The business of banking is changing around the world – the integration of the global financial market, new technology, demand variation, diversification of non-banking activities and so on are the underlying reasons.
The obstacles that kept financial services separate have been removed as a result of these adjustments – bringing new dimensions in the banking sector and developing new business concepts.
One of these concepts is Bancassurance – providing banking and insurance together – a relatively new idea in the financial sector. Broadly, it is an alliance between banks and insurance companies for selling insurances through the banks.
According to the Insurance Regulatory Development Authority (IDRA), "Bancassurance refers to acting as corporate agent for insurers to distribute insurance products." Though Bancassurance is a new buzzword in Bangladesh, it is widely used in western and developed countries.
Bancassurance first got popularin France in 1980, the USA initiated it in 1999. India started the service in 2000 after its government issued a notification allowing Indian banks to distribute insurances. Forming in 2001, "SBI Life Insurance" is the first joint venture Bancassurance of India where the State Bank of India had 74 percent share, and BNP Paribas Assurance Life Insurance had 26 percent. In Kenya, it was introduced in 2004.
Bancassurance is a win-win strategy for the banks, insurance companies, and also the customers. Banks can meet their deposit demand through it. Experts predict that soon 90 percent or above share of premiums will be collected from the Bancassurance business channel.
The service minimises credit risk of the banks through diversification of mortgage risk, personal loan risk and SME loan risk. It also assures a long term relationship with the customers as insurances are issued on a long term basis.
Given the wide range of insurance services and huge competition among banks – it will significantly increase the banks' profit along with a reputation for rendering more services.
Banks will generate more income from the commission earned by selling insurance products, and in turn, it will contribute to increasing the Return on Assets (ROA). Moreover, it will boost the productivity of the employees.
Insurance companies too have the same capacity to benefit from this platform. Despite being a significant part of the economy, insurance companies indeed cannot reach the grassroots level for several limitations. However, through this system, banks will sell their services – reducing their dependency on the branches and sub branches.
Using banks as a platform, insurance companies will establish an effective channel and a strong relationship between themselves and the customers, and at the same time cutting the huge cost of setting up their own network.
Insurance companies will receive upward sales revenue and a better brand image. Besides, they can concentrate on bringing innovative services based on customers' demands. The companies will be able to use ATMs, terminals of a bank's Point of Sales, and other technology used by the banks.
The customers' gain would be the one-stop service they will receive through this system. It works like a "Financial Super Market" for them. They will get comprehensive financial services under one roof.
In this system, when a customer takes a bank loan – in case of his early death or partial disability – the outstanding loan will be paid by the Bancassurance. Moreover, the depositors too will get insurance coverage – but the extent will be determined by factors such as price and underwriting. It is a convenient and better service for the customers.
On the other hand, bank employees will get incentives to perform comparatively when the banks open additional earning opportunities for them.
Prospects of Bancassurance
Bancassurance is a growing trend worldwide and its prospect is bright. The global market size of Bancasaurance has reached around USD 1,166 billion in 2018 and it is assumed that by 2024 it will be USD 1665 billion.
The growth rate of Bancassurance is four times more than life insurances. A research conducted by IDRA shows that from 2014-2019, the Compounded Annual Growth Rate of Bancassurance is 6.16 percent. Observations say that Bancassurance is flourishing in our neighbouring countries like India, Pakistan and Sri Lanka – where the economic scenarios are similar to Bangladesh.
In Europe, 40-50 percent of the insurance market is controlled by banks. In France and Portugal, 70 percent of the insurance products are sold through the banking channel, while in Spain it is 60 percent.
In Bangladesh, the concept is new and the public do not have any idea about it. Even so, research and analyses show that the prospects of Bancassurance are very high in the Bangladeshi economy. Experts opine that this economy befits the system of Bancassurance.
In Bangladesh, 62 banks and 76 insurance companies (Life and Non-Life) are rendering financial services. And IDRA found that only one percent of the total population enjoys the insurance service.
The grassroots people have a negative attitude towards insurances – but they have immense trust in the banking sector.
Banking operations in Bangladesh is still branch-oriented and countrywide the total number of branches are more than 8,000 countrywide. Moreover, almost all the life and non-life insurance companies are doing their business mostly in the urban areas – city dwellers being their target customers. Approximately half of the total population of Bangladesh is still not covered by insurance companies.
As banks have a wide network, through the Bancassurance, both the rural and urban people will be able to get insurance facilities. In this regard, we can be optimistic about Bancassurance playing a significant role in our economy in the near future.
To introduce Bancassurance, a formal agreement must be prepared between the banks and insurance companies. It must have the necessary clauses of revenue sharing and conflict resolutions about interest issues for the concerned parties. And then, approval should be taken from the regulatory bodies.
To achieve success in Bancassurance customer behaviour – market image, legal framework, product diversification, risk-factor assessment, manpower, partner selection, training, remuneration and so on should be given proper consideration. Here, banks cannot become insurance brokers. They must work as a mediator. A bank can become a corporate agent for one insurance company only, and the bank must have a chief insurance executive to handle all the insurance activities.
Limitations of Bancassurance
Undoubtedly, Bancassurance will bring a revolution in the financial sector. But it has some limitations as well as challenges.
The business portfolio of the bank may be affected if the insurance is perceived as a substitute for bank deposit. Conflict of interest may arise between the products of the banks and the insurance companies. To resolve the conflict of interest between the two platforms, there should be a proper guideline.
Delay in the settlement of customers' claim is a common problem. Banks should settle all the claims of the customers within a reasonable time which will ensure customers' trust on the banks.
Staff crisis, especially that of trained staff, may be another limitation. Negative attitude towards the insurance, lack of sales, and inflexibility of the insurance services may compromise the effectiveness of the system.
The bank employees' lack of understanding and specialisation in insurance business may hinder the progress of this new business product. The employees of commercial banks must be well trained to sell insurance products. They should be smart and competent in answering customers' queries.
Institutional training facility on Bancassurance is not available in Bangladesh yet. For the smooth operation of Bancassurance, banks should set up a separate subsidiary company that will work independently.
Banks should also have a provision of providing after-sales services. Considering the interests and demands of the customers, the banks and the insurance companies should bring innovative services.
Considering the huge prospects of Bancassurance, policymakers, regulators and other stakeholders must make concerted efforts for successful initiation of the system in Bangladesh. Government and the other concerned regulatory bodies should have a positive outlook towards Bancassurance, and thus, necessary laws should be written.