SAN BEDA COLLEGE

Mendiola, Manila

Challenges for Banking Innovations: Bancassurance

In Partial Fulfilment of the Requirements in Monetary Theory and Policy (ECO09)

Submitted to:

Mr. Ricardo Deri

Submitted by:

Espino, Karen
Garcia, Rogellene
Jimenez, Pauline
Limuaco, Andrea

3 AEC

November 9, 2017
I. Introduction of Bancassurance
The word Bancassurance was coined from the words, Bank and Insurance. It
is defined as an arrangement in which a bank and an insurance company form
a partnership so that the insurance company can sell its products to the bank's
clients. In this partnership, bank staff and tellers become the point of sale and
point of contact for the customer. Bank staff are advised and supported by the
insurance company through wholesale product information, marketing
campaigns and sales training.

Bancassurance arrangement benefits both the firms. On the one hand, the
bank earns fee amount (noninterest income) from the insurance company apart
from the interest income whereas on the other hand, the insurance firm
increases its market reach and customers. The bank acts as an intermediary,
helping insurance firm reach its target customer in order to increase its market
share. Bancassurance has proved to be an effective distribution channel in a
number of countries in Europe, Latin America, Asia and Australia.

II. Advantages and Disadvantages of Bancassurance

A. Advantages of Bancassurance
1. For the Banks
Banks get an additional source of income from commissions and fees from
their insurance business and the operational costs get lowered for banks as
they use the same infrastructure that they use to sell other banking products.
The banks will also sell a whole range of financial services to clients and
increase customer retention; Reduce risk-based capital requirement for the
same level of revenue;
2. For the Insurance Company
The Insurance Company gets improved geographical reach without
additional costs. Some insurers who partners with strong bank can help to
fund new business development and booster public confidence in the
insurer. Tap into a huge customer base of banks; reduce their reliance on
 traditional agents by making use of the various channels owned by banks.
The company can also develop new financial products more efficiently in
collaboration with their bank partners and obtain additional capital from
banks to improve their solvency and expand business.
3. For Customers
It provides multiple services at one place to the customers which enhance
the customer satisfaction also because of its convenience. It is also a one
stop shop for all financial needs and an Innovative and better products range
where can consumers can choose based on what they need.

B. Disadvantages of Bancassurance
Data management of an individual customer’s identity and contact details
may result in the insurance company utilizing the details to market their
products, thus compromising on data security. There is a possibility of the
conflict of interest between the other products of bank and insurance
policies (like money back policy). This could confuse the customer regarding
where he has to invest.

III. Models of Bancassurance

A. Structural Classification
1. Referral Model
Banks intending not to take risk could adopt ‘referral model’ wherein they
purely part with their client data base for business lead for commission.
The actual transaction with the prospective client in referral model is done
by the staff of the insurance company either at the premise of the bank or
somewhere else. Referral model is nothing but a simple arrangement,
wherein the bank, while scheming access to the clients data base, parts
with only the business leads to the agents/ sales staff of insurance
company for a ‘referral fee’ or commission for all business lead that was
passed on. In fact a number of banks in India have already resorted to this
approach to begin with. This model would be suitable for almost all types
 of banks including the RRBs /cooperative banks and even cooperative
societies both in rural and urban. There is larger scope in the medium term
for this model. For, instance banks to begin with resorts to this model and
then move on to the other models.

b) Corporate Agency
The other form of non-risk participatory distribution channel is that of
‘corporate agency’, wherein the bank staff is trained to appraise and sell
the products to the customers. Here the bank as an institution acts as
corporate agent for the insurance products for a fee/ commission. This
seems to be more practical and appropriate for most of the mid-sized
banks in India as also the rate of commission would be reasonably higher
than the referral arrangement. This, However, is prone to reputational risk
of the marketing bank. There are also realistic difficulties in the form of
professional knowledge about the insurance products. Besides,
confrontation from staff to handle totally new service/product could not be
ruled out. This could, however, be overcome by severe training to chosen
staff packaged with proper incentives in the banks coupled with selling of
simple insurance products in the initial stage. This model is best suitable
for majority of banks including some major urban cooperative banks
because neither there is sharing of risk nor does it involve huge
investment in the form of infrastructure and yet could be a good source
of income. Bajaj Allianz stated to have established a growth of 325 per
cent during April-September 2004, mainly due to bancassurance strategy
and around 40% of its new premiums business (Economic Times,
October 8, 2004). Interestingly, even in a developed country like US,
banks stated to have preferred to focus on the distribution channel similar
to corporate agency rather than underwriting business. Several major US
banks including Wells Fargo, Wachovia and BB &T built a great
distribution network by acquiring insurance brokerage business. This
model of bancassurance worked well in the US, because consumers
 generally prefer to purchase policies through broker banks that offer a
wide variety of products from competing insurers (Sigma, 2006).

