Bancassurance

Department of Commerce,Alva’s Post Graduate Center,

Moodbidre

Insurance: The Indian Profile

• Until 1956, private insurance companies

• In 1956, life insurance was nationalised

• In the same year, LIC was created absorbing

154 Indian insurers, 16 foreign insurers and 75 provident societies totalling 245 Indian and foreign insurers

• From1973, General Insurance business was nationalized. 107 insurers were amalgamated and grouped into four companies, as subsidiaries of General Insurance Corporation of India

Deregulating Insurance Sector• In 1999, IRDA Act was

passed• Subsidiaries of GIC

became Independent Cos

• Private Insurance Allowed since 2000

• FDI at 26% initially• Increased to 49% in

2012

Bancassurance

• Bank branches distributing insurance products is called bancassurance

• In UK, Barclays tried and Failed• France and Spain allowed it from 1990• Until then, Central Banks did not allow it

Compulsions of Banks in India

• Competition and Pressure on Interest Income• Need for Fee Based Income• Insurance Companies’ subscription to Perpetual

Bonds of banks to satisfy Basel Norms• Core Banking & Internet Banking

Compulsions of Insurance Companies• Using the Network of Bank

Branches• Widespread Geographical

Reach• Bank Branches in Rural Areas• Need to Scale up the Business

Quickly• Well Trained Banking Personnel• Banks as Financial

Supermarkets• Leveraging on Internet Banking

The Consumer Angle

• Easy Access due to Universal Presence of Bank Branches• Multi-Benefit from Single Location• Easiness of Payment• Banker’s Knowledge of Customer Profile• Easy Verification of Customer Details• Permanent Employees of Banks

Business Models

• Banks as Distributing Agents• Banks as Joint Promoters• Insurance Companies becoming Subsidiaries of Banks• Associate of Banks held by the same Holding Company

Basel Norms and Bancassurance

• Basel Norms Require the banks to have risk weighted capital as a percentage of the loan portfolio of bankers

• Banks carried on with a meager capital• Criteria applied was deposit loan ratio• Banks have to raise equity capital for the existing

loan portfolio

Perpetual Bonds and Preference Shares

• All the banks need to raise equity capital• Giving loans is a routine, public issue is not• When all the banks need to raise equity, it becomes

impossible• RBI allowed banks to issue perpetual securities of

15 years, renewable at the option of the banks• Insurance companies have massive funds to

subscribe to these securities• Banks are forging alliances with insurance

companies to access these funds

Micro-Insurance• Government is encouraging

microinsurance as part of inclusive development

• It carries low premium for the risk coverage of huts, livestock or any other small asset of rural population

• IRDA prescribed that every insurance company should cover the social sector and rural areas

• They can reach only through rural bank branches

Problem Areas• Bank Personnel lack training in marketing insurance

products• Banks are accustomed to serve customers at the

place of business and not at the place of the customers

• Bankers have to divide their time between marketing banking products and insurance products

• Servicing policy holders is another task the bankers are not accustomed to

• Working Hours Oriented Service

General Problems of Insurance

• Bankers have started having reservation about the survival of foreign insurance companies

• Failure of Insurance Companies will affect the image of the banks

• Packing insurance products as investment products• Administrative and other hidden charges• Near Bankruptcy of AIG• Increasing Complaints regarding settlement

THANK YOU