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Benefits of Bancassurance

Bancassurance provides benefits to customers, banks, and insurers. Customers benefit from ease of access to insurance products at their bank in addition to banking services, simpler products, comprehensive advice, attractive rates, security from vetted insurers, and easy premium payments. Banks benefit from new revenue streams, diversification of services and income, increased customer loyalty by being a "one-stop shop," and reduced distribution costs for insurance. Insurers benefit from accessing banks' large customer bases and distribution networks at lower costs than other channels.

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0% found this document useful (0 votes)
225 views9 pages

Benefits of Bancassurance

Bancassurance provides benefits to customers, banks, and insurers. Customers benefit from ease of access to insurance products at their bank in addition to banking services, simpler products, comprehensive advice, attractive rates, security from vetted insurers, and easy premium payments. Banks benefit from new revenue streams, diversification of services and income, increased customer loyalty by being a "one-stop shop," and reduced distribution costs for insurance. Insurers benefit from accessing banks' large customer bases and distribution networks at lower costs than other channels.

Uploaded by

Allen Chiwaura
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Discuss the benefits of bancassurance for the customer, the banks and the

insurer in today’s competitive business environment. (25)

Introduction

Bancassurance is a French term referring to the selling of insurance through a bank's


established distribution channels. In other words, we can say Bancassurance is the provision
of insurance (assurance) products by a bank. The usage of the word picked up as banks and
insurance companies merged and banks sought to provide insurance, especially in markets
that have been liberalised recently.

Dumitru D (2013) holds that Bancassurance is the selling of insurance and banking products
through the same channel, most commonly through bank branches. Selling insurance means
distribution of insurance and other financial products through Banks.

It is a controversial idea, and many feel it gives banks too great a control over the financial
industry. In some countries, bancassurance is still largely prohibited, but it was recently
legalised in countries such as the United States of America when the Glass Steagall Act was
repealed after the passage of the Gramm Leach Bililey Act. In Zimbabwe bancassurance is
legal and was has is being practised by a number of commercial banks.

Notwithstanding the above, it is it worth mentioning that Bancassurance has become


significant. Banks are now major distributions channel for insurers and insurance sales a
significant source of profits for banks. The latter partly is because banks can often sell
insurance at better prices (i.e. higher premiums) than many other channels. Secondly banks
have low costs as they use the infrastructure such as branches and systems which they already
possess and have paid for.

Bancassurance primarily rests on the relationship the customer has developed over a period
of time with the bank. The notion at play is that pushing risk products through banks is a
much more cost-effective affair for an insurance company compared to the agent route. On
the other hand for banks, considering the falling interest rates, fee based income coming in at
a minimum cost is more than welcome.
Furthermore, regarding the globalization tendencies, the origin of bancassurance companies
is a natural process. Hence, bancassurance includes the advantages carried by both sectors
which are both banking services and insurance sector. On the one hand the bank provides its
distribution network of branches and agencies as a place where insurance products are
offered on the other hand, it solves its problem of effectively within its primary distribution
network.

In some countries, especially in the United Kingdom, the life insurance market has noted a
decrease in market share, recently, and the insurers are now trying to gain and work out new
business. The intensification of competition caused by bancassurance and subsequent
decrease in the market share of insurer’s causes that the latter can only watch their clients
purchasing long-term insurance products from their banks, rather than from their insurance
agents.

Benefits to customers

1. Ease of access

The primal benefit that accrues to customers is ease of access. This is because customers have
a natural and frequent level of contact with their bank. It is equally natural that when they
visit their bank, they should find straightforward over-the-counter responses to all their
financial needs.These responses include precautionary savings, asset building, pensions,
mortgage protection and protection against unforeseen life events.Thus the customer benefits
from such as opposed to other distribution channels.

2. Simplicity

Customers also benefit from the simplicity embedded in the bancassurance policies.
Insurance products sold over-the-counter by banks have been specially developed to be
simple to understand and simple to sell. Usually underwriters spend time taking out complex
legal jargon and replacing with less tedious concise wordings made with the laymen in mind.
Their rate structures are also designed for maximum customer accessibility.
3. Comprehensive advices

Customers also benefit through the provision of comprehensive advice.Bancassurance


dovetails perfectly with the range of retail banking services by offering bank customer’s
advice on many services. Advice offered include savings products advice such as life
insurance and pensions as well as also loan protection products for home loans, auto loans
and personal protection products. Customers are therefore able to decide which products suit
them best

4. One stop shop

The customer also benefits through the convenience offered by the banks. The banks stock all
its financial products under one roof. This enables customers to access them with one visit.
Thus a customer will save time and money by purchasing and paying for his/her insurance
from the bank. The integration of insurance and banking activities has also means that the
processing times in the banks have had to be streamlined and reduced in order to save the
customer’s time.

