What Type of Insurance Is in Banking? A Complete Guide
Banking and insurance are two most significant financial system sectors and they are inseparable in several aspects. Although banks are concerned with offering savings and loans, as well as investment services, insurance involves offering financial cover in the event of risks. In the context of banking, insurance usually refers to financial products or guarantees that protect depositors, borrowers, lenders, and the banks themselves from financial loss.
Such a connection between banks and insurance may be expressed in two principal forms:
Banks as distributors/partners of insurance companies (insurance by banks) Banks are distributors/partners of insurance companies which offer different products to customers (so-called bancassurance).
Banking-related insurance schemes- Special insurance schemes that cover the bank, clients, or financial transactions.
Let’s explore these in detail.
1. Getting to Know Insurance in the Banking scenario
When we discuss insurance in banking we usually refer to the financial protection services that involve money risks, loans, investments or bank activity.
Some key purposes include:
Depositor protection (their money is not stolen in the event of bank failure)
Insuring banks (against fraud and bad debts and operational losses).
Insuring borrowers (against their inability to recover loans in case of a disease, loss of employment or even death)
Adhering to the regulatory requirements.
Simply put, the insurance within banking system serves as a cushion against the whole banking system.
2. Major Types of Insurance in Banking
The banking related insurance can be divided into five large categories namely:
One of the most significant safety banking measures is the deposit insurance. It is a way of making sure that in case a bank goes bankrupt or gets insolvent, the depositors will at least receive part of the money they deposited.
Example in India: Deposit Insurance and credit guarantee corporation (DICGC) is an insurer of Bank deposits up to 5 lakh per depositor per bank.
International Case: In the USA, deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to 250,000 dollars.
Coverage: Savings accounts, fixed deposits, recurring deposits and other such accounts.
Purpose: Boosts public confidence in the banking system.
Loan or credit insurance is used to cover the lenders (banks) against the risk of non-recovery of loans by borrowers.
Types:
Mortgage Insurance - Covers the bank in case of default of a house loan borrower.
Credit Life Insurance- It settles the outstanding loan balance in the event of the death or disability of the borrower.
Payment Protection Insurance (PPI) - Covers the repayment of loan within a fixed period under the circumstance that the borrower is not working, becomes ill or even involved in an accident.
Credit Guarantee Schemes- Governments or agencies guarantee small business loans so as to be able to lend.
Example:
Credit Guarantee Fund Trust in Micro and Small Enterprise (CGTMSE), in India is a credit guarantee offered by the banks to small businesses to lend to them.
C. Bankers’ Blanket Bond (BBB) / Crime Insurance
Banks deal with a lot of money and are faced with the risks of theft, fraud, cyber crime and forgery. A Bankers Blanket Bond (BBB) is a specialised insurance policy that protects these operational risks.
Coverage may include:
Loss from employee dishonesty or fraud
Theft or burglary of cash, securities, or other valuables
Forged cheques, drafts, or securities
Losses from counterfeit currency
Purpose:
To secure the assets of the bank, and run the bank smoothly.
Bancassurance can be described as banks and insurance companies collaborating with each other to distribute insurance services in the bank network.
Examples of bancassurance products:
Supplied by the export credit agencies (ECAs).
Health Insurance: Hospitalization cover, critical illness cover
General Insurance: Motor insurance, travel insurance, home insurance
Benefits for banks:
Additional revenue through commission
Enhanced customer service through the provision of one stop financial solutions.
Benefits for customers:
Facilitated access to insurance products in the course of banking transactions.
Simplified premium payments directly through bank accounts
E. Trade Finance and Export Credit Insurance
Insurance is a major factor in international banking in covering non-payment risks of banks and exporters in international trade.
Export Credit Insurance:
Guaranteed by the export credit agencies (ECAs).
Protects against payment defaults by foreign buyers
Covers political risks like war, currency restrictions, and government actions
Example:
Export credit Guarantee Corporation of India (ECGC) in India covers bank finance loans on trade finance.
3. What is the significance of insurance in Banking?
1. Stability and Trust:
Insurance becomes less fearful of the loss, and this contributes to the confidence of the people on the banks.
2. Risk Management:
Banks are subject to operational risks, credit risks and market risks- insurance moves some of these risks to the insurers.
3. Financial Inclusion:
Deposit insurance and credit guarantees have increased the willingness of more people to use banks.
4. Regulatory Compliance:
In most of the countries, there are certain insurance policies that are required by the banks in order to be legal.
5. Revenue Diversification:
Banks receive commissions through bancassurance of selling insurance products.
4. Regulatory Framework
Banking insurance is extremely controlled to safeguard the interest of the population and ensure stability in the system.
In India:
Banking activities are governed by RBI.
The insurance industry is controlled by IRDAI.
DICGC is involved with deposit insurance.
CGTMSE deals in credit guarantees of small businesses.
In the USA:
FDIC for deposit insurance
Office of the Comptroller of the Currency (OCC) for banking regulation
Federal Reserve oversight for risk management
5. Examples of Insurance in Banking Transactions
| Type of Insurance | Scenario |
|---|---|
| Deposit Insurance | A customer deposits ₹10 lakh. Deposit insurance protects up to ₹5 lakh. |
| Credit Life Insurance | A home loan borrower dies. The insurance covers the outstanding loan. |
| Bankers’ Blanket Bond Insurance | The bank suffers a loss due to robbery. This insurance provides coverage. |
| Bancassurance Model | Banks sell insurance policies directly to customers through tie-ups with insurers. |
6. The Future of Insurance in Banking
The interaction between banks and insurance is getting stronger because of:
Digital banking – Easy integration of insurance products into mobile apps
AI and analytics- Improved credit and insurance underwriting risk management.
Cybersecurity insurance- Insurance for growing cybercrime against banks.
Embedded finance - Insurance products provided in a banking service.
In Conclusion
The types of insurance in banking cover a wide spectrum—from deposit protection to credit guarantees, operational risk cover, and bancassurance products.
Their uses are three:
Protect depositors and customers from financial loss
Safeguard banks from operational, credit, and fraud risks
Enhance the financial system on a broader level through establishing resilience and trust.
Modern financial world is a global economy where banks are not only lenders and deposit takers, but they are also risk managers. Bank insurance is not a luxury, but a means of stability and financial inclusion, as well as a way of allowing both the bank and the customer to confront any kind of uncertainty with confidence.
