SPC ERA International Journal of E-Commerce and E-Banking Vol-1, No-1

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1 Sharada P. Chauhan Entire Research Academy s SPC ERA International Journal of E-Commerce and E-Banking Exact Papers URL : Issue IJECEB Dr Karanam Nagaraja Rao, Dr. Krishna Kishore Asst. Professors, Alliance University, Anekal road, Bangalore, kishoreonline@gmail.com Abstract The performance of Bank Assurance in the Life market in India is far from satisfactory. LIC s Market Share is around 70% of the total business and the bank assurance channel is contributing only 1.70% of the total business of LIC of India as at In Europe this channel contributes over 60% of life insurance business. In other Asian countries like Taiwan, Hongkong and Singapore it ranges from 5 to 40%. In India the banking channel is selling life insurance to less than 2% of its captured customers. An attempt is made in this article to study the Bank Assurance in life insurance sector in India. Key Words Bank Assurance, Life, Indian Market Study of Rural Life marketing through Bank Assurance Introduction 70% of the India s population live in rural areas covering around 6 lakh villages and 90% of them live in villages with less than 2000 people. The life insurance premium as a percentage of GDP in India is around 4.1% against 8% in South Korea. The life insurance penetration is very low in rural areas and is contributing 2.8% of the GDP in The rural areas sustain the national economy and it is of paramount importance to provide insurance coverage to the rural folk. Relying exclusively on Agency Channel until the opening up of the industry to private players in 2000, has not yielded adequate results. This can be testified by the fact that LIC could cover only 21% of the insurable population of India as at 2000 (Malhotra Committee Report, 2000). The opening up of the industry saw changes in the pattern of canvassing business and Bank Assurance played important role in the growth of Private Players. But the Major, ie, LIC of India has not embraced the Bank Assurance Channel in a big way. Literature Review By 2012 about 10.3 million household with income greater than Rs 2 lakh will control more than 22 percent of rural consumption. Further more rural India will not be one market. Pockets of attractive rural market will emerge in certain parts of India. Players will need to understand their needs, design products to match them and create distribution models to reach a highly fragmented consumer base cost effectively (Mckinsey & Company, 2007) It is cheering news for rural India that many private life insurers are putting in place exclusive marketing initiatives to take on rural business as a vibrant business proposition. And why not, rural is profitable business! Market surveys have indicated that the rural savings to income ratio is around 30%, which is higher than the urban population. Given the vast potential for insurance products in rural

2 India, different techniques are likely to emerge. Segmentation of the rural market, new approaches to leverage extensive rural banking services or savings oriented insurance products to provide flexibility in premium payment could be techniques to tap the vast rural potential (Mehrotra, D.K,2007) The primary mode of distribution among the semi-educated could be rural based banks, the village panchayats or the gram sevaks and the different village based NGOs which have deep network and trust among the village population (Purdy, 2002) The channels for distribution of insurance products in rural areas are the panchayats, district cooperative banks, agricultural & dairy cooperatives, and of course the agents. Since no player is using these channels for effective rural reach, it can be well said that the rural market is not sleeping any longer: the insurance players are. These channels have the potential to make the difference as they enjoy the trust of the people (Prasad & Saxena, 2007) As at , life insurance funds constitute only 12.1% of savings through household sector, where as it is 12.5% from pension funds, 14.2% from small savings and from bank deposits 44.5%. From this it is clear that there is lot of potential which is yet to be tapped (Venugopal,R, 2008) Research Problem Literature review points to the fact that resorting to the sale of insurance through multi- channels holds the key for in insurance penetration in rural areas. companies need to realize the importance of distibution channels other than agency Name of the Life COLLABORATED BANKS Insurer. LIC of India Corporation Bank,IOB, Andhra Bank, 1.70% Central Bank of India, Oriental Bank of Commerce,Bank of Maharashtra, Vijaya Bank, Sahara Bank, Centurian Banket, District Central Cooperative bank etc. SBI Life State Bank of India 44% channel, viz, Bank Assurance, Direct Marketing etc to spread the message of insurance in rural areas and tap the existing unexplored market. Literature review reveals that the study of Bank Assurance is largely generic and no attempt is made to study the reasons for its poor performanceeither from secondary or primary data. This paper tries to bridge this gap by studying the problems of Bank Assurance through secondary data. Objective of the Paper: The objective of the paper is to study the depth of bank assurance in the life insurance market and the reasons for its lacklustre performance in India. Research Methodology Research Design Exploratory research design has been used as the emphasis is on the discovery of ideas and insights. Data Collection The websites of different life insurance companies and their periodicals, industry reports, and the data available from the site of the Regulator, Regulatory and development Authority of India (IRDA). Research Findings The data collected from the secondary data indicated that Life Corporation has not paid much importance to Bank Assurance Channel. The performance of Private Players is better than the Public Sector LIC. The following Table indicates the trend: Table 1: Business Procured By Bank Assurance as at 31/03/2007. % of Business as at 31/03/07

