What is Bancassurance and will it work in Tanzania?

Can Banks in Tanzania Benefit from Bancassurance?

Bancassurance in its simplest form is the distribution of insurance products through a bank's distribution channels. In concrete terms Bancassurance, describes a package of financial services that can fulfil both banking and insurance needs at the same time. It takes various forms in various countries depending upon the demography and economic and legislative climate of that country. Demographic profile of the country decides the kind of products Bancassurance shall be dealing in with, economic situation will determine the trend in terms of turnover, market share, etc., whereas the legislative climate will decide the borders within which the Bancassurance has to operate.

The motives behind Bancassurance also vary. For banks it is a means of product diversification and a source of additional fee income. Insurance companies see Bancassurance as a tool for increasing their market penetration and premium turnover. The customer sees Bancassurance as a bonanza in terms of reduced price, high quality product and delivery at their doorstep. Actually, everybody is a winner here.

Why should banks In Tanzania Enter the Insurance Market?

There are several reasons why banks in Tanzania should seriously consider Bancassurance, the most important of which is increased return on assets (ROA). One of the best ways to increase ROA, assuming you have a constant asset base, is through fee income. Banks that build fee incomes can cover more of their operating expenses, and one way to build fee income is through the sale of insurance products. The banks in Tanzania that can effectively cross-sell financial products can leverage their distribution and processing capabilities for profitable operating expense ratios. Leveraging their strengths and finding ways to overcome their weaknesses, therefore banks in Tanzania could change the face of insurance distribution. The sale of personal line insurance products through banks meets an important set of consumer needs. Most large retail banks prompt a great deal of trust in the public eye, which they can use in selling them personal line insurance products.

Another advantage open to banks in Tanzania over traditional insurance distributors is the lower cost per sales lead made possible by their sizable, loyal customer base. Banks also enjoy significant brand awareness within their sector, again providing a lower per-lead cost when advertising through print, radio and/or television. In Tanzania, banks that make the most of these advantages and penetrate their customer base and markets will be rewarded with an above-average market share.

Other bank strengths are their marketing and processing capabilities. Banks have extensive experience in marketing to both existing customers (for retention and cross selling) and non-customers (for acquisition and awareness). They also have access to multiple communications channels, such as statement inserts, direct mail, ATMs, telemarketing, etc. Banks' proficiency in using technology has resulted in improvements in transaction processing and customer service.

By successfully mining their customer databases, using their reputation and 'distribution systems’ (branch, phone, and mail) to make appointments, and utilizing 'sales techniques’ and products tailored to the Tanzanian market, banks can have more than doubled the conversion rates of insurance leads into sales and increase sales productivity to a ratio which is more than enough to make Bancassurance a highly profitable proposition for them.

Advantages for Insurers

Insurers have much to gain from marketing through banks. Insurance companies are finding it difficult to grow (in today’s turbulent economies) using the traditional systems because of such issues like price competition (driving down margins) and increased claims payment ratio (due to customers increased knowledge and reforms in the Insurance Act which have come into force recently). It as become harder over the last few years, to sell life related insurance and larger policies to Tanzanians. Middle-income consumers, who comprise the bulk of bank customers in Tanzania, get little attention from most life insurance companies; who seem to favour corporate companies. By capitalising on bank relationships, insurers will recapture much of this under served market.

Most insurers in Tanzania that have tried to penetrate middle-income markets through alternative channels such as direct marketing have not done well. Clearly, a change in approach is necessary. As with any initiative, success requires a clear understanding of what must be done, how it will be done and by whom. The place to begin is to look at the strengths that the banks and insurers together have, creating a ‘win win’ business opportunity.

Teamwork is the key

In their natural and traditional roles and with their current skills, neither banks nor insurance companies could effectively mount a Bancassurance start-up alone. Collaboration is the key to making this new channel work.

