Banks and NBFCs take a liking to General Insurance

If you've been tracking the banking and financial services space lately, you would probably not have missed the surge in interest expressed by banks and non banking financial companies to enter the general insurance sector in the country. This at a time when banks are particularly keen to increase their fee based income and NBFCs are exploring newer avenues to diversify their business portfolio.

Listed below is a summary of some of the recent announcements and news bytes appearing in the press:

1. UCO Bank - Announced its plans to enter in to a JV with three other partners by September 2009. Reportedly, a PSU bank, a foreign bank and another foreign general insurance company. The banks intends to have a 30% stake and would invest INR 45 Crores in the proposed JV.
2. Corporation Bank - Engaged in discussions with a foreign player to establish a joint venture including a third partner.
3. IDBI Bank - The three partners who established IDBI Fortis Life Insurance - IDBI, Federal Bank and Belgium based Fortis International may float a general insurance company.
4. Union Bank - Earlier this year, the CMD of the Bank had announced plans to enter the general insurance sector
5. Religare - US based Liberty Mutual is said to have approached Religare Enterprises to establish a general insurance JV.
6. Magma - Although relatively less popular, a listed NBFC based out of Kolkata, Magma Fincorp has entered in to a JV agreement with HDI-Gerling of Germany to set up a new general insurance company

Already, the State Bank of India is in advanced stages of setting up its JV company along with IAG of Australia following the R1 approval received earlier last month. The company is looking to start operations before the end of FY2009-10.

Similarly, engineering giant Larsen and Toubro is in the process of setting up its own general insurance company. Reports indicate that its proposed JV with Travellers of the US did not fall through and that the company has decided to go solo. While there's little doubt that the company would be eying to leverage the captive business generated from the various L&T projects, it is the extent to which the company would be seeking to leverage the synergies and capabilities of L&T Finance, more particularly distribution, that would define whether it manages to make it through the ranks.

What is even more concerning is that these companies are vying to enter the GI space at a time when the industry has been reporting huge underwriting losses (excess of claims over premium). Private general insurance companies almost doubled their losses in FY2008-09, having reported losses to the tune of INR815 Crores as against INR416 Crores in FY2007-08, despite registering a 12% growth in premium income. The GI sector is witnessing cut throat competition, particularly group health, with many companies facing losses on account of third party motor insurance. In fact, the IRDA has called upon general insurers to reflect upon their underwriting losses, product, pricing and underwriting practices. It has also asked GI firms to address the issue of huge expense ratios which stood at 30% in FY2008-09.

While one may question the intent, one hopes these banks and NBFCs would stay put in the long term. In the recently launched guidelines on Corporate Governance, the IRDA has prescribed a minimum lock-in period of five years from the date of certificate of commencement of business for the promoters and no transfer of shares of the promoters within this period. With the M&A and IPO guidelines to be released soon by the IRDA, the field would be set open. Only time will tell whether some of these banks and NBFCs reconsider their plans or decide to buy stake in an existing venture or for that matter adopt a wait an watch approach.

Banca dethrones Agency - SBI Life tops the MRDT league

Reportedly, SBI Life has become the first Indian Life Insurance company to be ranked number one in terms of having the maximum number of agents for the Million Dollar Round Table, commonly known as 'MDRT'. In doing so, it has pipped its Korean counterpart Samsung Life with a total of 2677 members in calendar year 2008.

What is noteworthy is that of the 2,677 MDRTs, more than a third i.e. 1010 MDRTs were from the bancassurance channel. Essentially, what it means is that these are State Bank of India staff who've been recognised on the same lines as agents for MDRT purposes. Surprisingly, they are not on the roles of SBI Life.

So how did SBI Life manage to make the cut?

Understandably, these front line sales advisers at the State Bank of India branches known as Certified Insurance Facilitators have been given due recognition as agents since they are more or less dedicated towards life insurance sales except that they run their sales activity at the bank premises. Quite arguably, there are stark differences between agents and bank staff such as access to a ready customer base, customer profile, lead generators, salaried income, etc. Agents on the other hand have to generate their own leads, spend considerable time on the field, do not receive a fixed salary, need to establish their own office space and credibility, etc.

So how has this kind of an arrangement been recognised? SBI Life had approached the MDRT club and pushed its case to be allowed for a special dispensation on account of the sales model adopted by the CIFs claiming to receive no support from SBI Life for sales closures. Just that they operate out of the bank branches while in effect they operate just like an agent. And as one would have to believe, the MDRT club has approved the case amending its rule books.

Once tagged as India's leading bancassurance player, SBI Life has established itself as a credible player on the Agency front. It remains to be seen whether the company would like to reestablish itself as a bancassurance oriented company or would be happy to continue on the agency led growth path eyeing the IPO route in the near future.

What is ailing bancassurance...? A different spin

As per the IRDA Annual Report FY2007-08, banks acting as Corporate Agents contributed 18.89% of the total individual new business premium for the private life insurance companies during FY2007-08. If LIC is accounted for, the contribution of bancassurance is further reduced to just about 8%, 7.97% to be precise. While the figures for FY2008-09, have not yet been released by the IRDA, the widespread expectation is that the contribution of bancassurance may have reduced further or remained pretty much the same. It does riase many questions about the effectiveness of bancassurance as a channel and its importance in the Indian context.

