TAKAFUL FEATURE
Bancassurance or bancaTakaful: A moneyspinning 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. 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 wellestablished 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 sisterconcern companies.
Why are insurers and Takaful operators running after major banks? Any insurance or Takaful company, whether a start-up or a mature concern,
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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
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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.
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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 riskfree. 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 customercentric 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
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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 investmentlinked 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,
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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
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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.
10th April 2013