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| Kathmandu, Wednesday March 26, 2003 Chaitra 12, 2059. |
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Bancassurance
By L D MAHAT
Bancassurance can be termed as one of the most
significant development in the financial services industry over the past few years.
Bancassurance is the integration of banks and insurance companies and covers a wide range
of detailed arrangements between banks and insurance companies, but in all cases it
includes the provision of insurance and banking products or services from the same sources
or to the same customer base. Bancassurance was originated in France and has been a
success story in Europe. Banking institutions and insurance companies have found
bancassurance to be an attractive complement to their existing activities.
In a move towards universal banking, many banks
in recent years have started diversification in their business by penetrating in the
insurance industry, either directly or, most often, through an alliance with an insurance
company. As a result, financial conglomerates, which had previously been mainly limited to
banking and a range of securities activities, have increasingly extended their reach into
the insurance sector.
A number of insurance companies in the world
have already tied up with banks and some banks have already flagged off bancassurance
through soft launches of select risk products. There are few examples in the Indian
context too. SBI Life Insurance Co Ltd, the joint venture between the State Bank of India
and the French insurance major Cardif SA, has decided to retune its business model to
bancassurance. Karur Vysya Bank has entered into a bancassurance agreement with Bajaj
Allianz General Insurance Company. While some insurers welcome easing the entry barrier
between insurance and banking, others dislike the entry into insurance by banks. This
opinion may be due to different expectations for bancassurance. Some insurers think that
it provides more opportunities than threats, but others worry the opposite will hold true.
Insurance companies in many countries have also
acquired stakes in some banks. Those shareholdings can be seen as an investment, or as a
way of diversifying from the insurance business, or as a procedure for promoting the
distribution of insurance products through bank branches. Banks and insurance companies
have shown common interest for a number of reasons. Commercial banks can use their
distribution network to sell all types of insurance, particularly life insurance, to their
traditional customers. Insurance companies are experienced in designing certain complex
financial products and are offering financial products for placing savings that private
customers find particularly appealing, such as, retirement funds or single-premium
insurance policies.
The entry of bancassurance is going to
fundamentally change the competition structure and profitability of the insurance
industry. They can do business with strategic partners cooperatively, but may now find
themselves competing with the banks’ own products, having never treated them as
direct competitors before because of the regulatory walls between different types of
financial institutions. So, it is very important for the insurers to fully understand the
opportunities and threats of bancassurance in order to succeed in the financial
convergence environment.
There are a host of reasons as to why banks
prefer to enter the insurance industry. Intense competition between banks, against a
background of shrinking interest margins, has led to an increase in the administrative and
marketing costs and limited the profit margins of the traditional banking products. New
products could substantially enhance the profitability and increase productivity. Banks
can get financial benefits in the form of increased revenue by way of commissions and/or
profits from new business. Bank branch offices will be ideally suited to provide an
alternative distribution system to traditional insurance companies. Bancassurance is a new
distribution channel that has superior customer information and an extensive network.
Banks can sell insurance products by their
existing distribution channel enabling savings on solicitation costs of these products.
This is imperative in a competitive insurance market. Among the distribution channels,
bancassurance may have cost advantages because of economies of scale in marketing and
scope of services. Economies of scale in bancassurance may arise from the lock-in effects
of a customer base and lower commissions. Bancassurers can provide multi-product services
through existing delivery systems without adding proportionately to overhead and fixed
costs, resulting in economies of scope.
Banking and insurance companies can provide
integrated financial services in tune with customers’ needs by one-stop shopping
through bancassurance. Customers’ needs are much more sophisticated these days, and
they want all solutions from a single financial service provider. Bancassurance can
develop integrated financial products by using its powerful source of information
concerning the customers. It also provides the banks an opportunity to increase the
productivity of staff, as they now have the chance to offer a wider range of services to
clients. The realization that joint bank and insurance products can be better for the
customer as they provide more complete solutions than traditional stand-alone banking or
insurance products.
Bancassurance also poses numerous challenges to
the bancassurers. The main threat of bancassurance might be caused by the different
cultures of banking and insurance industry. Banks are perceived as more conservative than
insurance companies. Banks focus on reactive personal and order-taking services, while
insurance companies take proactive and sales-oriented approaches. It is usually said that
banking products are bought and insurance products are sold. It may be a great challenge
for increasing alienation of the majority of banking customers who are intimidated by
complex insurance products, the way they are sold and the people who sell them. Another
challenge may be high costs of developing, maintaining, and compensating a skilled sales
force have to be addressed and new marketing alternatives developed.
While bank branches can be used as appropriate
outlets, it has to be emphasised that banks should maintain an arms length distance from
the insurance business. It may also be noted that there is a vast difference between
selling a bank product like deposits and insurance. The product of insurance companies
also has intrinsically incoherent characteristics from that of banks. The core product of
insurance is risk, while that of the bank is money. The insurance product is substantially
different from other financial products because it is based on an inverted cycle of
production.
Despite the challenges stated above,
bancassurance has a success story in Europe. Banks need to cope with the challenges and
exploit the synergy between the banking and insurance business through financial
convergence.
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