Bancassurance, says the oracle or finance definitions online (aka Investopedia) is :
…is 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 client base. This partnership arrangement can be profitable for both companies. Banks can earn additional revenue by selling the insurance products, while insurance companies are able to expand their customer bases without having to expand their sales forces or pay commissions to insurance agents or brokers.
Bancassurance has been a major part of European and Asian insurance markets and, for a time, was presumed to be the future of insurance distribution in most countries around the world.
What happened was different. Bancassurance has not taken off in all markets the same as it did in the early success stories. Some of this has to do with the reversal of trust relationships between banking and insurance.
Bancassurance in South Africa
In South Africa, the major banks have continue to write mostly credit life and credit insurance, funeral policies and linked investments (often off the back of tax advantages arising through the sale of credit life and funeral policies.) Other products are also sold, including additional simple, non-underwritten products and some more complex risk products. With some exceptions though, the sale of more complex risk products by banks in South Africa has only been modestly successful.
Non-underwritten, low advice bancassurance in South AFrica
The sale of funeral policies to existing customers, leveraging the brand, customer relationships, administration capability and premium collection advantages is actually exactly what bancassurance is about. It is a low-advice, non-underwritten product, but it has been a success.
Credit life products are a slightly different creature. Although they are insurance products sold to bank customers with many of the same advantages as funeral products, the reason for sale is usually quite different. This is generally not a product demanded by customers, but rather one used by the lender to improve revenues and manage risk. Although some bank literally refer to “credit life” only as bancassurance, I believe that is a distraction from the real model of bancassurance.
There are two primary types of investment products offered by most South African banks.
- Linked, where the product is effectively a life insurance tax wrapper for existing unit trusts.
- Guaranteed, either lump sum or income, with the ALM work done by the insurer, the bank, or occasionally a third party derivative or structured product provider.
These products are successful through the tax advantages of the life wrapper, and the typical bancassurance advantages of brand, relationship and administration. Many of the sales will come through insurer- or bank- owned distribution channels of branch sales, call centres, tied agents, some online / direct and financial advisor divisions. However, there are also sales from true independent advisors, usually when sufficiently well informed to undertand the tax advantage of the expenses incurred within the life licence through the risk products. (Since changes in life insurance tax rules and the introduction of the Risk Policyholder Fund, this advantage is rapidly disappearing.)
The tax advantage aside, this is probably another tick for bancassurance in South Africa.
There are many other investment products offered. There are still some with profits products, there are some property investments, hedge funds, fund of funds and private equity than fit better into a linekd life policy than into a unit trust.
Underwritten, complex “new generation” life products
The notably less successful element has been the higher permium, higher advice, higher income targeted, underwritten, complex life products. This is the sector that includes Discovery’s Life Plan, Old Mutual’s Greenlight, MMI’s Myriad and similar offerings from the major life insurers.
As a general rule, the insurance arms of South African banks have not been successful in this market.
Where bankassurance isn’t yet working
Bancassurance has yet to really crack the complex, underwritten life space.
Some of the major reasons include:
- These products are predominantly sold by independent advisors and agents. The agents of banks are more used to selling simpler products and do not always have the knowledge to see more complex products. Independent advisors are not as impressed by banks’ brands in the insurance space and break the link of customer relationship between the financial services “product provider” and the end customer.
- The major insurers, not all to the same degree, innovated in product design some time ago. Me-too products have less to differentiate themselves from the crowd and must compete on other measures to attract attention.
- The major life insurers have invested decades in building their credibility in this space, with end consumers and with brokers. I’m not convinced that banks always appreciate how much time is required to offset this and that a strong banking brand doesn’t automatically follow through to compete on the same level as a dedicated life insurer.
- Bancassurers have historically made significant profits with attractive margins selling in the less competitive space of their own customers, typically lower income and less financially sophisticated. There is therefore less incentive to grow into less well known markets where the same advantages don’t apply to the same degree.
- Low acquisition cost products (such as simple, non-underwritten ones) suit a cash-accounting basis more so than those with higher acquisition costs and longer payback periods. To some degree this is fixable with more appropriate accounting and reserving policies, but often times banks have moderate appetite for the complexity and volatility this can create.
- People love to hate insurers. This is also true for banks, even those that are generally well regarded and win awards! But as much as people don’t like insurers, they do have views on who is more or less likely to pay a claim. And, unlike the lending business where banks have to trust customers upfront and hope they repay, in insurance, customers have to pay first and trust the insurer to make good on their promise to pay claims. This reversal of the trust arrangement is a fundamental difference for insurance, and is dramatically more important for more educated consumers with longer term horizons.
What next for bancassurance?
Discovery, launching a bank, will further integrate its product offering and is expected (by fans and competitors alike) to successfully integrate a complex life insurance offering, a generally admired and trusted brand, and a slick legacy free banking platform. They will likely make mistakes in the banking space, but it’s hard not to see this as a success.
Investec is relaunching an old insurance licence acquired in the aftermath of Fedsure’s failure and will offer risk products to its private banking clients. However, Investec doesn’t have the same volume of customers as Discovery and this will likely be a different, smaller threat to established insurers.
FNB has made great strides recently with their refreshed, revised and new product offerings. They may make greater inroads into a full bancassurance model than others have in the past.
Absa sometimes feels hard-done by, with their technological innovations not receiving the same coverage as those of FNB. Standard Bank has a different relationship with Liberty and Standard Insurance than the other banks (especially now that MMI is not operationally linked to the FirstRand Group), but will surely be eyeing developments elsewhere with interest.
Capitec has been inching into the insurance space with caution. Their success and growth in the lending and more recently transactional banking space may be warning signs that more is planned. Their core target market is less of an immediate target for complex products, but that could still change.
Overall, tax reforms will make investment products by funeral- and credit-life- heavy bancassurers less attractive. New Policyholder Protection Rules may also disrupt the market.
These changes aside, banks maintain significant advantages in selling financial services products. The next few years in South Africa may see a little momentum move the way of bancassurance in South Africa.