Banks bring a variety of capabilities to the table. Most obviously, they own proprietary databases that can be tapped for middle-market leads. In addition, they can use their name recognition and reputation at both local and regional levels. Strong players also excel at managing multiple distribution channels, cross-selling banking products, and using direct marketing. However, most banks in Tanzania lack experience in several areas critical to successful Bancassurance strategies: in particular, developing insurance products, selling through face-to-face "push" channels, underwriting, and managing complicated insurance products.

I would say that where banks usually fall short, a strong insurer will excel. Most have substantial products and underwriting experience, strong “push” channel capabilities, and investment management expertise. On the other hand, they tend to lack experience or ability in the areas where banks triumph. They have little or no background in managing low-cost distribution channels; they often lack local and regional name recognition and reputation; and they seldom possess access to or experience with the middle markets.

There Are Real Opportunities

Bank’s databases are is enormous even though the goodwill may not be the same as in case of their European counterparts. These databases have to be dissected variously and various homogeneous groups are to be churned out in order to position the Bancassurance products.

Other developing economies like Malaysia, Thailand and Singapore have already taken a leap in this direction and they are not doing badly. There is already an atmosphere created in the country for better insurance product liberalisation and there appears to be a political consensus also on the subject. Therefore, there is no hesitation in allowing the marriage of the two to take place. This can take the form of mergers or acquisitions or setting up a joint venture or creating a subsidiary by either party or just the working collaboration between banks and insurance companies.

Threats to Bancassurance

Success of a Bancassurance venture requires change in approach, thinking and work culture on the part of everybody involved. The Tanzanian work force at most level is so well entrenched in their classical way of working that there is a definite threat of resistance to any change that Bancassurance may set in. Any relocation to a new company or subsidiary or change from one work to a different kind of work will be resented with a passion.

Another possible threat may come from non-response from the target customers. Since banks and insurance companies have a major portion of their income coming from their investments, the return from Bancassurance must at least match those returns. Also if the alliance of major players is allowed to take place without proper supervision, there will be fierce competition in the market resulting in lower prices and the Bancassurance venture may never break-even.

Looking At the Figures

A study in USA a few years ago claimed that if banks made a major commitment to insurance and a more narrowly targeted commitment to investors, within 5 years they could increase retail revenues by nearly 50%. It further stated that:

• Banks could capture 10% to 15% of the total insurance and investment market by selling products to 20% of their existing customers.
• Banks' existing infrastructure enables them to operate at expense levels that are 30% to 50% lower than those of insurers.
• Bancassurance's bank-branch based sales system sells 3 to 5 times as many insurance policies as a conventional insurance sales and distribution force.
• By simplifying Bancassurance products each back office bank employee can easily manage policies compared to traditional insurers.

Lessons Banks in Tanzania Should Learn

We should take a leaf from the experienced players and develop Bancassurance only gradually. Like in France, Italy, Germany and Canada - banks were allowed first only to distribute the insurance products for a fee. This it self amounted to substantial income for banks since they were not carrying the risks and product development was also left to insurance companies. This seems fair since each player should contribute towards something in which he excels; banks in mass distribution and insurance companies in risk management. After stabilization, the roles may be expanded in opposite directions.

We need to develop innovative products and services. CIBC Bank in Canada relieves their customers of having to report and resolve motor claims. The bank assumes responsibility for the process, even phoning the police for the customer at the time of the accident. Another example is provided by Banco Bilbao Vizcaya of Spain who offers a life policy with simple premium payments and a clear contract that is designed to be sold, issued and signed at the point of sale within 15 minutes.

Banks and insurance companies in Tanzania wishing to pursue high insurance strategies would do well to learn from European bancassurers, who have decades of experience managing insurance subsidiaries. These banks have profitably sold insurance products to more than a fourth of their customers while generating more than 20% on sales. Credit Agricole is a large life insurer in France, and employs only less than 200 people in its insurance subsidiary. They are able to limit overhead by harnessing the bank's existing resources and capabilities thus making Bancassurance very lucrative and successful for them.