5. Attractive rates

Customers’ also benefit from lower priced insurance policies. Selling insurance products via
retail banking networks usually has the effect of reducing distribution costs, because
marketing expenses can be offset against more extensive ranges of banking products and
greater volumes of customers. Products can therefore be marketed at rates that are more
attractive to consumers. The overall effect is to relieve the burden on the pocket of the
customer.

6. Security

The customer also benefits due to the security that he/she derives from the bancassurance
arrangement.The solvency of the insurer selected is guaranteed because the bank will have
had gone through a vetting and scrutinising process of the insurer. Secondly the involvement
of the bank as the legal guarantee of the institutional intermediary is reassuring to the
customers

7. New products
Through bancassurance customers benefit from new products which will be churned out by
the banks in conjunction with insurance companies.The banks possess cost advantages which
could be useful to in design of products which would normally be costly to structure and
distribute.New products especially in the micro insurance area would prove to be beneficial
for customers in this regard.

8. Ease of premium payments

Premium payments are made easier for customers because of the banks ready existing
payment systems. The customer may make use of the stop order systems which automatically
deduct the premiums in their accounts ounce they are due. This will prove to be beneficial to
customers who are usually prone to forgetting to pay on time or may not receive reminders on
time that the premiums have been are now due.

However the benefits mentioned above are not without fault. For instance if the bank operates
a bancassurance scheme, it may make it mandatory to purchase cover from the bank as
condition to attain a loan. The implication maybe embedded in the agreement thus giving the
customer little leeway to compare prices in the market. This practise stifles the choices of the
customers and overly may produce feelings of resentment towards the banks.

Secondly the advice offered by the banks on bancassurance may be faulty because the banks
are not primarily into risk management rather money management.If the bank does not
commit specified resources to the servicing of its insurance clients, clients might end up
getting the short end of the stick. Faulty advice might be dished out by illtrained professional
who might be pursuing profits at any cost.

Another downside of using commercial banks in the distribution of insurance is that if the
bank is not doing well itself the insurance policies taken out may be costly. This is because
that bank will try to cross subsidise the products that they are selling. The effect is that the
insurance policies offered by the bank will be costly.This wipes away the cost advantage
benefit.

Benefits for Bank


1. Revenue creation

Perhaps the most important benefit that accrues to the bank is the creation of revenue. The
bank sees bancassurance as a way of creating a new revenue flow. This advantage was all the
greater in the early 1990s, a period characterized by increased competition between financial
institutions and a reduction in the banks’ profit margins and, therefore, the need to look for
new business.

2. Diversification

The advent of hysteria around risk management has fuelled the need for the banks to
diversify its operations.This has led to the need to diversify the operation of any
business.Banks are not spared in this urge to avoid the risk of concentration of income
sources. Thus the banks will benefit from the introduction of bancassurance because it
provides yet another source of diversification for the bank.

3. One stop shop

The bank becomes a sort of “supermarket”, a “one-stop shop” for financial services, where all
customers’ needs – whether financial or insurance-related – can be met. The broadening of its
product range makes the bank more attractive and can reinforce customer satisfaction and
therefore customer loyalty. The argument is mainly reinforced by the fact that customers now
prefer convenience in this 21st century fast paced cosmopolitan environment.

4. Cost effectiveness

The banks also benefits by means of reduction of distribution that the banks encounter in
order to set up and distribute the insurance policies .This is because the cost of distribution
can be seen as marginal since, in most cases, it is the bank’s existing employees who sell the
insurance products. This setting up of bancassurance also helps to absorb already existing
costs. Amongst other things, the one-stop shop model optimizes the use of the network and
increases the profitability of the existing branch network.

5. Increase in customer loyalty

The use of bancassurance has been observed to increase customer loyalty.In this day and age
customers are now holding many banks accounts with different banks. The argument is that
most well –to-do customers do not really place emphasis on who does their banking as long
as the banks charges are low. The introduction of bancassurance by the banks has seen a
reduction in the inter banks movement by customers and thus increasing loyalty.

6. Resource utilisation

The introduction of bancassurance has also led to the resource utilisation of the bank. The
bank may have idle resources which it has no means of disposal. These resources may
include excess staff or information technology equipment. The banks, by conducting
bancassurance, make use of these resources. The return on capital ratio also improves
because of the increased return through commissions garnered in bancassurance.

7. Increase in market share

The banks may witness an increase in market share by virtue of insurance client’s
referrals.The insured’s who use the bancassurance scheme may recommend to others because
of the convenience experienced whilst using the service. The banks also may benefit from the
advertising by the insurance company thus increasing its visibility and ultimately the market
share. The increase in customers in the bancassurance may spill over to the other products of
the bank available in the banking malls.

However the drawbacks of bancassurance are also worth mentioning.The banks image is
automatically tied to that of the insurer as result of their operations. Thus if the insurance
company fails to deliver proper service the bank will also be implicated. Customers will shun
the bank and he insurer by association. Thus the fate of the bank becomes tied to that of the
insurer and vice versa.

