CHAPTER II

LITERATURE REVIEW

LITERATURE OF BANCASSURANCE:

The business of banking around the globe is changing due to integration of global financial
markets, development of new technologies, universalization of banking operations and
diversification in non-banking activities. Due to all these movements, the boundaries that have
kept various financial services separate from each other have vanished. The coming together of
different financial services has provided synergies in operations and development of new
concepts. One of these is bancassurance.
Bancassurance simply means selling of insurance products by banks. In this arrangement,
insurance companies and banks undergo a tie-up, thereby allowing banks to sell the insurance
products to its customers. This is a system in which a bank has a corporate agency with one
insurance company to sell its products. By selling insurance policies bank earns a revenue
stream apart from interest. It is called as fee-based income. This income is purely risk free for
the bank since the bank simply plays the role of an intermediary for sourcing business to the
insurance company.
It has its genesis decades ago in France, where this channel today is the predominant source
of insurance business. It has grown at different places and taken shapes and forms in different
countries depending upon demography, economic and legislative prescription in that country. In
some countries, bancassurance 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countries such as the United States, when the Glass-Steagall Act was repealed after the passage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.
Bancassurance is a new buzzword. It originated in India in the year2000. Following the
recommendations of First Narasimham Committee, the contemporary financial landscape has
been re shaped. Thus, present-day banks have become far more diversified than ever before.
Therefore, their entering into insurance business is only a natural corollary and is fully justified
too as insurance is another financial product required by the bank customers.

From the view point of insurance industry also the importance of bancassurance was felt
necessary. With the increased pressures in combating competition, companies are forced to
come up with innovative techniques to market their products and services. At this juncture,
banking sector with its far and wide reach, was thought of as a potential distribution channel,
useful for the insurance companies. Thats where the bancassurance came into existence. Thus,
bancassurance is poised to become a key determinator/differentiating factor in the Insurance
industry as well.
Given Indias size as a continent it has, however, a very low insurance penetration and low
insurance density. The penetration level of life insurance in the Indian market is abysmally low
at 2.3% of GDP with only 8% of the total population currently insured. As 2opposed to this,
India has a well-entrenched wide branch network of banking system, which only few countries
in the world could match with. It is predicted by experts also that in future 90% of share of
premium will come from Bancassurance business only. And almost half of the population likely
to be in the wage earner bracket by 2010that there is every reason to be optimistic that
bancassurance in India will play a long inning.
Currently there are more and more exchange of wedding rings between banks and Insurance
Company for better business prospect in future. With the enoromous benefits for banks like
increase in revenue, return on asset, customer retention, better reputation etc., the bancassurance
is going to be a big revolution in the banking industry. It is against this backdrop an attempt is
made to analyse the financial performance of the HDFC bank in bancassurance so far and to find
out the areas where they can make use of and still need to focus in order to make HDFC bank to
play a vital role in the bancassurance industry.

MEANING:
Bancassurance is a combination of two words Banc and assurance signifying that both
banking and insurance products and service are provided by one common corporate entity or by
banking company with collaboration with any particular Insurance company. In concrete terms
bancassurance, which is also known as Allfinanz -describes a package of financial services that
can fulfill both banking and insurance needs at the same time.
It is the provision of insurance (assurance) products by a bank. The usage of the word picked
up as banks and insurance companies merged and banks sought to provide insurance, especially
in markets that have been liberalized recently. In its simplest form, Bancassurance is the
distribution of insurance products through the Banks distribution network.. It is a phenomenon
wherein insurance products are offered through the distribution channels of the banking services
along with a complete range of banking and investment products and services. Bancassurance
tries to exploit synergies between both the insurance companies and banks.

DEFINITION:
The term first appeared in France in 1980, to define the sale of insurance products through
banks distribution channels (SCOR2003).

The Life Insurance Marketing and Research Associations(LIMRAs) insurance dictionary

defines bancassurance as the provision of Life insurance services by banks and building
societies.

Alan Leach, in his book, European Bancassurance Problems and prospects for 2000,
describes bancassurance as the involvement of banks, savings banks and building societies in
the manufacturing, marketing or distribution of insurance products.

