Bancassurance in Asia
Bancassurance is the alternative distribution channel for insurance products where a strategic business relationship is formed between a bank and an insurance company with a view to making use of the bank’s sales channels as well as customer bases for the selling of insurance products to the bank’s customers. Though the concept of Bancassurance is fresh in Bangladeshi financial services market, it has, since its advent back in 1980, gained the enormous success in the USA, UK, EU and some Asian countries including India, Pakistan, and Malaysia.
The little is known in our country regarding the concept, a seminar on Bancassurance was held in August 2014 at CIDRAP auditorium in Dhaka organized by Bangladesh Insurance Academy, illustrates the prospects and working of Bancassurance in Bangladesh as an alternative insurance distribution route apart from the traditional agency system.
Since the liberation war in 1971, the Government has been working for the financial inclusion of the people of all strata. Amongst all other governmental initiatives, the milestone was the opening of the private insurance companies in the year 1980. These initiatives make headway for giving life to the fair competition amongst the insurance service providers offering cost-effective insurance protection for the peoples’ lives and properties.
Moreover; the penetration rate of insurance in Bangladesh is far below the standard as compared to other South Asian nations. In the developed countries of the world, the insurance contribution to their GDP reached a substantial percentage such as in the UK-11.8%, USA-8.1%, Japan-8.1%, India-4.1%, and China-3%.
On the contrary, our current premium penetration rate is 0.9% of GDP where 0.7% in life and 0.2% non-life business. In our country, only 04 persons out of 1000 persons have life insurance protection. Howsoever; the above figures are obviously promising in terms of the huge future potentials for bringing the vast majority of the peoples under the shield of insurance. The same echo of prospects for insurance penetration in the coming years throughout the Asian markets has been envisaged in the Swiss Re, sigma No 3/2013 report.
Insurance companies of the developed world sell their products through multiple distribution channels such as direct selling, agent, broker, bank, mobile, and internet. In our country, the widely used method is the traditional agency system which has so far been proved to be ineffective in some way as seen in the penetration rate.
In order to get in touch with the vast uninsured inhabitants, it would be prudent enough to utilize the unexplored opportunities offered by Bancassurance which has successfully become, in most of the countries of the world, the recognized method of distributing insurance products to the bank’s customers. This mechanism utilizes the customer bases and branch networks of the bank which, in turn, earn fees and commissions from the insurers for the enabling services.
To date, Bancassurance has already achieved an enormous thriving in the different parts of the world being initially introduced in France in 1980. Through the continuous successful phases, Bancassurance nowadays dominates the two-thirds of life insurance and pension business in the European markets where the market penetration are 92% in Malta (the highest achiever), 70% in Turkey, 61% in France, 63% in Austria 63% and 50% in Southern Europe. And the overall new business penetration is 15%-20% in the long-term insurance products.
On the other hand, the penetration rate in the non-life sector is yet to develop at which non-life policies are primarily distributed through agents and brokers. In 2010 Portugal has become the highest Bancassurance penetrator with 14% of their business sold while the penetration rate is 13% in Turkey, 11% in France. However; Malaysian market gained 7% of their business through Bancassurance though the concept is a recent phenomenon in Asia.
Basically, the non-credit related insurance products such as whole life, medical insurance, education insurance, will work better as these products may be a natural and complementary extension to the products of the retail bankers and ultimately complete the financial life-cycle of a customer. Through different tailored made insurance products, the bank can positively address the financial requirements of the particular segments of the society since the confidence and trust of the people is higher on the banking institutions.
On the other hand, some credit-based product may effectively be suited to the bank’s customers in respect of mortgages, vehicle loans, and overdraft facilities provided by banks with particular reference to fire, motor, consumer’s credit, and personal accident insurances.
The sound regulatory move towards to the flexibility as well as deregulation of the insurance sector can pave the way for establishing this strategic partnership between banks and insurers as done already in the major Asian markets. And the bright success resulting from Bancassurance process based on “Distribution Agreement Model” will surely open the innovative horizon for the advancement of the insurance sector of Bangladesh.
The government, quite recently, has introduced the “National Insurance Regulation- 2014”, a far-reaching directive for the prudential regulatory control of the insurance industry as a whole. In this very regulation, the government has set the ball rolling for the attainment of the insurance penetration rate up to 4% of GDP by the year 2021. For the successful accomplishment of the said goals, we have to have the pragmatic approaches to reach the uninsured masses applying all possible means. Amongst other guidelines set in the 2014 regulation, the making use of the mechanism of Bancassurance as an alternative distribution channel for insurance products is note-worthy.
