By Manoj Kumar
Bancassurance is fast catching on. What is this bancassurance? In its simplest form, it is distribution of insurance products through a bank's distribution channel. Also known as Alfinanz, bancassurance can be defined as a package of financial services that can fulfil both banking and insurance needs at the same time.

Bancassurance takes various forms in various countries. What form it would take in a country depends on factors such as demography, economic environment and legislative climate. The demographic profile of a country helps to decide the kind of products bancassurance will distribute. The economic situation will determine the trend in terms of turnover and market share. The legislative climate will decide the boundaries within which bancassurance has to operate.

Not just that. The objectives of 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 insurance customer sees bancassurance as a bonanza in terms of reduced price, high quality product, and doorstep delivery. Actually, it is a win-win situation for everyone.

Benefits to banks
There are several reasons why banks should seriously consider Bancassurance. The most important reason: opportunity to increase return on assets (ROA). Assuming a constant asset base, one ideal way to increase ROA is through fee income. Banks that build fee income can cover a large chunk of their operating expenses through this route. And how to build fee income? Through the sale of insurance products, of course.

Banks that effectively cross-sell financial products can leverage their distribution and processing capabilities for achieving profitable operating expense ratios. By leveraging their strengths and finding ways to overcome their weaknesses, banks could change the face of insurance distribution. Sale of personal line insurance products through banks meets an important set of consumer needs. Most large retail banks engender a great deal of trust in broad segments of consumers, which they can leverage by selling them personal line insurance products. In addition, a bank's branch network allows the face-to-face contact that is so important in the sale of personal insurance.

Another advantage banks have over traditional insurance distributors is their lower cost per sales lead, thanks to their sizable loyal customer base. Banks also enjoy significant brand awareness within their geographic regions, again providing for a lower per-lead cost of advertising through print, radio and television. Banks that make the most of these advantages are able to penetrate their customer base and markets for 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 and telemarketing. Banks' proficiency in using technology has resulted in improvements in transaction processing and customer service. By successfully mining their customer databases, leveraging their reputation and distribution systems(branch, phone, and mail) to make appointments, and utilising sales techniques and products tailored to the middle market, European banks have more than doubled the conversion rates of insurance leads into sales. They have increased sales productivity to a ratio which is more than enough to make bancassurance a highly profitable proposition.

Benefits to insurers
Insurers have much to gain from marketing through banks. Personal-line carriers have found it difficult to grow using traditional agency systems because price competition has driven down margins and increased the compensation demands of successful agents. Over the last decade, life agents have sold fewer and larger policies to a more upscale client base. Middle-income consumers, who comprise the bulk of bank customers, get little attention from most life agents.

By capitalising on bank relationships, insurers will recapture much of this under-served market. Most insurers, who have tried to penetrate middle-income markets through alternative channels such as direct mail, 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 way to begin is to segment the strengths that the bank and the insurer bring to the business opportunity.

Collaboration is the key
In their natural and traditional roles and with their current skills, neither banks nor insurance companies can 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 warm, middle-market leads. In addition, they can leverage 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 mail. However, most banks lack experience in several areas critical to successful bancassurance strategies: developing insurance products, selling through face-to-face "push" channels, underwriting, and managing long-tail insurance products.

Where banks usually fall short, a strong insurer will excel. Most have substantial product 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 prevail. 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 have access to the middle market.

Even though banks and insurance companies in India are yet to exchange their wedding rings, bancassurance as a means of distribution of insurance products is already in force in some form or the other. Banks are selling personal accident and baggage insurance directly to their credit card members as a value-addition to their products. Banks also participate in the distribution of mortgage-linked insurance products such as fire, motor and cattle insurance to their customers. Banks can straightaway leverage their existing capabilities in terms of database and face-to-face contact to market insurance products to generate some income for themselves in a way not thought of hitherto.

Once bancassurance is embraced in India with full force, a lot will be at stake. Huge capital investment will be required to create infrastructure particularly in information technology and telecommunications, a call center will have to be created, top professionals of both industries will have to be hired and an R & D cell will need to be created to generate new ideas and products. It is therefore essential to have a SWOT analysis done in the context of bancassurance experiment in India.

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, lack of involvement of the branch manager, 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 strategies.

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, synchronised 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.

Finally, the creation of bancassurance operations has a material impact on the financial services industry at large. Banks, insurance companies, and traditional fund management houses are converging towards a model of a global retail financial institution offering a wide array of products. It leads to the creation of a one-stop shop where a customer can apply for mortgages, pensions, savings, and insurance products.

Discovery comes from looking at the same thing as everyone else but seeing something different. Banks' desire to increase fee income makes them look at insurance. Insurance carriers and banks can become part of the vision through strategic partnerships. Now is the time to position your company for the new millennium of insurance product distribution.