Bancassurance has traditionally been practiced by many banks in a 'passive bancassurance' mode. Car insurance is bundled with every vehicle loan; credit life insurance is packaged with personal loans; mortgage life insurance with home loans: the list goes on. There is a good churning of fee income already and banks may be quite pleased with this state of affairs. Offering insurance under passive bancassurance is incidental and is secondary to the sale of core banking products. The goal is either risk management, or the protection of a banks' assets, or an improved offering in case of liability products, or deposits. Fee income ranks last in the sequence of management objectives.

'Active bancassurance' on the other hand is the active sale or distribution of insurance products to a bank's customers. It is driven by clear objectives of revenue, creating a one-stop-shop and developing customer retention and measured against stated monetary targets. These sales take place on a stand-alone basis and may involve different products and multiple distribution channels to make the whole strategy successful. The revenue from some bancassurance products is so large that it may dwarf the interest income from a similar looking core banking product. The banks who have tasted blood are already at it and are using it in a big way to push their profits.

"THE ECONOMICS OF ACTIVE BANCASSURANCE AND ITS FLOWING FEE INCOME IS TOO SIGNIFICANT TO BE SACRIFICED FOR THE SAKE OF RESURRECTING A FLEDGING ASSET OR A LIABILITY PRODUCT OF A BANK."

The current strategy of passive bancassurance needs a paradigm shift in order to exploit its full potential. The banks that have not moved to an active bancassurance mode have a huge opportunity cost and competitive disadvantage. The economics of active bancassurance and its flowing fee income is too significant to be sacrificed for the sake of resurrecting a fledging asset or a liability product of a bank.

Banks make interest income from the difference between the lending and borrowing rates charged to customers. These rates are largely dependent upon the 'bank rate' and 'repo rate' controlled by the respective central banks. Current market conditions however, have put a strain on the interest income as cost of borrowing funds has risen substantially and lending, particularly term lending, has become too competitive to provide worthwhile interest income. An increased cost of funds can only be offset by the smart deployment of those funds into various asset classes; and with intense competition in the asset marketplace, it is no mean feat for banks. Bancassurance steps in here to compensate for the loss of interest income and helps to stabilise the profits.

The sale of bancassurance products gives unbridled advantages to the banks. As an almost virgin market, with little or no competition, extremely high level of fee income on investment cum protection products and nil balance sheet risk for the bank; it stands in stark contrast to highly competitive traditional banking products. The banks who take the initiative will have first mover advantage and the banks that do not will have a huge opportunity cost staring at them.

The best way to analyse the importance of insurance fee income on the balance sheet of a bank is to measure it against the interest margins. Commercial insurance on large and complicated projects can fetch a substantial fee income as insurance premiums tend to be high. The detailed analysis reveals that bancassurance fee income can be used to partly offset the interest reduction in a competitive commercial lending environment. Similarly sales of unit-linked investment products from an insurance company can get more fee income than total interest income generated from a deposit product for a similar amount.

A bank has the opportunity to cross-sell insurance products to each segment of its customer base: single premium structured investment products to high net worth individuals, unit linked plans to salaried customers and endowment policies to the middle income segment can be easily sold and can prove to be a gold mine. Similarly, commercial policies like property insurance, marine insurance, export credit and all risks insurance can be sold to corporate customers resulting in complete customer fulfillment. Banks should also strive to provide tailor-made products like home insurance, travel insurance and health insurance to its mass customer base.

The focus should be on establishing a one-stop-shop which acts as 'allfinanz' and ensures that customers, whether individual or corporate, look no further for any of their financial requirements including insurance and financial planning.

Banks should ideally strive to take their fee income from bancassurance to a level equivalent to nearly 50 per cent of a bank's overall fee income. They should also strive to cross-sell at least one insurance policy to each customer, whether individual or commercial.

Bancassurance is a tool that can be used by banks to not only maximise profits, but also to reduce its balance sheet risks with the exception of when the bank becomes involved in insurance risk-taking business. It is also a way of reaching out to its customers and retaining them. The sale of a 10-year annual payment investment plan ties the customer to the bank for the next 10 years. In the coming days, when banks try to outdo each other in the traditional banking products marketplace, bancassurance will be the key differentiator to determine and influence a customer's choice of his preferred bank.