One
of the most significant changes in the financial services sector
over the past few years has been the growth and development of
bancassurance. Banking institutions and insurance companies have
found bancassurance to be an attractive and profitable complement to
their existing activities. The successes demonstrated by various
bancassurance operations particularly in Europe have triggered an
avalanche of mergers and acquisitions across continents and efforts
are on to replicate the early success of bancassurance in other
parts of the world as well.
Distribution
is the key issue in bancassurance and is closely linked to the
regulatory climate of the country. Over the years, regulatory
barriers between banking and insurance have diminished and has
created a climate increasingly friendly to bancassurance. The
passage of Gramm-Leach Bliley Act of 1999 in US and IRDA Bill in
India in 2000 have stimulated the growth of bancassurance by
allowing use of multiple distribution channels by banks and
insurance companies.
Bancassurance
experience in Europe as well as in other select countries offers
valuable guidance for those interested in insurance distribution
through the banking channel in developing markets. Many banks and
insurers are looking with great interest at building new revenue
through bancassurance - including large, traditional companies that
wouldn't have considered such an approach about a decade ago. Of
particular interest, many believe, is the potential for
bancassurance in developing economies such as those of Latin America
and Southeast Asia.
Distribution channels in Bancassurance
Traditionally,
insurance products have been promoted and sold principally through
agency systems in most countries. With new developments in consumers’
behaviors, evolution of technology and deregulation, new
distribution channels have been developed successfully and rapidly
in recent years. Bancassurers
make use of various distribution channels:
-Career Agents
-Special Advisers
-Salaried Agents
-Bank Employees / Platform Banking
-Corporate Agencies and Brokerage Firms
-Direct Response
-Internet
-e-Brokerage
-Outside Lead Generating Techniques
The main characteristics of each of these channels are:
Career Agents: Career Agents are full-time commissioned sales
personnel holding an agency contract. They are generally considered
to be independent contractors. Consequently an insurance company can
exercise control only over the activities of the agent which are
specified in his contract. Despite this limitation on control,
career agents with suitable training, supervision and motivation can
be highly productive and cost effective. Moreover their level of
customer service is usually very high due to the renewal
commissions, policy persistency bonuses, or other customer
service-related awards paid to them.
Many bancassurers, however avoid this channel, believing that agents
might oversell out of their interest in quantity and not quality.
Such problems with career agents usually arise, not due to the
nature of this channel, but rather due to the use of improperly
designed remuneration and/or incentive packages.
Special Advisers: Special Advisers are highly trained employees
usually belonging to the insurance partner, who distribute insurance
products to the bank's corporate clients. Banks refer complex
insurance requirements to these advisors. The Clients mostly include
affluent population who require personalised and high quality
service. Usually Special advisors are paid on a salary basis and
they receive incentive compensation based on their sales.
Salaried Agents: Having Salaried Agents has the advantages of them
being fully under the control and supervision of bancassurers. These
agents share the mission and objectives of the bancassurers.
Salaried Agents in bancassurance are similar to their counterparts
in traditional insurance companies and have the same characteristics
as career agents. The only difference in terms of their remuneration
is that they are paid on a salary basis and career agents receive
incentive compensation based on their sales. Some bancassurers,
concerned at the bad publicity which they have received as a result
of their career agents concentrating heavily on sales at the expense
of customer service, have changed their sales forces to salaried
agent status.
Platform Bankers: Platform Bankers are bank employees who spot the
leads in the banks and gently suggest the customer to walk over and
speak with appropriate representative within the bank. The platform
banker may be a teller or a personal loan assistant and the
representative being referred to may be a tarined bank employee or a
representative from the partner insurance company.
Platform Bankers can usually sell simple products. However, the time
which they can devote to insurance sales is limited, e.g. due to
limited opening hours and to the need to perform other banking
duties. A further restriction on the effectiveness of bank employees
in generating insurance business is that they have a limited target
market, i.e. those customers who actually visit the branch during
the opening hours.
