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Ensuring Fee Income: The Bancassurance Way

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Ensuring Fee Income: The Bancassurance Way

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' Digest in February 2006 (Issue 68)

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The debate is over. Banks are no longer required to be persuaded to sell or distribute insurance products to their customer base. In the seventies, when banks in select countries in Europe started implementing Bancassurance, rest of the world contemplated probably for too long whether to join the bandwagon or not. Most banks eventually did embrace Bancassurance albeit after having lost heavily either in terms of lost opportunity or by losing out to the early starters in Bancassurance. Up to 90 percent of new life insurance premium in West Europe today comes through banks because of their early foray into Bancassurance.

Banks’ traditional sources of fee income have been the fixed charges levied on loans and advances, credit cards, merchant fee on point of sale transactions for debit and credit cards, letter of credits and other operations. This kind of revenue stream has been more or less steady over a period of time and growth has been fairly predictable. However shrinking interest rate, growing competition and increased horizontal mobility of customers have forced bankers to look elsewhere to compensate for the declining profit margins and Bancassurance has come in handy for them.

Fee income from the distribution of insurance products has opened new horizons for the banks and they seem to be loving it. Product bundling in the retail space coupled with cross-selling of unit and investment linked life insurance plans seem to be the order of the day as far as Bancassurance revenue is concerned.

Opportunities

From the banks’ point of view, opportunities and possibilities to earn fee income via Bancassurance route are endless. Savings accounts, fixed deposits, loan accounts and credit cards are all goldmines as far as knowledge about customer’s preferences and financial status is concerned. Different insurance products can be tailored and targeted to specific segments based on the knowledge about customer’s spending patterns. The customers today are generally aware about the various insurance products available and most of them are already in need of some kind of protection whether it is car insurance, home insurance or a child education plan. All that is needed is to offer them a product which is tailored to fit their requirements and provides better value for the money.

The thumb rule for the bank should be to cross-sell at least one insurance product to each of their customer base since every existing relationship is a potential source of additional income in terms of Bancassurance sales. It is much easier for the banks to sell insurance products, mainly asset and wealth management products, as they have complete knowledge about the financial status of the customers through their spending and saving patterns. In terms of efforts too, it is easier for the bank to approach and convince a customer to buy a particular insurance product since he trusts the banks more than his insurance company. The method of approaching the customer and the sales practice shall however depend upon the business model adopted by the bank and may vary substantially from one place to another.

Products and Insurers’ Interest

In terms of products, there are endless opportunities for the banks. Simple term life insurance, endowment policies, annuities, education plans, depositors’ insurance and credit shield are the policies conventionally sold through the Bancassurance channels. Medical insurance, car insurance, home and contents insurance and travel insurance are also the products which are being distributed by the banks. However, quite a lot of innovations have taken place in the insurance market recently to provide more and more Bancassurance-centric products to satisfy the increasing appetite of the banks for such products.

Insurers who are generally accused of being inflexible in the pricing and structuring of the products have been responding too well to the challenges (say opportunities) thrown open by the spread of Bancassurance. They are ready to innovate and experiment and have set up specialized Bancassurance units within their fold. Examples of some new and innovative Bancassurance products are income builder plan, critical illness cover, return of premium and Takaful products which are doing well in the market.

Corporate Bancassurance

Bancassurance provides more ways to earn fee income for the bank. As we discussed earlier that every relationship provides an opportunity to cross sell Bancassurance products whether it is retail or corporate. Corporate relationships provide an opportunity for corporate Bancassurance which is taking shape slowly but steadily. All commercial enterprises need insurance for their buildings, factory or warehouses and banks can capitalize on this existing need for insurance cover. There is more fee income in distributing commercial property or liability insurance to corporate house as volume and turnover are high. It is easy to cross-sell commercial insurance at the time of term lending or providing Letter of Credit since it will be value addition from the customers’ point of view. Further, lending is an asset creation process for the bank and it makes sense even from the credit risk management perspective to have an insurance security of your choice.

Fire insurance, workers compensation insurance, group medical insurance and contractors’ insurance are just some of the commercial property and liability insurance which can be sold to the corporate customers of the banks thereby generating additional source of fee income. Similarly, Trade finance or operations division within the bank provide opportunity to cross-sell marine insurance. The importance of corporate Bancassurance lies in further cross-selling opportunity to the individuals within those companies.

The Takaful Revolution

Takaful is the Shariah compliant Islamic version of traditional insurance products. The premise lies in mutual and cooperative way of managing the funds generated from the sales of Takaful products. The premium is called contribution and any profits after the claims and management expenses are returned to the policyholders who are treated as shareholders. The return of premium is called as surplus distribution. Since its initiation nearly 20 years ago, Takaful products have caught the fancy of not only Muslim but also non-Muslims as Takaful treats its customers more fairly.

Islamic banks are already distributing Takaful products and earning fee income by tying up with several Takaful companies. Some of the Islamic Banks have formed Takaful as their subsidiary. The product ranges from life insurance, car insurance and health insurance to complex unit linked insurance products. Malaysia, Bahrain, Brunei and Saudi Arabia have been leading the Takaful revolution and the growth has been exceptional in these countries. Recently, United Arab Emirates, Pakistan and Qatar have also witnessed hectic activities in this sector. What is interesting to note is that even purely commercial banks have entered the fray by setting up dedicated Islamic banking division with Islamic insurance products as add on. Recent examples are HSBC Bank in UK with their Amanah range of products and Lloyds TSB Bank with their Islamic offerings including Life Insurance and Home Insurance based on Takaful principles. The call is to swim with the current as long as it takes you to the destination and the destination clearly is to increase fee based revenue.

Scenario in the Middle East

Banks in the Middle East are currently doing reasonably well in terms of generating fee income out of their Bancassurance activities. Though no official figures are available, Lebanon leads the pack in terms of penetration. Every single bank is tied up with an insurance company and every branch across the length and breadth of the country provides insurance services. Next in the lead is United Arab Emirates where large banks are now well-entrenched into Bancassurance activities. Not only insurance products are bundled or cross sold along with core retail banking products, direct marketing has also been employed to increase fee income based revenue. Direct Sales Agents and out-bound tele-sales agents are increasingly being employed by the banks to concentrate more on Bancassurance activities. However, small and medium sized banks in UAE are still far behind in realizing the full potential of Bancassurance.

Other countries in the region, e.g. Oman, Qatar, Bahrain, Kuwait and Saudi have not moved much in this direction mainly due to the taboo attached to the ‘Life Insurance’ and ambiguity of local regulation. Life Insurance penetration in the Middle East is currently less than 0.5% (Swiss Re: Sigma Report). Considering the economic boom in the Gulf region and large number of high net worth individuals (HNWIs), the potential for Bancassurance is tremendous and banks have the opportunity to cash on it. It is therefore imperative for the Central Banks or other regulators in all these countries to remove barriers in order for the banks to grow faster and enhance the level of customer satisfaction.

It’s here to stay

A typical commercial bank has the potential of maximizing fee income from Bancassurance up to 50% of their total fee income from all sources combined. Fee Income from Bancassurance also reduces the overall customer acquisition cost from the bank’s point of view. Banks have tasted blood and are going full throttle to capitalize on the opportunities thrown open by Bancassurance. Sales personnel are being recruited in hordes and substantial amount of money being spent for training on product knowledge and selling techniques.

At the end of the day, it is easy money (sorry to say that) for the banks as there are no risks (leave reputational risk) and only gains. Customers are happy and shareholders of the banks are smiling.

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