THE BANCASSURANCE DILEMMA - Institute of …

1 19 THINDIA FELLOWSHIP SEMINAR19 INDIA FELLOWSHIP SEMINARJUNE 2013 THEBANCASSURANCEDILEMMATHE BANCASSURANCEDILEMMAS hould banks be brokers with higher responsibility towards customers or should they continue as corporate agents?Bhavna Verma & Shivank ChandraGuide - Varun GuptaAGENDAAGENDABThf BANCASSURANCE The story so far BANCASSURANCE models IRDA (Licensing of BANCASSURANCE Entities) Regulations, 2012 Comparative analysis of agent and broker modelsComparative analysis of agent and broker models Bank as corporate agent, BANCASSURANCE agent and broker Insurer s perspective Bank s perspective Customer s perspective Customer s perspective Industry views and concerns SummaryBANCASSURANCE -THE STORY SO FAR BANCASSURANCE is an arrangement in which a bank and insurance company form a partnership so that the insurance company can sell its products to the bank s customer base. History and relative importance ofbancassurancegloballyHistory and relative importance of bancassurancegloballyThebancassurancemod el was introduced in Europe in the bancassurancemodel was introduced in Europe in the 1980s.

2 Main distribution channel for life insurance products in many countries in Europe Agents and brokers continue to be the dominant channels for the distribution ofAgents and brokers continue to be the dominant channels for the distribution of non-life products in Europe Most Asian markets are also witnessing growing contribution of the BANCASSURANCE channel to life insurance premiums. Factors that prompted banks to take upinsurance distribution in India59%35%Wider range of financialproductsFactors that prompted banks to take up insurance distribution in India29%18%29%Increase fee-basedincome/additional stream ofrevenueproducts18%29%24%18%24%Improve the sales cultureIncrease customer loyalty29%6%18%24%Acquire new customers Improve the sales cultureRank 1 Rank 2 Rank 30%10%20%30%40%50%60%70%80%90%100%Percen tage of respondentsSource: Towers Watson India BANCASSURANCE Benchmarking Survey, 2009-10 Essentially, banks see insurance products as a means to attract customers and additional fee income, at little extra investment.

3 BANCASSURANCE market share The share of bancassurancein new business sales has increased steadily over the last few years for life insurance Source: IRDA databusiness. Private life insurers tend to be more focused on bancassuranceand hence generate a relatively higher proportion of their business through banks when compared to public sector insurers. Globally and in India, banks contribution to general insurance business has been comparatively lower than their share in life insurance new premiumscollected by the : IRDA dataBancassurance success factorsBenefits to banksBenefits to insurersBenefits to customersBenefits to banks zEnhanced product portfoliozSource of additional feeBenefits to insurerszHigher market penetration through the existing customer base ofBenefits to customerszAccess to wider range of products within the bankAvailability of needbasedzSource of additional fee-based incomezMarginal additional distribution costs (use of existing staff)existing customer base of the bankzIncreased turnoverzLesser need to establish ownnetworkszAvailability of need-based advice and assured servicezHigher trustzEase of premium payments (linked to bank accounts)existing staff)zHigh degree of alignment in customised product design, sales support etc.

4 For bankled insurersown networks zOverall cost effectiveness versus agency channel(linked to bank accounts)zProducts may be cheaper versus agency channelfor bank-led insurersPrompted by the success of the BANCASSURANCE model globally and to facilitate active integration with the insurance company, several banks promote insurance companies singly or jointly in India. BANCASSURANCE MODELST here are four main types ofbancassurancemodels are four main types of bancassurancemodels Pure distributorStrategic allianceallianceJittWholly-ownedJoint ventureWhollyowned insurer / bankModels prevalent in IndiaModels prevalent in India Pure distributorStrategic allianceJoint ventureWholly-owned insurer / bankinsurer / bankIn India, while the first three models are practiced, regulations do not permit either banks or insurers to wholly own an insurance company or bank. Roles and responsibilitiesRoles and responsibilitiesProduct developmentMarketing and tiLead generation dlNew business iServicing, CRM and repeatInsurerInsurerBankInsurerInsurerPu re Distributordevelopmentpromotionand salesprocessingrepeat salesMarketingInsurerInsurer (and bank)Bank (and insurer)InsurerInsurerStrategic AllianceInsurer (and bank)Bank (and insurer)Bank (and insurer)Insurer (and bank)InsurerBk(di)Bk(di)BkBk(di)I(dbk)Jo int VentureWholly Owned Bank (and insurer)Bank (and insurer)BankBank (and insurer)Insurer (and bank)y(Integrated Venture)These are hygiene areas: Banks expect perfect deliveryIRDA(LICENSING OF BANCASSURANCEIRDA (LICENSING OF BANCASSURANCE ENTITIES) REGULATIONS, 2012 Exposure draft key provisionsExposure draft key provisionsBancassurers can operate through the corporate agency or broker hlthbkhlilt ittdchannel.)