Obstacles and Success Factors

Even insurers and banks that seem ideally suited for a Bancassurance partnership can run into problems during implementation. The most common obstacles to success are poor manpower management, lack of a sales culture within the bank, no involvement by the branch managers, insufficient product promotions, failure to integrate marketing plans, marginal database expertise, poor sales channel linkages, inadequate incentives, resistance to change, negative attitudes toward insurance and unwieldy marketing strategy.

Conversely, Bancassurance ventures that succeed tend to have certain things in common. Factors that appear to be critical to success include strategies consistent with the bank's vision, knowledge of target customers' needs, defined sales process for introducing insurance services, simple yet complete product offerings, strong service delivery mechanism, quality administration, synchronized planning across all business lines and subsidiaries, complete integration of insurance with other bank products and services, extensive and high-quality training, sales management tracking system for reporting on agents' time and results of bank referrals and relevant and flexible database systems.

Bancassurance can be a Mechanism for Insurance Growth in the Tanzania

Existing low penetration of insurance together with high per capita income gives an unusually strong platform to launch and grow the industry into the future. Recent economic strides and infrastructural boom in Tanzania, can work as a catalyst and push the insurance industry to new horizons. Market opportunities for banks offering Bancassurance products are endless.

Conventional Bancassurance products like deposit insurance, unit linked products and investment cum protection products are likely to continue to be sold to its customer base. However, the asset creation process in most African countries through equity markets and infrastructural investments have created a new generation of High Net Worth Individuals (HNWIs) and banks would do well to take note of it. In addition, non-conventional products and commercial insurance products can also be sold to individuals and corporate companies through banks.

From the banker’s point of view, the potential lies in tapping not only the existing premium turnover in the market but also the likely increase in turnover due to the entry of banks in the insurance market.

Strategies for Entering the Market
Collaboration with an insurance company is the key; this could take multiple forms as below:
• Buying an insurance company out right
• Acquiring shares in an existing insurance company
• Cross share holding between the bank and insurance company
• Signing an exclusive agreement with one insurance company
• Signing a non-exclusive agreement with more than one insurance company

All the above have their own advantages and disadvantages for entering the market based on the market conditions and practicality. If a bank owns an insurance company which is not an established player in the market, starting Bancassurance with them alone is not an attractive proposition. However, if the insurance company has a strong standing and a reputation in the market, it makes sense to sign an exclusive agreement with them.

Self Integration of Insurance Activities

This actually means the development of insurance products in-house which may involve risk taking on the part of the banks. In fact, this is not a good idea as the job should be left to somebody who extensively knows that field. In the past, many European banks to this kind of strategy but most of them have discarded self integration of insurance after the losses they suffered. Banks can still get the benefit of such integration by properly coordinating with an insurance company and getting the products done or developed exclusively for them.

The Effective Bancassurance Model

Is the one which helps in pushing sales as well as satisfying customer needs and helping banks to become a ‘One stop shop’. As a Bancassurance model, if the bank is using a distribution agreement model, it should, go in for an exclusive agreement with an insurance company who is reputable in the industry. The reason being, while signing up with multiple insurers you end up looking like a broker who is not committed to a ‘brand’ or a ‘product’ or a particular level of ‘service’, which is vital if you want to grow in Bancassurance. By signing an exclusive agreement with an insurer, a bank can put their own stamp ‘Brand’ on the product without actually taking any risk. The bank will thus be identified with the product it is selling and will be able to convince the customer in a much better way. However, if the insurance market is not mature and there is lack of creativity and innovation, even non-exclusive agreements are workable.

Banks Can Use Bancassurance to Diversify

The Banking Industry in Tanzania has been growing at a very high rate. However, maintaining such a growth for a longer period is not sustainable since the market has to mature at one stage and economic conditions change (like the one the world is in now). Bancassurance, therefore comes as an additional source of revenue to help maintain the growth momentum. This can also be used to offset the declining deposits due to the low interest rates.

