INTRODUCTION

The business of banking around the globe is changing due to

integration of global financial markets, development of new
technologies, universalization of banking operations and
diversification in non-banking activities. Due to all these movements,
the boundaries that have kept various financial services separate from
each other have vanished. The coming together of different financial
services has provided synergies in operations and development of new
concepts. One of these is bancassurance.

Bancassurance simply means selling of insurance products by

banks. In this arrangement, insurance companies and banks undergo a
tie-up, thereby allowing banks to sell the insurance products to its
customers. This is a system in which a bank has a corporate agency
with one insurance company to sell its products. By selling insurance
policies bank earns a revenue stream apart from interest. It is called as
fee-based income. This income is purely risk free for the bank since
the bank simply plays the role of an intermediary for sourcing
business to the insurance company.

It has its genesis decades ago in France, where this channel

today is the predominant source of insurance business. It has grown at
different places and taken shapes and forms in different countries
depending upon demography, economic and legislative prescription in

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that country. In some countries, bancassurance is still largely
prohibited, but it was recently legalized in countries such as the
United States, when the Glass-Steagall Act was repealed after the
passage of the Gramm-Leach-Bliley Act.

Bancassurance is a new buzzword. It originated in India in the year

2000. Following the recommendations of First Narasimham
Committee, the contemporary financial landscape has been reshaped.
Thus, present-day banks have 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.

From the view point of insurance industry also the importance of

bancassurance was felt necessary. With the increased pressures in
combating competition, companies are forced to come up with
innovative techniques to market their products and services. At this
juncture, banking sector with it's far and wide reach, was thought of as
a potential distribution channel, useful for the insurance companies.
That’s where the bancassurance came into existence. Thus,
bancassurance is poised to become a key determinator / differentiating
factor in the Insurance industry as well.

Given India’s size as a continent it has, however, a very low

insurance penetration and low insurance density. The penetration level
of life insurance in the Indian market is abysmally low at 2.3% of
GDP with only 8% of the total population currently insured. As

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opposed to this, India has a well-entrenched wide branch network of
banking system, which only few countries in the world could match
with. It is predicted by experts also that in future 90% of share of
premium will come from Bancassurance business only. And almost
half of the population likely to be in the 'wage earner' bracket by 2010
that there is every reason to be optimistic that bancassurance in India
will play a long inning.

Currently there are more and more exchange of wedding rings

between banks and Insurance Company for better business prospect in
future. With the enoromous benefits for banks like increase in
revenue, return on asset, customer retention, better reputation etc., the
bancassurance is going to be a big revolution in the banking industry.
It is against this backdrop an attempt is made to analyse the financial
performance of the HDFC bank in bancassurance so far and to find
out the areas where they can make use of and still need to focus in
order to make HDFC bank to play a vital role in the bancassurance
industry.

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 1.1 MEANING, DEFINITION AND

CONCEPT

MEANING:

Bancassurance is a combination of two words ‘Banc’ and

‘assurance’ signifying that both banking and insurance products and
service are provided by one common corporate entity or by banking
company with collaboration with any particular Insurance company.
In concrete terms bancassurance, which is also known as Allfinanz -
describes a package of financial services that can fulfill both banking
and insurance needs at the same time.

It is the provision of insurance (assurance) products by a

bank. The usage of the word picked up as banks and insurance
companies merged and banks sought to provide insurance, especially
in markets that have been liberalized recently. In its simplest form,
Bancassurance is the distribution of insurance products through the
Bank’s distribution network.. It is a phenomenon wherein insurance
products are offered through the distribution channels of the banking
services along with a complete range of banking and investment
products and services. Bancassurance tries to exploit synergies
between both the insurance companies and banks.

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DEFINITION:

The term first appeared in France in 1980, to define the sale

of insurance products through banks’distribution channels (SCOR
2003).
The Life Insurance Marketing and Research Association’s
(LIMRA’s) insurance dictionary defines bancassurance as “the
provision of Life insurance services by banks and building
societies”.

Alan Leach, in his book, “European Bancassurance –

Problems and prospects for 2000”, describes bancassurance as
“the involvement of banks, savings banks and building societies in the
manufacturing, marketing or distribution of insurance products”.

