Banks in recent years have been enthusiastically courted by insurers to enter into multi-million dollar partnerships. Insurers still see bank access as opening doors to more preferred clients. But why are banks still in the game? Is bancassurance getting more important to banks? We check out the banks’ perspectives on the tie-ups and explore what could make or break the vital partnership.
There is no doubt that the bancassurance market has moved towards more exclusive tie-ups between banks and insurers in recent years, as observed from major landmark deals like AIA’s and Citibank’s exclusive 15-year agreement in 2013, and more recently, Manulife’s and DBS Bank’s 15-year arrangement inked last year.
One of the latest to get on the bandwagon, Malaysia’s second largest lender by assets CIMB Group Holdings has also reportedly attracted final bids from Allianz, AXA and Sompo Japan Nipponkoa for the rights to distribute general insurance products through its branch network across Asia.
The reason insurers are willing to finance these arrangements, said DBS’ Regional Head of Bancassurance Richard Vargo, is “a matter of expedient and known access to customers, leverage of established infrastructure, processes and controls by the partner bank, and lower overall business risk”.
So what draws banks to the party?
Optimal resource utilisation
“For banks, working with a limited number of insurance partners allows greater attention to serving the customer, reduced compliance risk, greater integration efficiency and a much stronger commitment for co-investment in technology and innovation,” said Mr Vargo.
EY Asia Pacific Insurance Leader & Managing Partner Jonathan Zhao shared a similar observation: With the huge investments that a bank places in infrastructure – people, branches and systems, among others – it strives to make optimal use of its resources and leverage them to drive maximum value for its customers, thereby increasing customer loyalty and profitability.
Because insurance product relationships are long term in nature, this creates a continuous revenue stream. Hence, longer-term exclusive arrangements allow both bank and insurer to invest heavily in dedicated human resources, training, and integrated digital capabilities which would not be viable in short-term relationships with multiple insurance providers, he added.
Revenue generation
Mr Simon Phipps, Partner at KPMG noted that whilst insurers often see bancassurance agreements as a quick way to enhance their distribution reach, banks on the other hand, are motivated by the opportunity to “offer a wider range of products to their customers and benefit from the resources and know-how of insurers whilst, at the same time, generating commissions, other fees and often sizeable upfront payments from the insurer”.
“Depending on the way in which deals are structured, in relative terms, these partnerships can offer banks a very capital-efficient way of generating additional revenue for the bank,” he said.
Mr Zhao said: “Given that retail banks have two primary lines of revenue – interest income and fee income – the fees from such deals directly add to the bottom line of banks and improve its profitability.”
Whilst it did not disclose financial details of its deal with AIA, Mr James Griffiths, Citibank’s spokesperson for Asia also said it “expects [the partnership] to generate significant revenue for the banks in the region”. But more importantly, he said the tie-up would “build further on our retail presence in Asia” and is a big opportunity for Citi to “provide greater value and service to customers who are increasingly seeking better solutions for their insurance needs”.
Holistic propositions
Indeed one of the biggest benefits for banks to reap in its respective bancassurance partnerships is the chance to enhance its existing customer propositions. Mr Vargo said that one of the core reasons why DBS partnered Manulife was the “strategic alignment between the two companies” and its “shared view on a needs-and-solutions-based approach to serving the customer”.
“Over time, we believe our customers will benefit from our ability to deliver meaningful propositions and competitive product solutions from this strategic alignment.”
Insurance as a product category, Mr Zhao said, is essential to a bank’s wealth management offering, and hence can also be effectively positioned to increase customer engagement, as well as provide multiple opportunities for a bank to fulfil a variety of financial needs.
Further, on a broader level, Mr Phipps noted that banks are facing increasing pressure from regulation and disruption; as such, a broader customer proposition which includes competitive insurance products and services “can only be a good thing for the strategic positioning of the bank”.
Collective buying and marketing leverage
Aside from enhanced propositions, Mr Griffiths shared that such a partnership would also enable the bank to leverage collective buying power and global best practices in order to offer its clients competitively-priced insurance products.
