Bancassurance: Alliance for transforming the insurance industry

Thanks to the elimination of brokerage costs, bancassurance models are becoming quite popular around the globe. Unfortunately, there still exists no consistent model for bancassurance around the world. 

There are several factors such as tax, regulation, banking and penetration, local customs etc. which determines its success. As insurance companies look for new opportunities to penetrate new markets, regulations regarding banking and insurance play a crucial role in developing partnerships. 

What is Bancassurance?

Bancassurance refers to the collaboration between a bank and an insurance company where the company is allowed to sell insurance to the bank's customers. Bancassurance is also a relatively more convenient way for foreign insurance companies into a new market, as collaborating with domestic financial institutions allows them a quick entry into the market and access to a vast consumer base.

Bancassurance is also an additional source of revenue for the banks as they can increase their income through commissions and profit-sharing agreements. They can also spread their fixed costs over the insurance business as well. They can increase the productivity of their staff as access to insurance packages as well as banking facilities expand their client base without requiring much rehiring.

A general classification of bancassurance models can be fleshed out based on the legal ownership structure as well as the integration level between the insurer and the bank. Commonly, these models are known as the pure distributor model, the strategic alliance model, the joint venture model and the financial holding company model.

The role of regulation in bancassurance

A hospitable regulatory regime with liberal regulations on ownership of insurance companies as well as the sale of their products is critically important for bancassurance to develop.

For example, positive fiscal treatment, i.e., lower tax rates, subsidies, incentive packages etc., in many countries fostered the development of bancassurance, as the bancassurers could offer simple, low-cost, long-term saving products, as opposed to the traditional, more complex and high-cost offering from traditional insurance companies.

The government should undertake regulatory reforms to allow banks to merge with more than one insurance company and provide a wide range of choices for the customers. 

Governance and regulatory aspects of the industry, as pointed out, could best be handled by way of closer and systematic coordination between the respective supervisory authorities. If the regulator decides to be more aggressive in challenging the role of banks, their business models will be brought further into question. 

Illustration: TBS

How the traditional insurance companies should adapt to the nascent bancassurance industry

The traditional model of the insurance business is no longer viable as new technologies, evolving consumer expectations, new regulations as well as increased competition challenge typical insurance companies, leaving them with no choice but to adapt.

To compete in the rapidly shifting market, traditional insurance companies are being forced to incorporate digitalisation in their processes, as evidenced by the vast integration of FinTech and non-traditional distribution channels in modern insurance firms. Insurance companies should also prioritise partnerships with financial institutions to expand amid evolving circumstances.

But how to create a successful alliance?

There is no easy way to create successful alliances in the insurance industry. But you can always learn from the success of bancassurance. With more than 30 years of precedence, the bancassurance sector is the epitome of sustainable alliances that are mutually beneficial. 

Insurers can surely learn a great deal from the success of the bancassurance industry. They can also follow their path by incorporating financial technologies as well as insurance technologies to come up with a more effective recipe for success.

That is not to say, it's always sunny in the bancassurance industry. Conflict of interest may arise and the relationship between banks and insurance companies may be strained at times. Many of such partnerships can, therefore, end in 'divorce' without generating much value.

But why does this happen and how can insurers avoid such mishaps?

Well, one of the most common factors behind such 'divorces' is the failure to recognise partners' needs. While the relationship between banks and insurances may seem synergic, many conflicts of interest may arise thanks to differing objectives, goals and visions. 

To maintain caution, one should always keep their eyes wide open and take the time to fully comprehend the strategies, mission, visions and objectives of their partners with their own goals in the backdrop. 

Moreover, they should assess the value of the partnership and determine whether it is mutually beneficial for both parties. Both parties should also evaluate each other in terms of their willingness to commit in the long term.

Finally, one must carefully consider how the relationship operates at a functional level and what operating models are required to support that efficiently. Understanding what sustains a mutually beneficial alliance in the long term can go a long way in ensuring the success of the parties involved.

Key factors for a successful bancassurance relationship

Firstly, you must have attractive products, i.e., products that are simple, standard, ideally bundled with banking products and/or complementary to the range of existing banking products. 

Secondly, employees must be equipped through effective Training. These training programmes are generally included in the general banking curriculum. But in the case of bancassurance, such programmes must emphasise recognising cross-sell opportunities and bundling bank and insurance products, with ongoing support provided by product specialists.

There should be a transparent division of responsibilities, including a mechanism for managing day-to-day operations and ensuring orderly dissolution at the end of the arrangement, 

The operating model under which the bancassurance firm operates must be efficient with clearly defined processes and interfaces in terms of customer acquisition/sale, Cross-selling & up-selling, Post-sales service and claims management. The operating model should clearly define the responsibilities of partners, employees and all pertinent parties in the sales process.

There must be a clear-cut partnership strategy - a well-defined strategy on a win-win basis. Partners should possess a clear understanding of decision-making authorities, benefits and risks involved in the business.

Finally, the alliance should provide compelling incentives -incentives at least on par with industry averages explicitly included in annual targets of banking branches- to all the partners and in many cases, the employees as well.

Md. Kafi Khan is the Company Secretary of the City Bank Ltd

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.