Banks' traditional sources of fee income have been the fixed charges levied on loans and advances, credit cards, merchant fees on point of sale transactions for debit and credit cards, letter of credits and other operations. This kind of revenue stream has been more or less steady over a period of time and growth has been fairly predictable. However, shrinking interest rates, growing competition and increased horizontal mobility of customers have forced bankers to look elsewhere to compensate for the declining profit margins, and Bancassurance has come in handy for them.

Fee income from the distribution of insurance products has opened new horizons for the banks and they seem to love it. Product bundling in the retail space coupled with cross selling of unit and investment linked life insurance plans seem to be the order of the day as far as Bancassurance revenue is concerned.

Opportunities
From the banks' point of view, the opportunities and possibilities to earn fee income via the Bancassurance route are endless. Savings accounts, fixed deposits, loan accounts and credit cards are all goldmines as far as knowledge about customer's preferences and financial status is concerned. Different insurance products can be tailored and targeted to specific segments based on the knowledge about customer's spending patterns. Customers today are generally aware about the various insurance products available and most of them are already in need of some kind of protection whether it is car insurance, home insurance or a child education plan. All that is needed is to offer them a product that is tailored to fit their requirements and provides better value for money.

The rule of thumb for the bank should be to cross-sell at least one insurance product to each customer, since every existing relationship is a potential source of additional income in terms of Bancassurance sales. It is much easier for the banks to sell insurance products, mainly asset and wealth management products, as they have complete knowledge about the financial status of the customers through their spending and saving patterns. In terms of efforts too, it is easier for the bank to approach and convince a customer to buy a particular insurance product since they trust the banks more than their insurance company. The method of approaching the customer and the sales practice will, however, depend upon the business model adopted by the bank, and may vary substantially from one place to another.

"A TYPICAL COMMERCIAL BANK HAS THE POTENTIAL OF MAXIMIZING FEE INCOME FROM BANCASSURANCE UP TO A LEVEL EQUAL TO 50% OF THEIR TOTAL FEE INCOME FROM ALL SOURCES COMBINED."

Products and insurers' interest
In terms of products, there are endless opportunities for the banks. Simple term life insurance, endowment policies, annuities, education plans, depositors' insurance and credit shield are the policies usually sold through the Bancassurance channels. Medical insurance, car insurance, home and contents insurance and travel insurance are other products that can be distributed by the banks. However, quite a lot of innovation has taken place in the insurance market recently, to provide more and more Bancassurance-centric products to satisfy the increasing appetite of the banks for such products.

Insurers that are generally accused of being inflexible in the pricing and structuring of the products have been responding well to the challenges (say opportunities) thrown open by the spread of Bancassurance. They are ready to innovate and experiment and have set up specialised Bancassurance units within their fold. Examples of some new and innovative Bancassurance products are income builder plan, critical illness cover, return of premium and Takaful products that are doing well in the market.

Corporate Bancassurance
Bancassurance provides more ways to earn fee income for the bank. As we discussed earlier, every relationship provides an opportunity to cross sell Bancassurance products whether it is retail or corporate. Corporate relationships provide an opportunity for corporate Bancassurance, which is taking shape slowly but steadily. All commercial enterprises need insurance for their buildings, factories or warehouses, and banks can capitalise on this existing need for insurance cover. There is more fee income in distributing commercial property or liability insurance to corporate houses, as volume and turnover are high. It is easy to cross-sell commercial insurance at the time of term lending or providing Letters of Credit, since it will be value addition from the customers' point of view. Furthermore, lending is an asset creation process for the bank and it makes sense even from the credit risk management perspective to have the insurance security of your choice.

Fire insurance, workers compensation insurance, group medical insurance and contractors' insurance are just some of the commercial property and liability insurance that can be sold to the corporate customers of the banks, thereby generating an additional source of fee income. Similarly, the trade finance or operations divisions within the bank provide opportunities to cross-sell marine insurance. The importance of corporate Bancassurance lies in further cross-selling opportunities to the individuals within those companies.

The Takaful revolution
Takaful is the Shari'ah compliant Islamic version of traditional insurance products. The premise lies in finding a mutual and cooperative way of managing the funds generated from the sale of Takaful products. The premium is called contribution and any profits after the claims and management expenses are returned to the policyholders who are treated as shareholders. The return of premium is called as surplus distribution. Since Takaful was introduced nearly 20 years ago, Takaful products have caught the fancy of not only Muslims but also non-Muslims, as Takaful treats its customers more fairly.

Islamic banks are already distributing Takaful products and earning fee income by tying up with several Takaful companies. Some of the Islamic banks have formed Takaful companies as a subsidiary. The product ranges from life insurance, car insurance and health insurance to complex unit linked insurance products. Malaysia, Bahrain, Brunei and Saudi Arabia have been leading the Takaful revolution, and the growth has been exceptional in these countries. Recently, the UAE, Pakistan and Qatar have also witnessed hectic activity in the sector. What is interesting to note is that even purely commercial banks have entered the fray by setting up dedicated Islamic banking divisions with Islamic insurance products as add on. Recent examples are HSBC in the UK with their Amanah range of products and Lloyds TSB with their Islamic offerings including Life Insurance and Home Insurance based on Takaful principles. Their goal is to increase fee based revenue.

Scenario in the Middle East
Banks in the Middle East are currently doing reasonably well in terms of generating fee income out of their Bancassurance activities. Though no official figures are available, Lebanon leads the pack in terms of penetration. Every single bank is tied up with an insurance company and every branch across the length and breadth of the country provides insurance services. Next is the UAE where large banks are now well entrenched into Bancassurance activities. Not only are insurance products bundled or cross sold along with core retail banking products, direct marketing has also been employed to increase fee income based revenue. Direct Sales Agents and out-bound tele-sales agents are increasingly being employed by the banks to concentrate more on Bancassurance activities. However, small and medium-sized banks in the UAE are still far behind in realising the full potential of Bancassurance.

Other countries in the region, e.g. Oman, Qatar, Bahrain, Kuwait and Saudi Arabia have not moved much in this direction, mainly due to the taboo attached to the 'Life Insurance' and ambiguity of local regulation. Life insurance penetration in the Middle East is currently less than 0.5% (Swiss Re: Sigma Report). Considering the economic boom in the Gulf region and large numbers of high net worth individuals (HNWIs), the potential for Bancassurance is tremendous, and banks have the opportunity to cash in on it. It is therefore imperative for the Central Banks or other regulators in all these countries remove any barriers in order for the banks to grow faster and enhance the level of customer satisfaction.

It's here to stay
A typical commercial bank has the potential of maximizing fee income from Bancassurance up to a level equal to 50% of their total fee income from all sources combined. Fee income from Bancassurance also reduces the overall customer acquisition cost from the bank's point of view. Banks are going full throttle to capitalise on the opportunities thrown up by Bancassurance. Sales personnel are being recruited in hordes and a substantial amount of money is being spent on training on product knowledge and selling techniques.

At the end of the day, it is easy money for the banks as there are no risks and only gains. Customers are happy, and the shareholders of the banks are smiling.

Manoj Kumar has over 18 years of experience in insurance and banking industry and is currently working as Head of Bancassurance with Doha Bank in Qatar. He has worked for various insurance companies and banks in India, UAE and Qatar.