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Bancassurance in the GCC: The Need for Change

Bancassurance allows banks to sell insurance policies of insurers they have partnered with and is one of the many means of alternative distribution methods adopted by GCC insurance companies. Although the usage of bancassurance in the GCC region is still on the low end, significant growth for this sector is expected as stakeholders begin to realize the potential this business holds.
Advantages of Bancassurance
The bancassurance arrangement presents a multitude of advantages for insurance companies and the insurance industry as a whole:

1. The adoption of innovative ways for cooperation between insurance companies and banks which support and strengthen their activities and enhance their position and ability to compete and distinguish themselves. 2. It allows insurance companies to utilize a bank’s client database to sell their products and services; a customer segment which is usually considered to be generally inaccessible to insurance companies. 3. It allows insurance companies to gain a different type of client as opposed to dealing with only one type of clientele. Such a diversification will diminish their operational risk relating to doing business with a certain part of the population or society. 4. It allows insurance companies to distribute their services efficiently with lesser expenses compared to other distribution methods. 5. It allows insurance companies to provide their services efficiently when they are newly licensed or when they move to a new territory.

More specifically Bancassurance can greatly benefit recently established insurance companies in new jurisdictions as they can avoid waiting for the implementation of a marketing and promotional campaign to promote their services. Instead, they can immediately enter into a cooperation agreement with a bank for the purpose of providing their products to a segment of the public through the bank’s salesforce.
Historic Overview of Bancassurance
Bancassurace first started in the mid 60’s through Barclays bank in the United Kingdom. This specific venture was not successful and Bankassurance as a distribution mechanism for insurance policies ultimately proved to be a failed experiment. In the beginning of the next decade however, the 70’s, France reinvented the product and met with moderate success. Since then the concept has evolved and has turned into what we know now as Bancassurance.

The success of Bancassurance as a distribution mechanism relies heavily on a variety of factors including the regulatory and legal framework as well as the cultural and historical background of the particular target population.

The legal framework governing Bancassurance and the position and coordination of the supervisory authorities in relation to the application of the Bancassurance are paramount to its success and have a direct effect on the success or failure of the experience with the public.
Bancassurance in the GCC
Bancassurance in the United State and Europe has generally met with high success and penetration rates. This can mainly be attributed to an efficient and successful public insurance awareness campaign as well as the existence of an effective legal framework.

Bancassurance is on the way to becoming a very important and and effective medium to sell insurance products in GCC Countries. As an example, most banks in the UAE are either co-owned by insurance companies or co-own their own insurance companies. This enhances the possibility of fruitful cooperation between the two entities and limits, to a large extent, the possibility of having any disputes between both of them.

This alone however is not enough. The GCC insurance market is still very young and needs a lot of support specifically in light of the absence of the following:

a. Supervisory bodies which are efficient and active;

b. A legal framework which is clear, transparent and direct;

c. Training to the manpower in charge of promoting Bancassurance products; and

d. Individuals with adequate insurance awareness or at least a minimum level of insurance awareness within the public.

Although the Bancassurance market is steadily getting larger and larger, the level of insurance awareness amidst the general GCC population is not following the same trend. This can easily be illustrated by comparing the GDP of a country versus what is spent on insurance. Whereas worldwide averages of insurance penetration hover at around 7% to 8% of total GDP, the GCC only averages between 1% and 2% of total GDP.

This discrepancy in the usage of bancassurance by insurance companies versus public awareness of what bancassurance actually consists of, may lead to a number of problematic issues down the line especially without the implementation of an adequate regulatory framework.

As is stands, many situations arise where bank employees call clients to sell them insurance products which they do not know anything about. Rarely is there research done into the suitability of a particular product, its applicability to the risks of the client or whether a product may be beneficial for the client

We believe that the following steps must be taken as soon as possible by insurance companies operating in the market, insurance professionals, insurance regulators and other insurance bodies to control and supervise Bancassurance services in the GCC:

1. Train a sales workforce used by banks to allow them to understand the product(s) they are selling, understand a client’s needs, answer his/her questions with transparency and put him/her on notice about the terms and conditions of the insurance policy is may purchase.

2. Propose a legal framework that is applicable to Bancassurance to fill the gaps currently existing.

3. Revise the framework governing the relationship between banks and insurance companies including all applicable laws and regulations ensuring appropriate supervision of their work and relationship and including a public awareness campaign about bancassurance products and the roles of all these parties within the system.

4. Identify the responsibility of banks in this distribution mechanism as well as the responsibilities of the insurance companies within the general Bancassurance relationship framework.

Although the growth in the Bancassurance market is encouraging, we nevertheless believe that action should be taken by all stakeholders in the insurance industry to avoid a potential myriad of problems arising which may lead to considerable losses for all parties involved.
Published: April 2013
Publication: The Oath
Title: Bancassurance in the GCC: The Need for Change
Practice: Insurance & Reinsurance
Authors: Michael Kortbawi, Rima Mrad
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