Bancassurance is set to grow in Asia, but successful and profitable implementation requires diligent preparation, focus and commitment. Firms entering into a partnership must get it right, and can benefit from objective external advice.
Distribution of insurance products is key to sustained momentum. Although agency sales has traditionally been the main channel for most life insurers throughout the world, bancassurance is rapidly becoming the most suitable route to penetrate nascent markets. It has also been the key motivation for the most recent and prominent transactions between banks and insurers in Asia.
The Asian insurance sector is expected to grow steadily from a low base due to rising levels of GDP, increasing individual wealth, a large regional population and youthful demographics in the least penetrated markets.
There are marked disparities of insurance coverage within the region, and diverse regulatory regimes and levels of sophistication. For instance, a mere 2-3% of Southeast Asia is penetrated compared with 7% in South Korea. Yet, the Asian insurance sector is expanding, with GWP (gross written premium) achieving a 6% CAGR between 2010 and 2014, and AIA and Prudential (UK) growing revenues at 15% or more in recent years.
Before 2001, there was no bancassurance in Asia. However, regulatory changes in some markets facilitated the development of the sector, insurers saw it as a successful model and also an attractive entry strategy.
Bancassurance appeals to banks for several reasons. It provides them with fee income for little capital outlay, adds an extra product to its wealth management offering, improves customer retention rates and increases its overall share of a customer’s wallet.
They generally want fee payment in full at the outset and insist that the distribution channels for other products are not disrupted.
Of course, this is especially the case when a bank changes its insurance partner. The new partner has to be able to replicate the outgoing insurer's products and provide comfort there will be no decline in operational effectiveness and customer service. A fall in commission revenue and even a temporary rise in customer complaints could be harmful to the business, as well as detrimental to a channel head’s career. So, the transition from the outgoing to the incoming insurer must be seamless.
There is also often a debate within a bank during the initial negotiation process with the insurer. The corporate development team typically argues for an aggressive business plan in order to justify a high strategic partnership fee, while channel heads want lower sales targets that they are confident about delivering.
Meanwhile, insurers gain access to mature distribution channels without having to build new sales networks and they can use a bank’s local expertise and knowledge in unfamiliar jurisdictions. They try to link as much of the strategic partnership “upfront” fee to performance and spread the payment over the term of the partnership to match cash flows and mitigate risk, although in practice it can take six-to-seven years to cover the initial outlay.
Insurers also aim to secure shelf-space and focus for their products among others offered by a bank, increasing sales volumes and profitability. Branch staff and relationship managers need to be incentivised to sell insurance, especially to promote higher earning schemes, such as RPUL (regular premium unit-linked) products which have high VNB (value of new businesses) rather than single premium products which banks tend to prefer.
Bancassurance is now a proven model in Asia and there have been several successful partnerships such as the region-wide partnership between Standard Chartered and Prudential whereby the bank delivers the insurer’s life products on a preferred basis and which was renewed in July 2014 for an additional 15 years, the exclusive bancassurance venture launched by AIA and Citibank in December 2013 that encompasses 11 markets in the Asia-Pacific region for a 15-year period and a DBS and Manulife distribution arrangement agreed last January covering Singapore, Hong Kong, mainland China and Indonesia.
The trend has extended to non-life businesses too, led by the HSBC Group which in 2012 sold its general insurance business in parts in combination with 10-year distribution agreements with AXA and QBE respectively. Medium-sized banks and emerging markets have also adopted the model: recent deals include PNB Life and Allianz in the Philippines and Prudential’s acquisition of Thailand’s Thanachart Life in 2013 and its 15-year exclusive partnership with Thanachart bank
In fact, forming partnerships with highly-regarded local companies is one way to kick-start market entry, as Aviva did in Singapore and Indonesia, attaching itself to DBS and Astra respectively.
Choosing a suitable partner and governance structure is imperative. For example, if a bank wants to be a leading digital distributer, then its insurance partner should have the same ambition and be equipped to offer similar capabilities. Increasingly, focusing on customer service by providing smooth interfaces, multiple access points and bundling of products is a basic requirement, and both partners must be committed to that aim.
In addition, insurers expect banks to be proactive, pushing its salesforce to promote the insurers’ products through staff training, tailored scorecards and incentives, as well as marketing them in such a way that it becomes natural for customers to buy the products, for example by linking them to travel insurance.
In order to achieve these objectives, they should start integration planning six to 12 months before the partnership is actually launched.
Increasingly partners are reviewing the performance of their venture compared with the initial business plan, seeking external diagnostics of each aspect to identify the optimisation potential and strengthening implementation.
Often this is facilitated by measuring salesforce effectiveness and by bundling products, but now digital techniques and cross-border referrals and cooperation are common. Straight-through-processing and making this work with compliance requirements for both parties is becoming more important as well. Data-analytics and FinTech, such as blockchain will also eventually influence the bancassurance model. Lastly, bancassurance will need to adapt to the increasing use of mobile banking and mobile financial services.
Although partnerships have multiplied during the past decade, recent deals have been characterised by high priced, competitive auctions. Many banks already have partners and insurers have been prepared to pay up to gain access to the remaining distribution channels. In fact, it is likely that some banks will try to renegotiate the terms of deals struck earlier this century.
Furthermore, experience with delivering initial business plans have been mixed. There have been problems with a few large deals, where the fees have been too high and the parties underestimated the scale of difficulties operating in diverse jurisdictions. These developments can make it harder for insurers to enter long-dated bancassurance partnerships profitably, in particular if they are not prepared and lack an ability to create immediate scale.
In our experience working with EY’s clients there are five main factors that contribute to a successful and sustainable relationship between bank and insurer.
First, each must choose the most suitable partner and market from the outset. Second, that partnership needs to be set up on commercial terms that balance the interests and requirements of both parties.
Third, an effective operating model should be designed and implemented prior to launch in order for the partnership to hit the ground running. On the one hand, this means a focus on the sales and management capability of the bank, including the selling process, staff incentives and that shelf space and management attention prioritises insurance sales. On the other hand, it means a focus on the operational effectiveness of the insurer, including its core business processes, sales support tools and training, technology and reporting mechanisms (including digital and straight through processing) , as well as ensuring that its products and are simple and easy to sell.
Fourth, there should be a multi-level engagement governance model with continuous communication between both partners. And finally, there must be constant measurement, diagnosis and improvement throughout the life of the partnership.
If banks and insurers follow this template, then they are likely to enjoy a fruitful relationship and mutually benefit from the exciting potential in Asia’s growing bancassurance market.
By Adam Hutchinson and Martijn Van de Wiel, EY
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.