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Graham Morris investigates the potential for bancassurance in India.
The opening up of the insurance industry to private sector participation in December 1999 has led to the entry of 20 new players, with 12 in the life insurance sector and eight in the non-life insurance sector. Almost without exception these companies are seeking to utilise multiple distribution channels such as traditional agency, bancassurance, brokers and direct marketing. Bancassurance is seen by many to be a significant or even the primary channel (the latter being the case for at least SBI Life).
In other Asian markets we have seen bancassurance make significant headway in recent times. For example, bancassurance accounted for 24% of new life insurance sales by ‘weighted’ premium income* in Singapore in 2002. This is a significant increase on the equivalent 2001 statistic of 15% and is as a result of growth in significant bank-centric bancassurance operations. In Hong Kong the figure for 2002 is expected to be at the 20% level for the same basic reasons.
The management of the new Indian operations are conscious of the need to grow quickly to reduce painful start-up expense overruns. Banks with their huge networks and large customer bases give insurers an opportunity to do this efficiently.
Regulations requiring certain proportions of sales to the rural and social sectors give an added impetus to the drive for bancassurance. Selling through traditional methods to these sectors can be inefficient and expensive. Tying up with a bank with an appropriate customer base can give an insurer relatively cheap access to such sectors. This is still an issue for insurers despite the recent widening of the definition of the rural sector (so that it now accords with the census definition).
In India, as elsewhere, banks are seeing margins decline sharply in their core lending business. Consequently, banks are looking at other avenues, including the sale of insurance products, to augment their income.
The sale of insurance products can earn banks very significant commissions (particularly for regular premium products). In addition, one of the major strategic gains from implementing bancassurance successfully is the development of a sales culture within the bank. This can be used by the bank to promote traditional banking products and other financial services as well. Bancassurance is not simply about selling insurance but about changing the mindset of a bank.
In addition to acting as distributors, several banks have recognised the potential of insurance in India and have taken equity stakes in insurance companies. This is perhaps the precursor of a trend we have seen in the United Kingdom and elsewhere where banks started off as distributors of insurance but then moved to a manufacturing role with fully owned insurance subsidiaries.
The development of bancassurance in India has been slowed down by certain regulatory barriers, which have only recently been cleared with the passage of the Insurance (Amendment) Act, 2002. Prior to this, all the directors of a company wishing to take up corporate agency (such as a bank) were technically required to undertake 100 hours of agency training and pass an examination. This was clearly an impractical requirement and had held up the implementation of bancassurance in the country. As the current legislation places the training and examination requirements upon a designated person (‘the corporate insurance executive’) within the corporate agency, this barrier has effectively been removed.
Other regulatory changes of note in this area are the recently published Insurance Regulatory and Development Authority (IRDA) regulations relating to the licensing of corporate agents. This specifies the institutions that can become corporate agents and sets out the training and examination requirements for the individuals who will be selling on behalf of the corporate agent, the so-called ‘specified persons’.
‘Specified persons’ have to satisfy the same training and examination requirements as insurance agents. A noticeable exception is that for those possessing the Certified Associateship of Indian Institute of Bankers (CAIIB) only 50 hours of training (rather than 100 hours) will be required. This also applies to certified accountants and actuaries. It is hoped that this aspect of the regulations will lead to well educated, professional bank officers carrying out the financial advisory process.
Although expected, a restrictive feature of the bancassurance regulations is that they appear to constrain the corporate agent to receiving only commission; profit-sharing arrangements would seem to be ruled out. We feel that this, if applied in practice, is unfortunate as profit-sharing agreements, which are increasingly common internationally, serve to align the interests of the bank and the insurance company. Also, as products sold through bank channels can be highly profitable, such agreements may be financially advantageous for banks. In the longer term a profit-sharing agreement can help a bank move from being a distributor to a manufacturer of insurance products thus leading to greater integration in the financial services marketplace.
Given the open-mindedness and responsiveness of the IRDA to regulations in general, we hope that it will not be too long before profit-sharing agreements are permitted between insurers and corporate agents.
Currently bancassurance in India is very much in its infancy. There are a wide variety of banks which are very different, both in make up, culture, geographic spread and working practices. There are a wide number of approaches and models that can be adapted for bancassurance, many of which are dependent on these attributes, as well as the insurance partner views and competencies, and also the nature of the relationship between the bank and insurer - whether one of equity sharing company structure, or of a profit share nature or purely a distribution arrangement.
Sales have already been taking place both through insurance staff located in bank branches and also through bank staff directly. Results from both models have been very encouraging, with high productivity figures having been achieved. This shows that there is no single universal model that works in all cases and that almost always the quality of the implementation and execution is more important than the particular model chosen.
However, there is also a word of caution in that early success is often relatively easy to achieve by going after so-called ‘low-hanging fruit’, or products and customers which are easy to sell, and sell to. However, untold damage can be caused in the longer run by turning the bank into a ‘rabid’ sales animal, exhibiting the types of negative sales behaviour that is more often exhibited by insurance company agency forces, and therefore potentially driving customers away in the longer run. Bank managers can also be upset if their deposit base suddenly starts to disappear. Learning from experiences in other countries around the world about some of the dangers and pitfalls (especially in other parts of Asia), can therefore be crucial to long-term success.
Where legislation has allowed, bancassurance has mostly been a phenomenal success and, although slow to gain pace, is now taking off across Asia, especially now that banks are starting to become more diverse financial institutions, and the concept of universal banking is being accepted.
In India, the signs of initial success are already there despite the fact that it is a completely new phenomenon. The factors and principles of why it is a success elsewhere exist in India, and there is no doubt that banks are set to become a significant distributor of insurance related products and services in the years to come.
* Weighted premium income is calculated as: 10% SP + 100% AP with adjustment for premium payment terms of less than 10 years.
A longer version of this article first appeared in an Indian Institute of Bankers publication.
Watson Wyatt Insurance and Financial Services Practice recently welcomed Graham to its Distribution Consulting division. More details on this development are on Watson Wyatt growing around the world.
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