Bancassurance: A Tool of Integrating Insurance and Banking Industries PDF

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Published in Mirmire Monthly 344, Year 42, issue 3, 2070 Bhadra-Aswin (Vol 322) Bancassurance: A Tool of Integrating Insurance and Banking Industries Rabindra Ghimire 1 1. Overview of Bancassurance In term of marketing perspectives, insurance business is quite different from other types of business ...

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Published in Mirmire Monthly 344, Year 42, issue 3, 2070 Bhadra-Aswin (Vol 322)

Bancassurance: A Tool of Integrating Insurance and Banking Industries Rabindra Ghimire 1

1. Overview of Bancassurance In term of marketing perspectives, insurance business is quite different from other types of business like hotel, retail shop or transportation business. Customer goes to shop or in hotel to purchase their required goods and services but merely, customers goes to office of the insurance companies to purchase insurance policies specially life insurance products. Insurer need to visit potential customers and try to convince them. So, insurance companies have a team of insurance agents. In Nepal there are more than 1 lakh agents (individual and institutional) have been appointed to sell the insurance product. The term bancassurance is a combination of two words „banc‟ and „assurance‟ which refers to banks selling insurance products. Bancassurance, also known as „allfinanz‟ 2describes a package of financial services that can fulfill consumers banking and insurance needs. In fact, financial institutions can offer a combination of both banking and insurance services at the same time. Bancassurance as a way of financial conglomeration has appealed widespread attention in the world of academics and business. It offers consumers a „one-stop-shop‟ option for a larger range of financial product. It is at present used to describe all kinds of relationship between the banking and the insurance industries (Quagliarello, 2004). According to IRDA 3, „Bancassurance‟ refers to banks acting as corporate agents for insurers to distribute insurance products. Bank and insurance companies both can earn more profit since the banks get their commission for selling the insurance products and in the same way the insurance companies get the wide spread networking of their branches. Bancassurance is a subject of continuing interest to the financial services industry worldwide. Over the years, regulatory barriers between banking and insurance have diminished by creating a climate friendly to bancassurance. A broader definition of bancassurance was provided by Swiss Re (1992): “Bancassurance can be described as a strategy adopted by banks or insurance companies aiming to operate the financial services market in a more or less integrated manner. In practice, the term „bancassurance‟ is consistently used to describe a new strategic orientation of financial institutions in private customer business”. Bank mobilizes its staffs to sell the insurance policies since it has large number of customer network. Bank has more capital, more numbers of customers and more staffs than insurance company so that insurance companies can utilize the bank resources to promote insurance products. Attraction towards the Bancassurance is growing. There are several reasons behind the attraction.  

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First of all long term fund to bank is available from life insurance companies. Insurance premium is the sources of fund. So it is one of the method to increase deposits of banks. Bank wants to generate additional revenue from the same customers utilizing the same customers through the same channel of distribution and with the same people.

Mr. Ghimire is Lecturer, School of Business, Pokhara University. Corresponding address: [email protected] Allfinanz: banks entering the insurance sector by offering insurance products to their retail customers/ also referred to as bancassurance 3 IRDA stands for Insurance Regulation and Development Authority, an apex regulatory body of insurance market in India. 2

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Insurers want to control relationships with their customers, which is possible only through bank since they are the customers of the bank also. Bancassurance, definitely reduces the cost of marketing so that both bank and the insurance company can get benefit.

2. Historical Development of Bancassurance The first recorded settlement of bancassurance was in 1860, when the CGER savings bank from Belgium started to sell mortgage-linked insurances. Bancassurance as a term first appeared in France in 1980, to define the sale of insurance products through banks‟ distribution channels. It is the arrangement whereby branches of a bank distribute insurance products by an insurance company owned wholly or partially by the bank, or the branches distribute products developed by other insurance companies with which the banks have entered into selling arrangement. This form of a complete financial conglomeration has rapidly grown since the 1980s when interest margins on loans decreased steadily and banks started exploring new sources of revenue. As from the early 1990s, bancassurance has become a major distribution channel in many insurance markets. Europe is the epicenter of bancassurance practices. It has been a successful model in the European countries contributing 35% of premium income in the European life insurance market. It contributes over 65% of the life insurance premium income in Spain, 60% in France, 50% in Belgium and Italy. In the Asian markets, bancassurance has a limited share of the total sales primarily because of the near monopoly of the life agents in Japan, which is the largest life market. The development of bancassurance is closely related to the regulatory climate of a country, helping to explain differences in its importance across different countries. (Cummins et al., 2006) In some countries, bank insurance is still largely prohibited, but it was recently legalized in countries such as the United States, when the Glass–Steagall Act was repealed after the passage of the Gramm-Leach-Bliley Act. But revenues have been modest and flat in recent years, and most insurance sales in U.S. banks are for mortgage insurance, life insurance or property insurance related to loans. But China recently allowed banks to buy insurers and vice versa, stimulating the bancassurance products and some major global insurers in China have seen the bancassurance product greatly expand sales to individuals across several product lines. History of bancassurance in Nepal is as old as the Europe. Agriculture Development Bank launched a project "Small Farmers Development Project" (SFDP) since 1970 targeting to uplift small and low income farmers. Most of the farmers used the loan to purchase the cow and buffalo. Insurance against the risk of livestock was provided to farmers since 1987. However, the insurance scheme was initiated by the project implemented by bank but there was no link with insurance companies. Daniel divided the evolution of bancassurance products into three periods.  In the first period, prior to 1980, banks sold insurance guarantees that were a direct extension of their banking activities, but were not associated with life insurance. For example, credit insurance was not regarded as bancassurance.  After 1980, savings products that benefited from advantageous tax regimes associated with life insurance flourished in the banking markets.  Around 1990, the supply of insurance products by banks became much more diversified in both life and general insurance categories. 3. Advantages of Bancassurance to insurer, bank and customers Bancassurance: A Tool of Integrating Insurance and Banking Industries Rabindra Ghimire

