LIMRA Your Global Consulting Partner Presentation Graham Morris
LIMRA Your Global Consulting Partner Presentation – Graham Morris III Conference Mumbai 4 th July 2012 International Bancassurance Models
Presentation Overview • • • Bancassurance Models – overview Structural models Financial models Distribution and Operational Sales models Regulatory models and impact • China and Indonesia 2 © LL Global, Inc. SM
Bancassurance models - overview
Bancassurance Models • Bancassurance Models • Structural models – respective roles • Financial models • • • Distribution and Operational Sales models • Distribution channels used • Sales people banks and insurers • Product models related to channels Regulatory models • 4 • related to the structural models Regulators driving Market models • © LL Global, Inc. SM Usually driven by regulatory, with local market condition variations
Typical Structural Models
The various bancassurance structures ¾ The decision as to which model and therefore partner to adopt can be likened to the way a typical relationship might develop over time…. Distribution Agreement “Playing the field” Strategic Alliance “Going steady” Model 1 can be likened to the early days of youth when it is normal to have a number of different partners and relationships. Loyalty is pretty low and long term commitment rarely a consideration. Temptation to switch partners for a “prettier” one Having played the field for a while, it is likely that one partner will demonstrate the best ‘fit” in terms of commitment, attention, behaviour and attitude. The relationship develops to a point where each understands the other a little better and both start to consider the others’ needs and aspirations. Loyalty sets in and plans for the longer term begin. Joint Venture “Moving in” Financial Services Group “Go alone” Once “courting” has been going on for a while, it is natural to settle down with one partner and start enjoying an even closer relationship. Both partners get to know each other intimately and a relationship of mutual trust and respect develops. Any problems or difficulties are resolved jointly and amicably. Marriage brings about a whole raft of new responsibilities and a relationship that should be built on a secure foundation. Both partners look for ways to get more out of each other and to contribute to a long and prosperous relationship. 6 © LL Global, Inc. SM
Model 1: Distribution Agreement ¾ Bancassurance model 1 is a product provider model where simple products are sold by the bank (either by bank/insurance staff in-branch or by Direct and Tele Marketing) ¾ Can be a single or multiple provider relationship. Can develop into a single Strategic Alliance and/or beyond ¾ This model is simple, low risk for the bank and creates value through commission/fee income on sales Product Range Ordinary products can be phased after the bank staff have been through the learning curve Automatic Credit Life MRTA Simple Products Term PA Sales Channel Corporate Structure & Ownership Bank Staff Bank Sales Channel Telemarketing 7 © LL Global, Inc. SM Fees & Commissions Insurer A Commission Insurer B Bank
Model 2: Strategic Alliance ¾ This is similar to model 1, but with greater commitment from the insurer e. g. special product development, customised service proposition (own helpline, documentation etc) and closer collaboration over areas such as sales management. ¾ Bank will have some involvement in channel management. ¾ Will usually relate to one exclusive arrangement. Term of alliance can be fixed. ¾ This model is also low risk and creates value for the bank through commission/fee income on sales and a potential “profit” share Product Range Sales Channel Bundled Products Automatic Products Bank Staff Ordinary products can be phased after the bank staff have been through the learning curve Simple Products Term PA Corporate Structure & Ownership Bank Sales Channel Telemarketing 8 © LL Global, Inc. SM Fees & Commissions Insurer Bank Commission plus profit share
Model 3: Joint Venture Company ¾ A Joint Venture company better aligns interest / commitment from both the bank and the insurer and hence can often provide more optimal returns. ¾ Favoured by major international insurers due to the level of commitment and control. ¾ The bank would have to bear some of the insurance risk, but will get a share of the embedded value arising from the business. This requires the injection of significant levels of capital Product Range Automatic Sales Channel Ordinary Protection Savings Pensions etc Fees & Commissions Bank Staff Credit Life MRTA Simple Products Term PA Corporate Structure & Ownership Insurer Bank JV Life Company Telemarketing X% Share JV Financial Advisor Insurer Y% Share Joint Venture Company 9 © LL Global, Inc. SM Depending on share in the JV insurance company, both the insurer and the bank get to partake in the distribution and underwriting profit arising from the JV insurance operation
Model 4: Wholly-owned subsidiary ¾ A more integrated model where the bank acquires/sets up an insurance company (or an insurance company acquires a bank). ¾ For maximum benefit (in terms of cross-customer access etc) this would often be established under a Financial Services Group – in theory should produce the most benefit and value for a bank. Product Range Automatic Sales Channel Corporate Structure & Ownership Bank Staff Bank Credit Life MRTA Simple Products Term PA Ordinary Protection Savings Pensions etc Bank 100% owned Life Company Telemarketing JV Financial Advisor Fees & Commissions 100% owned insurance subsidiary 10 © LL Global, Inc. SM Bank gets a full share of the distribution and underwriting profit (embedded value arising from the business).
