What is Bancassurance: Its Services, Types, Models and Importance
Bancassurance means a partnership between a bank and an insurance company that allows the insurance firm to offer its products to the bank’s customers. It is the provision of insurance (assurance) products via a bank.
In the global market, the major bancassurance examples include European banks such as Crédit Agricole (France), ABN AMRO (Netherlands), BNP Paribas (France), and ING (Netherlands). However, the picture differs greatly from country to country. Read on to know the importance, features, types, benefits and status of bancassurance in India.
Importance of Bancassurance
In bancaassurance, banks are able to earn profits without undertaking any risky tasks. They must sell insurance company products in order to receive a commission. Additionally, offering life insurance products will benefit banks more because it will allow them to build better relationships with their customers.
Life insurance companies organise specialised training for bank employees. Insurance companies, on the other hand, are able to build a larger network of customers by tying up with the bank in question, thereby increasing their customer base.
Features of Bancassurance
- Banks are not allowed to pay a premium on a customer’s behalf
- It can only use 2 insurance companies in a single bank
- All commissions are documented in the annual financial report
- A bank’s primary focus is always on its banking operations
- A bank’s network can help an insurance company sell its products
- They need to comply with the periodic evaluation
- Bancassurance increases profits for both parties
- It improves the customer’s lifetime value
- It can provide all financial services under one roof
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Types of Bancassurance Services
- Life Insurance Products
- Endowment plans
- Unit-linked insurance plans.
- Term insurance plans
- Non-Life Insurance Products
- Property insurance
- Marine insurance
- Health insurance
- Key man insurance
Bancassurance Models
1. Classification Based on Structure
- Referral – Database Sharing: Under this model, the bank would provide office space to the insurance company in all of its branches, and trained executives from the insurance company would sit in the branches to sell products to potential customers. Banks can use this model if they want to minimise the risks and only share the client’s database for the purpose of generating business leads, earning commissions, or referring customers. As a result, the actual transaction occurs between the executives of the insurance company and the client. As a result, no bank employees are involved in the sale of insurance products.
- Corporate Agency: In this model, the bank functions as a corporate agent, distributing products and earning a commission. The insurance company trains the bank’s staff to sell the products to the bank’s customers. This model involves potential reputational risk to the marketing bank.
- Joint Venture: This entails a very complex relationship between the insurance company and the bank, in which selling insurance products appears to be just another function of the bank. Banks have a counter for selling insurance products inside of their office space, where customers can purchase insurance. This type of bancassurance is used by the State Bank of India, ICICI and HDFC.
2. Classification Based on Product
- Standalone Insurance Products: Under this model, insurance products are marketed through a referral arrangement or through a corporate agency on a standalone basis, i.e., without being coupled with the bank’s own products. As a result, insurance is another product in the list of products available to the customer, but of the respective brand.
- Insurance with Bank Products: As the name implies, it entails selling insurance products with no extra effort, i.e., banks frequently offer insurance cover at a nominal or even no premium, attracting customers to buy the bank’s own products.
Advantages of Bancassurance
Bancassurance has emerged as a critical channel for the distribution of insurance products and services for both banks and insurance companies in recent years. This partnership, if implemented properly and in a structured format, can benefit all parties involved, including banks, insurers, and customers. The benefits of bancassurance to banks, insurers, and customers are as follows:
1. To the Bank
- Bancassurance is the best way for banks to generate additional revenue with little or no capital outlay. A small initial investment yields a high return
- An addition to the product offerings
- An addition to the product offerings
- Improved manpower efficiency – because existing bank staff can receive training
- Selling a broad range of financial services to clients and increasing customer retention
2. To Insurance Companies
- Increased turnover
- Increased penetration in both rural and urban markets by using the bank’s current customer database
- Extremely cost-effective because the banks have already established the route and network
- Insurance companies may market their products through the existing branches and outlets of banks in rural and/or urban areas
3. To the Clients
- The goal of providing one-stop service to all customers is fulfilled. Convenience is currently one of the primary concerns in managing a customer’s day-to-day activities. As a result, the bank marketing insurance products gives them a competitive advantage over others. Customers can obtain comprehensive financial planning services under one roof.