In many set-ups, the bank employees are assisted by the bank's financial
advisers. In both cases, the bank employee establishes the contact
to the client and usually sells the simple product whilst the more
affluent clients are attended by the financial advisers of the bank
which are in a position to sell the more complex products. The
financial advisers either sell in the branch but some banks have
also established mobile sales forces.
If bank employees only act as "passive" insurance sales staff
(or do not actively generate leads), then the bancassurer's
potential can be severely impeded. However, if bank employees are
used as "active" centres of influence to refer warm leads
to salaried agents, career agents or special advisers, production
volumes can be very high and profitable to bancassurers.
Set-up / Acquisition of agencies or brokerage firms: In
the US, quite a number of banks cooperate with independent agencies
or brokerage firms whilst in Japan or South Korea banks have founded
corporate agencies. The advantage of such arrangements is the
availability of specialists needed for complex insurance matters and
-in the case of brokerage firms - the opportunity for the bank
clients to receive offers not only from one insurance company but
from a variety of companies. In addition, these sales channels are
more conceived to serve the affluent bank client.
Direct Response: In this channel no salesperson visits the customer
to induce a sale and no face-to-face contact between consumer and
seller occurs. The consumer purchases products directly from the
bancassurer by responding to the company's advertisement, mailing or
telephone offers. This channel can be used for simple packaged
products which can be easily understood by the consumer without
explanation.
Internet:
Internet
banking is already securely established as an effective and
profitable basis for conducting banking operations. The reasonable
expectation is that personal banking services will increasingly be
delivered by Internet banking. Bancassurers can also feel confident
that Internet banking will also prove an efficient vehicle for cross
selling of insurance savings and protection products. It seems
likely that a growing proportion of the affluent population,
everyone's target market, will find banks with household name brands
and proven skills in e-business a very acceptable source of
non-banking products.
There
is now the Internet, which looms large as an effective source of
information for financial product sales. Banks are well advised to
make their new websites as interactive as possible, providing more
than mere standard bank data and current rates. Functions requiring
user input (check ordering, what-if calculations, credit and account
applications) should be immediately added with links to the insurer.
Such an arrangement can also provide a vehicle for insurance sales,
service and leads.
E-Brokerage: Banks can open or acquire an e-Brokerage arm and
sell insurance products from multiple insurers. The changed
legislative climate across the world should help migration of
bancassurance in this direction. The advantage of this medium is
scale of operation, strong brands, easy distribution and excellent
synergy with the internet capabilities.
Outside Lead Generating Techniques: One
last method for developing bancassurance eyes involves
"outside" lead generating techniques, such as seminars,
direct mail and statement inserts. Seminars in particular can be
very effective because in a non-threatening atmosphere the insurance
counselor can make a presentation to a small group of business
people (such as the local chamber of commerce), field questions on
the topic, then collect business cards. Adding this technique to
his/her lead generation repertoire, an insurance counselor often
cannot help but be successful.
To
make the overall sales effort pay anticipated benefits, insurers
need to also help their bank partners determine what the “hot
buttons” will be for attracting the attention of the reader of
both direct and e-mail. Great opportunities await bancassurance
partners today and, in most cases, success or failure depends on
precisely how the process is developed and managed inside each
financial institution. This includes the large regional bank and the
small one-unit community bank.
Distribution Models
Bancassurers
have developed three basic distribution models: Integrative,
Specialist and Financial Planning model.
Integrative
/ Generalist Model:
The integrative model distributes products through existing bank
channels, and in its most well-known European version, branch
bankers themselves sell insurance products to customers.
Theoretically, this offers “One Stop Banking” and requires
extensive training to branch staff. Bank staff are supposed to know
the details of all the insurance products on offer. Telemarketing
and direct mail are also examples of integrative approaches.