According to IRDA, ‘bancassurance’ refers to banks acting as

corporate agents for insurers to distribute insurance products.”
Literature on bancassurance does not differentiate if the
bancassurance refers to selling of life insurance products or non-life
insurance products.Accordingly, ‘bancassurance’ is defined to mean
banks dealing in insurance products of both life and non-life type in
any forms.But in this research the focus is entirely concentrated
towards life insurance. It is also important to clarify that the term
bancassurance does not just refer specifically to distribution alone.
Other features, such as legal, fiscal, cultural and/or behavioural
aspects also form an integral part of the concept of bancassurance
(SCOR 2003).

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 There are many definitions of bancassurance and, in essence it
does depend upon the model used, and the stage of development.
However, the definition of a fully developed model that is most
commonly used is: “'Manufacturing and distributing cost effectively
banking and insurance products to a common customer base”.

CONCEPT:

This concept gained importance in the growing global insurance

industry and its search for new channels of distribution.However, the
evolution of bancassurance as a concept and its practical
implementation in various parts of the world, have thrown up a
number of opportunities and challenges.

Bancassurance is a relatively new concept in the global

stage.unlike banks and insurerswhich have been around in one form or
the another for centuries,bancassurance has only been around for a
few decades. The concept of bancassurance was emerged in the
western world when banks began to get involved in marketing of
insurance business. From a purely historical perspective, many regard
Barclay’s Life, set up in 1965 in the UK as an insurance subsidiary of
the eponymous bank, as the pioneer of bancassurance. But the term
bancassurance came into existence in France after 1980 to define the
sale of insurance through an intermediary bank.

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 It has reared its head in France in the late 1970’s,motivated by
among other things changing customer needs due to an inadequate
pension scheme that existed at that time. As the governments can no
longer maintain the funding that people have begun to take a more
active role in their future entitlements by looking at alternatives to
pensions. Bancassurance provides not only provides an alternative to
pensions but also caters to the current taste of customers, which is no
longer satisfied by the traditional products offered by the insurers. As
bancassurance allowed the banks to move away from income
generated by the interest spreads it is viewed as a solution to alleviate
the problem of poor consumer savings, squeezed margins. Thus
lackluster pension schemes, poor consumer savings, squeezed
margins, the need for one stop shop delivery for all financial services
among the consumers, increasing importance of strategic alliance has
all led to the growth of bancassurance in Europe. With the success of
bancassurance model in Europe, the bancassurance, which was only a
European phenomenon, is becoming popular in other continents also

Bancassurance seems to have made the greatest impact in

France. Almost 100% of the banks in France are selling insurance
products. It is claimed that the 55% to 60% of the life insurance
business in France had come through banks. In Portugal and Spain it
was over 70%. In U.K it is about 30%. In Argentina, Brazil, Chile,
Colombia and Mexico also the bancassurance is becoming popular.
Hardly 20 % of the United states banks are selling insurance products
as only recently the Glass steagell act was repealed which has
prohibited the banks from entering into the financial services. In Asia:

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Singapore, Taiwan and Hong Kong have surged ahead in
Bancassurance then that with India and China taking tentative step
forward towards it. In Middle East, only Saudi Arabia has made some
feeble attempts that even failed to really take off or make any change
in the system.

RELEVANCE OF BANCASSURANCE IN THE INDIAN

FINANCIAL SECTOR

i)) Integration of the financial service industry in terms of banking,

securities business and insurance is a growing worldwide
phenomenon. The Universal Banking concept is evolving on these
lines in India.

ii) Banks are the key pillars of India’s financial system. Public have
immense faith in banks.

iii) Share of bank deposits in the total financial assets of households

has been steadily rising.

iv) Indian Banks have immense reach to households. Total of 65700

branches of commercial banks, each branch serving an average of
15,000 people.

v) Banks enjoy considerable goodwill and access in the rural

regions.There are 32600 branches in rural India (about 50% of total),
and 14400 semi-urban branches, where insurance growth has been
most buoyant.196 exclusive Regional Rural Banks in deep hinterland.