Bancassurance models – impact on commitment • Commitment of both parties is one of the most key CSFs since without high levels of commitment the operation is destined to fail • Relationship also key to success and should be closer as the model develops High level of commitment to bancassurance Bank Own Company Wholly owned Joint Venture Marketing agreements Merger Distribution agreements Low level of commitment to bancassurance 11 © LL Global, Inc. SM
Bancassurance models – pros and cons (Bank) ADVANTAGES DISTRIBUTIO N AGREEMENT JOINT VENTURE MERGER ¾ Ease of tying up with insurance partner(s) ¾ No investment required ¾ Open to other partnership options ¾ ¾ Ease of exit – can lose hard won relationship Lack of commitment from Insurer/s No share of underwriting profits Tendency to sell only “compulsory” products ¾ Financial and management commitment ¾ ¾ ¾ Greater investment needed Potential conflict with core business Not easy to find a ‘best fit’ insurance partner Culture differences/difficulties Need to ‘open up’ customer base to insurer Risk of brand damage if insurer does not deliver ¾ ¾ ¾ from Insurer A share of underwriting profits Access to expertise of Insurer Risks are shared by Insurance partner Clear definition of responsibilities Greater penetration of customer wallet Can drive reciprocal business agreements ¾ Financial commitment and management ¾ Difficult to find a ‘best fit’ partner to merge ¾ ¾ ¾ OWN OPERATION DISADVANTAGES from Insurer A share of underwriting profits Access to unique expertise of Insurer Ease of entry to a new market – especially if partner is a well-respected institution Take over of partner’s assets and existing business (including any goodwill) ¾ Retain of profits within own organisation ¾ Full control of operation ¾ ¾ with Loss of independence Potential difficulties in post-merger integration Merger integration could delay or stall business initiative or existing operation Take over of partner’s existing liabilities ¾ All risks retained within own operation ¾ Lack of external/insurance expertise © LL Global, Inc. SM 12
Bancassurance models – pros and cons (Insurer) ADVANTAGES DISTRIBUTIO N AGREEMENT ¾ Ease of tying up with bank partner(s) ¾ Lower investment required ¾ Open to other bank partnership options ¾ ¾ ¾ Ease of exit – can lose relationship Low commitment from bank Other potential insurer relationships/conflicts Lack of control over bank’s leads Limited access to bank customers or database ¾ Financial and management commitment ¾ ¾ ¾ Greater investment needed Potential conflicts with main channels Partner relationship issues/management Not easy to find a ‘best fit’ bank partner Do not retain full underwriting profits ¾ JOINT VENTURE MERGER OWN OPERATION DISADVANTAGES ¾ ¾ from Bank needs to ‘share’ customer base – greater access to bank customers More control over lead generation Risks are shared by Bank partner Clear definition of responsibilities Ease of entry to new market – especially if partner is a well-respected institution ¾ Financial and management commitment ¾ ¾ ¾ Retain of profits within own organisation ¾ Full control of operation ¾ All risks retained within own operation ¾ Lack of external expertise ¾ Limited opportunity if existing banking from Bank ¾ Ease of entry to new market – especially if partner is a well-respected institution ¾ Take over of partner’s assets and existing business (including any goodwill) Difficult to find a ‘best fit’ partner to merge with Loss of independence Potential difficulties in post-merger integration Merger integration could delay or stall business initiative or existing operation ¾ Take over of partner’s existing liabilities operation within own operation is small © LL Global, Inc. SM 13
Typical Financial models
Financial model – cash flows to the bank Very important to have a good understanding of the magnitude of the cash flows that arise from the different models 1 An UP FRONT PAYMENT from insurer to enter into relationship 2 A COMMISSION STREAM for distributing products 3 CAPITAL INJECTIONS to support the underwriting model 4 15 © LL Global, Inc. SM Growth in EMBEDDED VALUE OR PROFIT SHARE from participation in underwriting profit