Specialist
Model: The
specialist model distributes investment or other complex insurance
products through product experts who are generally employees or
representatives of the insurance company. Platform bankers help
identify prospects who are then contacted by an insurance
professional. This process requires less training bur requires
higher compensation to support the referral process. This model may
not meet all of customers’ needs since it lengthens the process of
sale of even a simple insurance product which can otherwise be sold
across the counter.
Financial
Planning Model:
The “financial planning” model is the only “team” approach.
This method offers each customer and prospect a full financial
planning package addressing all of the individual's financial
concerns, risk tolerances and location in the cycle of life. This
process is beneficial for the customer, the bank and the insurer, as
the customer is viewed “outside the numbers”. Bancassurers
convey the message that they want to know all about the customer in
relation to their current and future financial needs and want to
assist them on all those aspects of their life.
To
move a bank in the direction of becoming an effective user of the
financial planning model, the bank’s sales force first has to be
taught how to qualify prospects and make referrals and properly
approach the customer/prospect. This process will include and
actively involve the bancassurer’s project incharge who is best
acquainted with pertinent federal and state regulations for the bank’s
geographic market area.
Insurers'
bank partners must then learn how to spot existing
depositors/borrowers' “life triggers,” i.e., milestones in a
life that represent insurance opportunities. Although bank
representatives have always done this in conjunction with bank
products, it is new to them to apply this concept to insurance
products as well. For example, a younger depositor mentions he is
withdrawing part of his savings to purchase his first car.
Knowledgeable bank representatives or platform bankers would
immediately understand the requirement for the car insurance and may
be personal accident insurance. These bank staff functioning now as
financial services representatives can provide such sound practical
advice, i.e., an insurance product to fit customer current
and future needs.
In
general, a well-trained sales person can always count on certain “life
triggers” -birth, death, divorce, career change or other
catastrophic event—to lead his or her regular bank customers to
new insurance products. If the bank’s personnel are shown how to
capitalize upon these triggers using insurance products, they will
automatically provide referrals to the insurance group and insurance
sales will follow.
Either
of these distribution models works under the right circumstances.
What's most important is whether the model is compatible with the
bank's customer base and the insurance company's strategic
objectives. European bancassurance experience shows that the
Financial Planning Model is an extremely productive way to reach a
large number of bank customers.
Key Value Drivers
Which
distribution model to use is a tactical decision secondary to more
basic strategic concerns. Bancassurance strategies should be driven
by markets and channels, encompass a broad range of tactics and
practices, and leverage the competencies of the bank and the
insurer. They should identify and build upon a discrete set of value
drivers, those factors of such fundamental importance that to ignore
any one of them could be fatal to the success of the project. The
following four value drivers should be considered in a bancassurance
strategy:
Brand
equity.
The strategy should leverage the bank's brand equity with consumers.
Consumers throughout the world rate bankers higher than insurance
agents in terms of such criteria as objectivity of advice and
product knowledge. A rationalized bancassurance strategy will build
on the superior brand equity of banks by integrating insurance into
the bank product portfolio and distribution infrastructure. For many
customers, banks can become the primary providers of financial
services by supplying personal risk management along with more
traditional banking services. Lloyds TSB has been using its own
brand name for a long time and have only recently indicated
rebranding after acquiring Scottish Widow. Halifax and Abbey
National continue to use their own brand names despite acquiring
Clerical Medical and Scottish Mutual.
Distribution.
The distribution model should accomplish the following objectives:
-
It
should cater to all segments of the banking population
-
It
should work as a single shop for all financial requirements for the
bank customer
-
It
should effectively utilize the existing branch banking platform
-
It
should take advantage of the multiple sales opportunities afforded
by the bank's other distribution channels
-
It
should strive for congruence between product characteristics and
channel.
One
of the key economic advantages of bancassurance is the savings
achieved through efficient utilization of the bank's existing
distribution channels. At some point in the development of a
bancassurance operation, the marginal cost of adding one more
customer becomes negligible. Bancassurers can reduce significantly
the costs of agent recruitment, selection and conservation. These
savings can be passed on to consumers through lower premiums, or the
bank can maintain the premiums at market level in order to increase
profitability. Because the lower and middle segments of the life
market are not price-sensitive, the second option is often more
desirable.