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vi) Banks have enormous retail customer base.Share of ‘individuals’
as a category in bank accounts is steadily increasing.Rural and semi
urban bank accounts constitiute close to 60% in terms of number of
accounts,indicating the number of potential lives that could be
covered by insurance with the upfront involvement of banks.

vii) Banks world over have realized that offering value-added services
such as insurance, helps to meet client expectations. Competition in
the Personal Financial Services area is getting `hot’ in India that
Banks can retain customer loyalty by offering them a vastly expanded
and more sophisticated range of products. Insurance distribution can
also help the bank to increase the fee-based earnings to a large
extent.

viii) Fee-based selling helps to enhance the levels of staff productivity

in banks.
This is vitally important to bring higher motivation levels in banks in
India.

ix) Banks can put their energies into the small-commission customers’
that insurance agents would tend to avoid. Banks’ entry in distribution
can help to enlarge the insurance customer base rapidly. This helps to
popularize insurance as an important financial protection product.

x) Bancassurance helps to lower the distribution costs of insurers.

Acquisition cost of insurance customer through bank is low. Selling
insurance to existing mass market banking customers is far less
expensive than selling to a group of unknown customers. Experience

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in Europe has shown that bancassurance firms have a lower expense
ratio. This benefit could go to the insured public by way of lower
premiums.

xi) Banks have an important role to play in the pension sector when
deregulated.Low cost of collecting pension contributions is the key
element in the success of developing the pension sector. Money
transfer costs in Indian banking is low by international
standards.Portability of pension accounts is a vital requirement which
banks can fulfill, in a credible framework.

REASONS FOR BANKS TO ENTER INTO BANCASSURANCE

The main reasons why banks have decided to enter the

insurance industry area are the following:

Intense competition between banks, against a

background of shrinking interest margins, has led to an
increase in the administrative and marketing costs and
limited the profit margins of the traditional banking
products. New products could substantially enhance
the profitability andincrease productivity.
Financial benefits to a bank performance can flow in
a number of ways, as briefly outlined below:

- Increased income generated, in the form of

commissions and/or profits from the business
(depending upon the relationship)

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 - Reduction of the effect of the bank fixed
costs, as they are now also spread over the life
insurance relationship.

- Opportunity to increase the productivity of

staff, as they now have the chance to offer a
wider range of services to clients

Customer preferences regarding investments are

changing. For medium-term and long-term
investments there is a trend away from deposits and
toward insurance products and mutual funds where
the return is usually higher than the return on
traditional deposit accounts.This shift in investment
preferences has led to a reduction in the share of
personal savings held as deposits, traditionally the
core element of profitability for a bank which
manages clients money. Banks have sought to offset
some of the losses by entering life insurance
business.Life insurance is also frequently supported
by favourable tax treatment to encourage private
provision for protection or retirement planning. This
preferential treatment makes insurance products
more attractive to customers and banks see an
opportunity for profitable sales of such products.
Analysis of available information on the customer
financial and social situation can be of great help in
discovering customer needs and promoting or

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 manufacturing new products or services.Banks
believe that the quality of their client information
gives them an advantage in distributing products
profitably, compared with other distributors (e.g.
insurance companies).
The realization that joint bank and insurance
products can be better for the customer as they
provide more complete solutions than traditional
standalone banking or insurance products.
Banks are experiencing the increased mobility of
their customers, who to a great extent tend to have
accounts with more than one bank. Therefore there
is a strong need for customer loyalty to an
organization to be enhanced.
Client relationship management has become a key
strategy. To build and maintain client
relationships,banks and insurers are forming
partnerships to provide their clients with a wide
range of bank and insurance products from one
source.
It is believed that as the number of products that a
customer purchases from an organization increases
the chance of losing that specific customer to a
competitor decreases.

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WHY IS BANCASSURANCE MORE SUITED TO LIFE

INSURANCE PRODUCTS?