Benefits For Banks Attributed From Selling Insurance:
1) It adds to the portfolio of retail products already offered by a Bank.
2) It helps in bundling and packaging the existing core banking products like adding deposit life insurance on a pure term deposit product.
3) Balances the less performing products
4) It is a risk management device, since the fee increase earned on the sale of insurance can be used to offset the loss on account of bad loans.
5) It helps increase customer loyalty since they have more reason than just the banking to continue their relationship with the bank.
6) It helps banks to become a ‘one stop shop’ for all the financial needs of the customer’s whether it is banking insurance investments or estate planning.

It is a long journey before the Tanzanian insurance market reaches its mature stage in this cycle of evolution. The time now is to innovate and harness the potential of insurance that this country offers. The growth of our industries is poised to offer more opportunities as new technology and revitalised pools of human resources shall be looking to the insurance industry to provide protection. Banks are in a unique position to sell not only personal lines insurance products but also commercial insurance by using their relationship with their loyal customer base.

Bancassurance Creates what banks long for Fee Related Incomes

Banks are no longer required to be persuaded to sell or distribute insurance products to their customer base. In the seventies, when banks in select countries in Europe started implementing Bancassurance, the rest of the world contemplated probably for too long whether to join this phenomenon or not. Up to 90 percent of new life insurance premiums written in Western Europe today come through banks because of their early venture into Bancassurance.

Bank’s traditional sources of fee income have been the fixed charges levied on loans and over draft facilities, credit cards, merchant fee on point of sale transactions for debit and credit cards, letter of credits etc. This kind of revenue stream has been more or less steady over a period of time and growth has been fairly predictable. However the shrinking interest rates, growing competition and increased mobility of customers have forced bankers to look elsewhere to compensate for the declining profit margins and Bancassurance has come in handy for them.

Fee income from the distribution of insurance products has opened new horizons for the banks and they seem to be loving it. Product bundling in the retail space coupled with cross-selling of unit and investments linked with life insurance plans seem to be the order of the day in developed markets as far as Bancassurance revenue is concerned.

What Are the Opportunities Available

Opportunities and possibilities to earn fee income via the Bancassurance route are endless. Savings accounts, fixed deposits, loan accounts and credit cards are all goldmines as far as knowledge about customer’s preferences and financial status is concerned. Different insurance products can be tailored and targeted to specific segments based on the knowledge about customer’s spending patterns. The customers today are generally aware about the various insurance products available and most of them are already in need of some kind of protection whether it is car insurance, home insurance or a child education plan. All that is needed is to offer them a product which is tailored to fit their requirements and provides better value for the money.

The rule of thumb for a bank should be to cross-sell at least one insurance product to each of their customer base since every existing relationship is a potential source of additional income in terms of Bancassurance sales. It is much easier for the banks to sell insurance products, mainly asset and wealth management products, as they have complete knowledge about the financial status of the customers through their spending and saving patterns. In terms of efforts too, it is easier for the bank to approach and convince a customer to buy a particular insurance product since he trusts the banks more than his insurance company. The method of approaching the customer and the sales practice shall however depend upon the business model adopted by the bank and may vary substantially from one place to another.

Products And Insurer’s Interest In Europe

In terms of products, there are endless opportunities for the banks. Simple life insurance, endowment policies, annuities, education plans, depositors’ insurance and credit shield are the policies conventionally sold through the Bancassurance channels. Medical insurance, car insurance, home and contents insurance and travel insurance are also the products which are being distributed by the banks. However, quite a lot of innovations have taken place in the insurance market to provide more and more Bancassurance products to satisfy the increasing appetite of the banks for such products.

Insurers who are generally accused of being inflexible in the pricing and structuring of the products have been responding well to such challenges thrown open by the spread of Bancassurance. They are ready to innovate and experiment and have set up specialized Bancassurance units within their branches. Examples of some new and innovative Bancassurance products are income builder plan, critical illness cover, and return of premium products which are doing well in the European markets.

