The idea of banks selling insurance products is relatively new to the Middle East, but considering the fact that it has the potential to bring in 50 percent of a bank's fee-based income, it simply cannot be ignored.
Within the Arab world, Egypt and Lebanon were among the first nations to introduce bancassurance.
Lebanon did it in 1996 with a partnership between SNA Assurances, part of the AGF Allianz group, and Societe Generale de Banque au Liban (SGBL). Thereafter, the concept has spread gradually to several countries in the Arab world.
In 2002, SNAA launched four operations with Bank of Beirut, Credit Bank, Beirut Riyadh Bank and ABN Amro Bank. It followed up with launching two operations with First National Bank in 2004 and Lebanese Swiss Bank in 2005.
At the regional level, SNAA launched bancassurance operations in the Kingdom of Saudi Arabia in 2000 with Banque Saudi Fransi (BSF) and in the United Arab Emirates in 2004 with Emirates Bank, in partnership with National General Insurance. The UAE, in fact, was among the last nations in the Gulf Cooperation Council (GCC) countries to launch bancassurance.
"Selling our products to their clients has proved to be a beneficial mission to these banks," says an SNAA spokesman. "They have in fact enlarged and diversified their product portfolio by offering a range of financial planning and insurance products, providing clients with adequate solutions to answer their personal requirements and satisfy their specific needs."
The word `bancassurance' probably originated in France in the 1930s from a combination of the French word banque (i.e. bank) and assurance (i.e. insurance). It refers to the sale of insurance policies by banks, and is a system widely adopted in Europe, USA and Japan, and most recently, Korea, which started this system from Sept 2003.
By adding this system to existing banking services, banks can provide a wider range of products and services in addition to their regular products such as deposits, loans, and investments. Insurance companies, on the other hand, provide better products through bigger channels via the banking network of branches. In fact, in the developed world, it accounts for almost 25 per cent of all corporate insurance.
Another school of thought sees bancassurance as the amalgamation of assurance and banking business within a financial environment.
In India, bancassurance essentially means insurance selling through bank staff, at bank counters. In other words, fully exploiting the synergies between banking and insurance, so as to develop and distribute cost-effective banking products.
The Life Insurance Marketing and Research Association's (LIMRA), insurance dictionary defines bancassurance as 'the provision of life insurance services by banks and building societies'.
The Association of British Insurers (ABI), defines bancassurers as 'insurance companies that are subsidiaries of banks and building societies and whose primary market is the customer base of the bank or building society'.
Another common definition of bancassurance is 'the involvement of banks, savings banks and building societies in the manufacturing, marketing or distribution of insurance products'.
Thus, the term bancassurance can have several connotations. In essence, it covers a wide range of detailed arrangements between banks and insurance companies; but in all cases, it includes the provision of insurance and banking products and services from the same source or to the same customer base.
Also, because there is a wide diversity of strategies available, there is no standard model for bancassurance. However, its appearance and development has been one of the most significant competitive developments in the retail financial services sector in Europe, USA, Japan, India, Australia, Middle East, South Africa and Korea.
Profit potential
Many banking institutions and insurance companies have found bancassurance to be an attractive and often profitable complement to their core businesses. Of course, the success of bancassurance strategies has been far from uniform across all companies and countries.
Nevertheless, the promise of being able to leverage the profitability of large customer bases and extensive distribution networks has attracted the attention of the retail financial services sector and encouraged more and more organizations to diversify outside their traditional competitive domains.
The introduction of innovative products, the need for life insurance products to go with a growing number of home mortgage finance options and increased awareness among customers about the need to get adequate cover for future financial stability and a host of other factors have helped the bancassurance market to take roots in some emerging markets such as the UAE.
Mutual benefit
"More and more banks are entering into arrangements with insurance companies to come up with appropriate products for their customers; and by all indications, the strategy has helped the banks establish rewarding business relationships," says Omar Brouhadiba, senior vice-president and head of the Commercial Banking Group at Mashreqbank.
"These developments have seen a number of banks with bancassurance products combining life protection and savings plans.
And they include both local and international banks. It is a mutually beneficial relationship, as the insurance companies get access to the markets huge customer base, while for the bank it ensures the availability of products that are more suitable to the needs of their own customers."
Mashreqbank first joined hands with Oman Insurance Company (OIC), in September 2003 to offer insurance products to their corporate clients.