Moreover, due to the fact that the bank may not be very well versed in underwriting issues
there possibility of faulty underwriting is high. The banks might take on risks which pose a
sound threat to its financial wellbeing.The bancassurance then proves to be unbeneficial
because the losses incurred may end up wiping into the banks equity. This situation is
undesirable for the bank.

Lastly the adoption of bancassurance in some countries is not quite as rapid as opposed to
some other countries.Thus the banks may find that it would have incurred are some costs in
setting up the bancassurance only to find the customer are not as forth coming. This proves to
be unbeneficial for the bank which has to sustain losses incurred on the operations of the
bancassurance scheme.

Benefits to Insurer

1. Increase in customer base

Through establishment of a new distribution network, the insurance company significantly


extends its customer base and enjoys access to customers who were previously difficult to
reach. This is a fundamental advantage which convinces an insurance company to ally itself
with a bank. Greater customer base is good for the insurance company because of the pulling
of risk and the diversification of the risk portfolio.

2. Vaired distribution networks

The second benefit that accrues to the insurance company is the openingup of another
distribution channel.Generally the more the distribution channels the better for any enterprise.
This is because more distribution channels guarantee that the product reaches the customer
one way or the other. The insurance company has the opportunity to vary its distribution
methods, in order to avoid excessive dependence on a single network

3. Image improvement

The insurance company often benefits from the trustworthy and reliability image that is built
by the banks. This is against a background where society general has a cumulative negative
perception towards insurance companies. Thus the insurance companies could use a
reputational boost from the banks that often have impeccable records and enjoy the envy of
most companies.Overly the insurers seem to benefit more than does the bankers.

4. Cost advantages

The insurance company also benefits from the reduction in distribution costs. This is relative
to the costs inherent in traditional sales representatives. The sales network is generally the
same for banking products and insurance products and thus no need to acquire new
equipment or hire new staff. The distribution cost will prove to be beneficial to the insurer
when designing new products which it may want the market to adopt quickly and build a
sufficient pool of funds to pay claims.
These cost savings have been recognized by many bancassurance operators around the world
and are therefore carried over into the costs included in contracts. This means that products
can be sold more cheaply.

5. Quick establishment

Another benefit that accrues to insurers is that it can establish itself quickly when entering
into a new market.The market in which the insurers may wish to penetrate may be saturated
already by the established insurers with a significant branch network. Often times this would
be tall order for the entrant insurers. Thus using the bancassurance method may prove
beneficial because it places the entrant insurer in a formidable position by using the existing
local bank’s network.

6. Ease of premium payments

Due to the automation of the premium payment system the premiums due to the insurers are
remitted on time. The bank simply deducts from the debit balances available in the insurer’s
accountants and remits the monies to the insurer.The latter receives the premiums and
proceeds to affect cover without lapsing it. The whole arrangement ensures at the end that all
policies in force are paid up and no problems arise for clients when a claim occurs.

However bancassurance does not accrue only benefits to the insurers.Some of the downfalls
of the bancassurance to insurers are mainly to do with loss of control over business
acquisition.The banks can now call the shots. This means that the banks may ask for higher
commissions and lenient terms for their customers. As more and more people insurer through
the banks the bargaining power of the banks increases

Secondly bancassurance proves to be unbeneficial to the insurers by way of lack of personal


touch. Bank staff may not be well trained and well versed with the intricate details of the
workings of the insurance company. Thus some customers may be unknowingly short
changed. This has the effect of creating resentment by the customers whom would rather
prefer to be serviced by the insurers themselves who know best.

Insurers also find it hard to benefit from bancassurance because diverging cooperate
objectives. Differing objectives place upon the insurers the need to reconcile their goals with
those of the bankers. Sometimes this might not be as easy an exercise because of shareholders
attitudes and staff goals. If the bank senses a mismatch in the general direction of the two
entities it might withhold customers from the insurers because and thus the bancassurance
agreement falls apart.

Conclusion

The debate of weather bancassurance has done more good than harm rages on. However
some aspects are worth mentioning. The advent of bancassurance has led to some efficiency
in some regards of the insurers, banks and customers as well. Bancassurance can also be
attributed with increasing revenues and ultimately survival rates for all two entities i.e. the
banks and insurers especially in India. As with any change that occurs some causalities occur.
Thus after executing a cost benefit a cost analysis one can conclude that bancassurance has
had more merits than harm.

Bibliography

1. Swiss Re, “Bancassurance: emerging trends, opportunities and challenges”, 2007.

2. Swiss Re, “Bancassurance developments in Asia-shifting into a higher gear”2002.

3. http://www.letslearnfinance.com

4 Anderson, R. C., and Fraser, D. R. 2000. Corporate control, bank risk taking, and the health of
the banking industry. Journal of Banking and Finance, 24, 1383-1398.

5.Angbazo, L. 1997. Commercial bank net interest margins, default risk, interest-rate risk, and
off-balance sheet banking Journal of Banking and Finance, 21, 55-87.

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