Bancassurance is one of the most popular distribution channels for conventional insurance and takaful alike. Muhammad Ashfaq-Ur-Rehman explores the growth of the sector and looks at the challenges holding it.

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10th
April 2013
TAKAFUL
FEATURE
Bancassurance or bancaTakaful has
been the most successful distribution
channel for many insurance and Takaful
companies across the globe. The term
bancassurance, or bancaTakaful,
is defined as the distribution of
conventional or Islamic insurance
(Takaful) products using a bank’s
distribution network: such as branches,
service centers, DSRs, telesales, phone
banking, corporate websites, ATMs and
tying up with third-party call centers.
The products typically include life,
investment-linked, health, annuity/
pensions and an array of general
insurance products. Insurance/Takaful
companies also make product offerings
through brokerage companies but since
some markets do not have a well-
established brokerage business, the
focus of choosing the best distribution
channel naturally shifts towards banks.
Most banking sectors already have a
strong built-in distribution infrastructure
along with a large customer base.
That makes bancassurance the natural
distribution channel for insurance
products. There are different models
used within bancassurance, however.
The bank may mobilize its own sales
staff, which will be either a synthesis of
‘insurance specialists’ and ‘generalists’
or only ‘generalists’ . In this situation
the insurer assists business solicitation
by providing coordination support
through dedicated coordinators
assigned to branches and other related
channels. Alternatively, the insurance/
Takaful company places its sales agents
in the bank under ‘referral model’
arrangements. The latter model is more
viable in exclusive agreements or sister-
concern companies.
Why are insurers and Takaful
operators running after major
banks?
Any insurance or Takaful company,
whether a start-up or a mature concern,
always wants to put its initial efforts into
getting quick and easy business, or ‘low
hanging fruit’ (quick revenue makers)
to offload the shareholder pressure that
exists in the form of initial set-up costs
(capex) or operational expenses (opex).
Thus, by viewing different options
in order for them to quickly get into
revenue generating rhythm, there is one
attractive avenue which can provide
the company a real booster to take the
business off right from the start, and that
avenue is bancassurance.
If we review the performance of the
insurance/Takaful industry in terms of its
growth over the past few years we notice
that there has been a huge contribution
made by the banks towards such rapid
growth. From an estimate, over 50% of
insurance or Takaful business is being
generated through banks under the
bancassurance model assuming that
a company uses all its distribution
channels; agency, direct marketing,
center of influence and so on. By virtue of
having a large customer base, banks are
seen as the most lucrative distribution
centers to many of insurers. That is why
banks have attracted many insurance
players to forge strategic alliances with
them.
The distribution of insurance products
via banks is not only a straightforward
way of tapping into a large customer
base but also a cost-effective proposition.
Such customer base is not merely already
refined from knowing the customer and
understanding issues such as anti-money
laundering perspectives, but to some
extent they have also passed through the
initial checks such as semi-underwriting
of financial and health aspects. These
pre-filtered steps give comfort to the
insurance companies. The reasons for
insurers to seek opportunities through
signing-off with the banks are primarily
to exploit a large customer base in a
short span of time without incurring
high agency costs, as well as leveraging
a reputational boost from a marketing
perspective. It is true that the reason
for the rapid growth and performance
of both the insurance and Takaful
companies has been somewhat due to
the fact that banks have shown incredible
results in fulfilling the life-stage needs of
their customers.
In terms of this bancassurance
growth, Asian markets such as Hong
Kong, Singapore, South Korea, Japan
and Malaysia have exploited the
opportunities better than markets in the
Middle East where insurance penetration
is still on average below 2% of GDP.
One of the factors involved in such an
extraordinary difference is the prudent
regulatory landscape. However, with the
emergence of Islamic finance especially
in the GCC, Malaysia, and Indonesia,
bancaTakaful success has ramped up.
Indonesia in particular is the largest
Muslim market in the world therefore
banks and Takaful operators are very
keen to harness its potential.
