Introduced in Europe in the late 1970s, the relationship between banks and insurers—widely known as bancassurance—is often an attractive proposition for both insurers and their
banking partners.
Bancassurance has long been a fruitful area for partnerships, as the synergies between banks and insurers are often very clear. Banks bring to the table customer connectivity by virtue of the frequency and quality of the customer data they manage. Insurers, on the other hand, bring specialized skills in areas such as insurance design, manufacturing and distribution.
Not surprisingly, the number of bancassurance agreements in place around the world has grown dramatically since inception and adoption is only expected to increase, as new and emerging markets start to focus on improving access to insurance and banking services. Bancassurance already attracts some of the biggest players in the marketplace, largely because of the allure of a strategic win-win, faster growth and scale economies.
Insurers see bancassurance agreements as a way to quickly enhance their distribution reach while taking advantage of increased economies of scale. Banks, on the other hand, see these agreements as an opportunity to offer a deeper variety of products to their customers while capturing commissions, fees and (often sizable) upfront contract payments from the insurer.
A marriage made in heaven
There is no single winning formula for successful bancassurance relationships and the nature of these alliances often varies significantly. Much like relationships in our personal lives, the degree of commitment between the parties often depends on the strength of the relationship and the perceived benefits.
In some cases, banks and insurers have entered into simple “nonstrategic partnerships” in which banks work with multiple insurers with no long-term commitment on either side (akin to being single and dating). Others have struck medium-term “strategic partnerships” using vehicles such as distribution agreements (think courtship or engagement), while those not shy of commitment have essentially married their partner through long-term joint-venture partnerships.
However, like most relationships, the dynamic between banks and insurers can be strained at times and, without constant effort and investment from both sides, can result in one or both parties feeling unfulfilled by the relationship. And, unfortunately, a significant number of these partnerships tend to end in “divorce,” without much value to show at the end—other than lessons learned for the next partnership attempt.
Understanding your objectives
One of the biggest reasons for bancassurance divorces comes down to a lack of recognition of the needs of the other party. The reality is that—while banks and insurers may seem very similar with clear synergies—each party has very different (and often directly conflicting) objectives.
Simply put, insurers are primarily focused on value creation by monetizing risk management over time, while banks are focused on driving value creation through the selling of shorter-term traditional banking products across an often stable and loyal customer base.
This often creates tension in the partnership, with the insurer wanting to develop and deploy products that create long-term economic value for shareholders, while the bank is looking to generate commission revenues from competitive products that can sell fairly easily in the shorter term.
At the same time, competition for “shelf-space” at bank branches is intense, with insurance typically one of 15 to 20 products sold by bank relationship managers. These managers are looking for products that are highly competitive and, as a result, tend to expect the insurers to absorb some level of margin compression.
As a result, there is often a misalignment of objectives that—unless expressly recognized when developing the agreement—can lead to missed expectations and, potentially, divorce. To accommodate this difference in outlook, insurers often try to incorporate “profit share” agreements into their partnership terms with banks to align interests between short- and longer-term results.
Regulation is also changing the dynamic, with banks becoming responsible for the sale of insurance products and, therefore, liable for potential mis-selling exposure. This is true in mature markets but also expanding into high-growth markets, for example, with recent legislation in India. These developments should help the positive development of the insurance sector and also better align the interests of banks and insurers over the longer term.
Creating the right operating model
A review of the more successful bancassurance agreements shows that it takes more than goodwill and an alignment of objectives to build a healthy relationship. It also takes clear rules of engagement; in other words, a transparent, practical and mutually beneficial operating model.
Key questions will need to be answered across a number of areas:
- Partnership strategy: How does the partnership align to the group’s corporate strategy and what level of integration will be required to achieve success?
- Product offering: Will the insurer offer their traditional product portfolio, create a new portfolio of bancassurance products tailored to the bank, or a combination of both?
- Branding: What role will the insurers’ brand play in the sales channel or will a new “cobrand” be created?
- Sales channel: Will the sales channel be managed by bank staff only or will insurance agents—embedded or via referrals—play a role?
- Sales approach: Will sales representatives be opportunistic, responsive or proactive when selling the products?
- Operating platform: Will the partnership require a standalone information-technology (IT) platform, or will it be integrated into the banks’ and insurers’ IT systems?
Critical success factors
Ultimately, the past four decades of experience with bancassurance has demonstrated that—even with the best partnership agreements and well-planned operating models—success always comes down to execution.
At KPMG International, we have identified three critical success factors that tend to characterize the most successful bancassurance relationships, see chart below.
Factors for successful bancassurance
relationships
Attractive products
- Simple, standard products;
- Bundled with banking products; and
- Complementary to the range of existing banking products
Effective training
- Training included in the general banking curriculum:
- Emphasis on recognizing cross-sell opportunities and bundling bank and insurance products; and
- Ongoing support provided by product specialists.
Clear partnership strategy
- Well-defined strategy on a win-to-win basis;
- Clear understanding of decision-making authorities, benefits and risks;
- Transparent division of responsibilities, including a mechanism for managing day-to-day operations and ensuring orderly dissolution at the end of the arrangement;
- Sense of identity for the bancassurance community; and
- Clear and compelling communications around insurance contribution to group value creation.
Compelling incentives
- Incentives, at least on par with industry averages, explicitly included in annual targets of banking branches; and
- Specific insurance incentives in line with banking products’ remuneration scheme
- Potential referral incentives
Efficient operating model
- Clearly defined processes and interfaces (bank/insurer/agent):
– Customer acquisition/sale;
– Cross-selling and up-selling; and
– Post sales service and claims management
- Clear definition of responsibilities in the sale process (e.g., lead generation versus sale).