- Creates a high level of trust
- Making claims is very simple
- Simple premium payment because it can be linked directly to a bank account • Simple access to a huge array of products within a bank
- Guaranteed services and advice from the bank, as customers are guided through their finances by professional experts and trained staff.
Disadvantages of Bancassurance
- The partners’ dependence and association may create a conflict of interest, resulting in new operational and performance risks which might in turn confuse the customers on where to invest.
- Such synergy requires extensive planning and supervising, which can benefit the participating company greatly.
- This necessitates a large initial investment as well as trained employees.
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Status of Bancassurance in India
Under Section 6(1)(o) of the Banking Regulation Act, 1949, a Government of India Notification dated August 3, 2000, specified ‘Insurance’ as a permissible form of business that banks could undertake. Following that, banks are permitted to enter the insurance business in accordance with the guidelines and with the prior approval of the Reserve Bank of India.
The Reserve Bank of India (RBI) has recognised ‘bancassurance’, which allows banks to provide physical infrastructure within select branch premises to insurance companies in order for them to sell their insurance products to bank customers with sufficient transparency and disclosure and in turn earn referral fees based on the premiums collected. This would allow the banking sector’s resources to be used more profitably.
Bancassurance can be a significant source of income. With competitive pressures and interest rate squeezing, spread profits are likely to be under pressure. Fee-based income can be increased by selling risk products such as insurance.
Insurance has enormous potential in India, and recent case has shown a massive growth rate. A combination of socioeconomic factors is likely to make insurance the largest and fastest-growing segment of India’s financial services industry.
However, before venturing into this new field, banks and insurers must first develop strategies for selling risk products, particularly in a competitive emerging market. However, the future of bancassurance looks promising. Banks in India have all of the prerequisites needed to make Bancassurance a success. They have a large branch network, a huge client base, customer trust, and experience selling non-banking products. If properly implemented, India has the potential to take the global lead in bancassurance.
Final Word
Bancassurance is a sales channel for selling insurance products through banks, not a type of insurance in itself. It is prevalent in a large portion of the world today and is gaining popularity rapidly making it. Furthermore, it is a two-way street because a bank can sell insurance company products while also offering bank products to insurance clients and insurance companies can benefit from the huge clientele of the bank. Customers too, benefit from getting all financial services under one roof making it of great service to all the parties involved.
FAQs
Ans: Bancassurance means a partnership between a bank and an insurance company that allows the insurance firm to offer its products to the bank’s customers. This collaboration could be beneficial to both entities. Banks make more money by selling insurance products, and insurance companies grow their customer bases without expanding their sales force. To put it another way, Bancassurance is the provision of insurance (assurance) products via a bank.
Ans:
• Banks are not allowed to pay a premium on a customer’s behalf.
• It can only use 2 insurance companies in a single bank.
• All commissions are documented in the annual financial report.
• A bank’s primary focus is always on its banking operations.
• A bank’s network can help an insurance company sell its products.
• They need to comply with the periodic evaluation.
• Bancassurance increases profits for both parties
• It improves the customer’s lifetime value.
• It can provide all financial services under one roof.
Ans: The various types of bancassurance services are:
1. Life Insurance Products
• Endowment plans
• Unit-linked insurance plans.
• Term insurance plans
2. Non-Life Insurance Products
• Property insurance
• Marine insurance
• Health insurance
• Key man insurance
Ans: Under Section 6(1)(o) of the Banking Regulation Act, 1949, a Government of India Notification dated August 3, 2000, specified ‘Insurance’ as a permissible form of business that banks could undertake. Following that, banks are permitted to enter the insurance business in accordance with the guidelines and with the prior approval of the Reserve Bank of India. The Reserve Bank of India (RBI) has recognised ‘bancassurance’, which allows banks to provide physical infrastructure within select branch premises to insurance companies in order for them to sell their insurance products to bank customers.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
