Many people refer to bancassurance as a channel, but I tend to disagree. Rather, it is a business model, created by fusing the brand and distribution capability of a bank, with the risk pooling capability and balance sheet of an insurer. Bancassurance can be multi-channel, selling through face-to-face interactions, online, through the mail or telephone—essentially it is selling insurance to bank customers through the bank’s existing infrastructure.
Bancassurance entered the Indian market-place against the backdrop of almost monopolistic tied agency distribution in the early years of the last decade. The advantages of bancassurance are widely acknowledged: Access to a well established bank branch network; the bank’s huge loyal customer base; long standing relationships between bank employees and their customers. However, despite successful experience developed in other countries, recognition of bancassurance as anything other than ‘alternative distribution’ has come only gradually.
Over the last 10 years, India has witnessed a major shift in how customers define loyalty. Earlier, loyalty to a particular bank or insurer was primarily emotional in nature, perhaps based on a personal relationship, with a lot of reliance on sentiments. But in today’s era, with an increased awareness and exposure to excellent service offered by other industries—the customer has become more demanding, seeking increasing value and service from an insurance proposition.
So, insurers and banks need to continually innovate and evolve to keep up with the times; constantly realigning their products and service with the varying market dynamics, including changing consumer ‘wants’ and behaviour. Furthermore, in preference to just providing a product (which can be commoditised and substituted), bancassurers must work to understand the exact needs of customers through extensive market research and by listening to regular customer feedback. Consequent insights gained from these initiatives can be leveraged to align products, sales methods and service propositions to meet customers’ needs.
For all that has been said and written, tied agency remains the largest single distribution channel, but bancassurance is making in-roads. In the first three quarters of the financial year 2011-12, as per market estimates, bancassurance accounted for 38% of the individual new business premium of private insurers, compared to 33% in FY10-11. Moreover, bancassurance has contributed significantly to the positive growth of the leading insurers in the past few years.
The growth in bancassurance has been fueled by the strong brand relationships between bank and customer, coupled with a relatively low cost of customer acquisition when compared with agency. Following the 2010 regulatory changes that capped charges on ULIPs to provide a better deal for customers, acquiring new policies in a cost effective manner emerged as the biggest challenge for life insurers predominantly operating a tied agency. While agents saw their commission incomes reduced and marginal producers became uneconomic, bancassurers fared better in this changing landscape, operating on comparatively lower expense ratios than those selling through traditional channels. Banks provide other financial services, so the existing infrastructure costs can be shared across many product lines.
Today, after almost a decade, bancassurance has stood the test of time and shown greater resilience to withstand the challenges arising from an ever changing market landscape and, in particular, the cost pressures on the industry in the last two years.
As the insurance industry matures, consumers and regulators will demand increasing standards of professionalism and market-conduct. Where there have been cries of mis-selling, the regulator has already been swift to intervene and mandate higher standards of disclosure, know-your-customer and demonstration of product suitability. This follows the evolutionary path of several other insurance markets, leading to the emergence of more full-time professional sales people and fewer part-time agents.
In this regard, banks and bancassurers perform well. Unlike an agent that can only sell insurance (and is often part-time, with a full-time job somewhere else) properly trained bank staff can dedicate themselves to serving all their customers’ financial needs in one-stop. This overcomes the part-time agent’s problem of not being able to find enough potential customers (in their spare time) to make a decent living. Bank staff members have a diversified product range so can be fully employed with a range of products, including insurance.
Banks know their customers and already have a strong ethical culture of compliance and audit. While agents come and go, your bank is there forever, so there is no avoiding responsibility when the customer comes calling. Banks have a reputation to protect, so any mis-selling that potentially damages an entire bank reputation is taken very seriously. Selling the right product, to the right customer, at the right time, is important for the bank’s reputation. It also helps the insurer’s persistency.
As the dynamics of the industry have changed, companies have learned how retaining existing customers is critical to profitability, making ‘persistency’ the new buzzword in the life industry. As margins have come under pressure, strategies for “market share at any cost” have given way to calls for “profitable, sustainable growth”. In this light, discontinuation of a policy has an adverse impact on all the stakeholders. The policyholder loses risk cover and fails to meet their long term financial goals; the intermediary fails to earn renewal commission and sustain the customer relationship; and the insurer is unable to recover the upfront cost of acquisition or build a sustainable base of polices. Consequently, this simple equation has compelled insurers to revisit their strategies and strike a balance between acquiring new customers and preserving existing ones.