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Banks have been providing services to their customers directly and they have up to date information of their clients so the relationship between banker and customers is quite closer than the relationship between policyholders and insurers. Credit provided by the bank is associated many kinds of risks among them default risk is one of the major risk. The default risk can be insured. To get protection from the default risk, banks themselves establish long term strategic alliance with insurance companies and do necessary procedure to issue credit insurance policy. Both bank and insurance company have been experiencing the positive impact from bancassurance practices. The distribution of insurance products through a bank‟s distribution channel brings diversification advantages by generating non-interest related income. Both insurers and banks are financial intermediaries that pool savings of individuals to channel these funds to the capital markets. The advantages to bank, insurance and customer can be summarized as follow: Table 1: Advantages of Bancassurance to Different Stakeholders BANK  Can earn more profit by selling new products from the existing strong organisation's resources and structure.  The broadening of its product range makes the bank more attractive and can reinforce customer satisfaction and therefore customer loyalty will be increases.  One-stop shop model optimizes the use of the network and increases the profitability of the existing branch network.  Increases the fee Income, strengthen long term client relationship and competitive pressures

INSURANCE COMPANY CUSTOMERS  Can reach to more customers  Can get better through banking network. Value Products,  Varieties of products reduce  Save time while the risk and increase the the get all opportunities financial services through single  The insurance company often window or one benefits from the trustworthy stop shop.– “One image and reliability that Stop Shop” people are more likely to attribute to banks;  An insurance company can establish itself more quickly in a new market, using a local bank‟s existing network.  Leverage on bank customer relationship, higher “hit rate” and therefore lower acquisition cost.

4. Different Approaches of Bancassurance How to entry in to the insurance market by bank is a strategic decision. This is not only influence by the internal environment, it is influenced by so many external factors like: legal and political environment, technology and global factors. In Nepal, banks are free to sale insurance products as an agent. Three primary models of bancassurance are in practices. These model may be slightly different countries to countries due to cultural, legal and technological influences. i. Distribution Agreement: Bank acts as an intermediary for an insurance company. The model is popular in USA, Germany, UK, Japan and South Korea.

Bancassurance: A Tool of Integrating Insurance and Banking Industries Rabindra Ghimire

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ii. Joint Venture: This is the creation of a new insurance company by an existing bank and an existing insurance company. Bank in partnership with one or more insurance companies can establish new company. Italy, Spain, Portugal, South Korea, India are doing practice on this model. Example of this model is found popular in India. Some instances are ICICI-Prudential Life, HDFC Standard Life (India), Kotak Life (with Old Mutual of South Africa), SBI Life (with Cardiff of France). iii. Full Integration: Creation of new subsidiary by insurance and bank. This is more popular in France, Spain, Belgium, UK and Ireland. Complex insurance products are not sold by banks, they referred to insurance company. Figure 1 illustrates the level of involvement of bank and insurance company while distributing the insurance products. Fig 1: Level of Involvement of bank and insurance company while distributing the insurance products to customers.

Source: Morshed, 2006 5. Bancassurance Practices in Nepal The organized history of bank and insurance in Nepal begins one decade interval( the first bank was established in 1937 and the first insurance company was established in 1947). However, banking industry is become many folds larger then insurance industry. The number of life, non life and composites insurers reached to 8, 16 and 1 respectively and their Assets, premium and investments by July 15 2012 reached to Rs. 67 billion, Rs. 17.48 billion and Rs.57 billion respectively. The insurance market is concentrated within Kathmandu and few cities outside the Kathmandu valley. Nepalese insurance industry in Nepal for a fairly longer period relied heavily on traditional agency distribution network. Most of the insurers have institutional agents. The portion of bank agents are significantly higher than non banking institution. Table 2 shows that out of 83 agencies, 77 (93%) are bankers and rest (6, 7%) are other than banking institutions. This data shows that institutional agency almost covered by banking sector. Besides name list of table 2, other banks also involve in insurance agency business.

