Last week, we dealt with the ‘Strengths’ and ‘Weaknesses’ of the prospects of bancassurance in India from banks’ viewpoint under the SWOT (S – Strengths, W – Weaknesses, O – Opportunities and T – Threats) framework. Today, in the concludingpart of the article, we focus on the ‘Opportunities’ and ‘Threats’.
Dr Manas R Das
- The primary objective indicators of insurance potential in a country are: (a) insurance penetration, i.e., premium as percentage of GDP and (b) insurance density, i.e., premium per capita. In terms of both the measures – 3.70% and USD 74 respectively – India ranks very low, globally. This implies that considerable potential does exist in both life and non-life areas for the insurance industry as a whole and bancassurers too.
- Today, life, in general, has become more uncertain and riskier. Not only man-made dangers (burglary, accidents, terrorist activities, hijacking, etc.) are on rise but also natural catastrophes (earthquakes, floods, cyclones, etc.) are becoming less infrequent than ever. One certainly does not welcome such uncertain times, but these uncertain times create opportunities for insurance business.
- The financial environment has become equally uncertain due to deregulation and financial scams. Interest rate deregulation, combined with pursuance of bringing in a soft interest rate regime, has resulted in rates of interest on all financial instruments coming down substantially. Against this backdrop, life products, at least, give tax benefits and future security. In fact, taking tax benefits into account, the return on certain life products is more than that on bank savings products, as interest earned on the latter is taxable. Thus, life products still have a lot of future even though there are several competing products from banks and other financial intermediaries. Further, the gap between bank savings products and certain life products is fast narrowing.
- The joint family system, which functioned like an insurance system, is gradually collapsing due to several reasons. More and more nuclear families are coming up, and with this, the demand for life cover for the head of the family and family members is also rising.
- An outcome of the above-mentioned phenomenon is that the elderly members in families are being gradually required to manage themselves either out of their own volition of not to become dependent on their children or being compelled in one way or the other by their children. Thus, the future older generation has to plan for their financial safety and security at their old age, and the awareness is also increasing in this regard. This augurs well for life insurance products.
- Improving economic conditions, coupled with higher education and small family concept, has resulted in savings orientation in the economy. The process has been catalysed by higher awareness about savings culture being spread through various media events by financial institutions.
- Some of the potential areas for bancassurers include health insurance, travel insurance, credit insurance, and insurance of brokers and other capital market intermediaries.
- Today, as bank branches are the origins for financial needs of any productive venture, these branches can simultaneously sell insurance products to borrowers, particularly, non-life products, instead of obtaining the same non-life cover from other insurers. Such one-stop mechanism also saves borrower many headaches.
- Bancassurance provides a good opportunity for the Indian banks to increase their fee-based income which can compensate for the loss in spread. Moreover, in cases where insurance business is carried out as a subsidiary, the dividend income from the subsidiary can add to the parent bank’s profitability and return on assets.
- The foreign direct investment limit in insurance sector is hiked to 74%.
- Bancassurance products, being “push” products, require a totally different mindset and work culture. Whether the staff of banks can achieve this is a big question.
- Further, since life products and banking products are similar, efforts to market the former will be less cumbersome by the bancassurance company. However, non-life products are entirely different from life or banking products and are far too complex, with high counter-party and reinsurance risks, and hence, it would be difficult for bancassurancecompanies to enter into general insurance business immediately, until and unless they develop and retain the required skill.
- The manner in which insurance profits develop poses a threat to successful operation of bancassurance.
- The Life Insurance Corporation of India and the four subsidiaries of the General Insurance Corporation are well established in their respective lines of businesses. Opening up the insurance sector has also awakened them, and being old players, they would like to take their competitors, who are new, on the horns. Thus, they will strive to become more competitive, and be buttressed by their financial and non-financial strength, including the lobbying power. This would pose a threat to the new bancassurers.
- Success of bancassurance would also depend on the extent to which as also how fast the technology being used for banking operations can also be adapted for meeting the technology requirements for insurance business. Otherwise, banks will have to incur large investments for putting in place the technological infrastructure for bancassurance operations.
- In the case of failure of bancassurance operation, the bank runs the threat of image risk. Similarly, the threat of cannibalization would also exist.
About the Author:
Dr. Manas R. Das is a former senior economist of State Bank of India. He has over 30 years of experience as an economist in two large commercial banks. Academically, he is a gold medalist in Bachelor of Arts with Economics Honours from Utkal University, followed by Master’s in Economics from Delhi School of Economics and Doctorate in Economics from Gokhale Institute of Politics and Economics. He is also a Certified Associate of Indian Institute of Bankers. He has won several awards, besides being a prolific writer.
READ PART-1 HERE.