September 2005
Sectoral

BY Ram Krishna Khatiwada

Ram Krishna Khatiwada

To serve the clients better and earn higher profits, banks and insurance companies can go for a strategic alliance under bancassurance model.

Faced with the increasing competition, Nepali banks have started identifying new opportunities and innovative products to cater to the changing demand of the customers. In this connection, they are eyeing the non-interest income sources like ATM, debit cards, internet banking, mobile banking, and bill payment services. Bancassurance would be the new area for them to expand to in the near future.

What is Bancassurance?

Bancassurance refers to a conglomerate offering both banking and insurance products, usually in the form of a holding structure of separate but interacting entities—an integrated alliance exchanging services or an integrated operational mode. It signifies a long-term relationship to provide a wide range of financial products to a common customer base, by exploiting synergies inherent in the collaborating institutions.

Globalisation of markets advances in technology, changing demographic and socio-economic patterns are some trends that will result in new or changing needs for insurance protection and financial planning. Banks and insurance companies should hone up their skills and potential in these areas and take advantage of the emerging opportunities. In addition to traditional products, banks need to develop special insurance products in order to fulfil the customers’ needs emanating from banking transactions or by improving certain products to make them more attractive to the customer.

Why should a bank enter this segment?

With the competition intensifying every day, the Nepali banking industry cannot continue functioning with the traditional banking approach. Globally, banks now operate across a broader range of activities, including insurance, via legally independent risk carriers. The insurance companies and banks should not just compete within the insurance industry and the banking industry alone but also in the wider financial service marketplace.

Global Scenario

Bancassurance has grown at different paces and has assumed different shapes and forms in different countries depending on the demography as well as the economic and the legislative prescription in the country concerned. During the last two decades, bancassurance has taken deep roots in various countries, especially in Europe. In UK, about a third of the policies are sold through banks. In Spain, 72 percent of insurance premium income comes through bancassurance, whereas in France it is at 55 percent. France, Italy and Spain recorded a penetration of more than 60 percent due to the large middle class population and a favourable tax treatment. However, it had little success in Germany, even after the purchase of Dresdner Bank in 2001 by Allianz, the country’s largest insurer. While Bancassurance recorded a huge growth in Europe, it did not do so in the USA and Canada. In the US, there were regulatory hurdles because the banks were not allowed to do insurance business and vice versa. Even after the Gramm-Leach Bliley Act of 1999, the target customers have not responded well. In China, banks are limited to playing the role of tied agents to insurance companies, which can still provide a good platform for bancassurance to develop. It is a relatively new concept in Australia and Asia. However, in the Asian markets, bancassurance has become a favourite choice of bankers and insurers and, as a result, governments have been offering legislative support. In India, most of the new generation banks as well as some renowned public sector banks are entering this bandwagon.

Opportunity for Nepali Commercial Banks

In the past couple of years, Nepali commercial banks have shifted their focus from traditional lending to corporates to retail lending. Though initially it was a move to get rid of the excess liquidity, it turned out to be a lucrative business for banks. Although it started with the initiatives of foreign and private banks, retail lending came in a full circle when the public sector banks like Rastriya Banijya Bank (RBB), Agriculture Development Bank (ADB) and Nepal Bank Ltd. (NBL) with their large branch network, joined the bandwagon. Now this business is undergoing a continuous evolution. The objective of retail banking is to provide its target customers a full range of financial products and banking services, giving the customer a one-stop solution for all his/her financial requirements. The products are backed by world-class technologies and delivered to the customers through the growing branch network, as well as through alternative delivery channels like ATMs, phone banking, net banking and mobile banking.

However, despite having a large branch network, efficient professional and world-class technology, Nepali commercial banks have not shown initiation toward the bancassurance business. They have been treating insurance companies solely as insurers of the loans given to consumers and business houses. Hence their alliance with the insurance companies is limited to that.

Bancassurance holds a great potential for the banks as a fee-based product while insurance companies can get corporate selling channels and expand their insurance products coverage (see the box in the next page for the list of opportunities).

Among the different models of bancassurance (see box in the next page), global scenario shows that distribution alliance is better in the initial or the introductory stage. In distribution alliance, banks can offer their services as distribution channels for insurance products through their wide branch network. In the present regulatory framework, there are no preventive rules that stop banks from being corporate agencies for the insurance companies. Banks can be a corporate agency for marketing insurance products for an agreed referral fee/commission. The banks can tie up with one or more insurance companies, life or non-life insurer, according to their branch network, consumers, expertise, technology and relationship with the insurance companies.

However, before embarking into bancassurance, there is a need to examine certain critical issues drawing lessons from the experiences of other countries. Issues involved in bancassurance can be classified broadly under three heads: strategic (involving decision on the partnership model keeping with the in-built strengths of the partners), operational (encompassing internal processes, procedures and systems) and attitudinal (engendering work culture, commitment, development of competencies and orientation toward corporate goals).

The Challenges

Nepali banks could also experience the major challenges faced by the majority of bancassurers throughout the world. They include:

Innovative Style: Selling traditional insurance products through a bank branch using traditional insurance sales techniques has done little to change the consumers' perceptions about insurance. The security and trust offered by a bank has been a major factor in creating consumer confidence in bancassurance but it is the major challenge that should be faced by bancassurers. Bancassurance requires new products and sales processes to alter consumers' perceptions.

Distribution costs: For a successful bancassurance product and an increase in its sales, highly knowledgeable professionals and dedicated sales forces are required. It is the major hurdle for Nepali commercial banks. It is a cost as well as time consuming process to develop, maintain and compensate a skilled sales force.

Complexity of products: To tap more and more consumers, insurance companies have been innovating and upgrading their products. Banks face hurdles while handling these complex products. So a team of competent professionals who can handle these complex products should be formed. Obviously, it would be a cost increment decision.

Market expansion and trust: The Nepali bancassurers should face challenges while expanding the market to reach the middle and the lower income families, improve the effectiveness of the current sales opportunities and exploit all marketing channels (most notably e-commerce). Besides, in bancassurance, trust is most important. Therefore, the marketing focus of these institutions should be on their image and brand name.

Rules and Regulations: In the bancassurance model, rules and regulations show a two-fold impact on both banks and insurance companies. In Nepal, the supporting rules and regulation regarding bancassurance are still absent. The commercial banks are operating under Nepal Rastra Bank's rules and regulations whereas insurance companies operate according to the Insurance Board's rules and regulations. This might be another major hurdle for the bancassurance model in Nepal.

Others: Industry experts say that the risks of integrating banking and insurance businesses include the organisational complexity and costs. These are closely associated with the information systems of individual partners, staff training for various distribution channels, a different comprehension of marketing in various client segments, as well as the threat of taking over the existing clients.

Nepali bancassurers might face all of these or most of these challenges.