Traditionally, much fewer non-life insurance products are

distributed through bancassurance than life insurance products. There
are several reasons for this:

✔The main reason may be the complementary nature of life

insurance and banking products: bank employees are already familiar
with financial products and quickly adapt to selling insurance-based
savings or pension products;

✔On the other hand, the non-life market requires special

management and selling skills, which are not necessarily prevalent in
bancassurance. In addition, such competencies require significant
investment in training and motivation, and therefore additional costs;

✔Life insurance products are generally long-term products, which

require customers to have complete confidence in the institution that
invests their money. And we now know that, in many countries, banks
have a better image and are more trusted than insurance companies;

✔Bank advisers can use their knowledge of their customers’ finances

to target their advice towards specific needs. This is a major
advantage in life insurance and less important in personal injury
insurance;

✔Some professionals also refer to the claims management aspect of

personal injury insurance, which could have a negative impact on

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brand image. This would seem to explain why for a long time
bancassurance operators hesitated to offer these types of product.

ADVANTAGES OF BANCASSURANCE:

Everybody is a winner in bancassurance. For banks it mainly

acts as a means of product diversification and additional fee income;
for insurance company it acts as a tool for increasing their market
penetration and premium turnover and for customer it acts as a
bonanza in terms of reduced price, high quality products and delivery
to doorsteps. Hence it is a win-win solution for everyone who
involved.

To the bankers:

In a situation of constant asset base the bank can increases

Return on Assets (ROA)by increasing their income, by
selling insurance products through their own channel. It can
cover operating expenses and make operating expenses
profitable by leveraging their distribution and processing
capabilities
Can leverage on face-to-face contacts and awareness about
the financial conditions of customers to sell insurance
products.

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 By acting as a one stop shop for all financial services,
they can improve overall customer satisfaction
resulting in higher customer retention levels
Banks enjoy significant brand awareness within their
geographical region providing for a lower per lead cost when
advertising through print, radio and television. The advantage
of a bank over traditional distributors is the lower cost per
sales lead made possible by their sizeable loyal customer
base.
Can establish sales oriented culture among the
employees

To the customers:

Comprehensive financial advisory services under one roof.

i.e., insurance services along with other financial services
such as banking, mutual funds, personal loans etc.
Enhanced convenience on the part of the insured
Easy access for claims, as banks is a regular go.
Innovative and better product ranges

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To the insurers:

Insurers can exploit the banks' wide network of branches for

distribution of products. The penetration of banks' branches
into the rural areas can be utilized to sell products in those
areas.
Customer database like customers' financial standing,
spending habits, investment and purchase capability can be
used to customize products and sell accordingly.
Since banks have already established relationship with
customers, conversion ratio of leads to sales is likely to be
high. Further service aspect can also be tackled easily.

Factors that appear to be critical for the success of bancassurance

are

Strategies consistent with the bank's vision, knowledge

of target customers' needs, defined sales process for
introducing insurance services, simple yet complete
product offerings, strong service delivery mechanism,
quality administration, synchronized planning across
all business lines and subsidiaries, complete
integration of insurance with other bank products and
services
Another point is the handling of customers. With customer
awareness levels increasing, they are demanding greater
convenience in financial services.

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 The emergence of remote distribution channels, such as PC-
banking and Internet-banking, would hamper the distribution
of insurance products through banks.
The emergence of newer distribution channels seeking a
market share in the network.

Bancassurance training for bank employees:

The bank employees will need to be trained in the following aspects of the
insurance business:
Features of the insurance products sold
How to identify and approach a potential customer
Basic insurance needs
Handling basic objections
Other distribution channels and products
Expected roles
Procedures
Remuneration and incentive schemes
Cultures
Customer service
Continuous training and supervision:

Apart from initial training, there should be further training to

support the development of the agent or employee. Some ways in which this can
be done are:
Agency meetings
Bank branch meetings
Area banking meetings
In-house magazine
Training circulars
Area sales seminars
Company library

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 Video tapes
Certified courses
Lectures
Training material booklets

Remuneration of bank employees:

Any commission payable by the insurance company is, as a principle, to

be credited to the bank profit center for the bancassurance operation. The bank
management sets the commission level for each manager and employee engaged
in the bancassurance operation.
Selling in the bank branches (by employees or by financial
advisers): For simple packaged products: employees could be
rewarded with gifts and/or salary increments based on their selling
performance in promoting both banking and insurance products.
Such performance could be quantified via the use of a points
system where by the various products are allocated as a number of
points.
Warm leads: In return for providing warm leads, the bank will get
a share, say 50%, of the normal first year commissions.

