Bancassurance: A state-of-the-art insurance distribution channel

Bancassurance is an alternative distribution channel for insurance products where a strategic business relationship is formed between a bank and an insurance company with a view to making use of the bank's sales channels as well as customer bases for the selling of insurance products to the bank's customers. Though the concept of Bancassurance is fresh in Bangladeshi financial services market, it has, since its introduction in 1980, gained enormous success in the USA, UK, EU and some Asian countries including India, Pakistan and Malaysia.
Little is known in our country about the concept. A seminar on Bancassurance was held in August 2014 at CIDRAP auditorium in Dhaka which was organised by the Bangladesh Insurance Academy to highlight the prospects and working of Bancassurance in the country as an alternative insurance distribution route apart from the traditional agency system.
The opening of private insurance companies in 1980 was a milestone in the field of financial inclusion of the people of all strata of society. The initiative made way for fair competition among the insurance service providers offering cost effective insurance protection for people's life and properties.
The penetration rate of insurance in Bangladesh is far below the standard as compared to other South Asian nations. In the developed countries, contribution of insurance to their GDP (gross domestic product) has reached a substantial percentage - in the UK 11.8 per cent, USA 8.1 per cent, Japan 8.1 per cent, India 4.1 per cent, and China 3.0 per cent.
As against this, our current premium penetration rate is 0.9 per cent of the GDP where 0.7 per cent is in life and 0.2 per cent in non life business. In our country, only four out of 1000 persons have life insurance protection. However, the above figures are obviously promising in terms of the potential for bringing the vast majority of the people under the cover of insurance.
Insurance companies of the developed world sell their products through multiple distribution channels such as direct selling, agent, broker, bank, mobile and Internet. In our country, the widely used method is the traditional agency system which has proved ineffective in some way as reflected in the penetration rate.
In order to get in touch with the vast number of uninsured inhabitants, it would be prudent to utilise the unexplored opportunities offered by Bancassurance which has become a recognised method of distributing insurance products to bank's customers.
Bancassurance, first introduced in France in 1980, has already thrived in many countries around the world. It now dominates two thirds of life insurance and pension business in the European markets where market penetration is very high: 92 per cent in Malta (the highest achiever), 70 per cent in Turkey, 61 per cent in France, 63 per cent in Austria and 50 per cent in Southern Europe. And the overall new business penetration is 15 20 per cent in the long term insurance products.
On the other hand, penetration rate in the non life sector is yet to develop. In 2010, Portugal became the highest Bancassurance penetrator with 14 per cent of businesses sold while the penetration rate is 13 per cent in Turkey, 11 per cent in France. The Malaysian market gained 7.0 per cent of the businesses through Bancassurance though the concept is a recent phenomenon in Asia.
Basically, the non credit related insurance products such as whole life, medical insurance and education insurance will work better as these products may be a natural and complementary extension to the products of the retail bankers and ultimately complete the financial life cycle of a customer. Through different tailored-made insurance products, the bank can positively address the financial requirements of the particular segments of society since the confidence and trust of the people is higher on the banking institutions.
On the other hand, some credit based product may effectively be suited to the bank's customers in respect of mortgages, vehicle loans and overdraft facilities provided by banks with particular reference to fire, motor, consumer's credit and personal accident insurances.
A sound move towards the flexibility as well as deregulation of the insurance sector can pave the way for establishing this strategic partnership between banks and insurers as has already been done in the major Asian markets. Bancassurance process based on "Distribution Agreement Model" may help advancement of the insurance sector in Bangladesh.
The government has recently introduced the "National Insurance Regulation 2014". In this regulation, the government has set the ball rolling for the attainment of the insurance penetration rate up to 4.0 per cent of the GDP by the year 2021. For the successful accomplishment of the goal, we have to have pragmatic approaches to reach the uninsured masses applying all possible means. Amongst other guidelines set in the 2014 regulation, making use of the mechanism of Bancassuance as an alternative distribution channel for insurance products is noteworthy.
With an eye to upgrading Bangladesh to the level of a middle income country by the year 2021, a sustainable financial market is a must where all of its players -  banks, insurance companies, non banking financial institutions and stock markets  - have to play a collective and corresponding role. So, the role to be played by insurance industry is, in no way, insignificant. The benefits of  Bancassurance as unexplored distribution channel have been appended below:
BANCASSURANCE: BANK'S REAPING OF THE REWARD: Though the impact of the 2008 world recession was not much on Bangladesh economy, the overall profitability of the banks has experienced a downturn in the recent years partly because of the competition in the market and mainly because of the advent of newer players in the existing customer bases. The current number of banks providing retail, merchant, and investment banking services in Bangladesh has apparently been over saturated with 56 banks (state-owned commercial - four, private commercial -  37, foreign commercial - nine, and state-owned specialised - 6) with thousands of branches across the country.
With the introduction of the online and/or mobile banking facility, the changes to the behaviour of the consumers have led to increased competition among bankers. And this ultimately results in the reduction of their operational profits. In order to maintain the profitability as well as greater income stability, banks need to supplement their core earning which can, at ease, be achieved through more productive use of customer base and branch networks by enabling the insurers in respect of Bancassurance.
The banks, with minimum efforts and without additional expenses, can produce fee income and/or commissions in exchange of the sales services on behalf of insurers. They can extend the range of their products offered, encompassing the life cycle of customers and accordingly facilitate another core strategic objective i.e., retention of customers.
BANCASSURANCE: THE LEADING EDGE FOR INSURERS: It is the responsibility of the 77 insurers to reach the uncovered community through exploring the sophisticated distribution channels. This is where Bancassurance fruitfully can speed up the process. Bancassurance makes sure the enhanced geographical presence of the insurers enabling practical segmentation and well refined strata group of the bank's customer database. Insurers employ its expertise upon diversification of the products in collaboration with bankers. This mutual relationship can result in increased productivity, sustainably higher rates of successful sales, lowering unit distribution cost (as no face to face selling is required), and higher profitability for insurers. The insurers can cut the overlapping cost and gain the economies of scale in terms of business expansion.
BANCASSURANCE: PROTECTING POPULACE WITH ACCUMULATED EFFORTS: The government aims at the financial inclusion of people of all walks of life for sustainable economic growth. It wants everyone to be protected with need based insurance products for ensuring standard of living through safeguarding from financial adversity. The accumulated effort by the government along with the banks and insurers for raising public awareness through insurance education may increase the scope of insurance protection.
The use of the Internet, mobile technology and social media for the expansion of financial education will help the masses make informed decisions on purchasing insurance products on their own.
Moreover, with advancement of science and technology, the average life expectancy of the people is on increase. The insurers can provide the aged society with sophisticated insurance solution and healthcare funding. Bancassurance can facilitate tailored approaches towards this edge by offering convenient access by the uninsured population to financial services at a competitive price with better customer focus and quality postal services.
BANCASSURANCE:  GOVERNMENT'S REGULATORY CONTROL: In order to modernise financial system, the regulatory framework should support multi channel distribution system like Bancassurance. It should devise procedures to avoid large scale losses as well as widespread disruption in the market. Strict supervision is required in competitive positioning of the parties, through continual reviews of the products.
To sum up, application of the "Distribution Agreement Model of Bancassuranc" depends on the advancing steps of the banks guided by the regulatory bodies, especially the "Bank and Financial Institutions Division" of the Ministry of Finance. In the greater interest of economic growth of the country as a whole, all parties concerned should put their heads together and join the global trend.

The writer is associated with Reliance Insurance Limited, Dhaka.
abdulkadir@reliance bd.com