'Bancassurance Guidelines for Banks' - Paving the Way for New Horizons in Banking
On December 20, 2023, the Bangladesh Bank issued a circular titled "Bancassurance Guidelines for Banks", permitting them to act as intermediaries in the sale of insurance products on behalf of insurance companies. This marks a recent development for both the banking and insurance sectors.
“Bancassurance is basically the provision of and selling of banking and Insurance Products by the same origination under the same roof”
What is Bancassurance?
Bancassurance involves a collaborative arrangement between a bank and an insurance company, enabling the insurance company to offer its products to the banks clientele. This mutually beneficial partnership allows banks to generate extra revenue through the sale of insurance products, while insurance companies can broaden their customer reach without the need to expand their sales force.Bancassurance Industry Growth
The global bancassurance market, especially prominent in the Asia-Pacific region and primarily focused on life insurance, is experiencing significant growth. According to the research and consulting firm IMARC Group, the markets value surged to $1.268 trillion in 2021. IMARC anticipates a continued expansion with a compound annual growth rate (CAGR) of 5.9%, projecting the market to reach a value of $1.802 trillion by 2027. A key driver of this trend is the increasing demand among the aging population for health and life insurance, along with a heightened interest in retirement plans.
History of Bancassurance
The term bancassurance originated in France during the 1980s. Initially, several countries were wary, believing that allowing banks to engage in bancassurance would grant them excessive control over financial products in the market, leading to imposed restrictions.
Why Bancassurance
Today, many nations have embraced bancassurance, witnessing significant global growth, with Europe emerging as its most successful region. In this collaborative model, banks serve as the distribution channel, while insurance companies focus on product development, leveraging the extensive network established by banks.
For banks, engaging in bancassurance opens avenues for additional income by offering their platform to insurance companies. It also provides an opportunity to expand their product offerings, leading to more comprehensive services that enhance customer loyalty. This positions banks as central hubs for individual customers financial products.
On the flip side, insurance companies benefit by increasing sales through the distribution network of banks and gaining access to the customer base of their banking partners. This collaboration facilitates the development of tailored insurance products.
Bancassurance proves advantageous for customers, as it addresses their financial needs in one go, saving time and energy. The dual access to banking and insurance services streamlines the product review and selection process. The pivotal role played by the banks customer relationships is a key factor in the success of bancassurance.
Bancassurance in Bangladesh – Overview
To start, let's gain a brief understanding of the insurance industry in Bangladesh. The Insurance Development & Regulatory Authority (IDRA) proposed guidelines for regulating the registration of insurance companies in the country. Consequently, the government of Bangladesh issued a notification affirming that "Insurance" is a permissible business activity for banks, as outlined in Section 7 (1) (la) of the Banking Company Act, 1991.
However, it was explicitly stated that any bank wishing to engage in this business must obtain specific approval from the Bangladesh Bank (BB). As a result, all scheduled commercial banks are authorized to conduct insurance business on behalf of insurance companies without assuming any risk participation, operating on a fee basis.
Thus, the oversight of the banking and insurance sectors in Bangladesh falls under the regulatory purview of both the Insurance Development & Regulatory Authority (IDRA) and the Bangladesh Bank (BB).
How can a bank engage in Bancassurance?
Any bank intending to participate in Bancassurance, which involves the sale of insurance, must first secure approval from the Bangladesh Bank and acquire a corporate agent license from the Insurance Development and Regulatory Authority (IDRA), Bangladesh, before proceeding.
Bancassurance Qualification Requirements
In granting an approval for Bancassurance, the bank shall comply the following criteria:
a) the capital to risk-weighted asset ratio (CRAR) with capital conservation buffer (CCB) shall not be less than 12.50 percent provided that the percentage to be fixed by BB from time to time;
b) shall meet the credit rating not less than Bangladesh Bank (BB) rating grade 2 defined at the Guidelines on Risk Based Capital Adequacy [Revised Regulatory Capital Framework for banks in line with Basel III];
c) shall meet the minimum CAMELS rating of 2 of Bangladesh Bank;
d) the level of net non-performing loans (NPL) shall not be more than 5 percent;
e) shall have positive net profit for the last three consecutive years;
f) shall have a viable Bancassurance business plan and review mechanism which must be approved by the Board of Directors (BoD);
g) shall have a competent and suitable manpower to operate a dedicated Bancassurance unit/wing and a declaration signed by the Managing Director of the concerned bank in this regard;
h) common beneficial owners of bank and insurance company or related parties as defined under section 26(ga) of the Bank Companies Act, 1991 shall not be eligible for engaging with Bancassurance;
i) Any other document warranted /sought by BB shall have to be submitted.
