Bancassurance

What Is Bancassurance?

Bancassurance refers to the partnership between banks and life assurance companies, combining their services. It's a collaboration between a bank and an insurance company that aims to offer the bank's customers life assurance and various insurance products. 

This collaboration can generate profits for both parties involved. The insurance company can use the bank's distribution channels to promote and sell its products, and in return, the bank receives a specified fee from the insurance company. 

Bank employees receive additional incentives, leading to increased productivity. Life insurance companies benefit from easy access to client data obtained through banks, resulting in a more efficient data collection process.

The bank's employees receive guidance and assistance from the insurance company, including detailed information about their products, marketing initiatives, and training on sales. Both the bank and the insurance company collaborate to distribute commissions. 

The insurance company is responsible for handling the processing and administration of insurance policies. 

Understanding Bancassurance

Bancassurance involves the collaborative selling of life insurance products through partnerships between banks and life insurance companies. Banks sell their clients' insurance products from partner companies and provide banking products to those with insurance policies. 

This mutually beneficial partnership benefits both banks and insurance companies. The insurance company provides a policy to clients, and clients make annual premium payments. The insurance company guarantees a one-time payment, referred to as a death benefit.

The owner purchases this security as a form of insurance. In the event of an accidental death in the future, this bancassurance product provides financial assistance to the owner's family in the form of a lump-sum cash payment.

For banks, this collaboration presents an opportunity to generate profits with minimal risk exposure. By promoting and selling insurance products on behalf of insurance companies, banks can earn commissions as compensation for their services.

It allows banks to establish positive relationships with customers and, in some cases, may bring extra benefits such as the opportunity for specialized training sessions for their employees.

Insurance companies can enhance their sales by leveraging the distribution channels of banks. They also gain access to the customer base of affiliated banks, facilitating the development of their products.

Customers' financial needs are met by offering two services simultaneously. This saves customers valuable time and effort and streamlines the process of reviewing and selecting products due to their familiarity with the bank's financial advisors.

History of Bancassurance

The term "bancassurance" originated in France during the 1980s. At first, many countries were worried that letting banks do bancassurance would give them too much influence over financial products in the market. This led to discussions about putting restrictions on the practice.

Many countries globally permit the adoption of this practice, with Europe notably experiencing significant success in its implementation.

Banks are the distribution channel in this process, while insurance companies focus on developing products. This arrangement enables both sectors to utilize the established network of banks.

A 2013 report showed that life insurance sales through bancassurance represented a substantial share, with percentages of 83.6% in Italy, 66.2% in Spain, 64.2% in France, and 62.6% in Austria. 

However, its market influence was comparatively lower in Eastern Europe and non-existent in the United Kingdom and Ireland.

The US has been slow because there's an ongoing debate about whether banks should be allowed to sell insurance. 

Problems include insurance agents dealing with unfair competition, potential risks for the banking sector, and the chance that banks might push customers into purchasing insurance to be eligible for loans.

Supporters argued that having banks and insurance companies involved would benefit both industries, offering convenience for consumers. They believed that increased competition could potentially result in lower insurance prices.

The Bank Holding Company Act of 1956 essentially stopped major national banks from getting involved in selling insurance. Whether a bank is allowed to sell insurance depends on the type of bank and the regulatory agencies overseeing it.

A 1980s U.S. General Accounting Office report noted that several states had allowed state-chartered banks to broaden their offerings to include various insurance products. 

Features of Bancassurance

Let’s understand the concept better by looking at some of its key features:

1. Premium Payment Restriction: Banks are prohibited from directly paying premiums on behalf of customers, maintaining a clear separation of financial transactions.
2. Limited Insurance Partnerships: A bank can engage with a maximum of two insurance companies within its operations, ensuring a controlled and manageable integration of insurance products.
3. Transparent Commission Documentation: All commissions earned are meticulously documented in the annual financial report, promoting financial transparency and accountability.
4. Banking Focus Priority: Despite the collaboration, a bank's primary focus remains on its core banking operations, emphasizing the importance of maintaining financial stability and service quality.
5. Network Synergy: Leveraging the extensive network of banks, it provides insurance companies with a unique platform to promote and sell their products. Network synergy expands the reach of insurance services, tapping into the existing customer base of the banking institution.
6. Compliance with Evaluation: Its operations are subject to periodic evaluations, ensuring the collaboration adheres to regulatory guidelines and industry standards.

Bancassurance Models

The different models are:

1. Referral Model: The bank suggests insurance options to customers and connects them with a partnered insurance company. The insurance company handles underwriting, policy issuance, and claims processing.
2. Tied Model: The bank sells insurance products exclusively from a single insurance company. The bank may have a strategic partnership or ownership stake in the insurance company, creating a close and exclusive relationship.
3. Non-Tied or Open Architecture Model: This model allows banks to offer insurance products from multiple insurance companies. This provides customers with a broader range of choices, and banks can select insurance partners based on the specific needs and preferences of their customers.
4. Joint Venture Model: The bank actively participates in designing products and distribution channels. Decision-making is a joint effort. There is a high level of integration in systems to optimize infrastructure utilization.
5. Wholesale Model: The bank purchases insurance products in bulk from an insurance company and then introduces them to its customers. The bank may add its branding and marketing efforts to the insurance products.
6. Strategic Alliance Model: The bank will specifically offer products that the insurance company wishes to promote. While maintaining separate entities, they collaborate closely on product development, marketing, and distribution.
7. Virtual Model: The insurance products are distributed through online banking channels and digital platforms. Customers can purchase insurance products seamlessly through the bank's website or mobile app.

