In an article titled "The New World of Banking" published in Finance & Development (June 2000 issue), a quarterly magazine of International Monetary Fund, the authors Tomas J T Balino and Angle Ubide state that "Four trends are fundamentally altering the financial world: consolidation of institutions, globalization of operations, development of new technologies, and universalization of banking". We are witnessing a phenomenon of financial institutions around the world consolidating at a rapid pace. The number of institutions is declining, and their average size is increasing. The past five years have witnessed the creation of the world's largest banking groups through several mergers.

This process of globalization has been dominated by industrial country banking groups' exploitation of the growth potential in emerging markets and developments in technology. Especially, the impressive growth of Internet banking and brokerage services have allowed globalization to go beyond the ownership structure of financial conglomerates and reach the retail markets. In fact, many banks are using their online operations to expand into foreign markets, avoiding the costly process of building retail brick-and-mortar networks of branches.

The last vehicle for this transformation of the financial sector is the universalization of banking, which is increasingly blurring the boundary between bank and non-bank financial services. This trend is already well developed in certain European countries - as exemplified by the widespread distribution of insurance products through bank branches, a phenomenon known as bancassurance - and presages the formation of conglomerates that provide all types of financial services.

The advantages and disadvantages of these four trends have been the subject of many articles and much debate. The perceived advantages of these trends are cost savings and improved profitability, benefiting both clients and shareholders, facilitating risk diversification, and improving the overall performance of individual economies by improving resource allocation. On the flip side, if consolidation and universalization are taken too far, it could lead to problems of loss of focus, becoming unwieldy and cultural misfit, apart from the abuse of dominant market positions and moral hazard issues, such as when institutions are considered to be too big to fail.

While it can be seen that the four trends mentioned above are closely intertwined and moving on together to change the financial world irrevocably, the focus of the present book is on bancassurance, a phenomenon as a precursor to and forming a part of the fourth trend of universal banking - a process of integration of all activities related to financial services.

Bancassurance - a term coined by combining the two words bank and insurance (in French) - connotes distribution of insurance products through banking channels. Bancassurance encompasses terms such as `Allfinanz' (in German), `Integrated Financial Services' and `Assurebanking'. This concept gained currency in the growing global insurance industry and its search for new channels of distribution. Banks, with their geographical spread and penetration in terms of customer reach of all segments, have emerged as viable sources for the distribution of insurance products. 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. Aspects such as the most suited model for a given country with its economic, social and cultural ramifications interacting on each other, legislative hurdles, and the mindset of persons involved in this activity, have dominated the study and literature on bancassurance.

Three important issues that are critical to making bancassurance a success are: business model suitability, functional compatibility and attitudinal flexibility. These are briefly addressed in this book to give a perspective on the complexity of the concept of bancassurance.

Business Model Suitability

The issue of business model suitability is found to be closely connected to historical and cultural aspects of a country. While in some countries the process of integration has been natural and smooth (as in France and Spain), it has been a case of forced coming together and painful (as in the US and the UK). It appears that adequate thought has not been bestowed both by bankers and insurers, where it was more a case of being swept off one's feet in the initial euphoria created by the allurements of synergy, economies of scale and the search for augmenting revenues.

Models have been developed based on the level of integration and the importance sought by the two players. We have cases of simple fee/commission sharing models and distribution alliances to that of establishing joint ventures and fully merged entities. The suitability of a particular model or otherwise in any given case has been found to be very much contingent on the nature and background of the entities and not amenable for replication by others. However, an evolutionary approach, meaning progressive integration of businesses after testing the responses, both internal to the organizations and the market, appears to be the preferred model.

Group soundness and brand image of the partners, product range in terms of quality and diversity, concurrence of operational areas and client base served are some of the other aspects that need to be addressed adequately before deciding upon the partners and the business model. The observation of Mr. Sean Fraser, Head, Insurance Services of Standard Chartered Bank that "Partnerships take time to develop. Patience is very important and strong leadership to making it work is essential. A long-term view of the business from both sides is also crucial", very aptly sums up the issue of business model suitability.

Functional Felicity

As a natural consequence to the selection of the right business model follows the issue of functional felicity. It is living together that is more important than coming together. Functional aspects such as enunciation of clear and aligned goals, level playing field - an issue related to the regulatory framework, training and competence requirements, mechanism for conflict resolution and revenue sharing, exploitation of each other's database on clients without violating privacy rights, and clear understanding of protection rules need to be attended to before the commencement of operations.

