A Report on
Impact of Bancassurance on Indian Insurance Market

In this ever-evolving world of market opportunities and uncertainties, there has been an increasing pressure on business house to offer unique and innovative products and services and adopt new approaches to and styles of marketing. The need of the hour is to take pro-active measures to understand customer requirements and deliver products and services to their satisfaction rather than being purely responsive to the evolving changes.

These developments coupled with increasing pressures on various governments and industries to open up have resulted in increased expectations of stakeholders for producing results in the most cost-effective ways.

These trends are visible in all industries encompassing core sectors, infrastructure projects, Hospitality and travel and tourism, Telecommunications, Health and Medical care, Banking and Insurance and a host of other industries.

The economic reforms initiated in 1991 has definitely given focus and food for thought to examine the weak links in economy and has resulted Government’s thinking either to revamp and strengthen some of the sectors or privatize others. Two industries particularly, Banking and Insurance, are benefited as result of new thinking.

The major trends that have affected global economy have also influenced these two industries to respond to them. Some of these trends are:

• Closely inter-linked global financial markets, enabling effective and timely decision making.

• New approaches to and styles of marketing various products and services.

• Greater integration of various aspects of products and services for achieving customer satisfaction and retention.

• Strategic alliances (forward, backward or parallel integration) with related industries to achieve convergence.

This brief is prepared with a view to understand the nuances of Banking and Insurance and trends affecting the respective industries. It aims at identifying the possible scope for a strategic alliance between Bank and insurance companies. It is presented in the following topics:

• Brief review of Scenario – Insurance

• Brief review of Scenario - Banking

• Trends in Insurance

• Trends in Banking

• Strategic Options

01. Brief Review of Scenario - Insurance

• Insurance in India started without any Regulation in Nineteenth century.

• It was story of a typical colonial era .A few British companies dominated the market mostly in large urban centers.

• Insurance was nationalized mainly on 3 counts First, Indian lives were not insured. Second, even if they were insured, they were treated as substandard lives and extra premium was charged. Third, there were gross irregularities in the functioning of insurance companies. 25 companies were already bankrupt and another 25 companies were filed for bankruptcy.

• Life insurance was nationalized in the year 1956,and then general insurance was nationalized in the year 1972.

• In 1999, the private insurance companies were allowed back again into insurance sector with maximum cap of 26 percent foreign holding.

02. Brief review of scenario – Banking

• Emphasis on banking was first witnessed when in 1949 banking regulation ACT was passed.

• The nationalization of all commercial Banks has affected in regularizing Banking policies and monetary  policies. RBI is made the policy making body for banking services.

• Nationalization of Banks has resulted in spectacular progress in Banking services.

• Entry of private investment in banking

03. Trends in Insurance sector

• India, with population of over 1 billion, the life insurance premium as percentage of GDP is 1.3 whereas, the global benchmark is 4.5.

• According to a recent survey the Indian insurance market size will be around *$50 billion.

• The real problem with agency force has been their reluctance to approach wider population.

• Since the efforts required to tap individually are high, agents tend to approach only High networth individuals. This has created gap between insured population and potential insurable population.

• Out of *300 million strong middle class people 20 percent of people are insured and that too covering only 25 percent of their actual need and financial capability and the rest 80 percent is not insured at all.

• This exemplifies the vast untapped potential market in India and the traditional distribution channels of insurance companies are fast becoming costly and obsolete.

• The entry of SBI and its associates with network of over 13000 branches and many other top banks with huge network of branches brings new dynamics into the field of insurance.

• With more and more new players foraying into the field of insurance the competition is getting charged up and margins are being squeezed.

• Insurance companies are compelled to look for new way of distributing insurance products other than traditional way of distributing it through agents.

04. Trends in Banking sector

• Globally the boundaries’ de-marking financial services is fast eroding.

• The concept of “one stop super market” is catching up.

• In the past specializing in one form of product or service was the norm, and then it has been transformed into how wider is the product range that a financial institution can offer.

• With the evolution of interconnected financial services more and more financial institutions are forced to offer more sophisticated products

• From Strategic Perspective, it is no longer possible for any financial institution to operate in globalized market without any additional source of revenue.

• Indian banking Industry is heading towards consolidation phase.

• Banks will be now focussed on Integration of  all financial services

05.  Strategic Options

In view of these developments and trends Banks and Insurance companies have few options but to seriously look into various ways and means to converge their efforts to tap the same target customers and benefit from such ways. It is imperative to understand that efforts made individually (Bank or Insurance) may have limited scope or may take a longer time to realize their goals. In addition, the emerging market needs also require innovative ways and styles of marketing, specifically focussed on personalized service and customized products and services.

These market conditions definitely give rise the scope to analyze the market needs, have efficient service design standards and adopt such practices for customer identification and retention. They need to understand the critical success factors for growth and remain competitive, particularly when the existing players are turning more aggressive. 

At this juncture they have few options but to initially integrate their services, and secondly look at innovative ways of distributing products, and thirdly and more importantly have strategic alliances with related industries.  One such strategic alliance between Banks and Insurance companies is “Bancassurance’, an alternate channel where Insurance company utilizes the network of Banks to distribute their services.

This type of strategic alliance is of recent phenomenon and the results of such alliance is yet to be placed on record.  Hence it is quite evident to have a comprehensive study to gain deep insights into the various issues and intricacies related with this alliance.

Some of the recent studies have revealed that the minimum conversion rates for an Insurance company if it chooses to go in conventional mode (Agency force) is quite low when compared to the expected levels in Bancassurance. The conventional conversion cycle is briefly described in the following diagram.

In this Diagram it is evident that call conversion in Agency force is 1% (in case of efficient agency) and 25 in case of  Bancassurance.

This analysis throws light on the potential of Bancassurance. The model for developing this service is briefly explained hereunder. However a comprehensive study may reveal the critical issues that are associated with this strategic alliance.

As this type of alternate distribution is new to Indian market, the success of the above mentioned start-up theory is yet to established.  Hence a comprehensive research is required to test the implementation feasibility and its implications in the Insurance sector.

In addition to this theory, a model that further supplements the argument of best-fit position for both Bank and Insurance Company is explained below.

It is pre requisite for the alliance partners to understand their individual stance on the basis of their strengths and weakness and look at best possible ways of converging their efforts to achieve goals and objectives.

 

This article only aims to raise the relevant issues pertaining to design and implementation of Bancassurance as “Enables Service” rather than positioning it as another alternative distribution channel of Insurance Companies.