Bancassurance Benefits

Let’s take a look at some of the benefits below:

1. Comprehensive Financial Solution:  Bancassurance addresses all customer needs, providing a holistic financial solution tailored to individual requirements.
2. Trust and Relationship: Customers trust products banks offer, leveraging existing relationships to enhance confidence in their offerings.
3. Convenience and Diversification: It is a one-stop shop for financial services, including mutual funds, loans, accounting, and insurance, streamlining customer access and convenience.
4. Professional Expertise and Efficiency: Banks provide information based on customer backgrounds, utilizing existing data to expedite processes and reduce transaction time.
5. Enhanced Customer Satisfaction: Consolidated services under one roof improve overall customer satisfaction, benefiting both insurance companies and banks.
6. Incentives and Motivation: Staff from both entities receive incentives to boost motivation, improve services, and attract new customers.
7. Mutual Profitability: Banks refer clients to life insurance companies, generating profits for both entities. Conversely, banks benefit as they sell their products to insurance clients.
8. Rural Market Penetration:  Collaboration with banks extends the reach of insurance products into rural areas, facilitating easier marketing and accessibility.
9. Increased Employee Requirements: Integrating bank and insurance operations leads to increased employee demand, benefiting insurance companies, especially in rural areas.
10. Cost-Effective Customization: Customers enjoy customized insurance products at reduced prices due to streamlined operations, cost-cutting, and the availability of expert guidance. This benefits both customers and increases premium turnover. 

Challenges in Bancassurance

The following are some of the challenges associated with bancassurance:

1. Integration Complexity: It necessitates collaboration between banks and insurance companies, leading to operational integration challenges. Aligning distinct business operations of both sectors is a complex task.
2. Lack of Direct Control for Insurance Companies: Insurance companies face a challenge as they lack direct control over selling their products through bank channels. There is difficulty in implementing and managing targeted marketing strategies for insurance products.
3. Employee Training for Banks: Banks encounter increased workload and training demands as their employees need to learn about insurance products—the learning curve for bank staff to understand complex insurance offerings.
4. Conflicting Incentives for Bank Advisors: When multiple bancassurance agreements are involved, bank advisors may have conflicting incentives. Potential conflicts of interest may lead to advisors recommending one product over another for personal gain.
5. Legal Responsibility Ambiguity: Defining legal responsibility becomes challenging in case of customer disputes. There is ambiguity in determining which party – bank or insurance company – should bear legal responsibility in customer conflicts.

Challenges in Digitizing 

The following includes the challenges in its digitizing:

1. Complex Sales Processes: The intricate nature of insurance sales processes poses a challenge for banks in transitioning to digital channels. The complexity of bancassurance products may hinder seamless integration into online platforms.
2. Limited Digital Offerings: Digital bancassurance channels constitute only a small fraction (19%) of non-life sales, indicating a limited digital presence. Many banks are yet to offer insurance products digitally, contributing to the slow growth of digital bancassurance.
3. Prioritization and Regulatory Concerns: Some banks may perceive life insurance as a lower-priority investment solution due to increasing regulatory constraints, such as MiFID II. Tax benefits in certain markets may be diluted, discouraging banks from prioritizing digital life insurance offerings.

The current state of Bancassurance 

Banks in many markets, especially in Asia–Pacific and Latin America, have prioritized Bancassurance channels for selling life insurance products. Life insurance products offer higher average sale prices and profit margins than non-life products.

Life insurance products align well with financial products, such as credit life products that surged during the credit boom of the 2000s. 

Banks leverage access to clients' financial assets to promote life policies with built-in cash value as an investment alternative, often highlighting the associated tax benefits.

Banks have hesitated to invest significantly in marketing non-life insurance products due to lower average sale prices and commissions.

In some cases, limited efforts have been made to increase the sales penetration of auto and commercial lines, with better performance in coupling home insurance with mortgage products.

Banks are seeking new sources of non-interest income, responding to historically low-interest rates, prompting a recognition of the potential in stand-alone non-life product sales.

Global Bancassurance Sales Trends

Global bancassurance sales experienced notable growth from 2011 to 2017. The trend can be seen as: 

Latin America Leading Growth

Latin America emerged as the leader with a substantial 12 percent expansion in premiums during this period.

The region's growth was attributed to rapid economic development in the 2000s, resulting in higher per-capita GDP and increased disposable income.

Asia–Pacific's Significant Growth

The Asia–Pacific region witnessed a 9.2 percent growth in bancassurance sales from 2011 to 2017.

China played a pivotal role, contributing two-thirds of the overall increase in the region's premiums. Motivated by low net interest margins, banks in the region turned to bancassurance to boost revenues.

Bifurcated Scenario in Asia–Pacific

While bancassurance accounts for 30 percent of the total new life insurance business in the Asia–Pacific market, its share in banks' total customer base remains relatively low.

European Market Potential

European penetration rates for bancassurance are relatively low, at 37 percent in life insurance and 8 percent in non-life products.

This suggests significant untapped potential for bancassurance sales growth in Europe.

Banks in the region can leverage bancassurance to a greater extent, potentially boosting sales in life and non-life insurance products.

Digital Tools as Key Factors

Facing challenges such as low net interest margins, banks globally are turning to bancassurance to increase revenues. In this context, using digital tools is identified as a key factor in the success of bancassurance.

Digital tools can enhance customer engagement and streamline processes, making them essential for banks aiming to increase non-life and life insurance product sales through bancassurance.

Authored and researched by Rani Thakur | LinkedIn

Reviewed and edited by Parul Gupta | LinkedIn

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