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Best Practices in Bancassurance

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Best Practices in Bancassurance

By Manoj Kumar, ACII (UK), CPCU (USA), ARe (USA), ARM (USA), FIII (India). MBA

President & Managing Partner, Bancassurance Consultants Worldwide Ltd. (BCWL)
Website: www.bc-worldwide.com | Email: manoj@bc-worldwide.com

This article was published in Policy Magazine in July/August 2008 Issue

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Bancassurance is unwinding itself. From being just another offering from a bank’s product basket, it has become an important bookmark in a banks’ strategy document. Extreme competitive pressure on interest income worldwide has led banks to redraw their strategies and demand more from Bancassurance. The result is visible in increased number of tie ups, mergers or cross-shareholding between banks and insurance companies. It is being manifested in different forms all around the world.

The move towards Bancassurance however has been a roller coaster ride; sometimes slow and sketchy and in some cases spectacular. What is it that makes Bancassurance a success? What are the best practices in Bancassurance? What are the pitfalls that must be avoided?

Product Integration

The success of Bancassurance lies in understanding the life cycle of Bancassurance and integrating the product and distribution mix according to the stages of the life cycle. Most Bancassurance partnerships go through three stages: early stage, youth stage and mature stage.

Early stage is basically the passive mode of Bancassurance. This stage involves predominantly product bundling and there is hardly any sales pitch. Simple insurance products like term life, car insurance, home insurance and travel insurance are bundled with core banking products like credit cards or savings account and offered as a packaged product to the bank’s customers. Customers generally don’t have a choice as the cost of insurance is not shown separately but factored in the product being sold by the bank.

Bancassurance moves into the youth stage as the banks’ hunger for fee income grows. Insurance products are sold on a standalone basis rather being bundled. The emphasis is on higher commission (fee income) and therefore sales efforts and processes are beefed up. Typically, whole life, universal life and unit linked investment products are sold at this stage.

The mature stage comes after the bank has gained enough experience and confidence in selling insurance products. There is a desire to do something different at this stage. Risk taking options are considered. In certain countries, regulators allow banks to take underwriting risks so that they can issue their own policies. At other places, joint ventures or acquiring a stake in any insurance company or even setting up an insurance subsidiary is contemplated. United States, Saudi Arabia, India and Vietnam are among many countries where banks are allowed to do insurance manufacturing compared to strict insurance distribution in other countries, e.g. Canada.

Goal Congruence vs Conflict

Goal Congruence

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All Bancassurance models rest on three pillars, viz. Bank, Customers and Insurance Company. Each of them has their own goals and objectives. Banks may be interested in maximizing their fee income while insurance companies may be looking at volume expansion so as to reach the critical mass. The customers would obviously look at convenience and cost reduction. Similarly at other times, banks may look at product diversification but the insurance company may look at customer acquisition. Therefore, unless there is goal congruence amongst all the partners in Bancassurance, it can’t succeed.

Goal conflict, on the other hand defines the shape, the Bancassurance model is likely to take in due course. If the banks and insurance companies are at loggerheads to occupy the same space, e.g. market share or customer ownership; the path to Bancassurance gets bumpy and customers stand to lose. In South Korea, insurance companies are campaigning vigorously to stop banks from selling insurance products and the dispute has taken political overtones.

Being a relatively new business model in most non-European countries, the regulators worldwide are still struggling to find the formula to encourage the best practices in Bancassurance and promote goal congruence.

Right Partnership

Goal congruence leads to selection of right partner. Selecting a right partner is of paramount importance for the success Bancassurance. Like in marriage, partners must be compatible and therefore utmost care needs to be exercised. Partners bring their strengths to the table, e.g. banks bring the brand or distribution network and insurance companies stitch the products based on their market knowledge and risk-taking abilities. The combined synergy leads to customer satisfaction and each partner is able to achieve its stated goals.

Selection of a right partner is also the most difficult part in the entire process of making Bancassurance work. From a bank’s perspective, the size of the insurance company or the commission structure it offers to the bank should not be the sole criteria. Rather creativity, product innovation, customer support, IT systems and long term commitment should be the guiding principle in the selection of a partner. Similarly, insurance companies should demand long term commitment and sharing of revenue based on underwriting profits from the bank.

There are some very complex partnership compatibility matrix available which may assist banks in analyzing, comparing and selecting a right partner.

Product and Distribution Mix

Product roll-out and distribution strategy closely follows the partner selection process. Products have to be in line with the customer profile of the bank and distribution channel must be in sync with the product being offered. Customer base needs to be segmented in a scientific way and could be based on income, age, occupation, sex, etc. and products should be developed with the specific customer segment in mind.

Product differentiation is another key factor contributing to the success of Bancassurance. Standard and off-the-shelf insurance products have no place in Bancassurance. Exclusive and customer-centric products with add-ons like premium payment in instalment or free additional coverage may work wonders. Similarly, a product may need to be sold through multiple channels, e.g. direct mailer, call centre and through branch network. It is important to remember that all products can’t be sold through all channels. The strength analysis of various distribution channels vis-à-vis a particular product is a must before a product is rolled out.

Recent Trends in Bancassurance

BancaTakaful is the single largest phenomenon that has influenced the Bancassurance growth and development in recent months. Ever increasing number of Islamic Banks in the Middle East and Far Eastern region has given impetus to BancaTakaful as these banks look to pure Islamic insurance (Takaful) rather than source a conventional insurance product. Islamic banks are not only distributing Takaful products, they have also been engaged in manufacturing of insurance products by way of either buying stakes in new Takaful companies or setting up their own Takaful subsidiary. HSBC Bank has been setting up Takaful entities worldwide and is one of the prime movers in BancaTakaful.

Other important shift in Bancassurance has been the focus on non-life insurance products. Banks already in Bancassurance have slowly been moving to general insurance products though the prime focus remains on life insurance. Recent foray into general insurance by banks are exemplified by Doha Bank who set up 100% owned insurance subsidiary Doha Bank Assurance Company in Qatar and Al Rajhi Bank in Saudi Arabia.

Innovation and Challenges

The challenge of Bancassurance lies in innovation. Both partners, whether banks or insurance companies must be creative in thinking. Banks need to think differently and analyze (probably anticipate) customers’ requirements and put a demand on the partner insurance company to reciprocate. The insurance company on its part must be able to manufacture products in tandem with bank’s requirements.

Other challenges facing Bancassurance today are complexity of regulation, lack of long term vision and commitment from top management, too much emphasis on fee income and sometimes mis-selling by banks. Banks would do well to factor these before they embark on a Bancassurance journey.

The success of Bancassurance also lies in integrating it within the bank’s structure so as to harness its full potential. Each division within the bank whether corporate or retail, has to accept the new neighbourhood called Bancassurance and should be willing to share the leads and customer relationships. There are challenges ranging from assimilation process within the bank to the ownership of the customer; from profit sharing between multiple divisions within banks to bringing in the sales culture.

Finally

Making Bancassurance work is more an art than a science. It requires human skills and intuitive approach rather than structured processes alone. Banks around the world have taken to various models of Bancassurance; some of them have succeeded while many stumbled. A successful Bancassurance at one place may not make a mark at other places for reasons related to cultural, social, legal, demographic and economic environment. Best practices therefore is to craft a model which leads to goal congruence for bank, customers and insurance company and that alone can lead to a successful Bancassurance.

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