Development and Growth of Bancassurance in the Middle East Region and Gulf Countries

Bancassurance represents a strategy whereby banks and insurance companies cooperate in more than one ways to tap the financial markets. It starts with the distribution of insurance products at its core but goes on to integrate Pension and Investment products into its portfolio, the concept sometimes also termed as ‘alfinanz’. The concept of bancassurance doesn’t refer specifically to ‘distribution’, other features such as legal, fiscal, cultural and behavioral aspects form an integral part of the concept. The interplay of all these factors determines the direction and extent of bancassurance in a particular country or a region at a given time.

Recent Phenomenon

Although the banks in the Middle East have been packaging banking products with insurance wrapped around it, there has been little or no effort to integrate bancassurance into their overall corporate strategy. The experimentation in bancassurance in the middle east is relatively new compared to Europe and one of the earliest serious initiative dates back to the year 2000 when Bank of Bahrain and Kuwait (BBK) and Bahrain Kuwait Insurance Company (BKIC) joined hands in Bahrain to distribute Secura brand of insurance products (mainly motor and home) through BBK’s branch networks. Many other alliances have been made in recent years and still more are finalizing the blueprint of their bancassurance adventure.

Offering of credit cards and mortgage linked insurance products like credit shield, purchase protection, travel insurance, mortgage protection, etc. by banks in the middle east can at best put them in the nascent bancassurance club. These products are sold as add-ons to the banking products and the revenue on insurance is not due to demand creation or customer persuasion. It will require more than passive selling to reach the sales and market share in insurance distribution that can propel the banks in the Middle East into the professional bancassurance club.

Advantage Banks

Banks are in the driver’s seat in almost all countries in the Middle East by virtue of their size, capital base and network. In most countries, many banks either own insurance companies or have stakes in them and that makes a perfect launching pad for the initiation of bancassurance for these banks in the Middle East. The table below lists some of the partnerships between banks and insurance companies in the Middle East:

Bancassurance Tie-ups in the Middle East

Country	Bank’s name	Insurance Company
UAE	Mashreqbank	Oman Insurance Company
UAE	Emirates Bank	National General Insurance
UAE	HSBC	HSBC Brokers
UAE	Dubai Islamic Bank	Dubai Islamic Insurance & Reinsurance
Bahrain	Bank of Bahrain & Kuwait	Bahrain Kuwait Insurance Co.
Bahrain	Takaful Islamic Int’l Co.	Takaful International
Oman	Bank Muscat	Al Ahlia Insurance Company
Oman	Bank Dhofar	Dhofar Insurance Company
Oman	Oman Int’l Bank	M Insurance Company
Qatar	Qatar Islamic Bank	Qatar Islamic Insurance Company
Qatar	Commercial Bank	Qatar Insurance Company
Qatar	Doha Bank	Al Khaleej Insurance
Kuwait	Kuwait Finance House	First Takafful Insurance
Kuwait	Gulf Bank	Gulf Insurance Company
Lebanon	Blom Bank	Arope Insurance
Lebanon	SNA	Tie up with 10 Banks
Lebanon	Societe Generale Group	Sogegap Liban
Lebanon	Byblos Bank	Assurances Banque Populaire
Lebanon	Medgulf	Allied Bank & Saudi Lebanese Bank & Banque de la Mediterranee
Saudi Arabia	Bank Al Jazira	Takaful Insurance Company
Egypt	Commercial Int’l Bank & ACE	Egyptian American Insurance Company
Egypt	Commercial Int’l Bank	Commercial International Life
Egypt	Banque Misr	Arab International Life Assurance
Egypt	Misr International Bank	Arab International Life Assurance
Kuwait	National Bank of Kuwait	ALICO

Legal Climate in the Middle East

Unlike their counterparts in other parts of the globe, there are hardly any restrictions that prevent banks from acquiring shares in insurance companies or vice versa. Glass Stegall Act of 1933 prevented banks and insurance companies in USA to practice bancassurance till 1999 when Financial Services Modernization Act was passed. Later further restrictions were removed in 2000 when Gramm-Leach Bliley Act was passed. India and Eastern asian countries including Japan, Thailand and South Korea are slowly but cautiously allowing mergers and cross-shareholding to take place between banks and insurance companies.

On the product side, product development cycle is very short. It is easy to roll out insurance or banking or a combined product on the exclusive judgment of the relevant companies. No exclusive regulatory authority for insurance exists in most gulf and Middle East countries and the insurance matters are handled by Economy and Commerce Ministry in most countries. Banks however are being monitored and supervised by Central Banks but they are silent on the processes and controls that should regulate the development and growth of bancassurance. Further, local laws in most Middle East countries don’t prevent banks from stocking or distributing insurance products from its premises.

