agency business, on fee-basis, without risk participation.

The transition of the insurance industry from a public monopoly to a competitive environment presents ample opportunities and interesting challenges to new and existing players. Out of the total population of more than 1000 million only 70 million is insured. The total annual life insurance premium in India is about Rs. 27,000 crores, with the total life insurance policyholders pegged at 10 million. Per capita insurance premium is quite low in India in comparison to developed countries. In 1999, it was $8 in India, $4800 in Japan, $1000 for Republic of Korea, $887 for Singapore, $823 for Hong Kong and $144 for Malaysia. Similarly, the penetration of insurance, which is assessed by the ratio of insurance premium to the Gross Domestic Product (GDP) in a country, is also very low. Insurance premium as a percentage of GDP was 11 percent for Japan, 17 percent for South Africa, 13 percent for Korea, 16 percent for UK and 9.4 percent for France, and only around 2.3 percent in India in 2000, which is very low in comparison to other countries. (In India it was 3.6 percent in 2002-03, 2.88 percent in 2003-04 and 3.17 percent in 2004-05.) The global benchmark for developing countries is 4.5 percent of GDP. The share of India in the world market in terms of gross insurance premium is again very small. It is 0.3 percent for India, 3.1 percent for Japan, 25 percent for European Union, 2.3 percent for South Africa and 1.7 percent for Canada. Obviously lower the ratio of insurance premium with respect to GDP, lower the availability of long-term funds in the financial system. The present scenario puts forth a challenging task for the players and opportunities also. The huge distance from the global benchmark is itself lucrative for the private and new players of Indian insurance. In India, life insurance markets grew by 10.5 percent in 2004-05 and non-life insurance markets grew by 10 percent.


1) The first and foremost objective indicators of insurance potential in a country are (a) insurance penetration, i.e., premium as percentage of GDP and (b) insurance density, i.e., premium per capita. India, with an insurance penetration 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 for the insurance industry as a whole and bancassurers too.

2) Today, life in general, has become more uncertain and risky. Not only are man-made dangers (burglary, accidents, terrorist activities, hijacking, 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 business.

3) The financial environment has become equally uncertain due to liberalization measures and financial scams. Interest rate deregulation, combined with pursuance of bringing in a soft interest rate regime, has resulted in rates of interest on all financial instruments coming down substantially. In India, where no good old age pension scheme, public healthcare system or unemployment welfare scheme exists, where will the public, particularly the middle class, which no doubt wants return but safety and liquidity first and foremost, 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 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 than on bank savings products, as interest earned on the latter, beyond a certain stipulated sum, is taxed at source, like dividends earned on shares. Thus, the moral of the story is that life 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 certain life products is fast narrowing.

4) The joint family system, which functioned like an insurance system, is gradually collapsing due to several reasons. More and more 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.

5) An outcome of the above-mentioned phenomenon is that the elderly members in families are being gradually required to manage themselves either out of their own volition of not becoming dependent on their children or being compelled in 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 awareness is also increasing in this regard. This speaks well for life insurance products

6) With economic growth, per capita disposable income is also rising. The biggest force to reckon with here is the middle class population, which, according to various objective and subjective estimates, varies between 250 million and 500 million.

7) Improving economic conditions, coupled with higher education and small family concept, has resulted in savings orientation in the economy. The process has been catalyzed by higher awareness about savings culture being spread through various media by financial institutions.

8) Today, as bank branches are the origins for financial needs of any productive venture, these branches can simultaneously sell insurance products to borrowers, particularly non-life products, instead of obtaining the same non-life cover from other insurers. Such a one-stop mechanism may also save the borrower many headaches

9) Bancassurance provides a good opportunity for Indian banks to increase their fee-based income. The Indian banks' net interest margin or spread has come down substantially, whereas their operating cost has been increasing. The trend is expected to continue in the near future. Increased fee-based income through distribution of insurance products will compensate for the loss in spread. Moreover, in cases where insurance business is carried out as a subsidiary, the dividend income from the subsidiary will also add to the parent bank's profitability and return on assets.

10) Recently, the Central Government has approved a voluntary retirement scheme for the insurance sector. This would provide an opportunity to bancassurers to hire such retired insurance employees, i.e., readymade talent, into their business.

