BANCASSURANCE – A THEORETICAL BACKGROUND

1.1 Introduction

Insurance is an important integrated financial service affecting not only

individuals and business but also having a considerable impact on the economic

health of a nation. Under insurance, the insurer promises to compensate the

insured for any loss of life or property on the happening of any future

contingency, in return for a small payment known as premium. But as no one

ever wants to talk of loss of any loved one or property etc. insurance is a service

that is not usually bought but has to be SOLD.

In India, insurance as an organised commercial activity made its beginning in

the year 1818 but a regulated and administered regime came up in 1912 with the

enactment of Life insurance companies Act. The first major transition took place in

1956 with the nationalisation of the Life insurance business followed by nationalisation
of the general insurance industry in the year 1971. A major step was taken up by the

govt. in 1991 to deviate from a monopolistic regime and integrate the Indian economy

with the global economy, which impacted the insurance sector in 1999 with the opening

up of insurance sector.

The insurance industry in India has come a long way since the time when

businesses were tightly regulated and concentrated in the hands of a few public sector

insurers. Following the passage of the IRDA Act in 1999, India abandoned the public

sector exclusivity in the insurance industry in favour of market-driven competition. This

shift has brought about major changes to the industry. The beginning of a new era of

insurance development has seen the entry of international insurers, the proliferation of

innovative products and distribution channels as well as raising of supervisory

standards
2

1.2 Insurance Distribution Channels

Kotler and Armstrong have defined distribution channels as “Sets of

interdependent organizations involved in the process of making a product or service

available for use or consumption, as well as providing a payment mechanism for the

provider”.

Insurance distribution systems span the spectrum from the use of a professional

employee sales force, to contracting with independent sales representatives, to direct

response methods such as mail and telephone solicitation. The ongoing competitive and

technological revolution in the financial services industries has resulted in greater

segmentation of distribution by product market, and to greater use of multiple

distribution methods by firms, including the establishment of marketing relationships

and alliances with non-insurance concerns. (Regan and Tennyson, 1999).

Regan and Tennyson, (1999) have classified the product distribution channels in

the insurance industry into five types: (1) mass marketing or direct selling; (2) employee

sales representatives; (3) non-employee sales agents who sell for a single company; (4)

non-employee agents who sell for more than one company; and (5) brokers.

Two distinct forms of distribution systems may be recognised viz. personal

distribution systems and direct response systems. Personal distribution systems include

channels like agencies, Bancassurance and work site marketing. Direct response

distribution systems are methods whereby the client purchases the insurance directly.

This segment, which utilizes various media such as the internet, telemarketing, direct

mail, call centres etc., is just beginning to grow. (Manocha and Chitkara, 2012)

In India, during the last decade, distribution of insurance has witnessed a flurry

of activities as: 1) Specification of minimum educational qualification for agents and

intermediaries 2) Mandatory pre-license training and examination 3) Issue of License by

IRDA 4) Elaborate regulation prescribing the code of conduct for all intermediaries 5)

Issue of regulations allowing/regulating corporate agencies, brokers and referrals etc.

thereby regulating and monitoring the entire framework to the interest of the consumer

at large. Alongwith regulation of intermediaries, the categories of intermediaries for

selling insurance products has also multiplied as competitors have to capture business

1.2 Insurance Distribution Channels

Kotler and Armstrong have defined distribution channels as “Sets of

interdependent organizations involved in the process of making a product or service

available for use or consumption, as well as providing a payment mechanism for the

provider”.

Insurance distribution systems span the spectrum from the use of a professional
employee sales force, to contracting with independent sales representatives, to direct

response methods such as mail and telephone solicitation. The ongoing competitive and

technological revolution in the financial services industries has resulted in greater

segmentation of distribution by product market, and to greater use of multiple

distribution methods by firms, including the establishment of marketing relationships

and alliances with non-insurance concerns. (Regan and Tennyson, 1999).

Regan and Tennyson, (1999) have classified the product distribution channels in

the insurance industry into five types: (1) mass marketing or direct selling; (2) employee

sales representatives; (3) non-employee sales agents who sell for a single company; (4)

non-employee agents who sell for more than one company; and (5) brokers.