5 The broker channel was previously not permitted. A BANCASSURANCE agent will be allowed to tie-up with one life, one non-life, one standalone and one specialised insurer in The conduct of BANCASSURANCE through the broking channel will be governed by the IRDA (Insurance Broker) pa minimum of 10 and maximum 20 of the listed states / Union Territories. Regulations, 2002 which are currently under opting to act as brokers will needIn any one given state, exclusivity of the BANCASSURANCE partnership must be maintained. Those opting to act as brokers will need to withdraw from existing ancassurancepartnerships. The driving factor behind the new regulations is reportedly to increase overall insurance penetration by utilising the vast network of banks, particularly in rural and semi-urban areas. COMPARATIVE ANALYSIS OFCOMPARATIVE ANALYSIS OF AGENT AND BROKER MODELSBank as corporate agent, BANCASSURANCE agent and brokerCorporate agent (current) BANCASSURANCE agent (proposed)Broker (proposed)

6 Sell products of one life and one non-life company across the countrySells the products of one life, one non-life, one standalone heath and one specialisedinsurance company in oneSell products of all insurance companies insurance company in one location RtlifdRtlifRtthtdRepresent one life and one non-life insurance company across the countryRepresent one life, one non-life, one standalone heath and one specialisedinsurance company in one ltiRepresent the customer and find the product that best meets the requirement among the products of all ilocation companiesMay be able to secure better Works on rates offered by the insurance company yrates as all companies products are offeredComparison of corporate agency and broker models (1) Insurer sperspectiveInsurer s perspectiveBancassurance modelAdvantagesChallengesCorporate agencyA tti tifbkMi htd tffitCorporate agency (single tie-up)zAutomatic tie-up for bank-led insurers and brand integrationHi hizMight need to offer equity stake to ensure commitmentNdtittzHigher senior management commitment / interest from bankEnhanced in estments bzNeed to commit resources to maximise productivityzPotential conflict with core b sinesszEnhanced investments by bank equity stake, people, training infrastructure, marketing etcbusiness product development based on bank scustomerbank s customer segmentation and needs analysisComparison of corporate agency and broker models (1) Insurer s perspective (contd )Insurer s perspective (contd.)

7 BANCASSURANCE modelAdvantagesChallengesCorporate agency (multiple tie-ups)zAccess to a wider range of bankszConflict of interest for bank-led insurerszCommitment from bank in a single locationzDilution of brand association for customers in areas where the zCustomised product development for major banking partnerpromoter bank partner s products are not offeredzNeed to engage with different banks in different locations, requiring additional time and resourcesComparison of corporate agency and broker models (1) Insurer sperspective (contd )Insurer s perspective (contd.) BANCASSURANCE modelAdvantagesChallengesBk hlBroker channelzOpportunity to offer products through several banks to maximiseproduct reach across thezConflict of interest for bank-led insurerszNeed to offer betterfee /product reach across the countryzInsights into the needs of different customerzNeed to offer better fee / commissions owing to increased competition zRisk of inadequate productdifferent customer segments and associated product development zRisk of inadequate product push amidst availability of products of several companieszRisk of inadequate productzRisk of inadequate product push due to mis-selling to maximise fee-based incomezRisk of high lapses if frequentRisk of high lapses if frequent churning due to mis-sellingComparison of corporate agency and broker models (2)Bank s perspectiveBancassurance modelAdvantagesChallengesggCorporate agency (single tie-up)

8 ZSales and training support from insurerzIncreased involvement of bank staffzBetter collaboration on product developmentzBrand integrationzPotential conflict with core businesszLimited product rangeComparison of corporate agency and broker models (2)Bank s perspective (contd.) BANCASSURANCE modelAdvantagesChallengesggCorporate agency (multiple tie-ups)zSupport from insurer in one locationzPossible conflicts of interestzEngaging with more than one zCustomised product developmentzOpportunity to experience insurance provider requiring significantly more management time, commitment and resources;the services of different insurance providerszTraining / re-training bank staff on products, processes of more than one insurance providerzAligning bank s IT systems with that of more than one insurance provider; Comparison of corporate agency and broker models (2)Bank s perspective (contd.) BANCASSURANCE modelAdvantagesChallengesggBroker channelzWider product choice to customerszIncrease costs of training staff on several products and providerszInnovative products and better rates due to higher competitionzPossible need to establish separate broking armzLesser staff motivation issue as selling insurance will be the core activity under a segregated zGuard against mis-selling to avoid reputational risksbroking arm if requiredComparison of corporate agency and broker models (3) ppgy()Customer s perspectiveBancassurance modelAdvantagesChallengesCorporate agency (single tie-up)Corporate agencyzBrand associationzTrust and reliabilityzLimited product optionszBrand association in corezDilution of brand associationCorporate agency (multiple tie-ups)

9 ZBrand association in core stateszWider array of products across locationszNew product options availablezDilution of brand association for customers in areas where the promoter bank partner s products are not offeredzLack of clarity about product ff ii difft ltiBroker channelofferings in different locationszAvailability of all product options in one placezNeed-based selling in the truezRisk of mis-selling to maximise fee-based incomezRisk of frequent churning tozNeedbased selling in the true sense if implemented ethicallyzHigher accountability towards customerzRisk of frequent churning to maximise fee-based incomeINDUSTRY VIEW AND CONCERNSM ixed industry response to the proposal of banks acting as Ministryis keen on banks actingasThe Financial Stability Report of the RBI dated December 2012 makes reference to the re isedbancass ranceg idelines stating that theThe Finance Ministry is keen on banks acting as insurance brokers, in a bid to increase insurance penetration and increase accountability to policyholders.

10 Revised bancassuranceguidelines stating that the option to allow banks to act as insurance brokers should be carefully considered in the light of potential conflicts of interest for bank-led insurers InsurersThereis initial apprehension amongbankledand reputational risks. Report of an IRDA Committee on Insurance Brokinghas indicated that while insuranceThere is initial apprehension among bank-led insurers on the brokerage model due to a onflictof interest issue. Some other insurers also have strong existing exclusive partnerships. Broking has indicated that while insurance broking by banks is likely to enhance penetration and overall service levels, approval of the banking regulator RBI has to be sought and fli tf i tt fbkldidtAt the same time, non bank-led insurers are optimistic about the opportunity to reach under-penetratedareas by utilising the networks ofconflicts of interest for bank-led insurers need to be areas by utilising the networks of multiple banks.