Bancassurance: A Tool of Integrating Insurance and Banking Industries Rabindra Ghimire

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Table 2: List of Institutional Agents of Insurance Companies Type Types of Agent Non SN Name of Insurers Bank Bank Total Life/Non Life 1 Rastriya Beema Sansthan 4 1 5 Life 2 National Life Insurance 5 1 6 Life 3 Nepal Insurance 4 0 4 Non Life 4 National Insurance 1 0 1 Non Life 5 United Insurance 3 0 3 Non Life 6 Premier Insurance 3 1 4 Non Life 7 Oriental Insurance 2 0 2 Non Life 8 Himalayan Insurance 3 0 3 Non Life 9 Alliance Insurance 3 0 3 Non Life 10 Sagarmatha Insurance 5 0 5 Non Life 11 Everest Insurance 5 0 5 Non Life 12 Neco Insurance 3 1 4 Non Life 13 Alico Insurance 3 0 3 Non Life 14 NB Insurance 1 0 1 Non Life 15 Shikhar Insurance 4 1 5 Non Life 16 Prudential Insurance 4 0 4 Non Life 17 Lumbini Insurance 3 0 3 Non Life 18 Siddhartha Insurance 7 1 8 Life 19 Asian Insurance 9 0 9 Non Life 20 NLG Insurance 5 0 5 Total 77 6 83 Source: Insurance Board, 2013 Figure 3 undoubtedly proves that involvement of banks in non life insurance sector is much higher than life insurance sector. It means non life insurance products are sold by banks and non banking institutional agents. Fig 2: Percentage of Insurance Agents

Fig 3: No. of Banks Agents in Life and Non Life Insurance

Bank

7%

Life 29%

Non Bank

Non Life 71%

93%

Source: Insurance Board, 2013 Bancassurance: A Tool of Integrating Insurance and Banking Industries Rabindra Ghimire

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Some banks have jointly selling insurance policies. Standard Chartered Bank Nepal, Nabil Bank, Commerce and Trust Bank, Civil Bank and NMB Bank also are selling insurance policies. As per the official record, in FY 2012/13, 14 banks and financial institutions become agents Bank of Asia became agents of 18 insurers whereas some banks only sells products of only on insurers. Similarly, other 12 institutions (Cooperatives, private company) also doing the same. Table 3: List of Bank and Financial Institutional and others for Insurance Agency SN Name of Agent

1 2 3 4 5 6 7

Agency for No. of Insurers 18 14 9 6 6 5 5

Bank of Asia Ltd Nabil Bank Ltd. NMB Bank Ltd. KIST Bank Ltd. Nepal SBI Bank Ltd. Siddhartha Bank Ltd. Annapurna Finance Co. Ltd. Sagarmatha Merchant 8 Banking 2 Source: Insurance Board, 2013 S&C: Saving and Credit, Coop : Cooperatives 6.

SN Name of Agent

9 10 11 12 13 14 15

NIC Bank Ltd. Civic Bank Ltd Business Development bank Siddhartha Dev bank Malika Dev Bank Prabhu Finance Other Institutions

Agency for No. of Insurers 1 1 1 1 1 1 12

Total

83

Conclusion The growth of Nepalese insurance industry over last six decades found sluggish comparing with South Asian countries. Bancassurance can be an effective tool to accelerate the growth rate of insurance penetration (Total written premium divided by GDP) and density (Total written premium divided by population) of the country. Having huge networking (11.1 million depositors getting services through 1,111 branches of 197 banks) of bank (A, B and C class), there is great opportunity to enter into large prospective market to bank and insurance. The huge potential market is still outside the access of insurance industry. Banking channel, in many ways, may be effective to extend the insurance market. Prevailing regulatory regime limits the role of bank only as a 'agent'. As per the demand of the customer, bank can play effective role to promote the insurance market in future if the regulatory and economic environment creates the conducive milieu and comfortable workable situation.

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References Cummins J.D., Weiss, M.A. and Xie, X. (2006). Market Concentration, Vertical Integration and Bancassurance: Consolidation and the “Insurance Middleman” ARIA Annual Meeting 2006, Washington, D.C. Insurance Board (2012). Current Situation of Insurance Industry and Analysis of Trends. Kathmandu, IRDA (2002). Insurance Regulation and Development Authority, Annual Report 2001/02. India. Morshed, O. (2006). Bancassurance: Business and Operational Models O.C.W. Jongeneel (2011). Bancassurance: Stale or Staunch? A pan-European country analysis. Quagliarello, M., 2004. La bancassicurazione: profili operativi e scelte regolamentari: Il Risparmio, 3, 101-129. NRB (2013). Monetary Policy, 2070/71. Nepal Rastra Bank. Kathmandu. Websites http://www.bsib.org.np/ http://www.nrb.org.np/

Bancassurance: A Tool of Integrating Insurance and Banking Industries Rabindra Ghimire

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