BankAssurance: Marriage of banking and insurance

By C. R. L. Narasimhan

With the insurance sector opening up, there is great interest in knowing how far the expansion of the insurance market will alter the contours of the existing financial structure. The expansion of banking into the insurance industry is inevitable.

At the same time the Chairman of the Life Insurance Corporation, Mr. G. N. Bajpai, has said that his corporation may acquire a bank.

In April 2000, the Reserve Bank of India permitted banks to enter the insurance market. Although no bank figures among the first few licensees announced recently, there is a lot of speculation on how far the proposed mingling of banking and insurance services will fare in this country. There are inevitably plenty of regulatory and other issues to be addressed. In its recent Report on Trend and Progress of Banking in India 1999-2000, the RBI touches on these issues.

In terms of the existing guidelines, commercial banks can take any of the three routes to enter the insurance business, namely, undertake distribution of insurance products as an agent of insurance companies on a fee basis; make investments in an insurance company for providing infrastructure and services support; and set up a joint venture company for undertaking insurance business with risk participation.

It has been well recognised by the RBI that there could be a competitive as well as complementary relationship between banks and insurance companies. For instance, in the life insurance business where the insurance contract (policy) is for a long period, the premium can be split up into two parts: (a) for risk coverage and (b) towards savings. The latter obviously is something that banks target as part of their core business.

Banks are the chief purveyors of the financial services to a large number of individuals and small borrowers. On account of their geographical reach and access to customers, banks could logically be a channel for the distribution of insurance products. On the other hand, bank services (as they are understood today), insurance selling and fund management are all inter-related activities having inherent synergies. Therefore, selling of insurance by banks could be beneficial for both banks and insurance companies. In Europe, this synergy between banking and insurance has given rise to a novel concept called ``BankAssurance''. Simply stated, bankassurance means that a package of financial services that fulfil both banking and insurance can be offered at the same time and at the same place.

This concept in turn impacts on the ongoing debate over ``Universal Banking''. In an extended sense, universal banking will include not only a combination of commercial and investment banking but insurance as well.

As the rural market is going to be a key area for future insurance thrust, the RBI will surely contemplate using the co- operative credit structure for spreading the insurance habit.

In the evolving nature of RBI guidelines, regulatory concerns will be of paramount importance. As of now the RBI has said the banks can neither take up insurance business departmentally nor set up a separate subsidiary. There has to be an ``arms length'' relationship between the bank and the insurance entity so that risks inherent in the insurance business do not enter the banks' balance sheets.

Second, the guidelines make a distinction between banks that can set up a joint venture and hence share in the risks and those which merely distribute insurance products.

The agency function, in fact, will become a key source for augmenting many banks' income. A few banks alone will do full- fledged insurance business.

As for a possible regulatory overlap between the RBI and the Insurance Regulatory Development Authority, the RBI has said that the holding of equity by a promoter bank in an insurance company is subject to compliance with the current IRDA regulation.

But the authority to grant case-by-case permission to banks to enter insurance business is vested with the RBI.

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Section  : Business
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