3 Company Bajaj allianz Life ICICI Prudential Life Tata AIG Life Aviva Life. HDFC Std Life Met Life Standard Chartered Bank and Syndicate Bank 22% ICICI bank, Lord Krishna Bank, 20% Punjab and Maharashtra Cooperative Bank, Federal Bank, Syamrao Vittal Co-op Bank, Citi Bank etc. HSBC Bank, Indian Bank, United 35% Bank of India, Punjab National Bank,Orissa Cooperative Bank, DBS Bank of Singapore, Sangli Bank of Maharashtra etc ABN Amro Bank, American 80% ExpressBank, Lakshmi Vilas Bank, Punjab and Sindh Bank, Indusind Bank rtc. HDFC Bank 45% J&K Bank, UTI Bank, Dhan Lakshmi Bank and Karnataka Bank Source: LIC Annual Reports & Yogakshema, March, 2008, p. no 10 The reasons for under utilization of this channel are as follows: Training to the banking staff in selling life insurance policies is inadequate. A Designated Person (DP) in the branch is imparted the mandatory IRDA training 100/ 50 hours who generally happens to be the Head of the Branch. The training is not given to all the bank staff with the assumption that it percolates down the line from DP. Involving all the bank staff for marketing leverage is difficult. Lack of insurance selling skills by the bank staff. Lack of simple and easy to understand policy by the bankers. Life insurance is not the core business proposition for the bank The bank staff has less motivation to sell life insurance as the commission 38% for selling insurance is credited to bank. The Designated Persons of the banks get frequent transfers with the result that there is no track of following up with old customers for renewal payments. At present the business is one way in the sense that life insurance products are sold by the commercial banks and not vice versa. In this scenario banks show less interest to promote insurance policies. In order to make the Bank Assurance effective, it is necessary to address to the problems. Leveraging the synergies of Banks Cross functionality in financial services is a global phenomenon in the last 2 decades and insurance is not an exception to this rule. Banks like HDFC, ICICI, Andhra Bank, Punjab National Bank, and SBI entered in to life insurance business though life insurance is

4 not their core activity. Similarly LIC entered in to the business of mutual funds and housing finance. In order to boost up the sales volumes, the synergies of banks and insurance companies need to be enhanced. The life insurers have taken the path of bank assurance channel to promote their rural business. Many rural banks are roped in by one or other insurer to enhance sales volumes and meet the rural obligations prescribed by the IRDA. Even LIC of India, the business of which from bank assurance is less than 2% of its total business has tied up with 31 banks having 10,175 outlets as at Aviva Life made strategic partnership with micro finance institutions (MFI) for providing Name of the life insurer. LIC of India SBI Life Company Bajaj Allianz Life Company Ltd ICICI Prudential Life Tata AIG Life Company Ltd Aviva Life Company Ltd. HDFC Std Life Company Ltd Met Life micro insurance to rural customers. It has three pronged bank assurance approach- Indian banks with extensive reach. Multinational banks for HNI customers. Regional Indian banks to cover rural areas. The synergies available to each partner helped in the growth of life insurance market. All major private players have strategic alliances with different sets of banks and other financial institutions and micro finance institutions. The table 2 illustrates the point. Table2: Bank assurance partners of various Life Companies. Collaborated banks. CorporationBank, IOB, Andhra Bank, Central Bank of India, Oriental Bank of Commerce, Bank of Maharashtra, Vijaya Bank, Sahara Bank, Centurian Banket,District Central Cooperative bank etc. State Bank of India Standard Chartered Bank ICICI bank, Lord Krishna Bank, Punjab and Maharashtra Cooperative Bank, Federal Bank, Syamrao Vittal Co-op Bank, Citi Bank etc. HSBC Bank, Indian Bank, United Bank of India, Punjab National Bank,Orissa Cooperative Bank, DBS Bank of Singapore, Sangli Bank of Maharashtra etc ABN Amro Bank, American ExpressBank, Lakshmi Vilas Bank, Punjab and Sindh Bank, Indusind Bank rtc. HDFC Bank J&K Bank, UTI Bank, Dhan Lakshmi Bank and Karnataka Bank Source: Websites of different insurance companies. The demand for insurance coverage of liabilities and the supply levels of the products meeting the specific need:

5 The financial constraints make the rural customers habitual borrowers. The farmers reliance on banking system has been growing up with borrowings from the banks leapfrogging from 17,835 crore rupees to 47,430 crore rupees from 1992 to The incidence of indebtedness can be had from the following Table 3 Table 3: The farmers' reliance on the banking system. Year Farmers deposits (Rs Farmers borrowing (Rs Number of farmers in crores) in crores) assisted in lakhs ,211 17, ,812 43, ,233 47, Source: Rural Marketing by Pradeep Kashyap, p no 280. The raising debts are a liability in case of the pre mature demise of the borrower and become a burden on the dependents. At present there is no mechanism to insure the liabilities. If these liabilities are insured it serves the purpose of risk reduction to the family members. Due to low levels of insurance awareness, the insuring of liabilities is ignored by the rural farmer. The awareness generation, which is the prime responsibility of the insurer, is to be aimed at sending strong signals among the rural people with regard to the following 4 benefits. 1. It is to relieve the borrower s family of the burden of repaying the remaining loan. 2. It is to cover the loss that the government/ bank may incur upon the demise of the borrower. 3. The debt dies with the debtor. The asset out of the debt survives with the survivors. 4. The message of former President of India, Abdul Kalam that, security in any facet of life is the primary prerequisite that impels an individual and the society to push forward to get to the heights of social and economic prosperity. Feeling of insecurity would totally dampen any enthusiasm to move forward and would certainly act as a negative factor inhibiting growth, nipping initiatives in the bud is to be conveyed to all rural people by the life insurance companies. There is a definite demand for loan protection policies in rural areas to cover the liability risk and there is growing potential for insurers to take advantage of the latent need of the rural customers. The products of life insurance companies so far are broadly restricted to Home loans such as Jeevan Gruha of LIC of India, Loan Protector from Bajaj Allianz Life Company and Met Mortgage Protector from Met Life. The loans taken by the farmers running to crores of rupees have no insurance coverage. Each loan can be a potential life insurance product provided the life insurance companies design such policies and have linkages with the creditor Bank who is arranging the loans in rural India. Suggestions for designing liability insurance schemes for rural people. Popularizing the liability insurance schemes can help wider social coverage in rural areas, some suggestions are offered in the practical perspective. 1. The life insurance companies should educate the cooperative societies/ banks for getting formal approval by cooperative members for the mandatory insurance scheme for all loans sanctioned by them. 2. The commission payable normally to the agent can be paid to the cooperative society/ Co-Op Bank to induce them to encourage insurance and for collecting premiums.

6 3. The insurance companies can think of a group policy for all borrowers in case the Board of the Co Operative Society authorizes mandatory insurance to all its borrowers. In this model the price for the coverage would be much less in view of low transaction costs. 4. The insurance companies can issue individual term assurance plans for periods synchronizing with the term of the loan by liaison with the creditor. Suggestions for maximizing sales through bank assurance channel: The deficiencies of bank assurance are discussed. One of the identified reasons for inadequate utilization of bank assurance potential is the lack of incentive to the bank branch managers who do business at the ground level. The commission that is payable by the life companies is paid to the bank and not to the bank managers. For the bank manager, the life insurance business is additional work and not a motivational option. The MOU is between the bank and the insurance company and hence the life insurance company cannot bypass the bank in paying commissions to the bank managers. In this scenario, the life insurance companies can think of other options as follows: The life insurance companies have to segment the bank assurance market in distict level, taluk level, town level and identify the weak spots in terms of volumes of business. Once this segmentation is done, the companies can explore floating competitions to individual bank branch managers and award gifts to those who secure prescribed targeted business. Periodic seminars/ workshops to be conducted to all the bank managers of the district with a view to update latest products/ circulars. Posting a life insurance company representative in the branch premises for assisting the branch manager in filling the proposals and to provide training support and maintain the data base. Bank customers meeting to be addressed by the insurance company representatives. The products designed for bank assurance need to be simple and easy to understand so that in the absence of the designated person in the bank branch, the other staff members can explain the features to the customers. Life insurance companies should think of leveraging the synergies and sell bank products from their counters. The companies can design bank customer specific group policies. All bank customers who take loans from the bank can be covered either by a group term assurance plan or an individual term assurance plan, the premiums of which can be adjusted from the saving bank accounts. The models of similar type are available from the Abhaya saving bank account of Corporation Bank and Vijaya bank saving account. In these schemes all customers of the savings bank account are a group and the bank purchases group insurance policy for all customers for covering the accident benefit. Conclusion Over reliance on any single channel of distribution may not be advantageous for the life insurance industry for spreading the message of insurance across the rural spectrum in India. Convergence of financial services is the order of the day in trend of globalization and liberalization. companies and the commercial banks should share their data bases and try to leverage the synergies for mutual advantage. Each loan from a commercial bank is a potential source for

7 selling an insurance product. Companies should work with the banks in unison and derive benefits out of the alliances. References: Malhotra Committee Report, 2000 Mckinsey & Company Report, 2007, India Life 2012: Fortune Favours the Bold, dia/pdf/insurance_a_summary Mehrotra, D.K, 2007, Valedictory address at the Indian Merchants Chamber, Mumbai, p Prasad, Rajendra Sharma & Saxena, Karunesh, 2007, Life Marketing in India: Leveraging the Strengths of Multi Channel Distribution p 10, Purdey, Stuart, 2002, Multi level Distribution and Life, CII 7 th Summit Venugopal,R, 2008, Bank Assurance in India- Problems & Potential, Yogakshema, March, 08, p