Attitudinal Flexibility

Attitudinal incompatibility on the part of employees of banks and insurance companies and the perception of customers on the poor quality of service in banks have been the major causes for the failure of bancassurance in some countries. Differences of opinion and perception because of different backgrounds of bankers and insurers have to be recognized and reconciled by the leadership on both sides. A high level of commitment on the part of the leaders is vital and the need for cascading of commitment down the organizations is equally important, if not more. To find the right kind of cultural fit which is a harmonious blend of both is a daunting challenge. It cannot be wished away, but should be confronted head on at the very beginning of the relationship.

The book is divided into four sections: 1. Bancassurance: Evolution; 2. Global Scenario; 3. Indian Scenario; and 4. Opportunities and Challenges. The first section includes four articles which talk about the emergence of bancassurance; the strategies for the convergence of the three sectors - banking, insurance and investments; the way to grow through an intimate knowledge of the customer; the prevalent partnership models; and the policies to be adopted to make bancassurance work. The second section with four selected articles covers the global scenario by giving an Asian perspective; bancassurance in the US; a comparison of bancassurance in Europe and the UK and the trend in Latin America; and finally a brief survey of the coming together of the two big forces - bankers and insurers. The third section on Indian Scenario has four articles and explores the emergence of bancassurance in India after the opening up of the insurance sector. There is the sowing of seeds, the call for a new culture to cope with the new concept, the factors needed to make it a success and a SWOT analysis in the Indian context. The last section begins by focusing on the opportunities and challenges for bancassurance in India, examining the recent trends, the building of a long-term solution partnership, the changing role of actuaries as a consequence of the convergence of financial services, and lastly, a counterpoint is made in the article on bancassurance in emerging market economies and the likely impact on the financial system.

Bancassurance: Evolution

The first article Bancassurance: Driving Factors by Geoff Mayne and Mathew Taylor of Fitch Insurance Ratings Agency, speaks of bancassurance as an emerging concept in the insurance industry seeking new channels of distribution in the global context. It analyses the pros and cons of the integration of insurance firms and banks. The article mentions that the concept of bancassurance has gained popularity in recent years via two different models - the integrated organic approach (the French model) and the merger approach (Netherlands - 1991). The authors while giving the strategic rationale, enumerates the driving factors from the points of view of both insurers and bankers. Distribution of insurance products through bank branches, enlarged customer base, defensive positioning, and size drive the insurers to embrace bancassurance. The forces that spur banks to seek distribution of insurance products through their branch network are: asset accumulation, disintermediation, lower risk and higher margin products (unit-linked products), potential for cross-selling, scale, client solutions, risk diversification, cost benefits and capturing increased profit.

The second article Convergence Strategies for Banking, Insurance and Investments, is sourced from a study conducted by Bank Administration Institute and Boston Consulting Group on converging financial markets. The study identifies the following key areas of opportunity for banks: Increase in ROI, customer retention and profitability, the lessons to be learnt from European banks, leveraging branch network and electronic distribution channels, focusing on underserved customer segments and growth opportunities. It enumerates and elaborates on critical success factors, such as, setting of aggressive goals, strong senior management leadership and support, close integration, easy-to-understand products, integrated generalist sales force, effective training programs, clear and meaningful incentives, insightful and effective customer segmentation, and leveraging of existing bank resources and capabilities. The study provides a roadmap for designing winning convergence strategies through seven steps:

Complete a self-diagnosis and choose target segments
Understand customer needs and dissatisfactions by segment
Develop innovative products and services
Improve product and distribution economics
Determine an appropriate branding strategy
Select the strategy to deliver the value proposition
Quantify goals and incentives.

The article ends by spelling out the way to execute the winning strategy that requires careful consideration and co-ordination.

