Insurance remains a major contributor to sustainable economic growth and development in all countries for which reason every channel for distributing same must be encouraged.

The traditional channels of selling insurance have been via agents, brokers and direct business until the evolution of bancassurance. 

Bancassurance has since developed to become the most vibrant and viable channel of distributing insurance solutions across Europe and Asia; contributing averagely in excess of 60% of total insurance premiums collected and above 30% of some banks’ total profitability. In Ghana, however, for almost a decade since the first ever bancassurance partnership was launched, not much is known of these unique collaborations between banks and insurance companies and its performance and contribution to the economy is not measured.This piece essentially is to emphasize why Corporate Initiative Ghana, organizers of the Ghana Banking Awards, should take a keen interest in the promotion and development of bancassurance in Ghana for the benefit of the financial services industry and the economy at large. 

As the name suggests, bancassurance is simply the partnership between banking institutions and insurance companies in order that both parties synergize towards providing one-stop-shop financial solutions to their clients. Bancassurance relationships are not restricted to universal commercial banks only; but also to other players in the financial sector – mortgage houses, rural and community banks, savings and loans companies, microfinance institutions and credit unions.

Bancassurance must be promoted because of its major role in deepening financial inclusion amongst the population and also generating an additional revenue stream for banks. In recent times, the two biggest contributors to income for banks - net interest income and fees and commission income - are dwindling in fortune resulting from internal and external factors; increased competition and disruptive technological advancement. 

Aggressive competition amongst banks, coupled with excessively negotiated interest rates by corporate depositors and borrowers, is resulting in squeezes on banks’ interest revenue margins, resulting in lower percentage growth in net interest income earned. Also, with the advent of Mobile Money technology, banks are being squeezed on fee and commission revenue sources too; as MNOs and Financial Technology firms evolve with rather swift and agile technology thereby taking away revenues from the banks. The fast-paced development of payment technology platforms is gradually relegating some banking services into extinction - telegraphic transfers, cheque book requests, ATM transaction services, standing order instructions, counter cheque request, salary payments, and third-party payments - thereby blocking revenue streams from these services for banks. Indeed, as the Electronic Money Issuers continue to lobby the Central Bank towards liberalizing regulation to accommodate Mobile Money Credit, banks stand to become further squeezed on interest revenue; which hitherto was a revenue stream solely reserved for banks.

These observations are supported by the recently launched PwC 2016 Ghana Banking Report which indicates that; “The Ghana banking industry in 2015 recorded a significant fall in the net interest margin (NIM) from 16.9% in 2014 to 9.7% in 2015” and also “Net income from fees and commissions increased by 12.0% from GH¢1bn in 2014 to GH¢1.2bn in 2015, accounting for 15.1% of total industry income, compared to 15.4% recorded in 2014.” This reveals that whilst fee and commission income increased marginally in absolute terms, its percentage contribution to the profitability of the industry is reducing; resulting from squeezes illustrated above. Another key variable in banks’ performance measurement is expenses and the cost-to-Income ratio (CIR). The PwC report revealed also that “the industry cost increased by 20.0% from GH¢3bn in 2014 to GH¢4bn in 2015” and proceeds to identify staff related expenses as accounting for 31% of the industry’s total operating expenses. Considering that cost of employee emoluments will largely be on the increase, and other operating costs remain invariable, increasing the income generated per staff is the surest way to reducing banks’ cost-to-income ratio which has remained at 0.5 for the past four years. Obviously, whilst other fee income sources are challenged, bancassurance guarantees that additional income towards reducing the industry’s CIR.

BancassuranceEconomics and Banking Profitability

Life insurance companies largely by their nature are aggregators and custodians of long-term savings funds which are immensely beneficial to banks. This is more so the case in Ghana where alternative asset classes are largely underdeveloped living insurers with a limited spectrum of instruments to invest in. Bank liabilities and their corresponding money market instruments become the major beneficiaries of insurance premiums. Banks with deposit liabilities in long term placements are better able to match those funds with long-term assets to the benefit of their customers. The business of a bank is to trade money; the longer money remains in the bank’s custody, the more the bank trades the money to generate revenue from interest margins. The more banks are able to trade money, the more money they, in turn, create within the economy through the system of the money multiplier. Ultimately, banks become more liquid and the resultant effects on money supply and lending rates are to the benefit of the people and the economy at large. In effect, the banking system and the larger economy are keen interest stakeholders in insurance premiums mobilization.

