ERM guru

Current challenges

1) Although the bancassurance concept is extremely appealing to insurers, banks failed to do the proper due diligence before selecting the bancassurance business partner. Bancassurance arrangements could be fitted into the definition of M&A transactions where cultures of two companies meet at the bank’s teller counter. It can make the bank’s customer either happy or confused depending on how similar those two cultures have been synchronized. The bank’s culture should always be dominant; however, we have seen the other way in many cases. What is tried to say here is that bankers, in many cases, partnered with the wrong insurer by just selecting the insurer who was ready to pay the most extensive sum of money as an upfront fee. This way, insurers who had the most considerable firepower in terms of cash flows could secure the most of exclusive bancassurance arrangements. Only a minority number of insurers were able to make a considerable sum of money available to fund these exclusive transactions. Money was one thing important; however, it appears that the bankers totally failed to consider the capacity of the insurers to service that many numbers of bankers where the insurers had multiple exclusive arrangements.

2) Bancassurance exclusivity has so far been a one-way street where Banker has to commit to one insurer, and insurers can have multiple exclusive transactions with different banks. Strange enough, the bankers do not appear to be concerned about data privacy and other privacy issues when they share customer-related information with an insurer who also has an exclusive relationship with other banks. In my experience with banks, I remember that bankers are usually overly concerned with such matters when dealing with outsiders. Only time can confirm or dispel the concerns people have on this issue.

3) When looking at the current number of Banca partnerships, one might question as to whether some insurers were trying to stockpile the Banca channels by securing as many banker relationships as possible to boast that they secured the most number of distribution channel relationships for the next ten years or 15 years without a realistic prospect of extracting meaningful values from those relationships.

4) When they were trying to acquire these relationships, as the bankers always had better bargaining power, some of the bankers used it just to extract as much money as possible. However, they failed to analyze the longer-term perspective of serving the banks’ customers. When observing this trend, the bankers seem to have forgotten about the very purpose for which the bancassurance relationships were initially entered into. I.e., the bankers wanted to provide all the financial services needs of their customers through one roof, which meant that the banker should have been working with insurers who would be able to satisfy the needs of their customers rather than working with the insurance company who can pay the maximum upfront fee for the banker for the relationship.

This naturally would suggest to a reasonable observer that this is where the bankers went wrong. The insurers who invested a colossal sum of money in these relationships too had to live up to the  promises to their head offices to secure the money reminding us of the saying “there is no free lunch.”

5) Insurers later realized that they did not have the human resources required to make the banker relationship successful, and they did not have experienced staff who understood how the bank’s customers should be treated. As a result, bad practices crept into the bancassurance business that insurers were ready to sell insurance policies to the banks’ customers at any cost, even if that meant that those insurance policies were not suitable to them. One of the main reasons this happened was that insurers are completed to recover the money paid as access fee and upfront fee. As a business, they had to do whatever they could to increase productivity no matter what it meant for the bank’s customers. This happened as there was no agreed strategy between the two-party to the partnership. As a result of this, what happened was that the bank customers were sold with inappropriate insurance policies, which led to a significant number of subsequent cancellations. It would not be surprising for the insurers and bankers to disagree with this opinion as they are yet to realize it. I would describe it metaphorically as a ticking time bomb.

The bank customers started thinking negatively about the bank whenever they were not happy about the insurer because they were of the view that the bank should have been bringing better insurance to them to give them a better customer experience. However, unfortunately, some bankers have not understood this issue yet. The reason is that they do not have a proper mechanism of identifying the customer experience through the Banca relationship.

6) In many of the bancassurance contracts, there was a condition of minimum persistency. However, when they agreed on the minimum targets, the bankers either did not understand how it works, or they took it for granted in that they thought insurers would take care of that aspect. On the other hand, the insurers thought it would be straightforward to get the bank to ensure the persistency of the insurance contract. Both parties seemingly failed to understand that ensuring persistency is not something one party could do alone. It should be done by both parties with a careful analysis of the customer base and then training the bank staff in charge of selling insurance contracts and making available to the customers the appropriate insurance products. When persistency is a condition that is a determinant of how the commission was paid to the bank, low persistency makes the bank not eligible for getting a certain amount of commissions originally agreed.

In some cases, the upfront commission had to be returned as per the terms of the agreement. Naturally, this situation creates stress in a long-term relationship that parties thought would be harmonious. Therefore, this led to a significant misunderstanding between the parties, and both parties tend to start pointing fingers at each other, saying that it was the other persons’ responsibility, and this, based on my knowledge, has led to the collapse of a couple of Banca assurance agreements within few years into the relationship. Therefore, it will not be a surprise if more of this type of relationship fails.

Contract terms at the time of entering into the contract were not adequately set out, assuming that there could be issues later on and indicate for issues how the contract can be terminated. It did not only create problems for one part Party. Neither insurer nor the bank would be able to terminate the contract at the contract termination clause not inserted in the contract or contracts had a significant amount of penalties to terminate the contract, which forces parties to stay in the relationship even when that is not working well. Ultimately the customers of the bank will become victims of this. This also means the bank will eventually lose customers.

Even after knowing that a bank has a long-term exclusive arrangement is place, other insurers would continue to approach banks that are already in committed bancassurance relationships hoping that those relationships would not work out and assuming the channel would be up for sale again. This may be because those insurers would know about the details of the terms of the distribution arrangement, poor performance, and relationship issues that might have surfaced.

All the issues I mentioned above are partly because the banks often selected bancassurance partners by giving more weightage to the ability to pay higher upfront fees and access fees rather than the capacity and commitments. Ideally, smaller banks should always be working with smaller insurers because smaller insurers have no appetite to enter into an exclusive relationship with big banks, whereby smaller banks can ensure that the relationship continues with full attention and commitment. Unfortunately, this is precisely what did not happen in this market. This brought many disadvantages to smaller banks who entered into a relationship with big insurers who appeared to forget them when they could secure another exclusive relationship with a more prominent bank than them.

To be continued...