A basis is needed for allocating this amount between branch staff (who
provide the warm leads) and the bank owners. A possible basis would be:
25% 25% 50%.

The structure shown above generates benefits as follows:

Financial rewards for employees who generate warm leads
Financial rewards for managers and other staff of the bank branch
who have supported bank activities while the assurance business
was being generated.

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 Group awards or bonuses are more desirable when the contribution of
the individual employee is either difficult to distinguish or depends on group
cooperation.

1.2 A) NEED FOR THE STUDY

Today’s banking business is not the one we have seen in the past. It has
become much more diversified. With the shift in the customer preferences from
deposits to investments, intense competition etc., the banks saw their profit
margin declining. Thus it has become imperative for the banks to retain the
customer by providing more value added services under one roof as well as to
find alternative ways to generate more income. As bancassurance provides the
best possible solution to all these, most of the banks nowadays have started selling
insurance products to its customers. HDFC bank is also having a tie up with its
subsidiary company HDFC Standard Life Insurance for selling Life insurance
products to its retail customers. Hence there is a need for the study to know
whether HDFC bank has been benefited out of bancassurance by way of financial
analysis and to suggest the areas where they can make use of and converge the
attention of the bank if any, is required.

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 REVIEW OF LITERATURE

2.1 Bancassurance - A Global Breakdown:

It is important to outline the impact that bancassurance has had on

differing regions around the world, as well as looking at the major regulations that
impact the further growth of bancassurance. Below, is provided with a brief
synopsis of bancassurance markets in certain key areas.

EUROPE:
Bancassurance is a construct of Europe (France in particular) and this
perhaps helps explain why it is such a phenomenal success within certain
European markets. Largely the 1989 Second Banking Coordination Directive
motivated the large influx of banks into insurance within Europe in recent years.
Currently, the penetration levels are fairly stable in Europe, since bancassurance
in the majority of Western European countries (France, Netherlands, Portugal and
Spain) has reached what studies such as Swiss Re. (2002) argue to be maturity.
These penetration levels will only pick up once bancassurance manages to fully
infiltrate Central and Eastern European countries such as Hungary and Poland,
and the Baltic nations. Currently, the final major hurdle for bancassurance in
Western Europe seems to lie in the U.K. where a predominantly strong insurance
board still attempts to resist the bancassurance trend even in the face of
widespread deregulations.

FRANCE:
In France, the success of bancassurance is mitigated by a favorable tax
treatment on life insurance products, lack of competition within the insurance
industry, and an inadequate pension scheme (Bonnet and Arnal (2000). The
pioneer of bancassurance in France is argued to be Credit Mutual, which created
its own life and non-life subsidiaries in the early 1970’s (Sakr (2001)).
REVIEW OF LITERATURE

Bancassurance has seen the most success in the life insurance market, something
that is true for every nation, increasing from 52% in 1995 to account for 69% of
life insurance business n 2000 (Durand (2003), and Turner (1998)). However, as
of late, the banking networks market share of the life insurance market has
remained fairly stagnant, actually dropping over the years to 66% market share in
2001 and 61% in 2003 (Falautona and Marsiglia (2003), Datamonitor (2003)).
This resulted from a combination of falling stock market prices and the banking
network bearing the brunt of lower transfer prices according to Benoist (2002).

This means that banking and insurance companies are overseen separately
within the country. For a conglomerate, the regulator will depend on who is the
parent of the two. for example, if the bank is dominant, then it is the job of the
banking regulator to oversee the company. There are no separates regulators for
financial conglomerates, merely a strong cooperation between different
regulators.