Technology.
Bancassurers should plan a technological infrastructure that will
exploit customer information found in the bank's database to uncover
sales opportunities and produce transactional simplicity for
insurance customers.
The
information banks have about their customers' buying habits,
economic status and money management practices constitutes a
valuable asset often unrecognized even by large, sophisticated
banking institutions. Using technology to order information about
the economic behavior of customer segments can provide valuable
insights about insurance-selling opportunities. For instance,
customers buying a home through a bank mortgage can be approached
for a variety of insurance products. With a traditional insurer,
behavioral information about policyholders is usually unavailable,
but even when known, can only be employed by agents (who have an
economic interest in thwarting a direct relationship between the
company and the client).
Bancassurers
should use technology to simplify the insurance purchase as much as
possible, thereby making the purchase an easier, more pleasant
experience and further differentiating themselves in the process.
Buying insurance in the traditional way means dealing with agents
and the complications of the underwriting process, which
bancassurance can eliminate. Branch customers are usually in a hurry
and don't want to wait, so banks will serve them best by
simplification. With point-of-sale technology, customers should be
able to buy policies in a short time and leave the bank with
coverage in hand. Particularly with an intangible such as an
insurance policy, the buying experience itself is a key part of the
purchase. Bancassurers should make the experience as positive as
possible, and technology can contribute greatly to this effort.
Culture.
An effective bancassurance strategy acknowledges the fundamental
cultural conflict between the bank and the insurance company by
aligning the bank's interests with those of the insurance company.
Without the bank's total commitment to the insurance strategy, any
bancassurance program is doomed to fail. One of the more effec-tive
ways to achieve this commitment is for the bank to have an equity
interest in the insurance company. With a stake in the financial
results of the insurance operation, the bank has a powerful
in-centive to support the insurance strategy. The alternative
approach, buying "shelf space" in the bank to sell
insurance products, will rarely be as effective.
In
any given situation, one of the four value drivers may greatly
outweigh the importance of the others. In some cases, solving the
cultural problem may loom especially large, while in others building
an effective technology platform may be paramount. Bancassurers will
need to consider all four, however, to achieve successful
balance.
Trends in Mature Markets
Bancassurance
has blossomed across Europe with penetration rates ranging from 20
percent of pensions and life premiums in Germany to 73 percent in
spain, according to Datamonitor. In the UK, around 10 percent of
life insurance premium income is generated regularly through
bancassurance channel.
The
success of bancassurance in European countries to date and its
projected future growth are eagerly trumpeted by investment bankers,
particularly to clients considering entering the market. In their
view, bancassurance is one of the primary beneficiaries of the
global movement toward liberalization and subsequent integration of
financial services. Clearly, the concept of one-stop shopping, or allfinanz,
is more advanced in some European markets where the process of
integration of financial services is further along.
European
experience shows that tax-advantaged insurance products with an
emphasis on savings accumulation can be successful in the banking
channel under certain circumstances. Protection products, such as
pure term insurance, are rarely promoted, and the big sellers are
investment products with an insurance wrapper. These products tend
to compete with banking or investment products rather than other
insurance products.
In
some countries, such as France and Spain, favorable tax treatment
affords bancassurance products competitive advantages. On certain
pension products sold in Europe through banks, the tax advantages
are substantial, sometimes even including deductible premiums. In
the United States, where bancassurance has achieved more modest
success, it is openly acknowledged that the market for annuities
sold through banks and insurance agents would evaporate if the
government withdrew the favorable tax treatment of these products.
However, annuities continue to enjoy tax advantages, and the market
for these products through the bank channel is booming.