Key considerations – fee income/value creation ¾ Understanding the source of profit and the likely financial impact on each party of each model is very important as part of the business planning process. • % of banks earnings Important to know and understand the trade off between commissions and the growth in embedded value; • the higher the commission, the lower the growth in embedded value • A distrbution agreement (and/or broker model) focuses the bank on commission income • A Strategic Alliance is usually exclusive, and almost always includes an element of profit sharing • A joint venture, or wholly owned operation should focus the bank on generating value as this can significantly outweigh commission income. 16 • Creates a culture of “value creation”, eg selling profitable products (as opposed to less profitable single premium plans) • A need for the bank and insurer ©to. LLjointly design and price products Global, Inc. SM
Distribution and Operational sales models
Multi tiered distribution model Product Categories Distribution Channels High Financial Services Consultants (FSC) (employed by insurance co) Customers Relationship Managers (RM) (employed by bank) Referrals and/or Wholesaler support (Internal & External) Insurance Specialists (FP) Level of Sales Training Over-the-counter Tellers / Customer Services Officer (OTC) Wealth Management & Estate Planning Needs-based, advice driven. Range of savings, investment & protection Savings & Investment Loan & credit-related products, mortgages & protection Packaged Products Deposit Type (endowments, term, PA, ADD) Lead generation & referrals to FPs & RMs Simple products & Credit Insurance (tick box, guaranteed issue) Call Center Direct Marketing (DM) Specialist advice, with tailored bancassurance products & financial planning solutions Simple products. (Refund of Premium type) Low 18 © LL Global, Inc. SM Simplified Underwriting Products
Distribution Channel model - potentials Seminar Sales Other group of linked companies Outbound telemarketing Inbound telemarketing Direct specialised sales force Group business to Corporate clients Direct mail Elegant advice (wealth management) Internet, e comm based BANK Worksite marketing to staff of corporate clients (including seminar selling) Moderate advice Mobile Forces (market dependant) Low advice face to face Creditor, packaged, loan channel No advice (commoditised products, OTC) Creates leads here too 19 © LL Global, Inc. SM
Sales Model example Bank Customers Channels Financial Planners In branch financial planners Creditor Business Mortgage redemption and collateral insurance Direct Mail Telemarketing Mail-shots to the bank’s various databases Carefully planned telemarketing campaigns Worksite Marketing to the employees of the bank’s corporate customers Product Propositions LIFE INSURANCE HEALTH INSURANCE Protection NON-LIFE PENSIONS / INSURANCE RETIREMENT INVESTMENTS / MUTUAL FUNDS Asset Accumulation 20 © LL Global, Inc. SM SAVINGS / DEPOSITS LOANS / CREDIT MORTGAGES CASH / CHECKING Lending & Transactions
Regulatory models and impact China and Indonesia
China – Initial regulatory reforms, Nov 2010 Regulatory measures Implications In-branch sales • Life insurer's agents/sales are not allowed to be stationed in bank branches • Only bank staff with license are allowed to sell bancassurance products • Bancassurance premium is likely to drop in the near term • Better training for branch staff is required to enhance sales capabilities Products • Each bank branch can only source products from up to 3 insurers • Banks and insurers are encouraged to offer protection and long-term saving products • Banks will be more selective in choosing insurance partners • Long-term products with higher value (e. g. regular payment) are likely to grow • Insurers are forbidden to pay banks incentive other than reported commission, which should be between headquarters, provincial branches or tier-2 branches • Commission payment between insurers and banks will become more transparent with lower hidden cost for insurers Incentives Stronger and more dedicated partnerships between banks and insurers are expected in the long run Source: CIRC, BCG analysis © LL Global, Inc. SM
Impact of Regulations (1) "Bancassurance products are becoming more complex, especially regular premium products, but training is falling behind. , as well as capabilities" "With insurance reps standing by at outlets, each sale will take 20 to 30 minutes to finish. Now they are all gone, there will be more pressure for OTC sales. " Source; BCG interviews "With all sales performed by banks, customers will come to banks for all disputes, policy changes, surrenders, etc. Risk is being transferred to banks and will challenge post-sale services. " “Most banks and their sales people don’t have the capability to sell regular premium products so the push to sell more regular premium could stall" © LL Global, Inc. SM
