BANCASSURANCE

1. BANCASSURANCE A BANKER'S PERSPECTIVE S.Muralidharan

2. WHAT IS BANKING? Deposit taking? Lending? Deposit taking and Lending? Merchant / Investment Banking? Financial Products Distribution (own/3rd party)? Financial advisory to clients? BANKING IS: Financial intermediation, Advisory & Distribution = Bancassurance is a legitimate banking activity.

3. WHAT IS INSURANCE? Insurance is the means of protection, at an affordable cost, from a risk with unaffordable consequences.

4. BANKING EVOLUTION Disintermediation is rife. Margins shrinking (the 3-9-3 rule of banking) Customer convenience - "Financial Mall" Strong competition: inter-se & non-banks New competition - internet, mobile companies, Post- crisis, A forced return to "Utility Banking" likely Curbs on profitable lines of business = Need for acceptable new sources of income

5. BANKING EVOLUTION - COMPETITION FOR CUSTOMERS Acquiring and retaining customers getting tougher High-profit customers weaned away by nimble smaller banks Large retail banks have large customer base and long reach; now through online too. They can leverage on their reach and customer base More products = better customer retention + more income.

6. INSURANCE EVOLUTION EXPANDING PRODUCT LINE-UP Life, Health, Assets, etc ("Traditional" lines) Marine and trade-linked Savings (Traditional, Unit-Linked), Loan protection, Pensions, various Hybrids. Weather and similar risk insurance Default swaps and other exotics Insurance has moved from underwriting to derivatives and fixed income to market-related investments.

7. INSURANCE EVOLUTION TOUGHER REGULATORY ENVIRONMENT Regulatory activism & consumer protection Control on pricing & expenses = lower sales remuneration and lowered interest in selling Complex products have earned a bad name = Independent direct selling teams are losing interest Sellers bundling investment advice and product sales.

8. INSURANCE & BANKING - OVERLAP OF INTERESTS Banks have the customers Insurers need Insurance selling can generate the income banks need Banks have the "reach" insurers lack Customers (still) trust the (Indian)Banks Banks are attempting to become Financial Malls. Insurance is a key product. Insurance products can help Banks retain customers for a longer term

9. BANKING AND INSURANCE - A MARRIAGE MADE IN HEAVEN? NOT QUITE LIKE HUMAN MARRIAGES, THIS ONE ALSO NEEDS CONSTANT FINE-TUNING AND PARTNERS NEED TO WORK ON IT.

10. TWO BANCASSURANCE MODELS - Ownership-defined Bank owns Insurance arm and distributes latter's products."OWNED" BANCA MODEL (SBI, ICICI etc). Bank contracts to distribute products of third-party insurers. "AGENCY" MODEL (LIC and Banks) A HYBRID of the two (AXIS/MNYL) with nominal ownership stake

11. TWO BANCA MODELS Defined by who sells PURE Banca model in which the Bank staff sell Hybrid Sales model in which Insurer's staff or agents, placed in the Bank, sell

12. TWO BANCA MODELS - Exclusivity-based The insurer is a pure Banca company and sells only through its "parent bank" (B2B 1 Model) The insurer sells through other banks (B2B 2) The insurer sells through other distribution channels (B2B & B2C)

13. WHAT IT CAN MEAN Each model has specific implications to the bank which owns it / distributes its products Degrees of ownership and exclusivity also has important implications.

14. HOW BANCA WORKS Insurer produces products Bank distributes Two models for selling Bank is paid commission on sale "Owner" Bank receives dividends Servicing - two options STP for effectiveness - systems integration Training & MIS provided by Insurer Systematic review and course correction

15. BANCA SUCCESS FACTORS A study identified critical success factors for banca • Systems integration • Senior Management Commitment to insurance • Integration of products (branding) Also important, • Sales culture and clear positioning of insurance

16. BANKERS' CONCERNS • Capital consumed • Income potential • Product portfolio integration • Systems integration • Complement & enhance Banking Products • Additions of profitable services • Customer retention / satisfaction / delight • Selling skill availability / development • Reverse risk flow • Brand Management • Compliance & Control