Distribution Strategies in an Emerging Market
The
business model for bancassurance in Europe does not necessarily
transfer to the regulatory and economic environment of a developing
market. To succeed in emerging markets, bank marketers will have to
develop unique strategies consistently attuned to local customer
expectations and consistent with bank distribution capabilities. The
biggest challenge is determining how to reach the middle and
lower-middle economic classes, which comprise the largest group of
bank customers in such countries.
A
frequent mistake made by many bankers and insurers is their failure
to develop unique strategies specifically for bancassurance.
Instead, they simply extend their traditional agency distribution
approach, because they view bancassurance as just another means of
reaching their existing market of affluent consumers. Agents
typically target the affluent because the average revenue per
customer is sufficient to support the fixed and variable costs of
the distribution system. The agency channel thus perpetuates itself:
commissioned agents sell to affluent customers because they generate
enough revenue to make it profitable to sell to other affluent
customers. Because agents are the insurance company's true
customers, insurers provide them with products suitable for sale to
the affluent.
In
developing markets, affluent populations are much smaller than their
counterparts in North America or Europe. Although distribution
models geared to wealthier bank customers exist, Bancassurers who
pursue this segment of the market are forced to compete directly
with traditional insurers. In a developing market, a strategy
focused solely on affluent customers ignores the largest group of
bank customers.
A
successful bancassurance strategy focused on middle and lower-middle
income segments of the bank marketplace requires insurers to rethink
assumptions. To fully exploit the potential of the mass-market
banking channel, insurers need new types of distribution,
underwriting, administration, policy issue and delivery, premium
collection procedures, customer service strategies and sales
approaches. In bancassurance, technology must be combined with
fundamental knowledge of insurance to develop processes unique to
the banking environment.
Distribution Channels and Product Complexity
The
design and implementation of the distribution model is as important,
if not more so, than product design in bancassurance (except for the
few clients who require customized product solutions for individual
financial planning needs). If an insurance or investment product
offers basic protection or the promise of reasonable return at a
fair price, consumers will buy it if the product, the distribution
system and the channel are compatible. Low penetration of insurance
in emerging markets is not a failure of product design, but a
failure of the distribution system.
The
diagram below demonstrates that products at varying levels of
complexity require different distribution channels and cost
structures. As products become more customized, the complexity of
the product and the cost of distribution (expressed as the
cost-per-customer contact) increases. As a result, the product and
distribution system must also change. Complicated estate or
retirement planning cannot succeed via direct mail, and it's not
economically feasible to sell only accidental death through an
external agency force. In a traditional sales environment, neither
the company nor the agent can earn adequate profits selling a
low-premium product (such as accidental death) because costs are too
high. Conversely, a direct mail company can be enormously successful
selling an accident product with an average premium of only $100
because the cost per solicitation can be kept low.
To be successful, the components of a distribution model must work
together; product features and benefits, distribution costs and
marketing channels all should complement each other. Bancassurers
can tap all the channels identified in the model: direct mail,
telemarketing, platform bankers, Internet, in-house specialists,
Career Agents or professional financial advisors. The most effective
bancassurance strategies will be driven by customers and channels,
not products, and will leverage the bank's competitive strengths.
A
customer and channel driven bancassurance strategy finds and engages
buyers where they are found. No attempt is made to impose a
preconceived product driven strategy. Traditional life insurers are
often trapped: they create a product with features attractive to
agents (such as high commissions), and then let the agents find
appropriate target markets. This is a type of "top-down"
product development approach. However, the bank channel requires an
analysis of the market that starts at the bottom, with the
customers, and works up.
A
"bottoms-up" approach in bancassurance works differently.
A customer and channel-driven strategy capitalizes on the existing
relationship of trust and familiarity between the banker and branch
customer and the frequency of branch visits. In emerging markets,
the lower-income customers found in bank branches are usually
wage-earners or small-business owners - the same type of customers
ignored by most insurance agents.