Despite the poor insurance penetration
in the Middle East, Saudi Arabia and the
UAE, are not only doing well but are at
the forefront in the GCC. Alongside these
countries, Bahrain, Oman and Qatar are
also making reasonable contributions
to the success of bancaTakaful in the
region. As the Middle East is dominated
by a Muslim population, the acceptance
of Islamic financial products including
Takaful over conventional products
has already opened up new windows
of opportunity. The prospects of
bancaTakaful in the Middle East region
are positive and it is expected that
growth is going to be steep, at least for
the next 10-15 years. The outcome of
bancassurance growth is eventually
going to bring about a positive change in
the regulatory framework of the region.
Bancassurance or bancaTakaful: A money-
spinning proposition for banks, insurers and
Takaful operators
Bancassurance is one of the most popular distribution channels for conventional insurance and Takaful alike.
MUHAMMED ASHFAQ UR REHMAN explores the growth of the sector and looks at the challenges holding it
back as well as the opportunities it offers.
continued...

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Continued
Why do customers prefer
to buy insurance/Takaful
products through the bank?
The benefits of bancassurance are not
just limited to banks and/or insurers/
Takaful operators but there is a great
deal of comfort, convenience and
inherent trust for customers as well.
There is a belief that banks historically
have built up and won the trust of the
customers over many years whereas
insurers have been unfortunately
unable to make such an impression.
The question to be asked is whether this
attitude is still true? In my opinion, the
story of trust in customers is changing
now due to rapid growth and stiff
competition between the banks. There is
not much difference left for customers
showing their confidence in banking
staff or that of the insurers.
In some cases I have come across,
clients prefer to deal directly with the
representatives of insurance/Takaful
companies instead of the staff of the
banks because of the intricacies involved.
This embraces some valid reasons:
notably a lack of product knowledge; and
no financial gain for bank staff in serving
customers post-sales, especially once the
claw-back period is over as the recurring
contributions/renewal premiums against
insurance policies mostly do not carry
attractive incentives in some markets
for the staff. Another fact of the matter
is that their revenue targets are well met
through new sales, and additionally they
are supposed to sell and meet targets for
other consumer products as well. This
places considerable pressure on the sales
staff and eventually their priorities go
towards achieving high scoring points for
their scorecard/incentive program.
How can bancassurance/
bancaTakaful become
a mature, long-term,
sustainable and mutually
lucrative business?
The marriage of any two ideologies
always carries some serious risks and
similarly bancassurance is not risk-
free. An environment of cut-throat
competition among banks, which
converts pressure onto sales staff, leads
to unethical activities such as mis-selling.
This takes its toll on the best business
practices and consequently affects the
business as a whole. Consequently,
the key drivers of the business i.e. the
customers, banks and insurers, suffer.
To overcome the problems that can
potentially impede performance and
jeopardize the industry in terms of
shrinking its life cycle, following are
some recommendations.
1) The relationships between the
partners should be at par:
In a bancassurance partnership,
the insurer and the bank should
work on an equal relationship so
that nothing is compromised. The
distribution power needs to be
tackled by the insurance and Takaful
companies by developing customer-
centric products and providing
unwavering service support to the
banks. The partnership should have
equal benefits available to both the
parties. The ‘banca distribution
agreement’ (BDA) should not have
any conditions that favor one party
or put the other in a compromising
situation. It is also pertinent to
make sure that the BDA ensures
that customers will not get ripped
off due to product high pricing or
poor profit returns over investment.
Ideally BDAs should be drafted on a
standard format provided/approved
by the regulator so as to establish
a fair market practice and a level
playing field.
2) A regulatory framework should
be set up to safeguard everyone’s
interests:
It is proven that where strong
regulations exist alongside an active
regulating authority in any financial
market it upholds the longevity of
the business. It protects the rights of
the customers and also functions as a
launching pad. Insurance regulators
in different markets are playing
pivotal role in terms of putting a
bancassurance regulatory framework
in place. In a recent example, the
Securities and Exchange Commission
of Pakistan has started working
on regulating the bancassurance
industry.
