Lydia Kayonde, Head of Bancassurance, Stanbic Bank Uganda
One of the most significant changes in financial services over the past few decades has been the growth and adoption of Bancassurance. While it may sound like a complex word, it is a simple term coined by combining two words, bank and insurance.
The sale and distribution of insurance products through banks is becoming more popular and prevalent across the world. Commercial Banks are adopting it because selling insurance products gives them a new and lucrative revenue stream without high new setup costs. Besides, this fee-based income is essentially risk-free since the bank simply plays the role of intermediary.
Insurance companies, on the other hand, see Bancassurance as a way for increasing their market penetration and premium turnover at near zero cost. While the customer enjoys the benefits of reduced prices, a wider range of products and much greater convenience. In short, Bancassurance is a win-win situation for all concerned.
The Financial Institutions Amendment Act, 2016 provides for the introduction of Bancassurance in Uganda. Bank of Uganda was charged with the formulation of the enabling regulations to guide the smooth operationalisation of the law. These regulations have since been approved by the Ministry of Finance and gazetted, meaning Ugandan commercial Banks are now in position to offer Bancassurance to complement their existing bouquets of products.
It is important to note however that Bancassurance is not a one size fits all model that will be rolled out the same way by all financial institutions. The choice of business model for the bank is dependent on a number of factors including the nature of the bank, the size of the market, the regulatory environment as well as customer preferences. Some of these models include:-
The Pure distributor: Here the bank acts as an intermediary offering products of more than one insurance company. The insurance company usually pays distribution commissions to the bank which are in turn offset by entry and management fees charged to the policy holders. The relationship between the bank and insurer will also be complemented by a more or less significant cross shareholding.
Strategic alliance: In this case the bank sells the products of only this particular insurance company. The main advantage for the bank being that it is able to select the best provider in terms of its customer profile, quality of products and brand image. At the same time, the insurance company gains access to the bank’s customer base without having to make a major financial investment. However, a potential disadvantage is that low levels of integration between the bank and the insurer remain, as the two companies continue to operate as completely separate entities.
Joint venture: Under this business model the bank and the insurance company (through shareholding), create a new entity. The joint venture distributes its products only through the network of its banking parent.
Financial holding company: Here a holding company owns both an insurer and the bank often referred to as a financial conglomerate. Potential advantages of this model are that operations and systems can be fully integrated.
Generally speaking, however, the most prevalent bancassurance model throughout the United States, Asia and Latin America is the pure distributor. In Europe on the other hand and most Commonwealth countries an integrated model, with strategic alliances and joint ventures is the preferred option.
Whatever model the banks decide to adopt, for any Bancassurance strategy to succeed, there is a need for an immediate and sustained focus on keeping operational costs to a minimum while steadily growing sales commissions through targeted promotional activity. A rapid growth in revenues should not be driven through a high pricing policy, but by steadily growing sales volumes.
Thus, a key to success when entering the insurance segment will be to establish a substantial market share as early as possible through cross selling. Banks that cross-sell financial products can easily leverage their distribution and processing capabilities for profitable operating expense ratios.
Most financial experts anticipate that the adoption of Bancassurance in Uganda will initially be slow but quickly gain traction as the financial markets and Ugandans start to grasp the full implications of the new value proposition. This is a welcome development for the banking industry.
The insurance industry is also set to gain and get the much needed shot in the arm to increase insurance penetration which currently stands at less than two percent. A supportive regulatory regime is key towards improving the current situation. This is why the strengthening of regulatory structures by the executive in terms of staff, policies and legislative initiatives is such a welcome development.