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Economics of Bancassurance

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Economics of 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 Bankers Middle East in July 2007 (Issue 85)

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Bancassurance has long been looked upon by the banks as an additional source of fee income. It is however seen more in the role of a ‘savior’ at the times of falling interest rates and intense competition from the peers rather than as a strategic initiative based upon sound economic rationale. Barring Western Europe, Bancassurance is still placed alongside many other non-core banking activities like leasing, project advisory, and securities broking and is not projected as a key differentiator by the banks. For most banks, while other non-interest sources of income may or may not have clicked, Bancassurance has always proved to be a winner.

From Passive to Active Bancassurance

Bancassurance has for a long time been practiced by many banks in a ‘Passive Bancassurance’ mode. Car Insurance is bundled with every vehicle loan, credit Life is packaged with personal loans, Mortgage Life with home loans and 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 of insurance under passive Bancassurance is incidental and is secondary to the sale of core banking products. The goal is either risk management (protection of banks’ assets) or improved offering notably in case of liability products (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 bank’s customers. It is driven by clear objectives of revenue, one-stop-shop and customer retention and is measured against stated monetary targets. These sales take place on stand-alone basis and may involve different products and multiple distribution channels to make the whole strategy successful. The revenue from some of the 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 using it in a big way to push their profits.

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

Economics of Bancassurance

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 have risen substantially and lending (particularly term lending) has become too competitive to provide worthwhile interest income. Increased cost of funds can only be offset by smart deployment of those funds into various asset classes; and with intense competition in the asset marketplace, it’s no mean job for banks. Bancassurance steps in here to compensate for the loss of interest income and helps to stabilize the profits.

The sale of Bancassurance products gives unbridled advantages to the banks. Almost virgin market, little or no competition, extremely high level of fee income on investment cum protection products and nil balance sheet risk for the bank; all stand in stark contrast to the highly competitive traditional banking products. The banks who take the initiative shall have the first mover advantage and the banks that don’t, have huge opportunity cost staring at them.

The best way to analyze 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 sale of a unit linked investment product from an insurance company can get more fee income than total interest income generated out of a deposit product for a similar amount.

Fulfilment for Every Customer

Banks have 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 for 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 fulfilment. 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 ‘alfinanz’ and ensures that customers whether individual or corporate look no further for all or any of their financial requirements including but not limited to insurance and financial planning.

Banks should ideally strive to take their fee income from Bancassurance to a level which is equivalent to nearly 50% of bank’s overall fee income (Source: ‘Ensuring Fee Income: The Bancassurance Way’ by Manoj Kumar in Banker Middle East – Feb 2006). They should also strive to cross-sell at least one insurance policy to each of its customer whether individual or commercial.

The Way Forward

Bancassurance is a tool which can be used by the banks not only to maximize profits but also to reduce its balance sheet risks with the exception when bank gets 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 with 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 shall be the key differentiator to determine and influence a customer’s choice of his preferred bank.

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