3) Customer experience:
One of the market forces that can
shape up the bancassurance industry
is the customer himself. Insurers and
banks need to work together in order
to educate customers particularly
in those markets where knowledge
of such complex financial/insurance
products is not high. In many
countries, bancassurance products
offer high upfront incentives to the
bank in the initial period and low
or none with claw-back approach
in the subsequent policy years. This
makes the customer service jittery
which should not be compromised
throughout the tenor of the policy.
In developing markets elements
of customer service is sometime
not taken up seriously whereas
in markets where there is perfect
competition and business is highly
regulated then the customer service
becomes an integral part of the
overall relationship. The importance
of recurring/renewal premium receipt
is considered as the backbone of any
life insurer/Famliy Takaful operator,
especially due to the high charges
levied in the insurance contract in
the early years. Undoubtedly, poor
insurance persistency could have
a negative impact on the Takaful/
insurance company’s bottom line.
4) Training , coaching and
incentivizing the staff:
It is imperative to have fully trained
staff for selling insurance investment-
linked products. The cost of
untrained staff selling such products
can put the bank and insurance
company in a bad situation from a
legal as well as a reputation aspect.
In general, this kind of issue surfaces
more in banks where ‘generalists’ are
deployed to sell insurance products.
These generalists typically are the
relationship managers or personal
bankers responsible for offering of
multiple financial products, from
bank accounts to personal loans,
mortgages and to credit cards and
such.
In some banks and markets since
these generalists keep rotating to
different branches and roles their
bancassurance training is not
easily manageable. Each center or
branch should have a dedicated
bancassurance coordinator helping
not only the bancassurance customers
of the branch or assigned branches
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but also imparting knowledge to his
colleagues. It is equally important
that the coordinator should also
have a clear career development
plan otherwise no one would like to
adopt that route. Some banks have a
balanced scorecard mechanism with
KPIs and incentive programs defined
for their sales staff. Incentives should
be aligned with overall performance,
and not just targeted to any particular
product. Bancassurance should
have correctly defined targets and
incentives in line with other retail
products.
5) Bancassurance hybrid-referral
model:
Although different bancassurance
models have already been discussed
above, in quest of evolution, a ‘hybrid
referral model’ could be useful
in taking the industry to the next
level. Regardless of the relationship
between the bank and the insurer/
Takaful operator — whether they
belong to the same parent group,
one party is owned by another party
or they work together in the form
of a strategic alliance — the insurer/
Takaful operator may work together
with its bank distribution partner
in establishing a ‘banca subsidiary’
under the ownership of the bank. The
dedicated bancassurance subsidiary
could prove to be an effective
model in optimizing real potential,
providing personalized services to
customers, avoiding any conflict from
cross-border staff interactions and
also reduce other risks associated
with the business.
Conclusion
The life cycle of bancassurance may
be extended should the banks and
insurance/Takaful operators work
together in the interest of fulfilling
customer’s life stage needs. Some level of
sacrifice over heavy revenue commission
is needed in order to tempt the customers
to visit the financial supermarket
willingly. Hence they pull the products
from the shelf themselves instead of
relying on the traditional method of
being pushed products by the promoters.
There are enormous benefits available
for all involved in the bancassurance
sector but it is critical to realize that if
the business is over-milked then the
industry may not be able to survive
long enough. This issue could be
safeguarded by stringent regulations
from the active regulating authorities
in addition to putting internal controls
and checks under the theme of corporate
governance by the banks and insurers or
Takaful operators themselves. Further,
risks associated with bancassurance
such as operational risk could be
managed by introducing key risk
indicators and key control systems.
‘Banca subsidiaries’ owned by banks
could also play a pivotal role towards
the growth of the industry.
Muhammad Ashfaq Ur Rehman is an
independent management consultant &
advisor. He can be contacted at M.ashfaq.
rehman@me.com.
Continued