Project on Indian Financial Market Structure
[Source: RBI Report on Currency and Finance 1999-2000 dated January 29, 2001]

Bancassurance

In developing countries, one important character of insurance business and of long-term life insurance, in particular, is that insurance policies are generally a combination of risk coverage and savings. The savings component in the insurance policies is seen as a possible source of competition for the banking industry, as the insurance industry develops on a competitive basis. There are, however, other considerations, that point to the possible complementarities and synergies between the insurance and banking business.

The most important source of complementarity arises due to the critical role that banks could play in distributing and marketing of insurance products. So far, direct branch network of LIC, GIC and its subsidiaries together with their agents have been instrumental in marketing of insurance products in India. With further simplification of insurance products, however, the vast branch network and the depositor base of commercial banks are expected to play an important role in marketing insurance products over the counter. The eagerness on the part of several banks and NBFCs to enter into insurance business following the opening up of the industry to private participation reflects this emerging process.

The present interest of banks to enter into insurance business also mirrors the global trend. In Europe the synergy between banking and insurance has given rise to the concept of 'bancassurance' - a package of financial services that can fulfill both banking and insurance needs. In France, for example, over half of the insurance products are sold through banks. In the US, banks lease space to insurers and retail products of multiple insurers, in the way the shops sell products. The institutional framework within which this functional overlaps are taking place has been varied - floatation of separate insurance companies by banks, banks' buying stakes in existing insurance companies, and swap of shares and mergers. Insurance companies have also sought to acquire stakes in some banks.

In India, the Reserve Bank, in recognition of the symbiotic relationship between banking and the insurance industries, has identified three routes of banks' participation in the insurance business, viz.,

1. providing fee-based insurance services without risk participation,

2. investing in an insurance company for providing infrastructure and services support and

3. setting up of a separate joint-venture insurance company with risk participation.

The third route, due to its risk aspects, involves compliance to stringent entry norms. Further, the bank has to maintain an 'arms length' relationship between its banking business and its insurance outfit. For banks entering into insurance business with risk participation, the prescribed entity (viz., separate joint-venture company) also enables to avoid possible regulatory overlaps between the Reserve Bank and the Government/IRDA. The joint-venture insurance company would be subjected entirely to the IRDA/Government regulations.

Besides commercial banks, rural cooperative credit institutions are also envisaged as an important vehicle for distributing insurance products in under-served rural areas. The Task Force to Study the Co-operative Credit System and Suggest Measures for its Strengthening (Chairman: Shri J. Capoor) noted that this could have the attendant benefit of portfolio diversification for these institutions.