Two distinct forms of distribution systems may be recognised viz. personal

distribution systems and direct response systems. Personal distribution systems include

channels like agencies, Bancassurance and work site marketing. Direct response
distribution systems are methods whereby the client purchases the insurance directly.

This segment, which utilizes various media such as the internet, telemarketing, direct

mail, call centres etc., is just beginning to grow. (Manocha and Chitkara, 2012)

In India, during the last decade, distribution of insurance has witnessed a flurry

of activities as: 1) Specification of minimum educational qualification for agents and

intermediaries 2) Mandatory pre-license training and examination 3) Issue of License by

IRDA 4) Elaborate regulation prescribing the code of conduct for all intermediaries 5)

Issue of regulations allowing/regulating corporate agencies, brokers and referrals etc.

thereby regulating and monitoring the entire framework to the interest of the consumer

at large. Alongwith regulation of intermediaries, the categories of intermediaries for

selling insurance products has also multiplied as competitors have to capture business

keeping in light the IRDA guidelines to ensure insurance reach and penetration in the
country.

Traditionally, agents have been the sole distributors of life and non-life

insurance and it continues to be followed as a prime channel by all insurance players till

date. However, new developments in consumer behaviour, technology, deregulations

etc. new distribution channels have been developed rapidly in the recent years. (Singh et

al, 2011).

Multiple distribution networks create a range of opportunities for insurers to

attract and serve customers in a differentiated way, keeping in mind the customer’s

preferred combination of product, pricing, service and channel. It is a way to reach

customers who could not be reached before, and to extract more value from existing

customers. It is therefore a powerful lever to increase market and customer access,

especially in mature insurance markets. (Earnest and Young, 2010)

The various distribution channels that operate on the Indian insurance scene can
be classified as:

Figure 1.1: Insurance Distribution Channels in India

Individual Agents Brokers

 Corporate Agents

 Bancassurance

 Direct Marketing

 Third parties

 Internet

 Telemarketing

Individual Agents: This is the most common route followed by all the insurance

companies. These people do not take title of the goods and services and perform only

limited functions. Their main function is to facilitate buying and selling for which they
earn commission on premium gathered. Through this mode, personal contact and

relationship is established with the consumer as they provide both pre-sale and post

sales services. Also, they can help the insurance company by providing customer

feedback on various products and services.

Brokers: Brokers are agents with a difference. Unlike the agent, a broker can sell

policies of several life and non-life insurance companies at the same time. They are

professionals, who assess the risk on behalf of the client and provide solutions to reduce

those risks by virtue of different insurance products and also assist in administration and

performance of such contracts, if need arises.

Corporate Agents: Corporate agents work like brokers but with the restriction that

they deal with only one company at a time. They are basically Non-banking finance

companies which cross sell insurance with other financial services and provide one-stop

solutions to customers. They are more effective as they are expert professionals and
enjoy trust of the consumer because of the guidance they offer and services they

provide.

Bancassurance: Bancassurance in its simplest form is distribution of insurance

products through a banks distribution channel. It is a medium for the cost-effective

distribution of insurance and pension products by penetrating diverse markets. There is

no clash of interest between banks and insurance companies as bank deposits are for

current consumption and they only market insurance services to their customers.

Direct Marketing Channel: The direct marketing channel or the zero-level channel is

whereby the company sells directly to the final consumer through its own employees.

Companies set up separate department to solicit and administer insurance business. The

main advantage of this method is the cost reduction as compare to the agency system.

Internet: Initially insurance was seen as a complex product and required an effective
sales agent to convince the buyer about the product benefits. Nowadays, consumer is

much more aware and all insurers have websites through which they provide

information about products and services. Customers are already using Internet banking

for conducting banking operations. Hence, insurance companies can take benefit of this

new technology adage to expand their operations.

Tele Marketing: Telemarketing of insurance means that telephones are used by the

customer care executives of banks and insurance companies to approach buyers and sell

them insurance policies. It is coming up as a good option for the working class who

have shortage of time and just want to avoid being caught in traffic jams to buy products

and services.