According to the Brussels-based Insurance Europe Federation, in its recent 2015 report publication; “the insurance sector is the largest institutional investor in the EU, with almost €9,800bn of assets under management invested in the economy in 2015; equivalent to 61% of the GDP of the EU.” Further analysis of the report reveal that;European insurers generate premium income of more than €1,200bn (life insurance contributing €730bn,non-life generates €343bn, and health premiums being €124bn), employ almost one million people and invest almost €9,800bn in bonds, company shares and other assets within the economy. Analyzing the micro effects of the report, it reveals an average of €2,010 per capita was spent on insurance in Europe in 2015 (of which €1,223 was on life insurance, €574 on non-life and €207 on health insurance) and also reveals Insurance penetration (gross written premiums as a percentage of GDP) to be 7.4% - ranging from 0.9% in Latvia to 11.4% in Finland.

Significant to note; bancassurance happens to be at the forefront of driving these impressive numbers in Europe. Analyzing Insurance Europe Federation’s reports in the last three years reveal that; the main distribution channel for the life insurance market in Europe remained bancassurance followed by brokers, agents, and direct writing. For instance, in 2014, bancassurance accounted for more than 80% of premiums in Portugal, rising from 76% in prior year; 79% in Italy, a rise from 72% in prior year; 63% in France, a rise from 61% in prior year; and remains flat at 79% in Turkey over the two years analyzed. This indicates that even in the countries with already high levels of bancassurance penetration progress continues to be made, pushing the boundaries of adoption to optimum levels. More interestingly, other countries are making far more significant jumps in bancassurance adoption. In Malta, whilst bancassurance contributed only 32% to GWP in 2013, this figure jumps to 82% in 2014 to top as the highest bancassurance contributing country in the EU, relatively.

Reviewing the Asian market, bancassurance has become so fiercely competitive that it has degenerated into practices which hitherto were unheard of in banking culture. Banks will now package their brand equity, price it as a tangible asset and float same for sale to insurers as upfront partnership fee. For instance, according to a 2015 report published in the Asia Insurance Review; “Manulife Financial Asia and DBS bank signed an exclusive 15-year bancassurance partnership effective January 2016 for US$1.2 billion access fees plus other ongoing variable payments. 

The partnership will allow the insurer to distribute its life and health insurance products through the bank’s branches in Singapore, Hong Kong, China and Indonesia.” Interestingly, further analysis of the report indicates that these “brand prices” are only set to increase by the day. Whilst in 2012, Allianz and HSBC signed a 10-year exclusive agreement for US$100.5 million in upfront cash consideration, AIA Group and Citibank signed a 15-year exclusive deal for a reported amount of US$1billion in 2013. In 2014, Prudential also struck an agreement to extend its exclusive partnership with Standard Chartered bank in Asia for another 15 years at a cost of US$1.25 billion in fees plus variable payments. These developments in Europe and Asia are a testament to the value that industry players put on bancassurance and obviously evident of the benefits both sets of players derive from developing this channel into viability.

BancassurancePerformanceRatios in Ghana

Apart from the many other indirect benefits that banks leverage from such partnerships, the most obvious and easily quantifiable is the commission revenue banks earn from these relationships. Bancassurance provides additional streams of revenue for banks under the fees and commission income classification. This revenue stream may include;income from commissions, referral fees, over-rider incentives, profit sharing arrangements, premises user charges, and also other intangibles like brand mileage gain and product diversification gains.

During her speech at the recent 2016 Bancassurance conference, the Commissioner of Insurance Ms. Lydia Bawa indicated that of the 23 Bancassurance partnerships registered with the National Insurance Commission, total Gross Written Premium (GWP) accrued to insurers in 2015 amounted to GHs31million. On the back of these policies in force via bancassurance, total commissions earned by the 16 banks with registered partnerships amounted to GHs10million whilst claims paid to the banks and their customers amounted to GHs6million. 