11) During the last couple of years, banks have been flush with deposits, whereas credit deployment has been slow - both due to several socio-economic reasons. Banks are investing in government and approved securities, overshooting the SLR ceiling. Therefore, banks now get an opportunity to focus on selling insurance products instead.

12) Some areas with good potential for bancassurers are health insurance, credit insurance, deposit insurance, travel insurance, capital market-related insurance and pension.

13) It is one of the basic ways to increase return on assets because they can increase their fee income through sale of insurance products. Banks that effectively cross-sell financial products can leverage their distribution and processing capabilities for profitable operating expense ratio.

14) Banks with their wide branch network spread all over the country (66,700 branches) can have a very good opportunity to enter the insurance business. India’s 27 public sector banks account for close to 92 per cent of total network. The network has among other things 33,000 rural branches and 14,000 semi-urban branches, where insurance penetration remains largely untapped. Huge manpower (8,74,170 staff) of all public sector banks will help in effective distribution of Insurance products.

15) In today's competitive environment offering more and more services under one roof would also help banks to improve their market share.

16) Huge customer database containing the names, profiles and contact numbers of banks can be of great use to insurance companies, since minimum average conversion from the bank database into sales will mean a higher productivity than their agencies. They also have access to multiple communication channels such as direct mail, ATMs, telemarketing, Internet banking etc.

17) This new venture would also help banks in better Asset Liability Management. Banks convert liquid short-term liabilities into long-term assets. It exposes them to default rate risk, liquidity risk and interest rate risk.


a. Bancassurance products, being "push" products, require a totally different mindset and work culture. Whether the existing staff of banks can achieve this is a big question. Have the Indian banks, which have Mutual Fund subsidiaries, succeeded in selling mutual fund products through their bank branches? Certainly not. The issue of cultural incompatibility can impede bancassurance business to a great extent. Alternatively, if the insurance subsidiary of the bank has to maintain the entire paraphernalia, comprising research, administrative, distribution and other staff, it would be too costly, and in some cases, the cost restrictions would not permit it to indulge in this.

b. Further, since life products and banking products are similar, efforts to market the former will be less cumbersome for the bancassurance company. However, non-life products are entirely different from life or banking products and are far too complex, with high counter-party and reinsurance risks, and hence, it would be difficult for bancassurance companies to enter into general insurance business immediately, until and unless they develop and retain the required skill.

c. The manner in which insurance profits develop poses a threat to successful operation of bancassurance. An analysis of profit signatures, i.e., the time pattern over which profits of the insurance sector develop, shows that worldwide, the breakeven period of time before profits ranges between 6 and 8 years (unless the company is captive). For life insurance business, this works out to 8-10 years. This is because initial procurement costs are high. In some countries, commissions and expenses required to earn first year's premium are much higher than 100 percent. In India, these stand at 90 percent for the first year's premium. On the other hand, distribution of profits is tightly regulated. In India, only 5 percent of the actuarial surpluses can be distributed as dividend. Does this bode well for bancassurance?

d. LIC and the four subsidiaries of GIC are well established in their respective lines of businesses. Opening up the insurance sector has also 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 more competitive, and will be buttressed by their financial and non-financial strength, including the lobbying power. This would pose a threat to the new bancassurers. Too much of competition may lead to accentuation of the adverse selection and moral hazard problems, which may ultimately prove detrimental to the insurance industry as a whole.

e. Success of bancassurance would also depend on the extent to which and how fast the technology being used for banking operations can be used for meeting the technology requirements for insurance business. Otherwise, banks will have to incur large investments for putting in place the technological infrastructure for bancassurance operations.

f. In case of failure of the bancassurance operation, the bank runs the threat of image risk and cannibalizing deposits (i.e. there may be a fear among the staff that investment oriented life insurance products may eat into the deposit base of the branches).

g. Insurance sales being commission/incentive driven, banks selling insurance products may be required to provide incentive packages in addition to the regular remuneration to drive the sales.

h. Maintaining the same service levels for insurance business as that for the banking services may be one of the biggest challenge.

i. Private players in the insurance industry being new entrants are technology-savvy. Banks, especially PSBs, have to rise up to the challenge and be willing to invest in technology.


