--BY SAURAV POUDYAL
Bancassurance, in plain words is banks providing insurance services, products or insurance benefits to their clients. Bancassurance is a model whereby both banking and insurance products are sold through the same channel from banks, especially from the branches of a bank.
Bancassurance may take various forms such as banks soliciting insurance products and services to their clients from an independent Insurance company or banks themselves owning insurance companies and offering insurance products.
Insurance and banking are two separate branches in financial service and bancassurance is the bridge between the two. Hence, bancassurance is mostly dependant on the relationship that a client has developed with his/her bank over the course of time.
The concept of bancassurance first germinated in France. Also known as Allfinanz, this concept quickly spread across the Europe in a short period. In the early 20th century, banks in US were restricted from selling insurance and investment products. In 1933 the Glass-Steagall legislation under the USA Banking Act separated commercial and investment banking in the USA. However, this restriction was removed in the late 1990s via the Graham-Leach-Bililey Act (GLBA) opening the avenue of bancassurance in the US too. The concept of bancassurance, however seem to have spread across the developing countries at much later dates. Most of the Asian countries were introduced to bancassurance only in the late 20th or early 21st century.
In its evolution, various models in bancassurance have developed across the world. There are three widely adapted models.
In the current scenario where the profit margins of financial institutions are shrinking from the traditional sales approaches whereby financial institutions rely heavily on interest earnings from their lending portfolios, bancassurance provides an alternate method of service delivery to enhance their profit margins.
Today, convenience stands at the top of the service pyramid for any individual or entity in terms of financial services. Given the intense competition in the financial world, banks need to think of innovative approaches to retain and increase their client base. With Bancassurance, financial institutions can improve their revenue books and their clients can enjoy the benefits and convenience of insurance services.
Some other notable benefits of Bancassurance are easier access to customers, reduction in distribution costs for the insurance companies and benefits from diversification of product lines for the banks. The banks have the advantage of increasing their profitability whereas Bancassurance provides the insurance companies with a cost-effective solution to market their products using the premises and resources of the banks.
Similarly, the conversion of small savings in banks to insurance premium will have a positive impact on overall domestic savings of a country and can pose as a good source of capital for long term investments. On the other hand, from an Anti Money Laundering (AML) perspective, Bancassurance comparatively carries lower risk as the individuals availing Bancassurance facilities are existing clients of the banks and they already have gone through a robust due diligence check as per the regulations of the central bank’s KYC (Know Your Customer).
In Nepal, Bancassurance is still in its infant stage and not a priority. There are various reasons for this. To put it bluntly, the insurance market of Nepal is still emerging. The majority still lack the exposure to insurance mainly due to lack of knowledge about the benefits of insurance. Low awareness levels about insurance and insurance not being a priority for the government are the other factors contributing to the slow growth of the insurance market in Nepal.The insurance market is not as mature as other advanced markets. Nepali insurance market is severely lacking product diversification.
Most of the products currently available in the Nepali market in terms of life insurance feature endowment, whole life or universal life which are all savings based products. In mature markets term insurance products are more preferred than endowment products as the premium is comparatively lower on term insurances. There are few term life products in the Nepali market and with a limited product diversification even among those available.
The amount of premium is directly proportional to the volume of insurance signups. If we consider the market of India, due to its huge population the premium amounts on insurance policies are much lower as compared to the premiums on similar products in Nepal. The simple reason being that the risk is spread among a larger mass of polices as compared to a limited number of policies in the Nepali context.
Both for banks and insurance companies there is a substantial opportunity if proper insurance products can be offered. There are very few to almost non-existent PPIs (Payment Protection Insurance) and MRTAs (Mortgage Reducing Term Assurance) plans. Even if they are available, the general public is largely unaware of such products and their benefits.
These plans cover the risk of scenarios where a borrower is unable to repay the outstanding loan from a bank due to various circumstances like bankruptcy, illness, death, etc. These plans provide a win-win scenario to all three parties- the bank, the insurance company and the borrower or the client of the bank. On the other hand, the Nepali market is completely devoid of ULIPs (Unit Linked Insurance Products). ULIPs are unique products that provide both insurance coverage as well as investment options to the clients where they can choose to invest in stocks, bonds or mutual funds. Clients can enjoy the benefits of insurance as well as return of investment from these polices.
Hence, there are plenty of opportunities for the insurance companies in Nepal to diversify their products to cater all client segments based on economic, geographic and demographic aspects. Given this, Bancassurance can play a vital role for the insurance market to set a strong foundation in an evolving economy like ours.
In developed markets, there are plenty of investment opportunities for the general public. In these markets, insurance products are viewed as an integral part of wealth management by banks. Banks act as financial advisors for their clients and provide proper consultation on the overall management of the wealth of their clients. The banks’ role is to provide their clients with the options of diversified portfolios which may include mutual funds, FOREX trading, insurance products, investment in bonds or primary and secondary markets, derivatives, etc. In mature markets, wealth management contributes to a major chunk of revenue for financial institutions.
For the insurance market to grow in any economy, there should be robust regulations and infrastructure in place to ensure viable and affordable access to insurance. To elaborate on this note, we can take the current slab for income tax exemption on insurance premiums, which is just Rs 25,000 per annum, as an example. This amount by far does not have any motivational value for the general public to get insured. The government and respective regulatory bodies should seriously put some more effort into making this slab more alluring to the public to generate interest. Furthermore, the unavailability of robust investment markets coupled with the general mindset for returns rather than risk coverage from insurance policies and low awareness levels about insurance, shows that there is still a long way to go for the life insurance market in Nepal to mature.
On the other hand, the insurance companies need to adopt intrepid approaches too. They cannot continue offering traditional products without investing in diversification and innovation. They are the ones capable of challenging the status quo. Although the insurance market of Nepal is evolving, the pace must be set by the insurance companies, the government and the regulators collaboratively, after all insurance is a prospect which is beneficial to both the economy and the public.
Strategic Alliance Model: Under this model, a bank and an insurance company get into a tie-up whereby the bank only markets the product of the insurance company. The bank is not involved in any other aspect of closing the deal and all the actions such as client assessment, underwriting, and claim settlements are done by the insurance company itself. This is the most common model in practice in Nepal.
Full Integration Model: Under this model the end to end service under bancassurance is handled by the bank itself. Sales and service level integration, to approach, to claim settlements are taken care of by the bank itself. In other words, the bank acts as a financial service provider as per the requirement of its clients for the respective insurance products that the bank solicits. This type of model is prevalent in more mature and developed investment markets.
Mixed models: under this model the sales and marketing activities are undertaken by the staff of the insurance company. The bank provides its client database to the insurance company and facilitates lead generations. This model requires very little technical investment, however there is an underlying risk of breaching client data confidentiality at the bank’s end.
(The author is the Head of Bancassurance at Standard Chartered Bank Nepal Limited. The views presented in the article are of the writer himself and do not represent the organisation that he is associated with.)