The third article, Bancassurance: Knowing and Growing with Your Customer, is a write-up, which is a part of the joint study on Creating Tomorrow's Leading Retail Bank by PricewaterhouseCoopers (PwC) and Economist Intelligence Unit. It articulates the challenge set for bancassurance to achieve real synergistic competitive edge over specialist bank/insurance providers and new entrants. The authors focus on the growing demand from customers for superior service, competitive prices and convenient access to a range of delivery channels. The emphasis is on making cross-selling an integral part of the corporate culture, and as intimacy develops, turn cross-selling into cross-buying by the customer. The tail-piece of the article, which is a quote from Gary Hamel, Executive Director of the world renowned corporate think-tank, The Strategos Institute, is very apt in this context, and it goes as follows: "Competition today is not between products, it's between business models irrelevancy is a bigger risk than inefficiency".

Bancassurance: Three Partnership Models is sourced from McKinsey Quarterly. The article suggests, based on research, that the sale of life insurance through banks will meet an important set of consumer needs. The authors give the steps to be followed by a bancassurance start-up: Develop the product ® build distribution ® generate sales lead ® sell the product ® process the policy ® administer the policy. Three partnership models are suggested, which are based on the nature and extent of association between the partners. The matrix developed is based on the role assumed by the two partners - that of a leader or arm's-length service/product provider. Where both the partners play the role of leader, the model is a joint venture; bank as leader, and insurer as arm's-length product provider will result in a leveraged bank distribution model and when the roles are reversed the third model of leveraged life distributor will be the resultant.

The true value of bancassurance can be acieved by both the parties only through concurrence of approaches, which is not a matter of choice but an imperative need.

Global Scenario

Bancassurance: An Asian Perspective is authored by Michael Dye of NMG Financial Services Consulting. The article is a regulatory tour of rules in Asia. It is to be noted that the regulatory framework in any country is an evolving phenomenon. It is an ongoing process, which is hooked to the emergence and growth of the sector and the lessons learned in the interim period. A brief survey of regulations in China, Hong Kong, India, Indonesia, Japan, Malaysia, The Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam is made. The article ends by saying that ultimately, bancassurance as a channel, will provide consumers with an alternative access to a wide range of products through the networks that already exist.

The article Bancassurance in the US, traces the historical reasons for imposing a restrictive regulatory framework through the enactment of Glass-Steagall Act of 1933, and the Bank Holding Companies Act of 1956 and the subsequent changes brought in legislation to dismantle the barriers erected between banks, securities firms and insurance companies by the enactment of Gramm-Leach-Bliley Act (GLBA) in 1999. The perception of the customer of bancassurance as an unsuitable channel has been another hurdle for its growth. The post-GLBA scenario is explored by drawing information from two survey reports over the past three years, which indicates a growing preference for bancassurance both on the part of banks and the customers. A brief mention is also made on the two-tier business model suggested for the success of bancassurance in the US. Given the potential for growth, and the search of bankers for supplemental sources of revenues in the prevailing regime of diminishing margins from traditional sources, the author concludes on an optimistic note on the future of bancassurance in the US.

The evolution and growth of Bancassurance in Europe, the UK and Latin America is a study in contrast. While in Europe, especially France and Spain to start with, and in other countries on the continent subsequently, bancassurance has been a success right from inception, the customer response in the UK has always been lukewarm for historical and cultural reasons.

The trends in European markets are towards instruments, which act as savings and investment vehicles rather than for pure insurance products. The preference for single premium investment products poses challenges for banks as there is little regular or guaranteed income, the need for searching for new customers each year, and the consumer's demand for higher returns than cover. The domination of Independent Financial Advisors (IFAs) in the UK is continuing but changes in consumer perception and improvement in the attitude of banks are also noticeable. However, the two major factors inhibiting growth of bancassurance in the UK are, there being no differentiated sales approach and inefficiency in harmonizing commissions and incentives. Some analysts and industry experts feel that European banks and insurers will go their separate ways in future.

The Latin American experience has been reasonably good because of liberalized regulatory environment, overall growth of the insurance industry, favorable economic, political and social conditions, and the fact that the models and experience of Spain have substantially influenced the sectors.

The fourth article in this section titled Bancassurance: Potential to Grow, after briefly talking about the conceptual aspect makes the point that banks have emerged as potential winners in the lookout for effective channels by insurers. There is a huge market potential out there in many countries and especially in India when compared to the global benchmark. It is a good news to bancassurers that only about 25% of the global insurable population is insured, and even among them most are underinsured.