1.3 Bancassurance

The banking and insurance industry have changed rapidly in the changing and

challenging economic environment throughout the world. In the competitive and

liberalized environment everyone is trying to do better than others and consequently

survival of the fittest has come into effect. Insurance companies are also required to be

competitive by way of cost cutting and serving customers in a better way. The time has

come for the industry to gradually move from the traditional individual agents towards

new distribution channels with a paradigm shift in creating awareness and not just

selling products.

The strategy for using the established, entrenched distribution network for one

product to market other new products has long existed in the consumer goods sector.

The basic premises of this kind of cross selling is the fact that companies keep

diversifying their product portfolio using established incumbent networks to promote

and distribute new product lines. Banks too have in the recent past adopted this strategy.

The answer to this is ‘Bancassurance’.

Bancassurance, known as “ALFINANZ” and most popular in Europe is the

simplest way of distribution of insurance products through a bank distribution channel.

It is basically selling insurance products and services by leveraging the best customer

base of a bank and fulfill the banking and insurance needs of the customers at the same

time

According to the European School of thought, “Bancassurance is the

amalgamation of the assurance and banking business within a financial environment”

According to the Indian School of thought, it means selling insurance through

bank staff, at bank counters, fully exploiting the synergies between banking and

insurance, so as to develop and distribute cost effective banking products.

The Life Insurance Marketing and research Association’s insurance dictionary

defines Bancassurance as “the provision of life insurance services by banks and building

societies.”
The Association of British Insurers defines Bancassurance as “insurance

companies that are subsidiaries to banks and building societies and whose primary

market is the customer base of the bank or building society.”

Another definition of Bancassurance is “the involvement of banks and building

societies in the manufacturing, marketing or distribution of insurance products”

According to IRDA, ‘Bancassurance’ refers to banks acting as corporate agents

for insurers to distribute insurance products.

It takes various forms depending upon the demography, economic and

legislative environment of the country. While the demographic climate determines the

kind of insurance products, the economic climate will determine the trend in terms of

turnover, market share etc., and legislative climate will decide the periphery within

which Bancassurance has to operate...

Significance Of Study :-

Bancassurance is used to describe the partnership or relationship between a bank and an insurance
company whereby the insurance company uses the bank sales channel in order to sell insurance
products. Bancassurance simply means selling of insurance products by banks. In this arrangement,
insurance companies and banks undergo a tie-up, thereby allowing banks to sell the insurance products
to its customers. By selling insurance policies bank earns a revenue stream apart from interest. It is
called as fee-based income. This income is purely risk free for the bank since the bank simply plays the
role of an intermediary for sourcing business to the insurance company. Insurers see it as a tool to
increase penetration and market share and bankers use it to augment their fee income and to smoothen
the volatility of interest income. Bancassurance is a package of banking and insurance service at one
roof.The introduction of Bancassurance has broadened the scope of retail banking.

Bank staff, rather than an insurance salesperson, become the point of sale/point of contact for the
customer. Bank staff are advised and supported by the insurance company through product information,
marketing campaigns and sales training.

Bancassurance provides various advantages to banks, insurers and the customers.

For the banks, Banks get an additional source of income from commissions and fees from their insurance
business and the operational costs get lowered for banks as they use the same infrastructure that they
use to sell other banking products.

For the Insurance Company, the insurance company gets improved geographical reach without
additional costs.

To Customers, it provides multiple services at one place to the customers which enhance the customer
satisfaction also.
Objectives and Research Methodology :-

Need for the study and Statement ofthe Problem

Despite the increasing importance ofBancassurance, there is little or no direct empirical

data available on the potential benefits ofthe Bancassurance model(s) for distribution of

insurance practiced at India and the related sources of those benefits. With the

privatization ofthe insurance sector and subsequent permission of government for banks

and insurance company tie-ups for distribution of insurance products, the multinational

and Indian private sector banks have done a good job on the sales ofinsurance products.

However, the sales are primarily made to bank customers with whom the banks have very

significant relationships. Whether banks can sustain sales to customers over and above

the ones who are already there and what is the contribution of Bancassurance to the

premium income for insurance companies is a matter ofresearch.

