The business of banking around the globe is changing due to integration of global financial markets, development of new techniques, universalization of banking operations and diversification in non-banking activities. Due to all these movements, the boundaries that have kept various financial services separate from each other have vanished. The coming together of different financial services has provided synergies in operation and development of new concepts.
One of these is bancassurance. Bancassurance – a term coined by combining the two words ‘bank’ and ‘insurance” (in French) connotes distribution of insurance products through banking channels. It refers to a tie-up arrangement of a bank with insurance companies for selling insurance products in life and non-life segments as corporate agents for fee based income. This income is risk free as the bank plays the role of an intermediary for securing business to insurance company. Bancassurance is a package of banking and insurance services under one roof.
Bancassurance in its simplest form is the distribution of insurance products through a bank distribution channel. In concrete term, bancassurance which is also known as ‘Allfinanz’ (in German) – distributes a package of financial services that can fulfill both banking and insurance needs at the same time. It takes various forms in various countries depending upon demography, economic and legislative climate of that country. Profile of a country decides the kinds of products bancassurance shall be dealing with. Economic situation will determine the trends in terms of turnover, market share etc.
The legislative climate will decide the periphery within which the bancassurance has to operate. The motive behind bancassurance varies: For banks – product diversification and source of additional fee income; for insurance company – a tool of increasing its market penetration and premium turnover; for customers – reduced price, high quality product and delivery at doorsteps. So, actually everybody is the winner. Meaning and Definition of Bancassurance: Bancassurance is the distribution of insurance products through the banks’ distribution channel.
It is a phenomenon wherein insurance products are offered through the distribution channels of the banking services along with a complete range of banking and investment products and services. In simple terms, we can say bancassurance tries to exploit synergies between both the insurance companies and the banks, Bancassurance can be an important source of revenue for banks. With the increased competition and squeezing of interest rates, profits are likely to be under pressure. Fee based income can be increased through hawking of risk products like insurance.
Bancassurance if taken in right spirit and implemented properly can be win-win situation for all the participants, viz, banks, insurers and the customers. Origin of Bancassurance: Bancassurance has grown in different places in different forms based on the demographic, economic and legislative condition of the country. Across Europe, in countries like Spain and UK, banks started the process of selling life insurance decades ago and the customers found the concept appealing for various reasons. Germany took the lead and it was called ‘ALLFINANCE. The system of bancassurance was well received in Europe, France taking the lead, followed by Germany, UK, Spain, etc. In USA, the practice was late to start (only in 1990s). it is also developing in Canada, Mexico and Australia. In India, the concept of bancassurance is very new. With the liberalization and deregulation of the insurance industry, bancassurance evolved in India around 2002. Global Scenario: The term bancassurance first appeared in France in 1980 to define the sale of insurance products through banks’ distribution channels.
It is most successful in Europe, especially in France, from where it started, Italy, Belgium and Luxemburg. Bancassurance tends to have greater influence where banking habits are well entrenched. The concept of bancassurance is relatively new in the USA. The Glass-Steagall Act of 1933 prevented the banks of the USA from entering into alliance with different financial service providers thereby putting a barrier on bancassurance. As a result of this, life insurance was primarily sold through individual agents who focuses on wealthier individuals leading to a majority of the American middle-class households being under insured.
With the US Government repealing the Act in 1999, the concept of bancassurance started gaining popularity and growth in the USA also. Coming to Asia, it has been estimated that bancassurance contributed almost 16% of the life premium in the Asian markets in the year 2006 primarily due to the growing Indian and Chinese markets. Middle East has probably the lowest penetration of bancassurance products and this has a lot to do with the cultural and religious attitude of predominantly Muslim customers for whom life insurance in its purely commercial form has been a taboo.
Nowadays, perceptions are beginning to change and there is a wider acceptance of appropriately developed life products. The legal climate in the Middle East is very conducive to bancassurance and is free from hurdles. With very low level of penetration of insurance, the prospects for bancassurance are quite bright. Indian Scenario: Bancassurance is a new buzzword in India. It originated in India in the year 2000 when the government issued notification under Banking Regulation which allowed Indian banks to do insurance distribution.
It started picking up after Insurance Regulatory and Development Authority (IRDA) passed a notification in October 2002 on Corporate Agency regulations. As per the concept of Corporate Agency, banks can act as an agent of one life and one non-life insurer. Currently, bancassurance accounts for a share of almost 25% to 30% of the premium income amongst the private players in India. Bancassurance provides various advantages to banks, insurers and customers. For the banks, income from bancassurance is the only non-interest based income.
Interest is market driven, fluctuating and quite narrowing these days. Banks do not get great margins because of the competition. This is why more and more banks are getting into bancassurance so as to improve their incomes. Increase competition also makes it difficult for banks to retain their customers. Bancassurance comes a help in this direction also. Providing multiple services at one place to the customers means enhanced customer satisfaction. As for the insurance company, it gets improved geographical reach without additional costs.
India’s rural market has huge potential that is still untapped by the insurance companies. Setting up their own networks entails such a huge cost that no company would be interested in doing so. Bancassurance again comes as an answer. It helps the insurance companies to tap the market at a much lower cost. As for the customer, the competitive nature of the Indian market ensures that the reduction in cost would result in benefits in terms of lower premium rates being passed on to him.
The penetration level of life insurance in the Indian market is considerably low at 2. 3% of GDP with only 8% of the total population currently insured. Thus, bancassurance provide an apparently viable model for product diversification by banks and a cost effective distribution channel for insurers. The success of the partnership between the two entities depends on the right model partnership. Given these changes, bancassurance and collaboration between banks and insurers has a long way to go in India.