Bancassurance
In India, ever since espousing of financial reforms following the recommendations of First Narasimham CommitteeThe most important committee was Narasimham Committee on banking Sector Reforms. It was set up in 1991. Please note that there were two Narasimham ....., the contemporary financial landscape has been reshaped steadily.
Banks have been striding into several new areas and offer innovative products, viz., merchant banking, lease and term finance, capital market / equityThe ownership interest in a company of holders of its common and preferred stock. market related activities, hire purchase, real estate finance and so on.
So, banking business has become far more diversified than ever before. Therefore, their entering into insurance business is only a natural corollary and is fully justified too as 'insurance' is another financial product required by the bank customers.
Definition:
BancassuranceThe phenomenon whereby a financial institution combines the selling of banking products and insurance products through the same distribution channel. Popular in the early 1990s ..... or Bank Insurance Model refers to the distributionReturn to investors of the accumulated income of a trust or mutual fund and distribution of capital gains. of the insurance and related financial products by the Banks whose main business is NOT insurance. So, simply Bancassurance, i.e., banc + assurance, refers to banks selling the insurance products. Bancassurance term first appeared in France in 1980, to define the sale of insurance products through banks' distribution channels.
Benefits:
It helps both the banks and Insurance Companies as follows:
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This is a referral business in which the banks tend to leverageThe use of borrowed money to finance an investment. the existing clientele.
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Insurance companies get the benefit because they can have distribution relationships with multiple insurers.
Business Model:
For Bancassurance, the Banks need to obtain a prior license from the IrDA or Insurance Regulatory and Development Authority, so that they can work as "Composite Corporate Agent" or may have "Referral Arrangement" with the Insurance Companies.
RBI Guidelines:
As per the Government of India Notification dated August 3, 2000, specifying 'Insurance' as a permissible form of business that could be undertaken by banks under Section 6(1)(o) of the Banking Regulation Act, 1949. The RBI, in line with this issued its guidelines for the Bancassurance as follows:
Agent Business
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Any scheduled commercial bank would be permitted to undertake insurance business as agent of insurance companies on fee basisIn a futures market, basis is defined as the cash price (or spot price) of whatever is being traded minus its futures price for the ....., without any risk participation.
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The subsidiaries of banks will also be allowed to undertake distribution of insurance product on agency basis.
Joint venture:
Only the Banks which satisfy the eligibility criteria given below will be permitted to set up a joint venture company for undertaking insurance business with risk participation, subject to safeguards. The maximum equity contribution such a bank can hold in the joint venture company will normally be 50 per cent of the paid cup capital of the insurance company. On a selective basis the Reserve Bank of IndiaThe Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934 with ..... may permit a higher equity contribution by a promoter bank initially, pending divestment of equity within the prescribed period:
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The net worthThe aggregate value of the paid up equity capital and free reserves (excluding reserves created out of revaluation), reduced by the aggregate value of accumulated ..... of the bank should not be less than Rs.500 crore;
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The CRAR of the bank should not be less than 10 per cent;
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The level of non-performing assets should be reasonable;
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The bank should have net profit for the last three consecutive years;
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The track record of the performance of the subsidiaries, if any, of the concerned bank should be satisfactory.
JV with Foreign partners:
In cases where a foreign partner contributes 26 per cent of the equity with the approval of Insurance Regulatory and Development Authority/Foreign Investment Promotion Board, more than one public sector bank or private sector bank may be allowed to participate in the equity of the insurance joint venture. As such participants will also assume insurance risk, only those banks which satisfy the criteria given above, would be eligible.
A subsidiary of a bank or of another bank will not normally be allowed to join the insurance company on risk participation basis. Subsidiaries would include bank subsidiaries undertaking merchant banking, securities, mutual fundMutual funds are touted to be the best tool for wealth creation over the long term. Definition: A mutual fund is a fund that is created ....., leasing finance, housing finance business, etc.
Investment in Insurance:
Banks which are not eligible for 'joint venture' participant as above, can make investments up to 10% of the net worth of the bank or Rs.50 crore, whichever is lower, in the insurance company for providing infrastructure and services support. Such participation shall be treated as an investment and should be without any contingent liability for the bank.
The eligibility criteria for these banks will be as under:
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The CRAR of the bank should not be less than 10%;
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The level of NPAs should be reasonable;
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The bank should have net profit for the last three consecutive years.
Prior Approval:
All banks entering into insurance business will be required to obtain prior approval of the Reserve Bank and have to be compliant with IrDA regulations. The Reserve Bank will give permission to banks on case to case basis keeping in view all relevant factors including the position in regard to the level of non-performing assets of the applicant bank so as to ensure that non-performing assets do not pose any future threat to the bank in its present or the proposed line of activity, viz., insurance business.
It should be ensured that risks involved in insurance business do not get transferred to the bank and that the banking business does not get contaminated by any risks which may arise from insurance business. There should be 'arms length' relationship between the bank and the insurance outfit.
Current Issue with Bancassurance:
Now, we know that Banks have to follow RBI as well as IrDA regulations for Bancassurance Business. The present regulations do not allow banks to sell insurance products of more than one insurance company.
The current issue is that the Banks might get to tie up with multiple insurance companies to distribute their products if a panel set up by the industry regulator comes to a consensus on the issue. Following requests from various life and general insurance companies asking Insurance Regulatory and Development Authority (IRDA) to allow banks to have distribution relationships with multiple insurers, the regulator had formed a seven-member committee in Mid of 2009 to look into the matter.
These 7 members are the veterans of the market viz. Deepak Satwalekar, G V Rao, S V Mony, Sandeep Bakshi, R Krinshnamurthy, N M Govardhan and A Giridhar. The committee was given the job to examine the desirability for a differential treatment of insurance intermediation by banks under the Bancassurance model consistent with international best practices and modified suitably to meet domestic regulatory requirements.
In September 2010, speaking at an insurance summit organized by industry body Assocham, Mr Harinarayan said IrDA would be coming up with new regulations on Bancassurance. Most insurers expect the regulators to break A rapid and sharp decline in a security or index. the exclusive deals that insurers have with banks for selling insurance. It is also expected that the regulator will put in place norms to ensure that banks continue to service policyholders even if they decide to discontinue their insurance partnerships.