It was a time when bancassurance was a largely untapped market in the Emirates. But it swiftly became popular when it was realized that it was a win-win situation for all the bank, the insurance company and
the customers.
"By utilizing our bank's distribution network, insurance companies have been able to reduce their distribution costs and pass on the benefits to their customers," says Abdul Mutalib Mustafa, general manager of OIC.
Since that start-up by Mashreqbank and OIC, several other banks and insurers in the UAE have introduced bancassurance, the most recent being Oman Arab Bank (OAB), which launched its bancassurance services in association with American Life Insurance Co (ALICO) in October 2006.
OAB claims that it will provide a complete range of insurance products and services under the brand name 'Dhaman', and will act as an agent for marketing and distributing various insurance products to its customers.
"In the first phase, insurance products and services such as Savings Plan, Education Plan, Retirement Plan, Medical Coverage, Lifetime Income Protection for Your Family, Travel Insurance Plan and Personal Accident Coverage will be provided at OAB branches at Ruwi, Al Khuwair and Qurum," an OAB spokesman said.
Regional growth
In the interim, the concept was introduced in Saudi Arabia in 2000, with the Saudi Arabian Monetary Agency (SAMA) allowing local banks to collaborate with insurance companies in the family `takaful' (Islamic insurance) field through bancassurance. Saudi Arabia has seen bancassurance improving production levels, and is expected to account for 30% of the market by 2010.
Syria, which has important banking potential, encouraged bancassurance development by opening its financial, banking and insurance sectors in the earlier part of the current millennium.
Abu Dhabi followed suit, with National Bank of Abu Dhabi (NBAD) launching a Bancassurance Regular Savings Plan designed to enable customers to save on a regular monthly basis to meet a range of investment needs.
"We developed the product in partnership with Friends Provident International Limited (FPIL)," says Khalid Deemas, Head of NBAD's Retail Banking Group.
"Our bancassurance product is exclusive to the UAE market, is offered on very competitive terms and provides a high degree of flexibility and choice. Customers can tailor the Savings Plan to closely suit their individual needs and circumstance as these change over time."
The NBAD Savings Plan is a regular premium, unit-linked, offshore life assurance policy, offered solely through the bank and issued by FPIL. In addition to providing access to a range of NBAD investment funds, the plan incorporates a number of optional protection benefits providing financial security in the event of death or terminal illness.
"It was a significant step for NBAD, and we were happy to forge a relationship with FPIL," says Deemas. It reinforced our commitment to providing our customers with value for money, best-in-class products designed specifically to meet individual needs."
Bancassurance traditionally, and for most banks in the Middle East, includes selling life insurance policies with an investment component, and this means taking a significant fee income.
Most people need insurance policies, sometimes several, so banks have the opportunity to cross-sell, and as they already know their customers and their status through their accounts, insurance is easier to sell, especially asset and wealth management products, as this is a bank's domain. An added advantage for the banks is the trust they already have from their customers, who are more likely to accept a product from a bank than an insurance company.
"The GCC has picked up in the last couple of years, particularly the UAE which was a little slow to start," says Manoj Kumar, head of bancassurance at Doha Bank.
"Bahrain was notably the first off the mark, but the UAE is now the frontrunner, although, not all banks in the UAE are involved and bancassurance is mostly done through the international and large banks. The small-medium sized banks have still some way to go."
In Oman only a couple of banks are involved, one more aggressively then the other. In Bahrain, two or three main banks are involved; and in Qatar, only Doha Bank offers bancassurance.
Unfortunately, the area of life insurance has not traditionally been a popular class of insurance because of the predominately Muslim population of the Middle East. Life insurance has been declared to be `haraam', and therefore has suffered.
To get around this, investment products have been developed which not only give high returns, but pay out in the case of unforeseen circumstances, a protection plan.
"Banks are not saying life insurance, they are saying investment products," says Manoj, who has been extensively quoted on the subject in the June 2006 issue of Banker Middle East magazine. "Investment also means unit linked investment products where life is inbuilt, so life becomes secondary, money management becomes primary.
"What we ourselves are doing, for example, is offering child education plans, or retirement or pension plans.
The products come from the insurance companies, and worldwide, insurance companies are considered to be the best investors. They are making very good returns from investments. They create policies for the long term, with protection.
"With a child education plan, for example, you can plan for the future of your child. Money is saved each month and this has an insurance component inbuilt, so if something happens to the payee, the child will still get the money. The product comes from life insurance, but is not life insurance; it is a long term investment product with protection, so the insurance becomes protection."