4.1 Objectives ofthe Study

4.1.1 Primary Objectives

• To study whether selling through banks (Joint Ventures and Distribution

Agreements) is more effective for insurance companies than selling through other

channels such as Agency and the Alternate Channel.

• To study the effect of the present Distribution Agreement model of

Bancassurance practiced at India, and compare the benefits with the three basic

models of Bancassurance namely Joint Venture, Strategic Alliances and the

Financial Services Group (Investment Option) practiced in different countries

namely Japan, Thailand, Europe and USA etc. and suggest suitable changes in

the present model or a new model for the Indian insurer.

.1.2 Secondary Objectives

• Identify the various mechanisms to examine whether Bancassurance

increases both internal and external customer satisfaction.

• Study the earnings through Bancassurance for insurance companies and

banks respectively.

1.2 Research Methodology

1.2.1 Type of Research: Descriptive Research

1.2.2 Research Design: Descriptive research is used to study the effect of the

partnerships between banks and insurance companies based on the performance of both

and the satisfaction level ofinternal and external customers.

1.2.3 Sampling: Cluster sampling is used for the selection of respondents. 500

respondents are selected from banks and insurance company employees and also external

customers at Gujarat.
1.4 Research Instrument

The research instrument is in form of questionnaires. The primary data is collected in

three sets. Separate set of questionnaires are administered to each of the three groups’

namely Insurance company employees, bank employees and external customers.

RESEARCH METHODOLOGY

1 Introduction

Research is defined as a systematic, self-critical enquiry aimed at understanding

a thing or phenomenon or solving a problem. Clifford Woody has defined research as

“defining and redefining problems, formulating hypothesis or suggested solutions;

collecting, organising and evaluating data; making deductions and reaching conclusions;

and at last carefully testing the conclusion to determine whether they fit the formulated

hypothesis (Kothari, 2009).

This chapter deals with the methodology adopted for the research study. It
describes the research design, sample size taken for study, procedure of data collection

and sources and statistical techniques for data analysis.

1.2 Design of the Study

The purpose of this research was to study the contribution of bancassurance

towards no. of policies sold, premium generation, and insurance penetration (no. of lives

covered) for the life and non-life insurance companies operating in the Indian insurance

scene. The study also aimed at examining the customer satisfaction in purchasing

insurance policies through banks by evaluating their perception about banks selling

insurance, their inhibitions in not purchasing through banks, factors motivating them to

make further policy purchase from banks and their future buying patterns. Another

parameter of the study was to examine the significance of various motivating or

inhibiting factors among the different cities to evaluate the difference in performance, if
any.

Hence, the study moved from exploratory research to descriptive research to

draw conclusions. In exploratory research, existing literature and other available

information was studied to draw inferences for the questionnaire. This questionnaire

was administered to the respondents through survey method and data collected.

1.3 Objectives of the Study

The study has been conducted with the following objectives:

1. To study the impact on policy mobilization and premium generation through

Bancassurance channel

2. To study the trends in the Bancassurance channel

3. To analyse and evaluate the various models used by insurance companies in

aligning with banks to get the dual advantage

4. To study consumer perception and acceptability of Bancassurance as a medium

of selling insurance and their resultant levels of satisfaction.

5. To evaluate the challenges and expectations of Indian Bancassurance businesses

Research Design:-

The banking and insurance industries have developed rapidly in the

changing and challenging economic environment all over the world. Due

to merging of global financial markets, development of new

technologies, universalization of banking industries and with the

expansion of non banking activities, the insurance industry has globally

brought in new channels of distribution into existence.

This has given rise to a new form of business wherein two big

financial institutions have come together and have integrated all their

strength and efforts to generate new means of marketing for

encouraging their products and services. When these two join together
it gives birth to “BANCASSURANCE”.

Bancassurance is the allocation of insurance products through the

huge network of banks whereby, banks act as a distribution channel for

providing varieties of banking and investment products and services. In

simple words we can say bancassurance tries to develop synergies

between both - insurance companies and banks.