According to IRDA, bancassurance refers to banks acting as corporate agents for insurers to
distribute insurance products.Literature on bancassurance does not differentiate if the
bancassurance refers to selling of life insurance products or non-life insurance products.
Accordingly, bancassurance is defined to mean banks dealing in insurance products of both life
and non-life type in any forms. But in this research the focus is entirely concentrated towards life
insurance. It is also important to clarify that the term bancassurance does not just refer
specifically to distribution alone. Other features, such as legal, fiscal, cultural and/or behavioral
aspects also form an integral part of the concept of bancassurance(SCOR 2003).
There are many definitions of bancassurance and, in essence it does depend upon the model
used, and the stage of development. However, the definition of a fully developed model that is
most commonly used is: Manufacturing and distributing cost effectively banking and
insurance products to a common customer base.

CONCEPT:
This concept gained importance in the growing global insurance industry and its search for new
channels of distribution. However, the evolution of bancassurance as a concept and its practical
implementation in various parts of the world, have thrown up a number of opportunities and
challenges.
Bancassurance is a relatively new concept in the global stage. Unlike banks and insurers
which have been around in one form or the another for centuries, bancassurance has only been
around for a few decades. The concept of bancassurance was emerged in the western world when
banks began to get involved in marketing of insurance business. From a purely historical
perspective, many regard Barclays Life, set up in 1965 in the UK as an insurance subsidiary of
the eponymous bank, as the pioneer of bancassurance. But the term bancassurance came into
existence in France after 1980 to define the sale of insurance through an intermediary bank.

It has reared its head in France in the late 1970s,motivated by among other things changing
customer needs due to an in adequate pension scheme that existed at that time. As the
governments can no longer maintain the funding that people have begun to take a more active
role in their future entitlements by looking at alternatives to pensions. Bancassurance provides
not only provides an alternative to pensions but also caters to the current taste of customers,
which is no longer satisfied by the traditional products offered by the insurers. As bancassurance
allowed the banks to move away from income generated by the interest spreads it is viewed as a
solution to alleviate the problem of poor consumer savings, squeezed margins.
Thus lackluster pension schemes, poor consumer savings, squeezed margins , the need for one
stop shop delivery for all financial services among the consumers, increasing importance of
strategic alliance has all led to the growth of bancassurance in Europe. With the success of
bancassurance model in Europe, the bancassurance, which was only a European phenomenon, is
becoming popular in other continents also.
Bancassurance seems to have made the greatest impact in France. Almost 100% of the banks
in France are selling insurance products. It is claimed that the 55% to 60% of the life insurance
business in France had come through banks. In Portugal and Spain it was over 70%. In U.K it is
about 30%. In Argentina, Brazil, Chile, Colombia and Mexico also the bancassurance is
becoming popular. Hardly 20 % of the United states banks are selling insurance products as only
recently the Glass steagell act was repealed which has prohibited the banks from entering into
the financial services. In Asia: Singapore, Taiwan and Hong Kong have surged ahead in
Bancassurance then that with India and China taking tentative step forward towards it. In Middle
East, only Saudi Arabia has made some feeble attempts that even failed to really take off or make
any change in the system.

RELEVANCE OF BANCASSURANCE IN THE INDIAN FINANCIAL

SECTOR:
Integration of the financial service industry in terms of banking, securities business and
insurance is a growing worldwide phenomenon. The Universal Banking concept is
evolving on these lines in India.
Banks are the key pillars of Indias financial system. Public have immense faith in banks.
Share of bank deposits in the total financial assets of households has been steadily rising.
Indian Banks have immense reach to households. Total of 65700branches of commercial
banks, each branch serving an average of15,000 people.
Banks enjoy considerable goodwill and access in the rural regions. There are 32600
branches in rural India (about 50% of total),and 14400 semi-urban branches, where
insurance growth has been most buoyant.196 exclusive Regional Rural Banks in deep
hinterland. 8
Banks have enormous retail customer base. Share of individuals as a category in bank
accounts is steadily increasing. Rural and semi urban bank accounts constitute close to 60%
in terms of number of accounts, indicating the number of potential lives that could be
covered by insurance with the upfront involvement of banks.
Banks world over have realized that offering value-added services such as insurance, helps
to meet client expectations. Competition in the Personal Financial Services area is getting
`hot in India that Banks can retain customer loyalty by offering them a vastly expanded
and more sophisticated range of products. Insurance distribution can also help the bank to
increase the fee-based earnings to a large extent
Fee-based selling helps to enhance the levels of staff productivity in banks. This is vitally
important to bring higher motivation levels in banks in India.
Banks can put their energies into the small-commission customers that insurance agents
would tend to avoid. Banks entry in distribution can help to enlarge the insurance customer
base rapidly. This helps to popularize insurance as an important financial protection
product.
Bancassurance helps to lower the distribution costs of insurers. Acquisition cost of
insurance customer through bank is low. Selling insurance to existing mass market banking