c) Insurance as Fully Integrated Financial Service/ Joint ventures

Apart from the above two, the fully integrated financial service involves
much more inclusive and intricate relationship between insurer and bank,
where the bank functions as entirely collective in its operation and selling
of insurance products is just one more function within. Where banks will
have a counter within sell/market the insurance products as an internal
part of its rest of the actions. This includes banks having wholly owned
insurance subsidiaries with or without foreign participation. In Indian
case, ICICI bank and HDFC banks in private sector and State Bank of
India in the public sector, have already taken a lead in resorting to this
type of bancassurance model and have acquired considerable share in
the insurance market, also made a big stride within a short span of time.
The great advantage of this approach being that the bank could make
use of its full potential to reap the advantage of synergy and therefore the
economies of scope. This may be suitable to comparatively larger banks
with sound financials and has better infrastructure. Internationally, the
fully integrated bancassurance have demonstrated advanced
performance (Krishnamurthy, 2003). Even if the banking company forms
as a subsidiary and insurance company being a holding company, this
could be classified under this category, so long as the bank is selling the
insurance products alongside the normal banking services. As per the
present regulation of insurance sector the foreign insurance company
could enter the Indian insurance market merely in the form of joint
venture, therefore, this type of bancassurance seems to have emerged
out of necessity in India to an extent. There is great scope for further
improvement both in life and non-life insurance segments as GOI is
reported have been actively considering to increase the
FDI’sparticipation to the upto 49 per cent.
 2. Product-based Classification
a) Stand-alone Insurance Products
In this case Bancassurance involves marketing of the insurance products
through either referral arrangement or corporate agency without mixing
the insurance products with any of the banks’ own products/services.
Insurance is sold as one more item in the list of products offered to the
bank’s customer, however, the products of banks and insurance will have
their relevant brands too.
b) Blend of Insurance with Bank Products
With the financial integration both within the country and globally,
insurance is increasingly being viewed not just as a ‘stand alone’ product
but as an important item on a menu of financial products that helps
consumers to blend and create a portfolio of financial assets, manage
their financial risks and plan for their financial security and well being
(Olson 2004). This strategy aims at blending of insurance products as a
‘value addition’ while promoting its own products. Thus, banks could sell
the insurance products without any additional efforts. In most times,
giving insurance cover at a nominal premium/ fee or sometimes without
explicit premium does act as an added attraction to sell the bank’s own
products, e.g., credit card, housing loans, education loans, etc.

IV. Bancassurance in the Philippines

Insurance firms realized they need not compete with banks for the people’s
money—they can partner and both gain from bancassurance.

In the Philippines, the Amended Insurance Code under Republic Act No. 10607
signed into law in 2013 institutionalized bancassurance, which involves cross-
selling insurance products within Bangko Sentral ng Pilipinas (BSP)-licensed
banks.
Years before the government recognized and regulated bancassurance,
French insurance giant AXA and local banking heavyweight Metropolitan Bank
and Trust Co. already forayed into the business in 2005.

1. Metrobank/PSBank-AXA
“The partnership between AXA and Metrobank is the pioneering
bancassurance operations in the Philippines, and is one that has lasted the
longest. Bancassurance has been very crucial to the growth of AXA
Philippines, contributing to majority of the business year in and year out,”
said Marie B. Raymundo, AXA Philippines’ chief bancassurance officer.

“What has been very crucial in our bancassurance partnership is that it has
been mutually beneficial for both parties, and especially to Metrobank
customers. The model has proven to be very strong and effective such that
we added a new bancassurance partner last year: PSBank,” she said.

She said the partnership with PSBank, which also belongs to the Metrobank
Group, would allow the insurance firm to have access to a broader market
while also providing the thrift bank’s customers with a one-stop shop for
short- to long-term needs—from protection, health, retirement, and
investment that have a life insurance component.

In the first quarter of the year, 68 percent of AXA Philippines’ sales came
from its bancassurance channel. PSBank president Vicente R. Cuna Jr. said
“this partnership allows us to advocate financial wellness to our clients as
we offer them suitable alternatives to save and grow their finances.”

The latest Insurance Commission (IC) data showed AXA Philippines ranked
second in terms of insurance premiums sold in the first half, just behind Sun
Life of Canada (Philippines).
2. BPI-Philam Life
BPI-Philam Life Assurance Corp., the partnership of Bank of the Philippine
Islands (BPI) with Philippine American Life and General Insurance
Company (Philam Life), ranked third and even eclipsed the sales of its
parent insurance company.