The distribution of insurance products through banks is helpful not

only to the insurance and banking companies but also to the customers.

The growth of bancassurance depends on how well banks and insurance

companies are able to conquer the operational challenges that are

frequently thrown at them.The need of the hour for the bancassurance business is to gather

together new ideas, new development / advancement / improvement /

evolution and work culture.

 It was initially a controversial issue in the some countries as many

critics believed that this would give banking sector too good a control

over financial services market. Therefore it was earlier restricted in many

countries. But today, many countries have started accepting

bancassurance in their market and have seen an incredible boom in this

sector.

This research work focuses on how bancassurance is gaining world

wide recognition, how has it appeared as an efficient tool for selling the

insurance products by some primary insurance companies and banks

and also on the benefits and significance of bancassurance in India.

The regulations leading bancassurance are also shown in this

research work. SWOT analysis is also done so as to recognize the various

opportunities and threats for bancassurance in India.

The present study has been carried out to know that how

globalization, liberalization and cut throat competition have jointly

brought the banking and the insurance sectors to facilitate each other

and offer effective services to the customers.

CHAPTER - 2

REVIEW OF LITERATURE

This chapter seeks to review the existing available literature on the effectiveness

of bancassurance as an insurance selling intermediary and the customer perception

regarding it. Since bancassurance is a relatively new concept in India, very few studies

were available on the effectiveness of bancassurance and also the customer perception

of bancassurance as an insurance intermediary. The financial implication of the alliance

between the banks and insurance companies has been excluded from preview and only

the impact on policy mobilisation and reach and density of the business generated has

been studied along with evaluating the customer response.

Insurance Marketing, in many respects, is fundamentally “Knowledge

Marketing”. Sales increase as (1) the seller knows more about the buyer – his attitudes,

his goals and problems, and (2) the buyer knows more about the seller and his product –

why it is needed, and what solutions it offers the buyer for his problems (Bickelhaupt,

1967).

The insurance market is characterised by price disparity, low selling costs, low

administrative costs, high quality staff and use of computers etc. In the light of given

circumstances, a flexible approach to insurance marketing is recognised as essential. It is

suggested that distribution channels should be selected depending upon the characteristics

of the market served, the product line offered and the total resources available to
management (Bickley, 1967).

The distribution channels are an important element for the success of the life

insurance business and have a long term impact on the profitability (Aggarwal and

Upadhyay, 2009). Mehr (1969) studied that insurance was being distributed through the

primary agencies, ancillary agencies, facilitating agencies and direct trade channels.

These channels varied in their length and width and the most efficient channel is one

which gives lower costs to the insured; greater profits to the insurer and more effective

coverage to the markets (Mehr, 1969).

The distribution of insurance products and services was the sole monopoly of the

agents for years. The opening up of the insurance sector in the year 2000 has brought incompetition and
challenges for the new entrants; along with the vast business opportunity

of an untapped market. To tap this potential, private insurers are concentrating on product

innovation, managing investments, customer service and multi-channel distribution and

marketing of insurance products (Jampala, 2005). This brought in many new channels

like corporate agents, brokers, direct business, bancassurance, internet etc. – each with a

mixed bag of opportunities and limitations (Jampala, 2005 and Singhvi and Bhatt, 2008).

The choice of these alternate channels is dependent on a multiplicity of factors

like consumers’ requirements, business interest of the insurer, strengths of the channel,

the legal and regulatory requirements etc. The factors that determine the choice of the

distribution channels of an Insurance company are: (1) where are the customers (2) what

is the target customer profile (3) which product can be sold through the distribution

channel (4) which channel provides best buying experience and value to target customer

segment and (5) What is the operational cost involved in each type of channel? (Earnst

and Young, 2010). Along with, the other factors to be considered before the distribution

strategy is finalised; include (1) existing organisation’s vision/mission and effectiveness

of execution, (2) corporate core competency analysis, (3) range of products and services
and effectiveness in distributing each major category and (4) implications of current

distribution costs, competitiveness and new product design (Chari, 2005). Further, the

rising costs of many types of insurance coverage and greater price- consciousness by the

consumers have forced the insurers to experiment with less costly distribution methods

(Bickelhaupt, 1967).