customers is far less expensive than selling to a group of unknown customers. Experience
Financial benefits to a bank performance can flow in a number of ways, as briefly outlined
below: - Increased income generated, in the form of commissions and/or profits from the
business (depending upon the relationship).Intense competition between banks, against a
background of shrinking interest margins, has led to an increase in the administrative and
marketing costs and limited the profit margins of the traditional banking products. New
products could substantially enhance the profitability and increase productivity. Europe has
shown that bancassurance firms have a lower expense ratio. This benefit could go to the
insured public by way of lower premiums
Banks have an important role to play in the pension sector when deregulated. Low cost of
collecting pension contributions is the key element in the success of developing the pension
sector. Money transfer costs in Indian banking is low by international standards. Portability
of pension accounts is a vital requirement which banks can fulfill, in a credible framework.

REASONS FOR BANKS TO ENTER INTO BANCASSURANCE :

The main reasons why banks have decided to enter the insurance industry area are the following:
Analysis of available information on the customer financial and social situation can be of
great help in discovering customer needs and promoting or manufacturing new products or
services. Banks believe that the quality of their client information gives them an advantage in
distributing products profitably, compared with other distributors (e.g. insurance companies).

 Customer preferences regarding investments are changing. For medium-term and long-term
investments there is a trend away from deposits and toward insurance products and mutual
funds where the return is usually higher than the return on traditional deposit accounts. This
shift in investment preferences has led to a reduction in the share of personal savings held as
deposits, traditionally the core element of profitability for a bank which manages clients
money. Banks have sought to offset some of the losses by entering life insurance business.
Life insurance is also frequently supported by favourable tax treatment to encourage private
provision for protection or retirement planning. This preferential treatment makes insurance
products more attractive to customers and banks see an opportunity for profitable sales of
such products.
Reduction of the effect of the bank fixed costs, as they are now also spread over the life
insurance relationship.
Opportunity to increase the productivity of staff, as they now have the chance to offer a wider
range of services to clients
It is believed that as the number of products that a customer purchases from an organization
increases the chance of losing that specific customer to a competitor decreases.

Client relationship management has become a key strategy. To build and maintain client
relationships, banks and insurers are forming partnerships to provide their clients with a wide
range of bank and insurance products from one source.
Banks are experiencing the increased mobility of their customers, who to a great extent tend to
have accounts with more than one bank. Therefore there is a strong need for customer loyalty
to an organization to be enhanced.
The realization that joint bank and insurance products can be better for the customer as they
provide more complete solutions than traditional standalone banking or insurance products.

BANCASSURANCE MORE SUITED TO LIFE INSURANCE PRODUCTS:

Traditionally, much fewer non-life insurance products are distributed through bancassurance than
life insurance products. There are several reasons for this:
The main reason may be the complementary nature of life insurance and banking products:
bank employees are already familiar with financial products and quickly adapt to selling
insurance-based savings or pension products;
On the other hand, the non-life market requires special management and selling skills, which
are not necessarily prevalent in bancassurance. In addition, such competencies require significant
investment in training and motivation, and therefore additional costs;
Life insurance products are generally long-term products, which require customers to have
complete confidence in the institution that invests their money. And we now know that, in many
countries, banks have a better image and are more trusted than insurance companies;
Bank advisers can use their knowledge of their customers finances to target their advice
towards specific needs. This is a major advantage in life insurance and less important in personal
injury insurance;
Some professionals also refer to the claims management aspect of personal injury insurance,
which could have a negative impact on brand image. This would seem to explain why for a long
time bancassurance operators hesitated to offer these types of product.