Banks have to continue to be innovative, and keep abreast of changing customer needs. To do this effectively, banks have to have a in-house product development team.
"You have to sit and do this with the insurance companies; and although it is a long-drawn process, you have to come up with, and provide difficult to beat products," says Manoj.
"The biggest potential for bancassurance lies in retail. However, nowadays customers are not loyal to anybody, even banks. They have become sophisticated and shop around for the best products. So you have to offer attractive products in order to develop loyalty and keep them coming back."
On September 11 this year, Doha Bank tied up with Aviva Life Insurance as part of the latter's bancassurance initiatives. After strengthening its leadership position in the bancassurance channel in India, Aviva has forayed into Qatar. After the tie-up, Aviva's products will be available in 40 locations in Doha.
Regional growth
Sadly, a stumbling-block in the spread of bancassurance in the UAE is that its legal position is not entirely straightforward.
"The concept of bancassurance can be viewed (as the name suggests) as being the meeting point between the banking and insurance industry," was the comment of Wayne Jones of legal firm Clyde & Co, as early as July 2004.
"However, in today's economy, the issue is wider than simply the crossover zone between financial and insurance products. Banks along with many other service providers are looking to offer customers the ability to purchase insurance products from their premises, and to take a role in the selling and placement of the product for a fee."
Obviously, the range of products is diverse, and can span life, motor and household insurance, through to extended warranty, travel and shipping insurance. Those wishing to display these wares on their forecourts range from banks, to motor dealers, retailers and even supermarkets and sports clubs.
"Most developed countries have in place laws which regulate an important service sector such as insurance," says Jones. "There is a strong consumer protection element to this regulation, with authorities insisting on proper licensing and adequate financing of those involved in carrying risk or selling insurance.
"In the UAE, this legislation is in the form of Federal Law 9 of 1984, and subsequent regulations governing the involvement of intermediaries. The insurance laws permit only licensed intermediaries to be involved in the offer, acceptance or sale of insurance policies in consideration for remuneration, whether by way of flat fee or commission."
The categories of intermediaries in the UAE are insurance brokers (traditionally acting on behalf of the insured), insurance agents (who represent insurers) and insurance consultants (whose brief is somewhat unclear, but tend to advise buyers of insurance).
"Any insurance intermediaries wishing to undertake these roles must be properly registered with the Ministry of Economy and Commerce," says Jones. "Any non-registered person undertaking any of these regulated activities, essentially advising on the sale or purchase of insurance for reward, will be in breach of insurance laws and liable
for sanction.
Sanctions are directed at the unlicensed intermediary as well as at the registered insurer who seeks to deal with that intermediary.
Adds Jones, "Regulation is all well and good. But it does tend to stifle perfectly legitimate efforts by banks and retailers to enter into alliances with insurance providers to offer their products to customers.
"Once a retailer or bank becomes involved in effecting the contract (usually for a reward), it begins to perform tasks that are the preserve of licensed intermediaries. There is no flexibility in the system. On a plain reading of the law, there is simply no scope for bancassurance beyond the realms of products that might be classed, on one reading as `financial' but with elements of `insurance' in them.
"There would appear to be nothing in the Insurance Law which would prohibit a bank, for example, advertising brochures for a registered insurer. The problem will arise when the bank's staff become involved in processing applications for insurance, or are remunerated for their services in procuring customers for the insurer."
This problem is not one confined to the UAE. The European Union has been grappling with the issue too. The solution, as demonstrated by the UK's Financial Services Authority, is to recognize the role that intermediaries intend to play in the sale of insurance products, and to have a more flexible licensing system.
Thus, certain sales agents in the market will now require licensing, but the licensing requirements are not as onerous as those pertaining to industry professionals whose core business is advising on insurance products.
"With increasing wealth, and numbers of well-off people in the Gulf countries, banks have a great opportunity with bancassurance as a means of generating significant revenue streams," says Ruth McKee in the Banker Middle East magazine. "And, bad or good, it still seems to be one area that has not been touched by the relevant authorities in the Gulf.
"Awareness has reached people. There are some early starters, there are late starters, and some are sleeping. But, I think that today or tomorrow, all the banks have to get into it, otherwise they are losing money. Every day you are not doing this it's a lost opportunity and you are losing money. Customers have this need already and you just have to go after it."
By Shirish Nadkarni
© POLICY 2006
