By Chandana L. Aluthgama Bcom (sp), FCMI, MBA, Head of Corporate Business Development - HNB Assurance PLC

This article is based on an intense research carried out by me in 2005 which I have also published both locally and internationally. It is my privilege to share a part of the research paper according to my findings with our industry.

To analyse the nature of Bancassurance, we can examine "What is Bancassurance?" and "What makes it different from a traditional Insurance operation?" The differences with other operations will help us to understand and to define the "Bancassurance" concept. The type of Insurance we know best is the "Insurance Agent or Broker". "How do they differ from Bancassurance?" Insurance intermediaries defined above will provide asset protection and life insurance to interested parties. These Agents or brokers identify the needs of their clients and provide insurance to the client’s interest. These intermediaries will also be entitled to a commission from the insurance company they are attached, for sourcing insurance business. Most of the traditional insurance polices they market are for one year in property insurance and long term for life insurance. Moreover the traditional insurance selling has been limited to these channels, whilst the traditional Banking activities have also been limited to developing and marketing banking instruments.

One of the most significant changes in the financial services sector over the past few years have been the appearance and development of Bancassurance.

Banking Institutions and insurance companies have found Bancassurance to be an attractive and often profitable - complement to their existing activities. The successes demonstrated by various Bancassurance operations, although not all of them have been successful, have attracted the attention of the financial services sector, and further new operations continue to be set up regularly.

A Bancassurance operation is an important link between the bank and the Insurance Company, unlike in the past today most banks are looking at distribution of insurance products through the bank’s distribution network in return for a fee. This is one of the emerging distribution point for the insurance companies.

Bancassurance has become the alternate distribution channel today providing insurance solutions to banking customers under one roof. This concept keeps in line with the current thinking of banks; build under the notion of "once stop shop". This facility will provide maximum convenience to banking customers

Many successful operations in Bancassurance have been recorded from the west and Bancassurance in Europe is deliberate since most developments in Bancassurance up to the mid-1990s took place in Europe. According to Munich Re Bancassurance has been the hype in other parts of the world, e.g. the USA, Canada and some areas in Asia, Bancassurance operations are now developing in other parts of Asia. In doing so, they seek to learn from the experiences of European Bancassurer’s.

Bancassurance covers a wide range of detailed arrangements between banks and insurance companies, but in all cases it includes the provision of insurance and banking products or services from the same sources or to the same customer base. Because there is a wide diversity of strategies, there is no standard model for Bancassurance, even within a country. Available literature also shows a wide range of possible descriptions of Bancassurance:

The Life, Insurance Marketing and Research Association’s (LIMRA’s) insurance dictionary defines Bancassurance as "the provision of Life insurance services by banks and building societies".

Alan Leach, in his book, "European Bancassurance - Problems and prospects for 2000", describes Bancassurance as "the involvement of banks, savings banks and building societies in the manufacturing, marketing or distribution of insurance products".

Munich Re has developed the following definition for Bancassurance. "Bancassurance is the provision of insurance and banking products and services through a common distribution channel and/or to the same client base."

The main reasons why banks have decided to enter the insurance industry area are, Intense competition between banks, against a background of shrinking, interest margins, which has led to an increase in the administrative and marketing costs and limited the profit margins of the traditional banking products. New products could substantially enhance the profitability and increase productivity. Financial benefits to a banks performance can flow in a number of ways, as briefly outlined below:

Several European countries have made considerable regulatory changes regarding the banking and insurance sectors. Although regulatory changes vary from country to country there has been a pan European trend towards the "universal bank" and the limitations of the past no longer exist. Banks are now able to operate across a broader range of activities, including insurance, via legally independent risk carriers. The insurance companies and banks are not competing within just the life insurance industry and banking industry respectively anymore but within the wider financial services marketplace. Customer preferences regarding investments are changing. For medium term and long-term investments there is a trend away from deposits and toward insurance products and mutual funds where the return is usually higher than the return on traditional deposit accounts. This shift in investment preferences has led to a reduction in the share of personal savings held as deposits, traditionally the core element of profitability for a bank which manages clients’ money. Banks have sought to offset some of the losses by entering insurance business. Life insurance is also frequently supported by favorable tax treatment to encourage private provision for protection or retirement planning.

This preferential treatment makes insurance products more attractive to customers and banks see an opportunity for profitable sales of such products.

The high operating expenses of bank branches have led many banks to decrease their branch network, as shown in the following table. The need for more efficient utilization of branches and bank employees is today as pressing as ever before. However, in Italy the number of branches has increased due to the noticeable development in Bancassurance. In the future, in view of ongoing consolidation, the bank branch networks will probably decrease as well. Analysis of available information on the customer’s financial and social situation can be of great help in discovering customer needs and promoting or manufacturing new products or services. Banks believe that the quality of their client information gives them an advantage in distributing products profitably, compared with other distributors (e.g. insurance companies).