Visiting
local branches frequently, these customers often develop close
relationships with branch managers or tellers. (Relatively few
insurance agents achieve similar levels of trust with their
customers.) Even in the United States, where Internet banking and
automatic teller machines (ATMs) are omnipresent, 50 percent of bank
customers have monthly contact with their local bank branch. In
developing markets, these contacts are more frequent and personal
and often come in the form of visits to a branch to perform simple
transactions such as funds deposits or withdrawals.
The type of distribution channels that a company uses affects the design
and pricing of its products, as well as the way in which the
products are promoted and perceived in the marketplace. Some
bancassurers started out by selling simple products which could be
sold in large volumes but which usually had low margins to cover
expenses and profits. If we compare how products and distribution
are related to the profits of an organization, we will come to the
conclusion that the more complex the products sold are, the higher
the required margins will need to be.
Many banks entered bancassurance with a defensive strategy in their
attempt to avoid market share erosion by insurance companies. Very
soon, though, they realized that they could gain market share if
they expanded their product range, developed a sales culture within
their organizations, created a multi-channel distribution structure
and exploited the potential of the customer information that can
enable the identification of customer needs.
Cultural Issues in Distribution
The managers of banks and of life insurance companies can come from quite
different cultures. There may be differences in the way of thinking
and business approaches of bankers and managers of insurance
companies. These differences create a communication and
implementation problem in bancassurance operations. Banks are
traditionally demand-driven organizations with a reactive selling
philosophy. Life insurance organizations are usually need-driven and
have an aggressive selling philosophy.
It has been observed that this friction at the level of bank employees
and life insurance salespeople arises from differing philosophies
towards selling, the jealousies of bank employees regarding
remuneration of life sales staff and fears of
"cannibalization" of deposits, e.g. the bank employee
fears that the salesperson encourages withdrawal of bank deposits,
putting the bank employee's job in greater jeopardy. As a result the
team spirit is negatively influenced and, since this is a crucial
factor for the success of any operation, it has to be confronted.
Cultural differences between the banking and the insurance industries
must be understood, respected and lived with in order for the
bancassurance venture to succeed. The development of a single
culture is another possible solution but this requires a very strong
commitment from the top management. This commitment must be
continuously conveyed to all bank employees and life insurance
agents. One way of achieving this is to develop a "statement of
mission" for the new organization and to get the staff to
commit to fulfilling this statement. This can help to ensure that
there is a common path for the bank and the life insurer.
Integration of Various Distribution Channels
It seems very difficult for a single
distribution channel to successfully reach the bancassurer's goals
and specific target markets. Many bancassurers are using multiple
distribution channels. This way they avoid becoming locked into one
channel and they can offer services to a greater number of target
markets. Multiple distribution channels provide another valuable
feature. They enable the enterprise to offer customers multiple
options for access. Therefore, if a customer wants to see someone
about a particular service on one day but wants to transfer funds at
a later date, e.g. on a Sunday night, the availability of both
branch office and 24-hour telephone access increase the service
value to that customer.
However, conflicts may arise among the various channels and also within
channels under a multi-channel system. To avoid this it is necessary
to ensure the following:
-
colleagues within a channel are motivated to cooperate
-
there is communication of the importance of every link in the
distribution process
-
cultural differences are communicated and respected
-
the goals of every partner in the distribution process can be fulfilled
by the process
-
the specific role and performance expectations of each channel member are
clearly stated, understood and accepted
-
communication between channels is encouraged
-
channel leadership is strong and committed to success.
By completely integrating their distribution channels in accordance with
an established model, companies can achieve substantial cost
savings, improve productivity and ensure that all stakeholders,
shareholders, customers and staff are satisfied.
The future of
integrated distribution calls for the customer to be placed at the
heart of the distribution network. The call centre and the agency no
longer operate as separate channels. Rather a synergy is realised
through realignment of roles and responsibilities and the creation
of a new sales integrated sales process, maximising lead generation
activity. Whatever the combination of distribution channels, the
financial services company must seek to always improve the customer
experience and deliver the service more cost effectively.