In a briefing with Filipino reporters at the Hong Kong headquarters of AIA

Group Ltd. last February, Philam Life chief executive Estelito G. Madrid said
the company expected to maintain its solid performance throughout the
year. He said the booming economy would bolster not only its
bancassurance business, but also its traditional channels offering life
protection and health needs.

“Our bancassurance channel performed well in the second half of 2014. We

worked closely with our joint venture partner, BPI, to focus on expanding
the footprint of our in-branch insurance specialists and improving their
capabilities,” AIA said in its 2014 report.

The partnership with BPI gave Philam Life access to the bank’s network of
more than 800 branches. The number of active specialists in
bancassurance rose by 49 percent last year, AIA added.

3. RCBC, SunLife Grepa

Canada’s giant insurers are also benefiting from their local bancassurance
arms. SunLife Grepa Financial, the Canadian insurer’s venture with the
Yuchengco group’s Rizal Commercial Banking Corp. (RCBC), was in
seventh place in the IC ranking. Manulife China Bank Life Assurance Corp.,
a partnership between Canadian-led firm Manulife Philippines and China
Bank, was 11th. PNB Life, led by taipan Lucio Tan’s Philippine National
Bank (PNB), was in ninth place.
 Other banks are also boosting their bancassurance businesses. Last June,
Sy-led BDO Unibank Inc. concluded an agreement to terminate its joint
bancassurance venture with Italy’s Generali Group to take full control of
Generali Pilipinas Holdings Co. Inc., the parent company of life insurer
Generali Pilipinas Life Assurance Co.

A statement released by BDO said it is “re-focusing its insurance strategy

to align with its thrust to solidify its presence in the broad-based middle-
income market.”

“BDO intends to embark on a new journey of diversifying into the life

insurance sector via this new wholly owned unit to maximize cross-selling
of products to its extensive retail customer base,” BDO president and chief
executive Nestor V. Tan said.

The holdings firm and its insurance unit will be renamed BDO Assurance
Holdings Corp. and BDO Life Assurance Co. Inc., respectively. Generali
Pilipinas ranked 10th among life insurance companies in terms of premiums
as of the first half.

4. EastWest-Ageas Insurance
In May, Gotianun-led EastWest Banking Corp. inked a joint venture
agreement with Belgian insurance group Ageas Insurance International NV
to put up a new life insurance firm named EastWest Ageas Life.

Of the 20-year exclusive distribution agreement with Ageas, EastWest Bank

president and chief executive Tony C. Moncupa Jr. said: “We have always
viewed bancassurance as an integral part of our business model. We see it
as a necessary ingredient to have complete product offerings for the
financial services needs of our target market segments. Specifically, the
consumer and middle market corporate segments.”
 5. Security Bank-FWD Group
Security Bank Corp. also sealed last year a bancassurance deal with FWD
Group, the insurance arm of Hong Kong tycoon Richard Li’s Pacific Century
Group.

“Bancassurance is a fast-growing life insurance distribution channel in the

Philippines, which is an under-penetrated market compared to its Southeast
Asian neighbors,” Security Bank president and chief executive Alberto S.
Villarosa said last October.

Insurance Commissioner Emmanuel F. Dooc, meanwhile, told reporters last

month South Korea’s Samsung Life Insurance Co. Ltd., which is said to be
looking at business opportunities in the Philippines, is eyeing a bank partner.

On its website, Samsung Life claims to be South Korea’s “largest and most
prominent insurer” as well as one of the oldest in the country, having been
established in 1957. A part of the South Korean conglomerate Samsung
Group, its principal products include life and health insurance, annuities,
and other financial services.

V. References
Bancassurance. Retrieved from
https://www.investopedia.com/terms/b/bancassurance.asp

Definition of ‘Bancassurance’. Retrieved from

https://economictimes.indiatimes.com/definition/bancassurance

(2017, June 7). What is BANCASSURANCE? What does

BANCASSURANCE mean? BANCASSURANCE meaning & explanation.
Retrieved from https://www.youtube.com/watch?v=6MLkzsri2Ms
De Vera, B. (2015, August 19). Insurers, banks win in bancassurance.
Retrieved from http://business.inquirer.net/197409/insurers-banks-win-in-
bancassurance

What are the models used in bancassurance? Retrieved from

https://moneymindz.com/articles/Deposits-and-Bank-Accounts/Fixed-
deposits/What-are-the-models-used-in-bancassurance