Bancassurance

Definition: Bancassurance is a convergence of two words, banc + assurance, which was coined in France in the year 1980, to refer to an arrangement between the bank and insurance company wherein the insurance company markets or sells its products and services to bank’s customers. In bancassurance, the bank act as a corporate agent to sell life insurance and general insurance products.

With the help of this arrangement, both the banking and insurance needs of the customers are fulfilled at the same time.

To put it simply, bancassurance is a process of tapping a bank’s customer relationship to distribute a number of insurance products. Or we could say, when both banking and insurance products are offered by the bank under one roof, it is bancassurance.

In this, the bank and insurance company come together to form a partnership. The banking company sells the insurance company’s products for which it receives a certain amount as fee from the insurance company. For this purpose, a number of officers who have been authorized by IRDA turn into a point of sale and point of contact, to act as specified persons for offering insurance products to clients. And to do so, the wholesale product information, sales training is given to the bank staff by the insurance company.

On the other side, the insurance company widens its overall market reach and customer base, without increasing the sales force and paying commission to the agents. In this way, the bank serves as a mediator between the insurance company and customers. However, the administration and processing of the policies are done by the insurance company itself.

License for Bancassurance

Banks need to secure the prior approval of the Insurance Regulatory and Development Authority (IRDA), to act as a composite corporate agent of insurance companies. Further, for undertaking a bancassurance business, there is no need to secure prior approval from the Reserve Bank of India (RBI).

Bancassurance Models

Structure-Based Classification

1. Referral – Database Sharing: In this model, the bank will provide office space to the insurance company, in all its branches and the insurance company’s trained executives will sit at the branches to sell the products to the customers. Banks can opt this model if they want to avoid risk and so they only share the client’s database for generation of business lead, to earn commission or referral fee. And so the actual transaction takes place between the insurance company’s executives and the client. Hence, there is no participation of the bank staff in selling the insurance products.
2. Corporate Agency: In this model, the bank acts as a corporate agent to distribute the products and earn a commission. And to do so, the bank’s staff is trained by the insurance company to sell the products to the bank’s customers. The reputational risk of the marketing bank is involved in this model.
3. Fully Integrated Financial Service or Joint Venture: This involves a highly intricate relationship between the insurance company and the bank, wherein selling of the insurance products looks like one more function of the bank itself. Banks have a counter for selling insurance products within their office space, where insurance products are offered to the customers. State Bank of India, HDFC, and ICICI use this type of bancassurance.

Product Based Classification:

1. Standalone Insurance Products: In this model, insurance products are marketed via referral arrangement or corporate agency is done on a standalone basis i.e. without coupling it with the bank’s own products. Hence, here insurance is one more product, in the list of products that are offered to the customer, but of the respective brand.
2. Blend of Insurance with bank products: As the name suggests, it involves selling insurance products without any extra efforts, i.e. banks often offer insurance cover at a nominal premium or even without any premium, which attracts customers to sell the bank’s own products.

Benefits of Bancassurance

This is obvious that bancassurance helps banks to develop synergy, as the bank possesses ready customers, who deal with the bank frequently. And so they trust bank staff more than a private agent.

Benefits to Customers

• Customers can avail a range of products under the same roof.
• They can avail financial planning advice.
• Easy policy renewal through standing instructions to the bank.
• Better and informed selection of financial products.
• Higher trust and credibility.
• Easy access for claims

Benefits to Insurance Company

• Increased customer reach through banks network.
• Obtaining credibility in the customer’s mind by collaborating with the bank.
• Easy renewals and policy lapse incidence reduces.
• Scope of cross-selling and up-selling
• Introduction of co-branded products such as fire insurance policy for home loans.
• Increased turnover
• Lessens need to set up their own network
• Economy in distribution cost

Benefits to Banks

• Increase in non-interest income of the bank
• Obtains new customers, as well as better penetration in the existing customer base.
• Profitability targets of the branch can be achieved easily.
• Marginal additional cost of distribution.

A word from Business Jargons

Bancassurance is such an arrangement wherein a bank’s distribution channels are used by the insurance company to sell their products and services, for which the banks get additional revenue, in the form of fees. For an insurance company, selling products through a bank is a cost-effective and convenient alternative, when compared to the agency channel. On the other hand, income from selling insurance products is generated at a very low cost.