With an eye to upgrading Bangladesh to the level of a middle–income country by the year 2021 (with Gross National Income per capita USD 4,719 as per World Bank Data-October 2013), a sustainable financial market is a must where all of its players – banks, insurance companies, non-banking financial institutions, and stock markets – have to play a mutual and corresponding role. So the role to be played by the insurance industry is, in no way, insignificant. The initiatives of Insurance Development & Regulatory Authority (IDRA) in collaboration with Bangladesh Bank, Bangladesh Securities and Exchange Commission (BSEC), and Microcredit Regulatory Authority, have pivotally been sought here.
ADVANTAGES OF BANCASSURANCE
The respective enefits of the utmost utilization of the Bancassurance as unexplored distribution channel have been appended below:
Bancassurance: the Bank’s reaping of the reward
Though the impact of the world recession in 2008 onward is hardly considerable upon Bangladesh economy, the overall profitability of the bank has experienced a downturn in the recent years partly because of the competition in the market and mainly because of the advent of newer players in the existing customer bases. The current number of banks providing retail, merchant, and investment banking services in Bangladesh, has been, somehow, over-saturated with 56 banks (State-owned commercial -04, private commercial – 37, foreign commercial-09, and State-owned specialized -06) with thousands of branches across the country.
With the introduction of the online and/or mobile banking facility, the changes to the behaviors of the consumers have led to the increased competition among bankers. And this ultimately results in the reduction of their operational profits. In order to maintain the profitability as well as greater income stability, banks need to supplement their core earning which can, at ease, be achieved through the more productive use of customer base and branch networks by enabling the insurers in respect of Bancassurance.
The banks, with minimum efforts and without additional expenses, can produce fee income and/or commissions in exchange of the sales services on behalf of insurers, It can extend the range of their products offered, encompassing the life-cycle of customers and accordingly facilitate another core strategic objective i.e. retention of customers. On contrary, the insurers assume the banker’s business continuity risks, financial risks, and operational risks through providing insurance solutions such as professional indemnity insurance for the directors of the banks.
Bancassurance: the Leading edge for Insurers
It is the responsibility of the 77 insurers to reach the uncovered community through exploring the sophisticated distribution channels. This is where Bancassurance fruitfully can speed up the process. Bancassurance makes sure the enhanced geographical presence of the insurers enabling practical segmentation and well-refined strata group of the bank’s customer database. Insurers employ its expertise upon diversification of the products in collaboration with bankers. This mutual relationship can results in increased productivity, sustainably higher rates of successful sales, lowering unit distribution cost (as no face-to-face selling is required), and higher profitability for insurers. The insurers can cut the over-lapping cost and gain the economies of scale in terms of business expansion. There is no denying the fact that leaving a vast majority of the people uninsured, not only the insurers achieve substantial profits, but the government itself cannot materialize the concept of a welfare state in Bangladesh.
Bancassurance: Protecting populace with accumulated efforts
The government aims at the financial inclusion of the people of all walks for a sustainable economic growth. It wants everyone to be protected with need-based insurance products for ensuring the standard of living through safeguarding from financial adversity. The accumulated effort by the government along with the banks and insurers for raising public awareness through insurance education can see a visionary success in increasing the scope of insurance protection.
The use of the internet, mobile technology, and social media for the expansion of financial education will help the masses make the informed decision on purchasing insurance products at their own and thus fulfills the objectives of the government.
Moreover; with the advancement of the science and technology, the average life expectancy of the people is an increase. The insurers can provide the aged society with the sophisticated insurance solution and healthcare funding. The power of Bancassurance can effectively facilitate tailored approaches towards this edge by offering convenient access by the uninsured population to financial services at a competitive price with better customer focus and quality post-sale services.
Banc assurance: the government’s regulatory control
In order for the modernization of the Bangladeshi financial system, the regulatory framework should support multi-channel distribution system like Bancassurance. Simultaneously the regulatory bodies need to concentrate exclusively upon the consumer protection ensuring treating customers fairly, professional conduct of business and put a heightened vigilance on the market players. It should devise the procedures to avoiding large-scale losses as well as widespread disruption in the market. The strict supervision is required in competitive positioning of the parties, through continual reviews of the products, and in maintains insurers’ solvency to absorb losses arising from the vast volume of insurance services.
The extensive professional training is to be conducted from time to time for ensuring competency of people engaged in Bancassurance service as the success partly rests with the way of dealing with the customers. The special provision of incentives for rural bankers involved is to be made as the banks are enabling insurers through Bancassurance with their best selling expertise, customer database, and branch networks.
To sum up, the application of the “Distribution Agreement Model of Bancassuranc” is fundamentally reliant upon the advancing steps of the banks guided by the regulatory bodies, especially the “Bank and Financial Institutions Division” of the Ministry of Finance. And in the greater interest of the economic growth of the country as a whole, all parties concerned should put their heads together without lagging behind of the world’s trend.