The realization of banks and insurance products can be better for the customer as they provide more complete solutions than traditional standalone banking or insurance products.

For example, a policyholder takes out a permanent assurance with the aim of funding future education costs. At the same time, the policyholder can take out a loan (mortgage) and assign the life policy to the bank as beneficiary. For the bank the benefits are increased sales and a more widely based relationship with the customer than would be possible with bank products only.

Banks are experiencing the increased mobility of their customers, who to a great extent tend to have accounts with more than one bank. Therefore there is a strong need for customer loyalty to an organization to be enhanced. Client relationship management has become a key strategy. To build and maintain client relationships, banks and insurers are forming partnerships to provide their clients with a wide range of bank and insurance products from one source.

It is believed that as the number of products that a customer purchases from an organization increases the chance of losing that specific customer to a competitor decreases. The western industrialized countries and the decrease in birth rates in conjunction with increasing life span will have a significant impact on the age structure of the population in the future. As a result it is likely that there will be increasing pressure on public pension systems and an increasing need for additional retirement provisions or long-term investment products. Banks see an opportunity to meet clients’ growing, needs in this area while making a profit. Banks are used to having long-term relationships with their customers. Banks have developed skills in deepening the relationship with their customers over time, for example by marketing extra services such as deposit funds or taxation advice.

Life insurance operations are also used for managing a relationship over the long term with their customers.

This allows similar skills to be practiced and the Bancassurer’s can make use of the best that each partner has to offer. Apart from the benefits that can be derived from the possible wide spread of branches across the country, Bancassurers can have a competitive advantage over traditional insurers (non-bancassurers), derived from the provision of customer service through automated teller machines (ATMs). In particular the Bancassurers can provide its customers with an ATM card that can be used to gain access to any ATM and request information such as cash values, unit price, policy status, next premium due date, loan accounts, surrender values, etc. This channel of customer service can easily be extended so that the customer can gain access to information regarding his bank accounts and insurance policies through his personal computer. Finally the Internet can be considered as an additional customer service channel since the customer can gain access to information regarding his bank accounts and insurance policies through this network as well.

Under the above circumstances Bancassurance has been defined by many markets in different ways and operated in many different ways. However, the gist of the subject matter gives one understanding; the researcher has defined the concept of Bancassurance in the Sri Lankan context as follows. The Bancassurance concept could be developed according to the researcher as "to provide asset protection to banking clients with maximum convenience and most competitive pricing, via a system driven customer friendly administrative mechanism, in order to enhance the risk quality of the banking loan portfolio, through a mutually beneficial process"

External alliances will take an insurance company to the second phase of growth. The Bancassurance channel will be an obvious choice of expansion with the comfort of having the hypothesis being successfully tested overseas.

Bancassurance in its simplest form is the distribution of insurance products through a bank’s distribution channel. In concrete terms Bancassurance, which is also known, as Allfinanz - describes a package of financial services that can fulfil both banking and insurance needs at the sametime. It takes various forms in various countries depending upon the demographic, economic and legislative climate of that country. Demographic profile of the country decides the kind of products Bancassurance shall be dealing in with, economic situation will determine the trend in terms of turnover, market share, etc., whereas legislative climate will decide the periphery within which the Bancassurance has to operate.

The motives behind Bancassurance also vary. For banks it is a means of product diversification and a source of additional fee income. Insurance companies see Bancassurance as a tool for increasing their market penetration and premium turnover. The customer sees Bancassurance as a bonanza in terms of reduced price, high quality product and delivery at doorstep. Actually, everybody is a winner here,

Bancassurance has a long history even though hyped up in the 1990’s as a concept. According to Genetay and Molyneux (1998) provide an excellent overview of Bancassurance in Europe and document its historical roots dating back to the 1800s. As discussed by these authors, Daniel (1995) differentiates three periods of Bancassurance development:

There are several reasons why banks should seriously consider Bancassurance, the most important of which is increased return on assets. One of the best ways to increase ROA, assuming a constant asset base, is through fee in-come. Banks that build fee income can cover more of their operating expenses, and one way to build fee income is through the sale of insurance products. Banks that, effectively cross-well financial products can leverage their distribution and processing capabilities for profitable operating expense ratios.

By leveraging their strengths and finding By ways to overcome their weaknesses, banks could change the face of insurance distribution. Sale of Personal fine insurance products through banks meets an important set of consumer needs. Most large retail banks engender a great deal of trust in broad segments of consumers, which they can leverage in selling them personal line insurance products. In addition, a bank’s branch network allows the face-to-face contact that is so important in the sale of personal insurance.