What is Bancassurance?
Bancassurance refers to a partnership formed in between bank and insurance company. The partnership is made with the motive of selling insurance products and insurance benefits to bank’s customer base. Bank use its own staff and distribution channels for selling the products of concerned insurance company. In simple terms, under bancassurance arrangement, the banks serve like corporate agents for insurers thereby helping them in distributing insurance products. The word Bancassurance is derived from the merger of two words that is bank (Ban) and Insurance or Assurance (Assurance). It was first formed in France and got adopted in India in year 2000.
The partnership formed under bancassurance arrangement provides benefit to both banking as well as insurance company. Insurance companies get facility of selling their products among wider range of customers without any need to pay broker’s commission. It ultimately helps company in enhancing their sales volume via exposure to large market area. On the other hand, banks also earn revenue by selling off insurance products in the form of fee. They charge commission from insurance companies for selling each product among their clients. Customers also get facilitated by bancassurance as they are able to fulfil each of their financial and investment needs by just visiting their bank branch. Bancassurance has proved to be very successful concept till now in number of countries such as Latin America, Australia, Asia and Europe.
Features of Bancassurance
Various features of bancassurance are discussed in points given below: –
- Insurance companies get access to larger market area and wider customer base without carrying out any huge market campaigns or increasing their sales force.
- Banking firms earn revenue in the form of commission that is charged from insurance company for sale of insurance policies.
- Bank personnel and tellers are only the point of contact and point of sale for insurance customers.
- Insurance companies train and helps bank staff by providing them with sales training, wholesale product information and running marketing campaigns in order to reach bank customers for sale of insurance.
- Customers get facilitated via bancassurance as they get access to all of their required services (both financial and insurance) under same roof. It provides them more satisfaction thereby helping banks in enhancing customer lifetime value.
Models of Bancassurance
There are basically 4 models of bancassurance-
- Full Integration Model: Full integration model is one where there is complete integration of banking and insurance services. The insurance activities are deeply integrated within the processes of bank. Premium is collected from customers by bank itself via directly deducting from their account held in that bank. All of the insurance products are sold under bank brand thereby acting as complete solution of financial services required by customers. The sales are carried out by bank employees and also control each service level of insurer inclusive of approach to claims. Under this type of bancassurance model, bank also hold additional core activity as similar to insurance company.
- Strategic Alliance Model: Strategic alliance model is a type of partnership where bank carries responsibility of only marketing the insurance products. Bank perform marketing of these products and rest all insurance functions are carried out by insurance company itself. Here, the infrastructure of banking company is leveraged by insurer who in return provides a source of fee income to banks. This model is characterized by low level integration in between product and distribution channel management. Bank shares complete database of its client base with insurance company, these clients are then targeted for insurance sales. An example of these model is HDFC bank working with HDFC ERGO general insurance and HDFC Life Insurance Company.
- Joint Venture Model: In this model, there is active participation of bank in product as well as distribution design. All decisions are made jointly by bank and insurance company. Also, there is high system integration for utilization of infrastructure. The banks generate higher level of profits by operating as insurance distributor instead of producer. It is low-cost model where insurer exercise no control over distribution.
For example, there is join venture among India first life insurance co. ltd and Bank of Baroda (44%), Andhra Pradesh (30%) and UK investment company known as Legal and General (26%).
- Financial Service Group: Financial service group can also be called one-stop shop for all financial product and services. In this model, every type of financial service meeting customer needs is available under same roof. This model involves low cost and has complete integration of both banking and insurance services. Customers also get more facilitated by this type of model as they get convenience of fulfilling all needs at single place.
Advantages of Bancassurance
Bancassurance, at present, has become key route for insurance product and services distribution for both banks as well as insurance companies. This type of arrangement can prove out to be very useful for all concerned parties: banks, insurer and client, if implemented in proper and structured way.
The advantages offered by bancassurance to banks, insurance companies and customers are as follows:
Advantages to banks
- First of all, it helps banks in doing addition to their product portfolio. With bancassurance agreement, banks are able to include insurance products to their product mix thereby diversifying the customer portfolio and enhancing their market penetration.
- Bancassurance model assist bank in raising their profitability level as well as non-interest fee income. By selling off insurance products, banks easily earn risk free income in the form of charging commission from concerned insurance companies.
- It helps bank in strengthening their relationships with customers thereby building good customer loyalty and retention rates. Customers feel more satisfied when get access to integrated financial services at one place.
- Bancassurance involves cost-efficient use of existing resources where no additional resource is brought by bank for selling insurance products. The existing employees and premises are utilized for carrying out sales of insurance product and services. This enables both bank and insurer in reducing distribution cost and raising the profitability of channels.
- Banks are easily able to increase customer lifetime value (CLV) with the help of bancassurance partnership. The increase in loyalty and stickiness of customers towards there bank leads to high CLV.
Advantages to Insurer
- Insurance companies gets easy penetration into large market area through bancassurance alliance. The existing customer database of bank present in both urban as well as rural market are targeted under this for sale of insurance products.
- It saves large cost of insurers as the already existing route and network are utilized for sale purpose. Insurance companies do not need to hire additional employees or premise for selling insurance products and services that ultimately leads to avoiding huge expenses.
- Insurance companies by utilizing bancassurance alliance are able to increase their premium turnover. When these companies collaborate with banking firms having large customer base, then their sales volume gets enhanced thereby bring in more amount of premium.
Advantages to Customers
- Clients get access to one-stop service through bancassurance partnership. In today’s time, convenience is a major factor considered by people while managing their day-to-day activities. Therefore, a bank offering insurance services in additions to their regular product are able to enjoy competitive edge over others.
- It helps customers in getting their application and policy processed with faster pace. The bank already possesses client data and documentation that helps in reducing turnaround time concerned with application processing and claims management.
- Customers place more trust on their respective banks as compared to insurance carriers and independent agents. Due to this, the propensity to purchase products from their banks is much higher.
- The clients get facility of doing easy payments of premium for their insurance policies. Premium amount gets directly deducted from customer bank account.
Disadvantages of Bancassurance
- There are high chances of customer confidential data being getting leaked under bancassurance alliance. Insurer utilize customer database of banking firms for marketing their products. They get access to individual identity and contact details that may compromise on data security of customers.
- Under such partnership between bank and insurance firms, there is a possibility of conflict of interest in between insurance policies and other products of bank, such as policy of money back. This may ultimately put customer in confusion with regard to where he has to invest.
- It is merely a hope but not fact that appropriate approach and services are provided by banks to their customers. Many banks in India are known for their bad customer service and if they are given responsibility of selling insurance products too, then it will turn more worse.