17. BANKERS' CONCERNS Animating sales teams Controlling sales teams Sales incentives etc - issues abound Customer ownership / data protection

18. PRODUCT INTEGRATION European Experience: Banca works best when products are integrated Banks usually in the short term savings MFs medium term Insurance long term, Pensions even longer = Insurance completes savings spectrum + Provides Risk Cover Not direct competition for bank deposits Key element of Financial Planning & Advisory Needs sophisticated selling

19. CAPITAL CONCERNS An issue in "owned banca" models Insurance is capital-intensive Insurance investments reduce Bank capital - an ongoing issue Insurance Break-even takes long Owner-Banks need to be patient RoI: Low and Slow. Income from dividends & valuation of insurer Valuations market conditions dependent

20. Income Potential PAST: High sales commission NOW: Regulators stamping out high commissions In India product pricing requires IRDA approval; high "margins" not possible Bundled products like "loan-linked insurance" used to have high margins - no more. Insurers resorting to innovative compensation Insurance Income disappointing banks.

21. SYSTEMS INTEGRATION A study revealed systems integration as a key success factor for Banca success. Banking front end should facilitate sale, after sales servicing and claims management. Should facilitate viewing customer savings pattern and propose appropriate products Customer should be able to make premium payments, and receive receipts at the Bank Insurance seasonality could cause traffic jam in Bank's systems.

22. COMPLIMENTS BANK PRODUCTS Fear of cannibalisation real. Risk of cannibalisation not high If sold well, it can complement Bank products Insurance does not compete in terms of: tenor returns purpose risk cover To be complimentary, needs to be sold well

23. ENHANCE BANK PRODUCTS Loans with built in death risk cover Loans with unemployment cover Loans with health cover Mortgage loans with death risk cover "Gap" cover for car loans. Etc etc

24. RETAIN CUSTOMERS Banks face competition from new sources: Online, mobile Cos, Credit Cards, etc. Need to protect against poaching Offering all segments of life-time financial services is an effective protection Retail Customers using >4 products dramatically more profitable Banking equivalent of a Mall is as attractive

25. SELLING SKILLS DEVELOPMENT Advantages depend on selling ability Bad selling can cause problems Need to develop ability to analyse need and sell appropriate product Must become part of Bank's normal training But.... It is not seen that way. Seen as a burden and an intrusion Need greater training commitment from Bank

26. RISKS IN BANCA Depends on the model. Ownership most risky. Insurance losses can affect Bank capital Constant demands for capital infusion Poor RoI Low income if valuation not captured. Banking contagion can spread to Insurance Risk to Bank due to mis-selling insurance Customer dissatisfaction with Insurer can affect his view of distributing Bank Brand

27. BRAND MANAGEMENT To be effective, insurance must be integrated well with Bank brand Exposes the Bank to insurance problems Unsolved issues can cost the Bank dearly. If done well, can add to Bank Brand, valuation Can bring new customers and retain old ones. Bank regulators not happy with brand integration.

28. COMPLIANCE Two regulators = twice the problems Indian regulators wish the businesses to be kept distinctly separate even at front end Cannot leave insurance customer data on Bank's system and vice versa = promised economies don't follow Composite statements like in Wealth Management first step in integration.

29. CONTROL & ANIMATION OF SALES Control and animation of Sales Teams poses a challenge. Less so in "Agency" Banca model. Insurance needs to be "sold". Works only with incentives. Banks not used to incentive structures. Imaginative solutions required. Clarity needed on who controls salespeople. Separate deptt works. Has some issues too. Line Management must accept ownership

30. WHO OWNS THE CUSTOMER? The Bank? The Insurer? Ideally it should be the Bank. For effectiveness, all customer ownership should be with the Bank - Regulations don't permit it In practice, each has its own database. Reluctance to share data For greater benefits from Banca, higher data integration required. Changes in regulation likely? Real risk of data loss in Agency model...