Everybody wants to share the insurance pie! It's a business that banks have been itching to get into. And now that the guidelines for their entry have been formalised, most of them are simply raring to go. But does the mere fact that banks and insurance companies are both in the business of managing risks give them an edge over others in the insurance business? Or are they chasing the pot of gold at the end of the rainbow?
Their strengths, at least as far as public sector banks (PSBs) are concerned, are undoubtedly their widespread branch network and, of course, their largely under-utilised staff. With a network of more than 60,000 branches spread over every nook and corner of the country, PSBs have an unassailable advantage in an industry where a good distribution network can make all the difference. Add to this, the low penetration of insurance in the country insurance premia accounts for less than 2 per cent of GDP as against close to around 10 per cent in most of the European countries the fact that a few other domestic players will be able to cough up the Rs 74 crore needed for entry or meet the stringent conditions laid down by the IRDA .
Global experience, however, is mixed. Apart from the US, where, till recently, the Glass-Steagall Act prohibited banks from owning insurance companies and vice versa, 'bancassurance' or the phenomenon of banks offering both traditional banking products as well as insurance products is not exactly new. Yet, it has remained confined to a few countries in Europe, France, Belgium and Italy.
The reasons are two-fold, one cultural and the other institutional. In countries where the equity culture among retail investors is not well developed and the bulk of retail savings is held in the form of bank deposits, it is easier for banks to persuade customers to shift their money from banks to life assurance products. Where insurance products are of the plain vanilla type, and hence not dependent on expert advice from independent advisers, bank branches are able to do the job just as competently as insurance offices.
Going by this, banks in India would seem to start off with an advantage. Despite the spread of equity culture, equities still account for a relatively small part of household savings. According to the RBI's just released booklet on macroeconomic and monetary developments in 1999-2000, the share of equities in gross financial saving, after peaking at 13.5 per cent in 1993-94, declined to 2.6 per cent in 1998-99.
Vanilla products today dominate the insurance market in the country. Public sector banks can easily sell these products through their branches. However, this may soon change. The huge mop up by mutual funds during the last fiscal is a reflection of the public's shifting preferences between bank deposits and equity. And with the private sector set to enter the insurance sector, the market is bound to see the launch of newer and more customised products backed by strong service orientation.
Moreover, for all the broad similarity in their businesses, banks and insurance companies actually have nothing much in common. Banks are in the business of intermediation between borrowers and lenders. For them, the major risk arises from mismatches between assets and liabilities.
Insurance, on the other hand, is a mechanism for risk transfer. It is based on the law of averages and probability and delivers only when there are a large number of homogeneous units all exposed to the same risk. The cost is always known only much later since the main component of cost the claim arises only at a future date and that too, not always!
Banks, therefore, need to quickly disabuse themselves of the notion that the insurance pie is theirs for the taking. It's going to be an uphill task for them, one that will call for a sea change in attitude at each and every level. And that's not going to be easy for our desi PSBs. It's definitely time for them to brush up their front office manners.
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