Traditionally banks transform short-term liabilities into long-term assets. This generates credit risk on asset side and liquidity risk on the liabilities side. The maturity mismatch between assets and liabilities exposes banks to interest rate risk and makes them more vulnerable. The bank can address this specific issue by entering into insurance business. An insurance activity accumulates substantial amount as premium receipt. With the long-term fund, banks can decrease the possibility of liquidity and solvency problems. Even if banking and insurance are carried out as separate entity, through a holding arrangement, the insurance outfit can afford a potential source of liquidity for the parent.

All over the world, governments are known to intervene in the insurance business through regulations to make insurance a catalyst of social development. The Indian government has also issued detailed guidelines regarding this. IRDA has made it mandatory for every insurer who started business after the commencement of IRDA Act, 1999 to ensure the 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 suppose 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.

These rural and socially disadvantaged sectors are very difficult to service. They are scattered geographically in small indigenous social groups. It is very difficult to identify their need and design products that are viable as well as acceptable to these segments. In fact, the real issue is cost effectiveness. These target clienteles can be addressed by spending substantial amount of money by way of marketing research to identify their needs and promotional measures to reach them. The coming together of banks and insurance can provide substantial synergy here. The banks already have a massive infrastructure spread across the width and breadth of the country. Banks possess a vast array of market intelligence including rural and disadvantaged section of the society. This information can be leveraged to design appropriate products for the specific requirements of target population. The widespread branch network can be used as a marketing channel without incurring significant amount of money. Definitely collaboration between banks and insurance companies can be of great benefit to service this target group in a cost-effective and financially viable manner. In fact, it may be noted in this connection that generally insurance company suffer from substantial amount of losses in the early years of their operation. One of the contributory factors in this regard is social obligations mandated by the government. International experience shows that even in relatively developed countries it takes a long period of time to reach out to less privileged regions and segments of population. Obviously, in India the problem is much larger and more complex. Bancassurance is an appropriate strategy in this connection.

In a service industry such as insurance, which offers promises in return for payment upfront, redemption of commitments has to be perfect. The claims settlement service is mostly affected by problems in decision-making, causing enormous delays. Against this background, joining of hands between banks and insurance offers double-edged solution. The existing track record of banks in providing satisfactory services has been dismal to say the least. But of late, with the hotting up of competition in the banking sector, there has been a perceptible improvement. In addition, a number of banks had to offer VRS to shed the excess manpower and introduce technology into their service operations. Still, a whisper of next round of VRS can be heard in the banking sector. In such scenario, if banks enter into new and fast growing sector like insurance the problem of excess staff can be overcome without compromising the morale of the workforce. Of course, banking personnel need rigorous training to adapt to insurance business. In this context, one viewpoint is that the bank employees by their past track record cannot be trusted to become customer-friendly overnight. 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 have responded in a very encouraging manner to the challenges thrown at them through competition by private sector banks. It implies that given the chance and requisite training, they can also become successful in insurance sector.

In fact, customer expectations are also a function of the level of services made available to them. And the bank employees in the public sector understand them quite well. That is why as and when customers demand better services, banks have provided the same.

The road to Bancassurance has been laid. A few Bancassurance vehicles have started their journey on the road; but they have miles to go. Bancassurance ventures should primarily strive to remain safe and sound through proper corporate governance, risk management and operational practices. Good customer service should remain another important goal of bancassurers. In a competitive market, where products are cloned in no time, customer service provides one with the necessary cutting edge to remain ahead of others. In this, technology will have a dominant role to play. Product research through market surveys is also essential. Nevertheless, bancassurers, at least for some time to come, will concentrate on urban and life areas of business.

The convergence of banking and insurance in India happens due to market pressure. The contribution of Bancassurance will be substantial. The ability to tap into bank's huge customer base is an irresistible opportunity for insurance companies. The scope to benefit from the generous commission payout by insurance companies is a great attraction for banks.


Dr. S. Hareendranath
Head and Director,
PG and Research Department of Commerce,
Mahatma Gandhi College,
Thiruvananthapuram – 695 004

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