Indian Scenario

Graham Morris' article on Bancassurance in India - A Beginning, examines the question: Why bancassurance in India? Augmenting of revenues seems to be a major attraction for banks to sell insurance products in view of the sharp decline in margins in their core lending business. Some banks taking equity stakes in insurance companies is perhaps a precursor to assuming a bigger role by them in the future. Regulatory issues, relevant business models, learning from the experiences of other countries as a crucial factor for long-term success are some of the important points dealt with in the article. The author says that initial successes achieved augur well for bancassurance in India.

In the article Bancassurance: Calling for a New Culture, Mr. S Venkitaramanan, former RBI Governor, calls for a new culture in the emerging scenario of convergence of financial services in India in keeping with the global trend. The article talks about problems of cultural integration between banking and insurance sectors. While the life insurance sector is associated with marketing innovation, consultative selling and incentive compensation, banking culture is one of relationship building, little risk, stability, and compensation schemes less related to performance.

Bancassurance: What Needs to Make it a Success begins with a valid observation that banks though unaccustomed to selling their own products are venturing into bancassurance which involves selling of more complex products. This calls for a paradigm shift in the behavior of PSBs, which have to develop marketing skills. There is ample scope to exploit the underserved rural and social sector through the existing distribution network of banks. At the same time, there is a need for banks to be sensitive to customer preferences. The growing competition to sell insurance products due to the entry of many new players and in their new found enthusiasm, if bankers try to push too hard they run the risk of driving away even their existing customers, and on the other hand if they are passive the customers may fall back on the agent who has a proven track record of success.

Manoj Kumar, cites important reasons for banks in India to seriously consider bancassurance, namely, increased return on assets through fee income, cross-selling of financial products, leveraging the distribution and process capabilities and taking advantage of their proprietary databases. He makes a SWOT Analysis of the prevalent position and identifies a number of factors under each head, which need careful consideration. He opines that unholy alliances and unhealthy competition may make bancassurance in India unviable.

Opportunities and Challenges

Some of the critical issues that need a closer look to identify the opportunities, and encounter challenges effectively are examined in this section. The first article, Bancassurance in India: Opportunities and Challenges, deals with three issues, namely, business model suitability and strategy to be adopted, operational issues such as internal processes, procedures and systems, and the third issue of attitude. Some of the key opportunities available and the associated challenges relevant to bancassurance in India are identified, and deliberated upon. Aspects, which appear as opportunities unless understood and acted upon properly, may turn into challenges. The question of integrating of regulatory bodies is also addressed, and the opinion expressed is for continuation of separate regulatory agencies but with better coordination, smooth flow of information and minimal governmental interference. A note of caution is sounded that the regulators need to be alert and proactive to avoid scams in the insurance sector which have beset the banking sector and stock market after deregulation and liberalization.

Recent trends in bancassurance in terms of market penetration in Europe, common partnership models, and marketing/distribution issues find mention in the article of Mr. S Neelakantaiah, AVP, Treasury Department, ING Vysya Bank Ltd. The author gives a list of cogent, and substantial reasons for banks to enter into insurance business in India, the most important being, market-size in terms of annual insurance premium collection of Rs.1, 80, 000 crore, distribution reach, cost reduction by about 30%, and expertise in investment management.

Neil Daswani in his article Building a Long-term Solution Partnership, touches upon some new issues thrown up with the emergence of bancassurance on the financial sector horizon, which are solutions related to investment and securities. He talks about Forex-linked yield enhancement solutions and liquidity investment solutions. In respect of securities, he mentions about regional sweeping and pooling of balances which include physical sweeping, notional pooling and interest relocation programs.

With the convergence of financial services, the role of actuaries is also changing. The emerging theme in the dialogue among the regulators is the emphasis on risk assessment and risk management and a search for consistent approaches. The author says that because actuaries are the insurance industry's foremost experts in risk assessment and risk management, their role in this evolution will be critical. Actuaries need to develop their skills to bridge the gap between insurance and the other sectors of financial services.

The authors of the article Bancassurance in Emerging Market Economies: Impact on the Financial System, project a contrary viewpoint to the theme of the book which adds richness to it with a new perspective. They argue that the issues of concentration, contagion and regulatory risks have a potential to destabilize the financial system. They go on to identify, and expand upon aspects of current risk profiles of banks, and insurers, management challenges, convergence-induced risks and the role of regulators in managing the emerging risks.

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