Claim Processing
The settlement of claims shall be the responsibility of the insurer and shall be obliged under the following arrangements:
a) The bank shall assist the insured person or nominee (s) as a facilitator in processing the claim as applicable. The means of communication with the insurer for the settlement of the claim shall be clearly stated in the Bancassurance agreement. The bank shall provide adequate information to the claimant about the means of communication with the insurer for submission of claim;
b) Bank, at the request of the insurer, shall provide all necessary assistance in collecting the necessary documents and information regarding settlement of the claim;
c) The insurer shall settle the claim directly with the insured person or nominee (s), whichever is applicable, under intimation to the bank.
Commission
Commission shall be determined between the insurer and the bank as per their agreement conforming regulations set by the IDRA.
Agreement between Bank and Insurance Company
A bank shall not continue agreements with more than 3 Life insurance and 3 non-life insurance companies at the same time.
Types of Bancassurance Services:
1. Life insurance
2. Non-Life insurance
Advantages of Bancassurance
Bancassurance has become a significant avenue for the dissemination of insurance products and services, proving valuable for both banks and insurance companies. When executed with careful planning and a structured approach, this partnership can yield benefits for all parties involved, including banks, insurers, and customers. The following outlines the advantages of bancassurance for banks, insurers, and customers:
For Banks:
o Bancassurance represents an optimal avenue for generating additional income for banks, requiring minimal or no capital investment. This modest capital outlay, in turn, leads to a substantial return on equity.
o It serves as a valuable addition to the banks' product portfolio.
o Bancassurance offers a straightforward means of generating supplementary fee-based profits.
o Utilization of existing bank staff for bancassurance can enhance manpower efficiency through easy training.
o The potential for a high degree of alignment in product sales in a customized manner, coupled with robust support services.
o Enables the sale of a broad range of financial services to clients, contributing to increased customer retention.
o Optimizes manpower utilization to enhance overall productivity and efficacy.
o Facilitates an increase in turnover for insurance companies.
o Enables enhanced penetration in both rural and urban markets by leveraging the existing customer database of partner banks.
o Proves to be highly cost-effective, as the banks have already established the route and network.
o Offers the opportunity for insurance companies to utilize the established branches and outlets of partner banks in both rural and urban areas for marketing their products.
For Insurance Companies:
For Customers:
o Offers a one-stop service, providing customers with a comprehensive solution for their financial needs. The convenience factor is crucial in managing day-to-day activities, and banks marketing insurance products gain a competitive edge by addressing this concern. Customers can access complete financial planning services under one roof.
o Establishes a high degree of trust between customers and the bank.
o Simplifies the claims process, making it easy for customers.
o Streamlines the payment of premiums by allowing direct linkage to the bank account.
o Provides easy access to a diverse range of products within the bank.
o Ensures customers receive assured services and advice from the bank, benefiting from the expertise of professional professionals and trained staff guiding them through financial matters.
Disadvantages of Bancassurance:
o Heightened risk of customers' data security being compromised, with potential vulnerabilities from both banks and insurance companies.
o Customer confusion may arise in cases of conflicts of interest between other products offered by the bank and insurance products, such as money-back policies.
o The expectation for improved services from banking institutions may be challenged, particularly in regions where banks may not have a strong reputation for providing excellent customer service. This concern arises as banks are also responsible for the sale of insurance products.
o The simplicity of buying insurance at the bank might dissuade consumers from exploring other options and obtaining the most competitive prices. Additionally, concerns arise regarding the expertise of bank employees in advising customers on their insurance needs, as compared to specialized insurance agents and brokers who possess in-depth knowledge of the field.
Bancassurance Guideline Link:
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