Sales people play a vital role in maintaining persistency rates and this is where the banker-customer relationship has an in-built advantage. Insurers operating tied agencies are witnessing a considerable increase in the number of orphan policies owing to a growing number of inactive agents, or agents leaving the industry, posing a serious constraint on continuity of services—particularly in terms of collecting renewal premiums. Moreover, most agents pursue insurance only as a part-time profession and may prioritise new sales over collecting renewal premiums.
On the other hand, bancassurers have some of the highest persistency rates amongst the insurers. For instance, according to the December 2011 regulatory data, Canara HSBC Oriental Bank of Commerce Life Insurance is ranked second and third in terms of 25th-month and 13th-month persistency respectively amongst all private players. This can again be ascribed to the inherent strengths of the bancassurance model: Trustworthiness, frequent interaction of customers with the bank staff leading to strong rapport, ease of premium payment and, to top it all, customer’s loyalty with the bank.
The future direction of bancassurance in India will be determined, in part, by the regulator’s stance on allowing banks to tie-up with more than one life insurance company. The IRDA released an exposure draft on ‘open architecture’ in 2011 for public consultation, proposing a geography-based structure for bancassurance partnerships: exclusive partnerships within a zone, but different partnerships in different zones. A nation-wide partnership could not be considered under the proposed regulations. This is uncommon elsewhere in the world, where countries either adopt a 1:1 exclusive alliance between bank and insurer, or allow banks to behave more like brokers, selling the products of many companies. It is also counter-strategic for those who have invested to establish bancassurance subsidiaries and joint-ventures partnerships.
Recent regulatory interventions have focused on products, to offer better value to policyholders and deny those who would mis-sell, the opportunity to mislead their customers. However, where sales conduct is a problem, it is sales conduct—rather than product—that needs to be regulated, to ensure consumers get a fair deal. The proposed guidelines suggest that, for the sale of insurance products, banks should come under the supervision and regulation of the insurance regulator. This is a sensible approach to ensure that the regulator can directly control (and police) those who sell insurance to consumers.
To prevent mis-selling and further develop a needs-based sales culture, bancassurers invest heavily in training bank staff, bringing higher efficiency and understanding to the insurance sales process. As the industry conforms to ever-higher standards for training and accreditation, this investment will have to continue and will probably accelerate.
The drivers of this new regulation are presented as giving customers more choice and making insurance available to a wider population through bank branches—particularly those in rural communities—by leveraging the branch network of the bank and the cost efficiencies of the bancassurance model.
However, the proposed model faces some challenges. Clearly, multiple, fragmented bank relationships are less efficient than universal, bank-wide partnerships, where training, systems and processes can be seamlessly integrated between bank and insurer. If bancassurers cannot operate an integrated model, reaching into rural communities becomes less commercially viable and may fall by the wayside.
Secondly, if banks are able to ‘play one insurer off against the other’ they may engage in commission or compliance arbitrage between insurers, in pursuit of higher commission rates or relaxed controls. Neither of these will benefit the customer or, in the longer term, the industry.
With 26 lakh agents across the country, 24 insurance companies, a large number of bancassurance partnerships and a broking sector, there is plenty of choice and competition for the customers’ business.
One of the challenges faced by bancassurance partners is fitting insurance into the bank proposition in a way that is seamless for the customer; this includes developing the sales culture within the bank, something that challenges retail banks across the world as competition increases and banking becomes commoditised. While loans are taken, insurance has to be sold. Insurers have long experience in the arts of sales and sales management so can bring value to the bank that can be applied across all product lines. However, the volume of insurance that is sold in any bancassurance partnership is ultimately down to the bank. The priority the bank puts on insurance (driven by perceived value) and the amount of senior management attention, determines sales. Adding product or additional partners counts for naught, unless the bank’s senior management is committed to the cause—and evidence that commitment with resources and attention.
There is no shortage of competition or choice for the consumer; the commercial viability of distribution, through a largely part-time agency sales force, against a backdrop of (entirely appropriate) increasing regulatory requirements for training, supervision, compliance and competency is what challenges the insurance industry. This can be addressed, as it has been in other markets, by a move to an industry with fewer—but more qualified—full-time agents; the possible emergence of ‘independent financial advisers’ (IFAs)—again full-time and professionally qualified; and an equally qualified and professional, integrated bancassurance sector.
Bancassurance represents a tremendous opportunity and has the potential of evolving into a more refined business model that has nation-wide reach to sustainably service customers at lower cost than traditional agency. Banks and insurers need to closely align their propositions to the needs of the customer and integrate their operations to achieve economies of scale that can be passed on to policyholders. The future belongs to those who embrace this challenge and are able to execute it effectively to unlock the massive potential.
The author is the chief executive officer of Canara HSBC Oriental Bank of Commerce Life Insurance Company.