Potential in the Middle East

Banks in European countries with mature bancassurance own between 50% and 90% share of the total life insurance sales in their respective countries. Compared to this, Middle East banks have just started to realize the importance and potential of life insurance sales. Considering the present average penetration of less than 1% by insurance companies in life sales in the Middle Eastern countries, the bancassurer’s share can be written as almost non-existent.

Potential of bancassurance lies not only in capturing the market share based on the existing premium turnover but also in increasing the insurance penetration thereby increasing overall premium turnover. The insurance penetration in general and life insurance penetration in particular is abysmally low compared to any other advanced country in the world and herein lies the potential of bancassurance. Entire untapped market is the potential area which bancassurance can count upon. Compared to average per capita insurance premium of $919 in Europe, the average per capita premium in the gulf region is only $155. The table below gives a comparison of per capita insurance premium of some countries in the Middle East and elsewhere:

Per Capita Premium in select countries

Region / Country	Per Capita Premium
USA	$3,266
Europe (Average)	$919
Switzerland	$4,343
UK	$3,394
Gulf Countries (Average)	$155
UAE	$302
Bahrain	$220
Kuwait	$259
Oman	$77
Saudi Arabia	$47
	Source: Sigma Report, Swiss Re

Why bancassurance?

Historically consolidation of financial services industry and the trend towards bancassurance has been derived by the following factors:

· Offering of financial services by housing societies and other non-banking channels further increasing the competition

· Shrinking margins due to increasing customer price sensitivity and decreasing customer loyalty

At the current level of performance however banks in the Middle East look quite secured in their own traditional banking role. The performance of key indicators for banks in Middle East is a testimony to this. A report by GBC, UK states that average ROE of GCC banks in 2001 was 15.3% compared to average ROE of 12.5% by international top 10 banks. Capital Adequacy Ratio for most banks in the middle east is comfortably above 10% against the ratio of 8% set by Bank for International Settlement (BIS).

Why should banks then invest time and resources in bancassurance? Banks in the Middle East should seriously consider bancassurance for the following reasons:

· Increased competitiveness has led to increased credit risk resulting in a telling effect on the balance sheet

· Experts feel, banks profits in the middle east and GCC countries have peaked and sustaining similar growth rate is not possible in the coming years unless there is a change in the strategy

· Life insurance products are somewhat complementary to deposit products of banks as both involve long term funds management

All the above factors coupled with a huge untapped insurance market (particularly life sector) in the background should force the think tanks in the banks to sit down and ponder seriously on a suitable strategy to embark on the bancassurance and earn fee-based income.

Product Profile for Middle East

Bancassurers in the Middle East need to concentrate more on life products as there is a synergy between banking products, particularly deposit and investment products and life insurance products. Both relate to long-term investments and fund management. Life insurance products are integral to a person’s financial planning viz. retirement planning, Children’s Education Planning, Long Term Care and Investment Planning. Simple life products should be designed so as to facilitate easy understanding and quick turnaround time in sales.

Property insurance is relatively complicated and requires specialized skills and personal attention to sell. With higher turnaround time and rock bottom prices due to intense competition amongst insurers, there is little or no margin left for bancassurers. Though some bancassurers have taken corporate bancassurance route to sell property insurance products, success remains elusive.

Despite having a predominantly Muslim population, life insurance is no longer a taboo in the Middle East. Globalization and increasing sophistication in life have created a need for sound investment products that not only gives higher returns but also pays in the event of unforeseen things happening. Bancassurers need to combine their investment products with protection and tap the market. Islamic banking products and Takaful insurance products are already out in the market in many Middle Eastern countries. Banks would do well to target this niche segment.

Further, the presence of a large number of expatriates in the Middle East who lead their lives with uncertain future are a big market for pension and child education products. Innovation is the key here as good products have a definite market in the Middle East.

Long Term Commitment Required

Half-hearted approach to bancassurance on either side has translated more into failures than success stories. Bankers, in their urge to make quick bucks enter into unholy bancassurance alliances with one or more insurers without having a proper strategy or long-term commitment. The alliances are largely driven by premium rates and thickness of fee income rather than as a strategic shift in the corporate strategy.

What is required is an integrated approach towards bancassurance with the focus on strategy rather than issues. The following should be kept in mind while embarking on the path to bancassurance:

o Long term agreement (minimum 3-5 years) should be signed between the two parties

o Deciding factors for reaching an agreement should be the brand equity and service standards of the partner rather than price

o Total CRM should form the basis of relationship in order to achieve cross-selling

o Huge investment in IT systems, training, retraining, call center and product development will be required

o The objective should be the creation of the One-stop Shop with banks in the role of financial advisors to their clients

Conclusion

Middle East banks have already taken the legendary ‘First Step’ towards bancassurance. Various banks in different countries are at different stages of implementation as per their own strategy. The legal framework encourages the growth of bancassurance in the Middle East. High-income level and the sophistication of the mid-segment population coupled with high level of IT connectivity also augur well for the development and growth of bancassurance in the Middle East.