Corporate Bancassurance in Tanzania

Bancassurance provides more ways to earn fee income for the bank. As we discussed earlier that every relationship provides an opportunity to cross sell Bancassurance products whether it is retail or corporate. Corporate relationships provide an opportunity for corporate Bancassurance. All commercial enterprises need insurance for their buildings, factory or warehouses and banks can capitalize on this existing need for insurance cover. There is more fee income in distributing commercial property or liability insurance to corporate companies as their volumes and turnovers are high. It is easy to cross-sell commercial insurance at the time of providing business loans and providing Letters of Credit since it will be value addition from the customers’ point of view. Lending is an asset creation process for the bank and it makes sense even from the credit risk management perspective to have an insurance security of your choice.

Fire insurance, workers compensation insurance, group medical insurance and contractors’ insurance are just some of the commercial property and liability insurance which can be sold to the corporate customers of the banks thereby generating additional source of fee income. Similarly, Trade finance or operations division within the bank provide opportunity to cross-sell marine insurance. The importance of corporate Bancassurance lies in further cross-selling opportunity to the individuals within those companies.

Have You Heard Of Takaful Products

Takaful is the Shariah compliant Islamic version of traditional insurance products. The premise lies in mutual and cooperative way of managing the funds generated from the sales of Takaful products. The premium is called a ‘contribution’ and any profits after the claims and management expenses are returned to the policyholders who are treated as shareholders. The return of premium is termed as surplus distribution. Since its initiation nearly 20 years ago, Takaful products have caught the fancy of not only Muslim but also non-Muslims as Takaful treats its customers fairly.

Islamic banks distribute Takaful products and earn a fee income by tying up with several Takaful companies. Some of the Islamic Banks have formed Takaful as their subsidiary. The product ranges from life insurance, car insurance and health insurance to complex unit linked insurance products. Malaysia, Bahrain, Brunei and Saudi Arabia have been leading the Takaful revolution and the growth has been exceptional in these countries. United Arab Emirates, Pakistan and Qatar have also witnessed activities in this sector. What is interesting to note is that even purely commercial banks have entered this niche area by setting up dedicated Islamic banking division with Islamic insurance products as add on. Examples are HSBC Bank in UK with their Amanah range of products and Lloyds TSB Bank with their Islamic offerings including Life Insurance and Home Insurance based on Takaful principles. The call is to swim with the current as long as it takes you to the destination and the destination clearly is to increase fee based revenue.

Bancassurance in the Middle East

Banks in the Middle East are doing well in terms of generating fee income out of their Bancassurance activities. Lebanon leads the pack in terms of penetration. Every single Lebanese bank is tied up with an insurance company and every branch across the length and breadth of the country provides insurance services. Next in the lead is United Arab Emirates where large banks are now well-entrenched into Bancassurance activities. Not only insurance products are bundled or cross sold along with core retail banking products, direct marketing has also been employed to increase fee income based revenue. Sales Agents are increasingly being employed by the banks to concentrate more on Bancassurance activities.

Other countries in the region, e.g. Oman, Qatar, Bahrain, Kuwait and Saudi have not moved much in this direction mainly due to the taboo attached to the ‘Life Insurance’ and ambiguity of local regulation. Considering the economic boom in the Gulf region and large number of high net worth individuals (HNWIs), the potential for Bancassurance is tremendous and banks have the opportunity to cash on it.

Bancassurance Is Here To Stay and Opportunities Should Not Be Missed

A typical commercial bank has the potential of maximizing fee income from Bancassurance within and up to 50% of their total fee income from all sources combined. Fee Income from Bancassurance also reduces the overall customer acquisition cost from the bank’s point of view. Banks should capitalize on the opportunities thrown open by Bancassurance. Sales personnel should be recruited in masses and money spent on training them on product knowledge and selling techniques. At the end of the day, it is easy money for the banks and insurance related companies as there are virtually no risks and only gains. Customers will be happy and the shareholders of the banks will keep smiling.