UNITED KINGDOM:
Bancassurers have faced a tougher time in trying to penetrate the U.K.
market, thanks in large to a combination of restrictive regulations and a powerful
insurance governing body. The first move for bancassurers came in 1985 when
Standard Life purchased a stake in the Bank of Scotland. Changes in legislation
soon followed in 1986 and 1988, which made it legal for banks to market
insurance products and set up their own insurance subsidiaries (Sakr (2001)).
Even then, the main type of union between the two was a joint venture, since the
banks placed an emphasis on maintaining the knowledge of the insurer. Twenty
years later, researchers argue that bancassurance is still in its infancy within the
U.K., currently accounting for 15% of new insurance premiums issued (Benoist
(2002),

It is argued that restrictive regulations were detrimental to the growth of

bancassurance within the country and that due to the lack of experience the
REVIEW OF LITERATURE

correct model for the U.K. is still to be found (Hubbard (spring 2001)). Two
benefits of the regulatory system in the U.K. are firstly, that it is based on one
almighty regulator that overseas the different factors of the financial services
industry (the financial Services Authority). This leads to more streamlined
regulations than in other countries that employ functional form regulatory
systems.

SPAIN:
Spain has one of the most developed markets in bancassurance
(Datamonitor (2003)). Current penetration of bancassurers is over 75% of life
insurance business and an ever-increasing proportion of the non-life business. In
Spain, the evolution of the bancassurance market is fostered by the phenomenal
growth within the insurance services industry (life insurance alone has seen 30%
growth per annum over the past 15 years (Durand (2003)). The development of
bancassurance in the Spanish market was facilitated by the well-established
network of regional building societies, and also the cultural mentality that it is
correct to take on risks (Goddard (1999)).

BRAZIL:
In Brazil the laws are in the bancassurers favor, and the banks within the
country control more than 65% of the insurance market (Nigh and Saunders
(2003)), a size that rivals the leading bancassurers in Europe. Furthermore, in
Brazil, bancassurers are assisted by regulations that ban the development of agent
networks (Benoist (2002)).

NORTH AMERICA:
The North American financial services market is the largest in the world
and bancassurance has developed in a differing manner in this region depending
on the country in question. In Canada, there has been consolidated regulation for
more than 15 years and banks are legally allowed to own insurance companies,
but limitations are placed on the products that can be provided (Dorval (2002)).
REVIEW OF LITERATURE

While in Mexico, bancassurance has been a flourishing industry due largely to the
role played by banks in the creation of pension funds since the 1997 pension
reforms.

Bancassurance in the U.S. has, in contrast, faced a very tight regulatory

and legislative environment for many decades. The formation of financial
conglomerates was greatly hindered by the Banking Act of 1933 (Glass-Stegall
Act) and the Bank Holding Company Act of 1956. Only in 1999 did laws become
more favorable to banks offering insurance products, with the passing of the
Gramm-Leach Bliely Act. However, due to the divergence between the state and
federal laws regarding banks offering insurance products, bancassurers still face a
hard time ahead in relation to regulations and attempting to overcome powerful
lobbies that aim to maintain existing hierarchies (Boot (2003)). Currently, only
around 7% of Americans purchase their insurance products through bank
branches (Thomson (summer 2002b)). However, with the ever-continuing
regulatory changes such as the demutualization of insurance companies coupled
with an ageing population, it is widely believed that there will be strong growth
potentials for bancassurers in a mature market such as the U.S.

ASIA AND THE PACIFIC:

Bancassurance in the Asian region has been relatively slow to take off,
with the exception of countries such as Australia, Hong Kong and Singapore
where regulations have been considerable lenient (Swiss Re. (2002)). The trend in
the majority of mainland Asian countries has been for a bank to form ties with a
foreign insurer in order to begin bancassurance operations with around 80% of
these being life insurers, and the financial structure of the operation tends to be in
the form of a distributional agreement. Since bancassurance is still in its infancy
in most Asian countries, it is very susceptible to global changes. The Swiss Re.
(2001) study argues that one of the major threats to the growth of bancassurance
in the region is a U.S. or EURO economic slowdown.
REVIEW OF LITERATURE

Most countries within Asia have only recently begun allowing the
formation of bancassurance operations with the main players listed below. Certain
countries within the region are still holding out against the onslaught of the
bancassurance trend. Vietnam still restricts banks from offering life insurance
products, while South Korea has made certain rules that make it difficult to begin
a bancassurance operation within the country. Nevertheless, bancassurers have
made considerable advancements within the Asian region, having a positive
outlook for future growth. The Swiss Re. (2002) study believes that in few years
from now bancassurers could account for 13% of total premiums collected in
Asia’s life insurance sector.