ADVANTAGES OF BANCASSURANCE:
Everybody is a winner in bancassurance. For banks it mainly acts as a means of product
diversification and additional fee income for insurance company it acts as a tool for increasing
their market penetration and premium turnover and for customer it acts as abonanza in terms of
reduced price, high quality products and delivery to doorsteps. Hence it is a win-win solution for
everyone who involved.

TO THE BANKERS:
In a situation of constant asset base the bank can increase Return on Assets (ROA)by
increasing their income, by selling insurance products through their own channel. It can
cover operating expenses and make operating expenses profitable by leveraging their
distribution and processing capabilities
Can leverage on face-to-face contacts and awareness about the financial conditions of
customers to sell insurance products.
By acting as a one stop shop for all financial services, they can improve overall customer
satisfaction resulting in higher customer retention levels
Banks enjoy significant brand awareness within their geographical region providing for a
lower per lead cost when advertising through print, radio and television. The advantage
of a bank over traditional distributors is the lower cost per sales lead made possible by
their sizeable loyal customer base.
Can establish sales oriented culture among the employees to the customers:

TO THE CUSTOMERS:

 Comprehensive financial advisory services under one roof. i.e., insurance services along
with other financial services such as banking, mutual funds, personal loans etc.
Innovative and better product ranges
Easy access for claims, as banks is a regular go.
Enhanced convenience on the part of the insured

TO THE INSURERS:
Insurers can exploit the banks wide network of branches for distribution of products. The
penetration of banks branches into the rural areas can be utilized to sell products in those
areas.
Customer database like customers financial standing, spending habits, investment and
purchase capability can be used to customize products and sell accordingly.
Since banks have already established relationship with customers, conversion ratio of
leads to sales is likely to be high. Further service aspect can also be tackled easily.

FACTORS THAT APPEAR TO BE CRITICAL FOR THE SUCCESS OF

BANCASSURANCE ARE:

Strategies consistent with the banks vision, knowledge of target customers needs, defined
sales process for introducing insurance services, simple yet complete product offerings,
strong service delivery mechanism, quality administration, synchronized planning across
all business lines and subsidiaries, complete integration of insurance with other bank
products and services.

Another point is the handling of customers. With customer awareness levels increasing,

they are demanding greater convenience in financial services.

The emergence of newer distribution channels seeking a market share in the network
The emergence of remote distribution channels, such as PC- banking and Internet-

banking, would hamper the distribution of insurance products through banks

The emergence of newer distribution channels seeking a market share in the network

BANCASSURANCE TRAINING FOR BANK EMPLOYEES:

The bank employees will need to be trained in the following aspects of the insurance business:

Features of the insurance products sold

How to identify and approach a potential customer
Basic insurance needs
Other distribution channels and products
Handling basic objections
Cultures
Remuneration and incentive schemes
Procedures

Expected roles
Customer service

CONTINUOUS TRAINING AND SUPERVISION:

Apart from initial training, there should be further training to support the development of the
agent or employee. Some ways in which this can be done are:

Area sales seminars

Training circulars
In-house magazine
Area banking meetings
Bank branch meetings
Agency meetings
Company library
Video tapes
Certified courses
Lectures
Training material booklets

APPROXIMATE REMUNERATION OF BANK EMPLOYEES:

Any commission payable by the insurance company is, as a principle, to be credited to the bank
profit center for the bancassurance operation. The bank management sets the commission level
for each manager and employee engaged in the bancassurance operation.

Selling in the bank branches (by employees or by financial advisers): For simple
packaged products: employees could be rewarded with gifts and/or salary increments
based on their selling performance in promoting both banking and insurance products.
Such performance could be quantified via the use of a points system where by the various

products are allocated as a number of points.

Warm leads: In return for providing warm leads, the bank will get a share, say 50%, of
the normal first year commissions.

A basis is needed for allocating this amount between branch staff (who provide the warm leads)
and the bank owners. A possible basis would be: 25% 25% 50%.

THE STRUCTURE SHOWN ABOVE GENERATES BENEFITS AS

FOLLOWS:

Financial rewards for managers and other staff of the bank branch who have supported
bank activities while the assurance business was being generated.

Financial rewards for employees who generate warm leads.

Group awards or bonuses are more desirable when the contribution of the individual employee is
either difficult to distinguish or depends on group cooperation