Bancassurance: Making the Growth Sustainable- Part 1
This article talks about the potential of the bancassurance business in Vietnam as it has become a scorching topic for the last few years and continues to dominate the headlines of insurance industry news at the moment. We all have seen numerous bancassurance agreements between banks and insurance, especially the life insurance companies operating in Vietnam. Moreover, if one can remember, some of these deals fetched in hundreds of millions of dollars for a 10 to 15 years exclusive arrangement, but only some of them have been relatively successful.
Over the years, while some have been relatively successful, and some have yielded less than average results, some of the others have failed miserably. Unfortunately, most of these failures are not visible yet though the parties to the transaction understand it very well and are in the process of internal firefighting to salvage the relationship without really knowing where they would end up being. Therefore, before further writing on the current status, it would be worthwhile going a little bit into the past to understand the evolution of the Banca business, which could shed some positive light in terms of the channel’s growth.
The insurance industry in Vietnam grew above and beyond the growth stories of regional countries in the past several years. However, more significant growth could have been achieved if the insurers had alternative distribution channels alongside the maturing agency channel. Therefore, insurers had to look for a new distribution alternative. Moreover, at that time, insurers understood that the banks in Vietnam had not really paid any attention to working with insurance companies and bankers did not think that it would be a promising thing. However, insurers thought that was an excellent opportunity, and they would be able to grow at a much faster rate above and beyond the current level of growth. The banks have also had not much thought about transacting with insurance companies by letting insurers reach out to their customers to sell insurance policies. On the other hand, the bankers were also thinking about differentiating themselves amongst the competition in the banking industry while creating a sustainable opportunity to create yet another source of fee income.
Rise of Bancassurance
In 2007, I can vividly remember the first bancassurance conference that we organized to kick off the Banca business in Vietnam partly due to predictions and anticipations on limitations to growth of the business due to excessive reliance in the agency model of distribution and also as we saw there was a significant area of growth in the Banca business in the regional counties. We invited bankers and organizers were, some insurers and my firm. The participation rate was abysmal, and those who participated were junior management from banks as it had been assigned to them despite us inviting the senior executives from banks. Even those who participated in the conference have not seen it enough to understand how the bancassurance model works and had no idea if that would be suitable for Vietnamese banks. Eventually, there were more and more conferences, more talks, and more thought leadership about the importance of the bancassurance business and how the banks can leverage the power of their customer base using the geographical spread of the branch network of banks in the country to create more value and extra fee income. However, there was no talk whatsoever about the exclusive Banca relationships yet.
Based on my interactions with bankers and insurers then, I felt that the financial crisis of 2008 was a silver line to the bancassurance business, where bankers started paying more attention to the possibility of working with insurers on a long-term basis. Bankers realized that it is always good to have more income sources and bancassurance nicely fitted within their expectations in an era where financial crisis sent shockwaves in the banking industry due to increased non-performing loans.
Bankers were wise enough to understand that they had an alternative that could pave the way for them to look good temporarily as the upfront fee could generate good cash flows that they could take to the income statement straight away. This naturally gave rise to several bancassurance partnerships. However, those partnerships did not fetch hundreds of millions of dollars at that time.
Alongside the above reasons, the other reason for appreciating the Banca assurance business is severe competition in the banking industry where banks wanted to have different mechanisms to try and keep their customers from leaving for other banks. Selling insurance products to their retail customers was one of the core strategies to create a “one-stop-shop” under their retail strategy.
On the other side, insurers were also struggling to expand their business due to the slow growth of the agency channel, which was primarily part-time, and organic growth was difficult and painfully slow. In addition, the acquisition was expensive, making the insurance business less profitable. This was particularly true for the fairly new life insurers to the Vietnamese Insurance industry as more established players had been able to take advantage of early agency development. Therefore, the insurers [Especially new life insurers] realized that the bancassurance channel was the solution. Eventually, Insurers started to approach bankers looking for exclusive relationships. When multiple insurers started talking to the same bank, they realized that it was a gold mine and also part of their strategy too.
To be continued…
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