Let's me put the above in perspective. Most banks in the country today have a distribution arrangement with one life insurer or the other; in some cases multiple on account of the group insurance route allowed by the regulator. As at the end of June 2008, the total number of branches of Scheduled Commercial Banks including Regional Rural Banks and Local Area Banks stood at 76,518. In contrast to the above, at the end of March 2008, the number of offices of life insurance companies including that of LIC of India stood at around 8900.

The bank branches comprise of 31,127 rural branches (40.67%), 17,858 semi-urban branches and 27,533 urban and metropolitan branches. As against this, the offices of life insurance companies comprised of 939 metro offices, 1637 urban offices, 3540 semi urban and 2797 (31.38%) in other locations (consider rural).

So despite the access to a huge bank branch network, what is ailing bancassurance in India?

While there are numerous challenges and operational issues in terms of training, dedicating bank staff for insurance, incentivisation of staff, union issues, huge handholding on the part of the insurance company staff, etc, part of the issue also lies in how the entire bank branch network is structured.

It is a known fact that foreign banks and new generation private sector banks have taken to bancassurance much more than their PSU counterparts, displaying greater capabilities in terms of customer segmentation, use of technology, targeted products, dedicated staff, management buy-in, etc. It is worthwhile to note that branches of foreign banks are mostly concentrated in the urban and metropolitan areas with no presence in rural areas. Similarly, new private sector banks have just about 6.3% of their branches in the rural areas. What this has meant is, foreign banks and private banks with their enhanced sales and distribution capabilities and improved use of technology have effectively managed to target customers in the larger metros and to a certain extent Tier II and Tier III cities, making bancassurance an urban centric distribution model.

By some estimates, while foreign banks were earlier contributing a significant percentage (thought to be around 70%) of the new business premium collected by banks, the percentage has now come down. Large private domestic banks such as ICICI Bank, HDFC Bank and Axis Bank has emerged as dominant players. Even relatively smaller banks like Syndicate Bank are performing very well. However, the challenge is with PSU Banks and old private sector banks. They have yet to establish themselves as serious players in the bancassurance space.

Nearly half of the total bank branches are operated by nationalised banks, of which around 35% are in the rural areas. What is even more interesting is the fact that of the 34,426 centres (read locations) served by scheduled commercial banks, single office centres accounted for 38.3% of bank offices. In rural areas, 84.9% of the banked centres were single office centres. This is the real challenge. In rural areas, even banks (largely PSUs and old private sector banks) do not have the distribution capability, manpower support, etc. What many banks have been able to do is through the group insurance route cover members of Self Help Groups. However, the numbers covered continue to remain in thousands. Unless this puzzle is cracked, it would be difficult to envisage bancassurance playing a critical role in helping increase the penetration of life insurance in India which is currently pegged at around 4% (as per a recent Swiss Re Report).

SBI Life - No more 'Banking on Bancassurance'

In its 3 August 2009 edition, Businessworld magazine in India carried an article titled "Banking on Assurance" on SBI Life, arguably India's leading bancassurance led life insurer. Worth noting are a few stats.

- Bancassurance bought in 28% of SBI Life's New Business Premium in FY2008-09 and 39% in FY2007-08.
- Overall channel mix - Bancassurance (28%), Agency (40%), Alternate channel (1.4%) and Group corporate (30%).
- The company started building its agency force in 2005 and has about 70,000 agents on its rolls in addition to 450 offices.
- Having posted a net profit of Rs34 Crores in FY2007-08, the company reported a loss of Rs26 Crores in FY2008-09.
- AUM at the end of FY2008-09 stood at Rs14,964 Crores and currently stands in excess of Rs18,000 Crores
- Advertisement spend in FY2008-09 was Rs15 Crores as against

What is worth noting is that the percentage of new business through the bancassurance channel has been dropping over the last few years. In fact, it generates a little over a quarter of the new business currently. In a way, SBI Life is no more a pure bancassurance player. In percentage terms, players such as MetLife and Aviva generate more business through their bancassurance channel than SBI Life. By some accounts, the promoter Bank of SBI Life, the State Bank of India has just been able to activate less than or about half of its entire bank branch network.

The company which thus far enjoyed lower costs of distribution through higher dependence on the bancaasurance channel is fast set to lose that advantage. In closed room discussions, Insurance Company CEOs admit that agency is a difficult monster to control once it starts growing. No wonder then, the company reported a loss in FY2008-09 having reported profits in the previous three years and having achieved the fastest breakeven amongst the leading private players. With life insurers including SBI Life keen to take the IPO route, it would be interesting to see how analysts and investment bankers reason and account for the above changes.

SBI Life rejigged its senior management positions a few months ago and is set to be led by a new CEO, MN Rao from 1 August 2009. With both the CEO and the Deputy CEO moving, it surely won't be an easy ride for the insurer with the industry still facing some tough times in light of the prevailing business conditions.