Impact of regulations (2) • Mixed messages from banking and insurance regulators puts industry at standstill • Large insurers may benefit from existing relationships with large banks, with more to seek exclusive relationships • Small players will need to reconsider dependency on bancassurance, and may need to move towards multi-channel • More investment in training as training plays roles in facilitation rather than direct execution“ • OTC sales push will be replaced by sales at bank's wealth management (or VIP) center, as bank financial planners replace insurance agents as key sales force Balance of power between banking and insurance regulators © LL Global, Inc. SM
Bancassurance sector still faces Issues Descriptions Impact Product structure • Dominated by SP savings substitutes • Little attention to protection products • Unable to meet customer needs Moving away from "basics" Value creation • Very low or negative profit margin • Excessive cost loading in general • Missed opportunities in value creation Lower embedded value and profitability Compliance • Misselling and misrepresentation • Off-book commission kick-backs • Consumer complaints and lawsuits Reputational risks for banks and insurers Sales training • Sales process management is weak • Sales staff trainings not systematic • Sales force qualification not strict Poor lead generation and low productivity Operating model • Many-to-many without exclusivity • Bank and insurer not on equal footing • Lack of innovation in product & distribution Focus on size rather than quality © LL Global, Inc. SM
Changes going forward Industry players Gear towards "new bancassurance world" • Move towards regular premium products with mixed results • Improving training for sales force, focusing on sales support for banks, rather than sales training for insurance reps • Smaller companies difficult to survive • Immediate drop in volume in Q 1 2011, recovering Increasing number of bank and insurance partnerships • Approved pilots • New JV proposals: ICBC, China Construction Bank, Agriculture Bank of China © LL Global, Inc. SM
Bancassurance – sales operating models • There are 3 primary branch sales operating models in Indonesia: 1. 2. 3. In branch specialists selling (either from JV or insurer) Bank staff selling and supported by insurer “wholesalers/FSCs” Bank staff referring to outside insurer staff Sales Operating Model In branch specialists selling (either from JV or insurer) Partnership Typical performance metrics AXA Mandiri Financial Services Over 2, 000 Financial Advisers operating in 882 branches. At peak, 7. 8 cases per month, now down to around 6. Focus on RP unit linked. Bank BNI Tried several times to replicate AMFS, now restarted and apparently performing better. CIMB Sun Life Bank staff selling and supported by insurer “wholesalers/ FSCs” BII and Prudential Bank staff referring to outside insurer staff Permata Bank and Prudential Allianz and Danamon (soon to be replaced by Manulife) Relatively recent, and with a higher net worth branch segment focus Usually around 3 policies a month. Premium varies depending on bank customer profile but several quote around 3 cases per branch per month. This model now becoming out of favour due to the change in legislation, and Manulife will use FSC model Prudential has established its usual “Standard Chartered” model of Financial Execs feeding off leads from the bank staff. In some instances, they are also located and selling in branch. 27 27 © LL Global, Inc. SM
Indonesia – impact of one regulatory change • Open architecture • Competitive market – all targetting bank distribution • Investment products (within small limitations) to be sold by insurance company staff – end 2010 • Most products fall into this category • Applies to all banks • Impact: • • Model – Expenses - Product set - Sales practices • Varies by bank segment May have a positive impact on product mix – but not for the original intentions – control of sales switches towards insurer © LL Global, Inc. SM 28
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