Comparing the above statistics with the overall industry data from both subsectors of the financial services industry reveals that;bancassurance contributed 2.06% of total insurance industry GWP (GHs1.5billion) and an even smaller percentage of 0.83% of total fees and commission income of the entire banking sector (GHs1.2billion). 

These figures pale in significance when compared to other developed financial markets in Europe and Asia where Bancassurance contributes up to 60% of industry GWP and more than 30% of some bank’s overall profitability.For instance; according to International Banker’s 2015 Report on Bancassurance, “Fitch cites Banco do Brasil’s joint venture with Spanish insurer Mapfre and Itaú’s 30% stake in Porto Seguro as being two examples of bancassurance deals in recent years that have proven to be highly beneficial.WhileBradesco experienced a 28% to 31% portion of its parent company’s total earnings being generated from insurance operations between 2010 and 2014, Brazilian banking giant ItaúUnibanco, meanwhile, reported a 15% to 17% share of total profits being classed as insurance profits over the same four years.”

However, there is significant hope for these relatively young partnerships in Ghana. It is worth noting that Bancassurance commissions by their nature are mostly recurring and cumulative such that these commission figures are only set to increase exponentially as long as the base value (bancassurance sales) increases year on year. For instance, banks are guaranteed a base commission of GHs10million (being 2015 commissions earned) as recurring commissions on existing policies in 2016, plus additional commissions from new sales of 2016, all things being equal.  To illustrate this, let us assume that a bank customer buys an insurance product via the banking hall in 2007; the bank will continue to enjoy commissions from that sale in the present day, as long as the customer continues to pay his/her recurring monthly premium to keep the policy in force.

Types of Bancassurance Partnerships in Ghana

The exact relationship between a bank and an insurer that constitutes bancassurance is not specifically defined in Ghana and many other countries. Interactions and transactions between insurance companies and other players in the financial ecosystem have always existed but these were not called bancassurance partnerships. A customer of a bank is able to request standing instructions (premium payments) to sweep into the credit of an insurer’s account in the same bank, and that will not be bancassurance. Even in recent times, under many formal arrangements, where insurers enter into specific premium collection contracts with banks, and the banks, in turn, earn fee income for such services, such relationships may not qualify as bancassurance. What about when a bank simply insures its landed properties, equipment, and vehicles or its employees’ lives with an insurer?Well, the simple answer may be that these kinds of transactions are business-as-usual which are not required to be registered or approved by either regulator - Bank of Ghana and National Insurance Commission - as such may not be classified as bancassurance. What requires regulatory approval, though, may include these kinds of relationships:

Retail Product Distribution:This is the type of relationship which has become most commonly referred to and accepted as bancassurance. These are mostly arrangements where off-the-shelve insurance products are distributed via banks’ sales channels; banking halls, call centers, direct sales agents, relationship managers, and lately banks’ digital platforms. These product solutions in the banks’ spaces may be same products (in terms of pricing, features, and benefits) as the insurance company distributes via its own sales channels; financial advisors (tied agents), insurance brokers, customer service centers and digital platforms. However, unconventional development in the marketing function of corporate strategy has brought about the concept of white-labeling which has come to gain massive grounds in bancassurance. White-labeled products are these same insurance products which, hitherto, are named and sold in the insurer’s name, now being packaged and branded in the bank’s name and sold as such. 

In effect, whereas a customer will subscribe to the “Old Mutual Transition Policy” via an Old Mutual Financial Advisor, an Ecobank customer will subscribe to same product as “Ecobank Transition Policy” via an Ecobank branch (Ecobank being Old Mutual’s bancassurance partner). Further advancement in the product differentiation strategy of banks is leading to new developments where banks commission their insurance partners to develop and tailor specific solutions that meet the unique needs of their customer segments. In such instances, the bank becomes an integral part of the product development journey until the product receives regulatory approval to go into the market. Some banks will request exclusivity rights over the content, features, and benefits of such products so to prevent redeployment of same or similar products with their competition; for niche market advantage purposes.