“By partnering AIA, we will also be able to leverage on our partner’s sales and marketing capabilities to create innovative products to suit the needs of our clients. We can also better integrate the insurance business into our customer reward programmes with incentives offered around insurance services,” he added.
Make or break
Notwithstanding the tie-up motivations and benefits up for grabs, Mr Phipps said that with the level of regulatory scrutiny across the financial services industry continuing to build, “entering into partnerships with third parties, whether that be insurers or others, comes with inherent risks, which need to be carefully evaluated and managed”.
Whilst there is no single winning formula for successful bancassurance partnerships because the nature of these alliances tend to vary, the general consensus is that there must be a cultural and strategic alignment between both bank and insurer, as well as active commitment to prioritise the working relationship.
Mr Phipps also emphasised the need for both parties to understand each other’s operational objectives, noting that one of the biggest reasons for the breakdown of bancassurance partnerships is a “lack of recognition of the needs of the other party”. “While the strategic intent of banks and insurers may appear similar on the face of it, the reality is that each party has got to where they are today from a different starting position (banking vs insurance) so there are inevitably underlying differences in the way the parties think and act about things along the way.
Historically at least, (life) insurers have tended to be focused mainly on value-creation through monetising the transfer of risk over longer periods of time, whilst banks are often focused on driving value through the sale of shorter-term traditional banking products across an often stable and loyal customer base. Especially in today’s low interest rate environment for example, banks are naturally keen to find ways of offering short-term deposit replacement solutions to meet customer needs, and this can often be challenging for the profitability of insurers.
This, he said, can sometimes create tension in the partnership, with the insurer wanting to develop and deploy products that create longer-term economic value for their shareholders, whilst the bank is also looking to meet customer needs and generate commission revenues from competitive products that can sell more easily in the short term.
Like any good marriage, he said, the relationship needs to be actively managed along the way, whether the partnership is based on an open architecture, exclusive distribution agreement or JV structure.
Cultural alignment
An ideal bancassurance partnership, Mr Zhao said, would be one where both partners are culturally aligned, and there is prioritisation of the partnership at both ends and transparency at an operational level.
“A partnership between two culturally similar organisations makes it significantly easier to align the ways of doing business and achieving end objectives. For example, if a bank has a strategy [to be a leader] in digital, the insurance provider would need to have that strategy as well to be able to deliver on the relationship.”
Mr Phipps agreed, emphasising the growing importance of digital and innovation amongst banks and insurers and noting that not all companies are in the same place at the same time. This can create challenges when partnerships are mid-flight and relative priorities and capabilities have changed.
Keep mutual trust strong
Mr Zhao added: “Bancassurance partnerships rely on having strong relationships across the value chain –these need to start at the CEO level in order to be successful at an operating level, and are to be built by creating an environment of trust and transparency, leading to joint execution of the strategy.”
Agreeing, Mr Vargo said that mutual trust founded on aligned stakeholder interests, a customer-focused mindset and equal commitment to the partnership by both parties are crucial elements that hold the deal together. Frequent and effective communication on the value of bancassurance to all members from both organisations will also help to ensure this commitment and alignment to deliver a winning business.
He added that the DBS-Manulife partnership has “kicked off with a very good alignment of stakeholder priorities” and a strong and common mindset on customer centricity. “This has helped forge a high amount of mutual trust at all levels of the partnership. As long as the partnership maintains this high level of trust and a long term view, issues that arise can be kept small and addressed quickly.”
Clear rules of engagement
Finally, aside from goodwill and an alignment of objectives to build a healthy partnership, Mr Phipps also noted that “success always comes down to execution” – collaboration also requires clear rules of engagement, that is, a transparent, practical and mutually beneficial operating model, among other factors.
Both Mr Phipps and Mr Zhao highlighted clearly defined processes and responsibilities between both parties, as well as effective training and product specialist support are critical to operational effectiveness.
And to this, Mr Vargo shared that in DBS’ experience, while both companies work collaboratively and take mutual responsibility for customer sales and service, in general, the sales process and management of the frontline teams are led by the bank, whilst product knowledge training is led by the insurer as it is the product manufacturer.