Bancassurance - A New Concept Catching Up

 | April 08,2010 06:12 pm IST

Introduction

The strategy for using the established, entrenched distribution network for one product to market other new products has long existed in the consumer goods sector. Thus the networks for soaps and detergents have been used by companies to distribute newly launched food products, the distribution channel for Rados has been used to market televisions and so on.


Of course, the basic premise for this kind of cross selling is the fact that companies keep diversifying their product portfolios, using established 'incumbent' networks to promote and distribute new product lines. Banks, too, have in the recent past adopted this strategy both in India as well as internationally. They have moved away from the classical model of deposit taking and credit disbursal through their branch networks and have begun to offer a wide range of products and services like security broking facilities and mutual funds. This is the phenomenon of 'universal banking' that builds on the principle of leveraging existing networks to broaden portfolio offerings.

 

Change in regulatory regimes has also facilitated this diversification. The famous Glass Steagall Act in the US that restrained bans from diversifying into related areas was effectively rendered obsolete by the late 1990s. This diversification of banking services has been driven by a number of factors, all of which have threatened bank profitability.

 

In India the concept of banc assurance appears to be gaining ground quite rapidly both through commission based arrangements and joint ventures between banks and insurance companies.

 

Theme

Growing disintermediation by corporate borrowers (direct borrowings by firms from the debt market for both working capital and term loans), better inventory practices that have reined in working capital needs and a liberalized external borrowing regime coupled with dwindling international rates have all eaten into 'fund incomes' of banks. In short, the margins or spreads that banks make between the cost of funds (deposits plus borrowings) and the returns on funds (interest earnings on loans).

 

Diversification

Banks have felt the need to offset these through growing fee incomes particularly from the retail side. To target the retail segment, banks have felt the need to offer a more diversified product range to appeal to a diverse range of risk profiles.

 

On the other hand, stand-alone financial product providers (NBCs, mutual funds etc.) have faced crippling distribution costs that in the face of growing competition, they have not been able to pass on as 'load' on this product. Thus as far as banks and other financial services providers are concerned, there has been a 'double coincidence' of needs that has led them to collaborate either through direct equity participation or ownership by banks or strategic alliances.

 

One of the more recent examples of financial diversification is 'banc assurance', the term given to the distribution of insurance products through branches or other distribution channels of banks. The concept that originated in France now constitutes the dominant model in a number of European countries.

In France 70 per cent of new business premiums come through this distribution channel, 69 per cent in Portugal, 63 per cent in Spain and so on. Projections by insurance giant Aviva peg the distribution share of banc assurance at 33 per cent by 2010, making it the single largest distribution channel. In Asia, the share of this network is small but growing rapidly.

 

In China for instance, this accounts for more than 20 per cent of the urban market in insurance in 2003. (It is, however, interesting to note that in some countries bank regulations prohibit bancassurance and it is this regulatory diktat rather than conscious strategic choice that has harnessed the growth of this marketing channel.) In India the concept of bancassurance appears to be gaining ground quite rapidly both through commission based arrangements and joint ventures between banks and insurance companies. According to SBI Life insurance estimates, about 15 pr cent of the gross premium of new players in FY 2003 came through bancassurance and is estimated to grow further.

 

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Comments


preeti on 09/11/10 at 08:41 pm

hiiii