Loan Protection Relationships: Even for banks and lending institutions that do not have retail insurance product distribution relationship with insurers, the bank will most likely have some form of loan protection policy in place. Banks and lending institutions will subscribe to loan protection policies to protect credit facilities granted against repayment default arising from death, incapacitation, and sometimes retrenchment of the borrower. Normally, under such arrangements banks will negotiate bulk pricing regimes with an insurer (or group of insurers) where the bank is the policyholder and beneficiary (lost payee) of the sum assured and the borrower being the life assured. In effect, should any of the defined risk events crystallize in the life of a borrower, the bank will call on its loan protection insurer to offset the outstanding loan balance on the borrower’s account? Loan protection policies come in various forms and are normally labeled as; Credit Life Assurance – where it is a retail personal loan facility, Mortgage Life Assurance - where the facility is a mortgage by an individual, and Key Man Assurance - where the facility is granted to a business with key identifiable individuals behind the business. Premiums covering these policies are priced as a percentage of the loan amount disbursed by the bank, charged upfront (deducted from approved loan amount) at disbursement and credited to the insurer; at which time the policy is deemed to come into force. 

Various banks and their insurance partners adopt different approaches in the product design structure, pricing and administration of these policies. In terms of pricing; some partnerships will charge age-specific premium rates per borrower, others will apply graduated rates within age bands of borrowers, whilst some others will negotiate one single applicable rate across for all borrowers irrespective of age. From the product design perspective; irrespective of which pricing model is adopted, some partnerships will apply premium charges as a one-off throughout the repayment life of the facility (mostly under credit life) whilst other partnerships will adopt yearly premium payments,at concurrent rates applicable, relative to the remaining loan balances on anniversary date (mostly under mortgage life and key man assurance arrangements). Administratively; although all banks will collect premiums before a policy comes into force (no premium, no cover), some banks will credit daily premiums into internal suspense accounts on behalf of the insurer and will remit same in bulk to the account of the insurer on monthly basis. Other partnerships will adopt weekly bulk premium credits and some others will do daily credits to insurers. Some partnerships will negotiate terms for premium credit refund to the bank where a loan facility is paid off ahead of schedule owing that premium paid was to cover the lifetime of the credit facility.

Embedded Product Relationships:Banking products across the industry are largely vanilla with limited variations except for fee charges and interest earnings/charges. For competitive advantage reasons, banks are now adopting insurance “wrappers” as value added services built into the generic products within the industry. Depending on the extent of benefit the bank is willing to differentiate its products with, as against premium cost implications to the bank, both parties will align, negotiate pricing and co-craft the product document. In most cases, the bank will share its product concept paper with the insurer and the insurer will explore technical possibilities of being able to embed/wrap and administer a policy practically behind the bank’s product. Banks will normally go-to-market and communicate these add-ons as free (non-added cost) to their customers. Meanwhile, some banks will “shoulder” the cost of premiums and some will build the cost back into the product’s fee charges. Administering the insurance premiums and also the benefits of these products are guided by service level agreements separate to the product document or will be scripted in the product document and submitted for regulatory approval. Some of these benefits are segregated according to the bank’s customer segmentation and some are applicable to products across the board. For instance, all current account holders (some banks specifically restrict to salary accounts)are entitled to a sum assured of a certain amount in the event of incapacitation or retrenchment whilst other banks will restrict such benefits only to a certain customer segment (executive customers) of the bank.

Corporate Referral Relationships: Corporate insurance products can be very technical and complex in underwriting such that the regulatory regime does not sanction banks to sell such products at any point in time. As such, bancassurance partnerships will not necessary cover corporate product distribution but can accommodate corporate referrals to the insurance partner to follow up the lead from the bank. Corporate insurance solutions are mostly not off-the-shelf or over-the-counter transactions for which they take the time to close amidst serious technical underwriting, risk assessment, calculated risk pricing, in-depth policy wording discussions and acceptability before sign off. In all these, the bank which is the closer and trusted partner of the corporate customer, will avail access to the insurer and provide relationship support through the process until the transaction is sealed.

Full-Scale Partnerships: Just as almost all the above relationships are strategic alliances with a particular chosen insurer by a bank; this type of partnership encompasses all of the above types of relationships in one particular agreement. These types of partnerships are almost joint venture relationship between an insurer and a bank. In such a situation, both players come together to ring-fence their customer base and practically keep out any sort of competition from breaking through. In such relationships, parties develop their partnerships beyond transactions to include sharing of certain types of information between each other so to develop a one-stop-shop customer database and mine same to cross-sell and deepen customer retention. These relationships do extend to joint call center activations where cross-platform telesales activities take place. These partnerships are able to develop joint digital platforms or accommodate one another on their platforms and in some cases integrate their operational systems for real-time transactions. Admittedly, in cases where partnerships develop to this extent, there are mostly common shareholding and governance relationships between both parties via a holding company.

