India’s Growing Bancassurance Market Looks to Reorganize

India's insurance industry will need a reality check on its growing bancassurance distribution channels, which require adjustments to enhance the sophistication of its products, partnerships and regulatory development.

Bancassurance is expected to become a major distribution channel for India's private insurance sector, contributing 40% of premium income by 2012, according to consultancy Towers Watson in a report.

In the early days, acquiring bancassurance partners was high on insurers' agenda. Insurance companies are now looking more seriously at the productivity and profitability of bancassurance partnerships, said Rajagopalan Krishnamurthy, managing director of India at Towers Watson.

In India, most major banks formed joint ventures with life and nonlife insurance companies, mainly foreign insurers. Only one or two big banks are left without any bancassurance tie-ups, said Krishnamurthy in an interview.

The foremost issue is the regulatory policy of allowing one bank to tie up with only one life and one nonlife insurer, said Towers Watson in the report. The second wave of insurers entering India have been left with no major bancassurance options.

"The regulators are looking at the development closely," said Krishnamurthy. "A committee is set up to review the bancassurance market picture in the country." A proposal to move to "open architecture" for multiple partnerships is under discussion with strong arguments in favor.

"We would expect that when the regulators finally move in this direction, they might do so carefully, and lay down a calibrated approach as in the approach with many policy reforms in India," said Towers Watson's 2010 bancassurance report.

The capital position of banks in bancassurance ventures is a major concern for regulators because life insurance requires substantial capital in the long term. Also, Krishnamurthy said "life insurance business takes a long time to break even." Therefore, banks are now not allowed to hold more than a 51% stake in new bancassurance joint ventures.

For existing one-to-one bancassurance ventures, Krishnamurthy noted companies are seeking initial public offerings in the stock market to dilute the banks' shares ownership, and to raise funds for the business. Life bancassurance ventures such as ICICI Prudential Life Insurance Co., HDFC Standard Life Insurance Co. and SBI Life Insurance Co. have plans to list on the stock exchange.

Multiple Partners

In the beginning, bancassurance joint ventures were mostly one-to-one bank and insurer partners. The trend now is for multiple banks to enter a joint venture with an insurer, noted Krishnamurthy. Banks do not want to be in the position to provide all the capital in a venture.

In 2007, Sompo Japan Insurance Inc. formed a nonlife venture, Universal Sompo General Insurance Co. Ltd., with multiple banks. State-owned Allahabad Bank and Indian Overseas Bank hold a 30% and 19% stake in the venture, respectively; privately-owned Karnataka Bank has 15%; Dabur Investment has 10% and Sompo Japan has 26% (BestWire, Nov. 27, 2007).

In 2009, Dai-ichi Life Insurance Co. Ltd. formed a three-way life venture, Star Union Dai-ichi Life, with Bank of India and Union Bank of India, with respective 51% and 23% stakes. Dai-ichi Life owns a 26% stake.

Joint venture and third-party distribution partners are both popular bancassurance models in India, said Krishnamurthy. Banks earn commission fees as an important source of income. For smaller banks, Krishnamurthy said bancassurance is part of their strategy to retain customers.

Banks are exploring the formation of separate distribution companies, which could be in a joint venture or a wholly-owned subsidiary, to make insurance distribution a more focused activity. Krishnamurthy said regulators are "supportive" of this new trend. Two listed state-owned banks are planning to form distribution companies.

While the regulator is evaluating the multi-distribution option for bancassurance, it has sought greater transparency for commissions and other payouts made by life insurers to bank partners. "The regulator has also spoken in favor of reducing the levels of commission and fees for products sold through bancassurance channel," said Towers Watson in its report.

Regulation would be tightened for the supervision of bancassurance to oversee banks in a more responsible manner, noted Krishnamurthy. Basically, regulators do not want banks to form more than one bancassurance partnership so as to avoid conflicts of interest.

For insurers, the market has highlighted the uncertain nature of partnerships with banks. In the past year, 40% of life insurers surveyed by Towers Watson admitted that they lost one or more bancassurance tie-ups.

Also, bancassurance partnerships have undergone structural changes in India. The survey found over 80% of respondents indicated they expect to acquire between one to three banking distribution partners in the coming year. Also, about 45% of life insurers reported the persistency of their bancassurance business is lower than 75%.

In many cases, the report said banks tend to view insurance distribution as short-term partnership, even with annual renewable contracts. Therefore, the Insurance Regulatory and Development Authority recently stipulated a minimum tenure of three years for bancassurance alliances.

Banks dominate India's financial scene, with about 48% of household savings held in bank deposits, and banks provides over 60% of the credit needs of the corporate sector. Commercial banks are usually the first choice for multinational insurance companies for distribution partners to enter the Indian market, said Towers Watson.

India has 27 stated-owned banks, 22 private banks and 31 foreign banks with 64,600 branches. In addition, there are 1,720 urban cooperative banks in cities and large towns with 7,500 branches, and 96,000 rural cooperative credit institutions.

The banks' huge penetration networks provide access to 420 million account holders across India. Bancassurance is taking "an ever increasing share of business" from traditional agency channels, said Towers Watson.

In the fiscal year ended March 31, 2009, banks and nonbanking financial companies generated 100 billion rupees (US$2.2 billion) of new business for private life insurers, representing 29% of total new premiums. The share of bancassurance premiums for the top 10 life insurers ranged from 14% to 58% of their total business, according to Towers Watson.

Unlike in an agency model, Towers Watson said bancassurance joint ventures tend to be less complex, involving fewer tiers of supervision and management. As for sales and marketing, the model enables more direct liaison and supports with distribution branches contributing to better capital efficiency and lower overall cost ratios.

Remaining Issues

Despite the optimistic outlook, India's bancassurance is facing a number of issues in product development and channel management. One urgent issue is the poor sales culture in most banks, said Towers Watson. The banks often lack an incentive system to motivate the staff to cross-sell insurance products.

Customer data and relationship management are inadequate in India. Public banks which control more than 90% of total customer business are generally indifferent to recording customer data and managing available information, said Towers Watson.

In India, bancassurance distribution is "highly skewed in favor of unit-linked products," which accounted for more than 85% of premium income generated from this channel. "While the major reason for this is the high commission rates for saving-oriented insurance products, other regulators in India overseeing the capital markets and pension industry have recently began a subtle attack on the situation," said the report.

In the nonlife sector, bancassurance generated about 50% to 80% of new business for private insurers. Nonlife insurance companies tapped the strength of bancassurance network because retail distribution was not developed in a big way under the former tariff regime, according to Krishnamurthy.

The expansion of nonlife business to personal lines from commercial lines also attributed to the growth of bancassurance in India, noted Krishnamurthy.

Motor insurance was the dominant personal line, contributing half of nonlife bancassurance premiums, followed by health insurance with about 12% of premiums, according to the report. About 86% of nonlife insurers indicated they were selling personal accident and home content insurance through bank partners.

(By Iris Lai, Hong Kong bureau manager: [email protected])