Banking awareness : All about Bancassurance or Bank Insurance

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Banks and insurance companies collaborate to form a partnership in which the bank sells the insurance firm’s products to its customers. This arrangement of selling an insurance product through banks is known as Bancassurance.

Bancassurance, i.e., banc + assurance, refers to banks selling the insurance products. Bancassurance term first appeared in France in 1980, to define the sale of insurance products through banks’ distribution channels (SCOR 2003).

This arrangement profits both the bank and the insurance company, as the bank earns a commission amount from the insurance company while the insurance firm broadens its market share and customers. The bank acts as a mediator by helping an insurance firm reach its target customers to increase its market reach.

Importance of Bancassurance

The importance of Bancassurance are listed as follows:

1)Cost-effectiveness: Insurance companies look to Bancassurance as a cost-effective mode of distribution.

2)Helpful environment: Given that the customers already trust the bank with their money, they are also generally more willing to consider new products from the same financial institution, thereby creating an enabling environment to sell the products.

3)Commission-based income: A bank is able to income base and increase its overall productivity by strengthening its branch network, goodwill and client base by presenting itself as a one-stop-shop for its customers, therefore improving customer

Bancassurance is a relatively new idea in the financial sector. The belief behind Bancassurance is to combine the marketing capabilities and selling-culture of insurance companies with the distribution network and sizeable customer base of banks. In this arrangement, insurance products are traded through the broad distribution sections of the banking services accompanied by a comprehensive range of banking and investment products. In short, Bancassurance has a tremendous chance, if appropriately implemented, to be a win-win situation for banks, insurers and the customer.

BANCASSURANCE MODELS

1) Pure distributor: In this model, the bank sells the products of an individual insurer exclusively, either bundled with the bank’s products or in stand-alone basis.
Strategic alliance: In this model, a higher degree of involvement is made in product development, service terms and management by the bank.

2)Joint venture: The bank and the insurance company form a new corporation in which they both hold shares. The shareholding may be equal for both parties, though it not essential.

3)Financial service group: In this model, an insurance company may make/acquire a bank or a bank may create/purchase an insurance company. Here, a larger conglomerate may look to create multiple financial services companies, including a bank and an insurance company, and may utilise the synergies that come with operating both the businesses.

Bancassurance in India

In India, the first three models are practised, but the laws do not permit either banks or insurers to own an insurance company or bank wholly.

The insurance sector in India is expanding rapidly. Both banks and insurance companies perceive bancassurance as an opportunity to increase the Indian financial industry’s future income and footprint. Non-life insurance products are featured to a lesser extent as compared to life insurance products. The banks have a customer base of more than 100 million and therefore are in a perfect situation for taking bancassurance forward.

Bancassurance in India is gaining ground extremely fast despite being a very new concept. In India, the banking sector is under the control of Reserve Bank of India and insurance sector is managed by the Insurance Regulatory and Development Authority (IRDA). Since Bancassurance contains constituents from both industries, it comes under the influence of both regulators. Each of the regulators (RBI and IRDA) have given out comprehensive regulations for the bank’s involvement in the insurance sector.

This degree of possible fee-based revenue creation by banks in India from bancassurance is the temptation for banks to get involved in the space.

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