Common to all the above forms of partnerships, whichever distribution model both parties agree to, the regulation requires that the insurance underwriter is boldly inscribed on all marketing collaterals and mentioned in all marketing communications pertaining to that product. Also, all such relationships must be guided by a bancassurance distribution agreement which spells out the value proposition, operating model, service level responsibilities, fee and commission incentives; all of which must be signed off by the respective regulators.  

Commission Arrangement of the Partnerships:

Actuarial professionals build and model pricing algorithms into insurance solutions with consideration for many variables that include; life expectancy within the geography of the product, population of the catchment area, the profitability of the product and distribution economics (including commission payout). Of all these variables, however, the commission payout structure built into the product design will largely be determined by the product type; pure risk product or savings embedded product. Almost in all instances, pure risk products earn higher commissions than savings products for a simple reason. Lower commissions on savings products allow for customers to accumulate higher investment funds, hence higher returns, in the savings basket of the insurance product. With these as rule of thumb, banks and their insurance partners will determine the structure of commissions applicable to their respective partnerships. At all times, commissions on insurance products are either recurring or one-off.

Front-loaded commissions:Depending on the fee income appetite of the bank, some banks negotiate for heavy commissions upfront or within a short period of the life of the policy. Whereas commissions payable to the bank can be at relatively lower rates but earned throughout the life of the policy (say @ 10% of premiums for 15 years), other partnerships do have arrangements where the commission is earned at 25% of premiums for five years in the life of the policy. In effect, in the latter partnership, the insurer will be squeezed with heavy commission payout in the earlier years but will retain such commissions to itself in the later years of the policy.    

Decreasing commission rates: These arrangements are normally targeted towards savings embedded products but can be applicable to pure risk products also. These are built and instituted in a manner such that percentage commission rates reduce during the life of the policy. Examples abound where a product pays out 10% commissions on premiums in the first year of the policy, the commission percentage reduces to 7% in the next three years of the policy, then a further reduction to 5% in the next 4 years of the policy, before a final reduction to 2%for the rest of the life of the policy. 

Flat-rate commissions:These commissions are not in the category of either of the above. These rates are applicable throughout the life of the policy and the percentage rate never changes. These are mostly applicable to pure risk products; where premium payments are monthly recurring with relative corresponding recurring commissions (individual pure risk products like funeral policies)  or where premiums are charged annually on outstanding liability balances but commission percentage rates applicable remain flat throughout every renewal anniversary date until liability is paid off (mortgage life and key man assurance policies).

One-off commissions:These commissions are applicable to policies where premiums are paid one-off and upfront though the policy may be in force for up to 5 years from the date of cover. These are mostly relevant to credit life policies where premiums are loaded and charged as a one-off fee; the corresponding commission percentage agreed is applied and earned one-off as well.

Referral fees:These are fees payable on the back of referrals from the bank to the insurer. These fees are only payable where a referral transaction is closed and becomes policy on the book. Referral fees are normally set at lower rates than commissions considering that the actual sale and underwriting is done by the insurer but with relationship assistance from the bank. These fees are mostly applicable to corporate non-life insurance and life insurance situations where underwriting tends to be much more technical.

The way forward

Big Data analytics is the future of commerce.Telecommunications and technology firms have already proven that they are the masters in this space as they command customer numbers far in excess of banks and insurance firms combined. They have already invaded the banking space and one can only expect their eventual venture into formalized“telco assurance” disruptive relationships. Bancassurance collaborations must be one sure mechanism by which insurers and banks, being the foremost traditional financial service providers, can come together and ring-fence their traditional customer base so they can remain relevant to the invading competition; otherwise, many more of their services will sooner than later become extinct.

The writer is the Head of Corporate Business, Old Mutual Ghana. He is a long-standing player in the financial services industry – Banking, Insurance and Pensions – and an advocate for Financial Inclusion.