On the other hand, for the consumer; the choice of the insurance distribution

channel is driven by the relative attractiveness of the intermediary’s particular advantage

on the parameter of advising i.e. giving suggestions for matching customer preference

with existing standard products; vs. customizing i.e. tailoring products to meet customer

needs (Bloos and Schellenberger, ). Further, while comparing whether independent

agents provide better services to their consumers than sole representatives of direct

writers, it has been concluded that it is not necessary that independent agents will always
provide better services to their clients (Etgar, 1976) .

In considering these alternate channels; bancassurance comes up as the most

feasible option because of the vast coverage, existing infrastructure base and rapport with

the customers. (Raja Rao, 2004). In the global context too it has been witnessed that for an insurance
industry seeking new channels of distribution, integration with banks comes

up as a feasible option because of vast bank branches, enlarged customer base, defensive

positioning and size etc. (Mayne and Taylor, 2002).

In India, the advent of bancassurance was necessitated by the poor penetration

ratio of the insurance companies and the declining income of the banks (Karunagaran,

2006). The persistent endeavour in scouting for new technology, new products / services /

new avenues, has become necessary for the growth as well as sustainability of the

banking system in India. In this context, bancassurance is an appropriate choice for banks

to increase their stable source of income with relatively less investment in the form of

new infrastructure (Mishra, 2012).

Also, the large reach and customer base of banks in both urban and rural areas in

India, the persistency rate in Bancassurance due to the continuous contact with the client

is better than in other channels. The ease of payment of premium and the facility of

maturity/claim payments through the bank account make it a customer friendly channel

(Goverdhan, 2008). Also, the fact that Banking operations in India are still branch

oriented and manually operated is all the more conducive for flourishing of

bancassurance (Gupta et al, 2012).

But, Sethi (2003) is of the opinion that it is not only the requirement of the

insurance companies to align with banks to sell their products and increase premium

generation, it is a requirement with banks too as it provides a means of product

diversification and is a source of additional fee income. Augmenting of revenues seems

to be a major attraction for banks to sell insurance products in view of the sharp decline
in margins in their core lending business (Morris, 2002).

Apart from having the advantage of reaching out to the potential customers at the

remotest of places, it offers a complete basket of financial advice to the customers under

one roof (Gupta, 2006). In addition to providing a comprehensive financial service under

one roof, bancassurance benefits customers with better service quality, advice on

financial planning, credibility, transparency in dealings, ease of renewals, electronic

banking and the like (Kumaraswamy, 2012). The customers are also in favour of such

one stop solutions for their needs. With increasing options of products and services, as

well as easier access to information, the customers look for stores or companies where

their various needs can be fulfilled. Hence, banks combine their core products with

insurance as well as other travel and leisure related products; which allows them to

increase their profits by providing cost benefits and ease to consumers (Alinvi and Babri,

2007).
The cost disadvantage of the agency channel is also one of the major reasons for

the spawning development and sale of products through the bancassurance channel

(Sharma and Saxena, 2004).

The merger and integration of organizations produces a synergistic impact on the

aligning organizations i.e. the rewards accruing for the integration are higher than for the

individual organizations taken independently. But this is yet to be reported in the case of

bancassurance. Various studies the world over have found that no significant increase in

revenues can be seen for banks – whether big or small (Berger, Humphrey and Pulley,

1996). The gains that emerge are principally driven by increase in the operating cash

flows rather than from risk reduction or increased incomes. (Fields, Frazer and Kolari,

2007). In the Indian context, the growth rate in income from bancassurance for public

and private sector banks indicates that the private sector banks have performed better than

the public sector banks. It is because of differences in cross-selling practices followed by

both the sectors. These differences emerged mainly because of their different philosophy,

background and distinct target customer segments (Grover, 2010).

For Bancassurance to be successful, the drivers of success include, supportive

regulatory environment, positive fiscal treatment of long-term savings, additional

revenues generated for banks and simple and standardised products (Teunissen, 2008);

demography, consumer awareness and education; and economic factors prevailing in the

country (Shah and Salim, 2011).