banc

Bancassurance in Practice

M Mnchener RckMunich Re Group

Contents

1 Introduction 2

2 Entering into bancassurance 42.1 Ways of entering into bancassurance 42.2 Reasons for banks to enter into bancassurance 52.3 Benefits from bancassurance for insurance companies 7

3 Bancassurance products 93.1 Finance and repayment products 103.1.1 Credit insurance 103.1.2 Overdraft insurance 113.1.3 Capital repayment 123.2 Depositors products 123.2.1 Depositors insurance 123.2.2 Objective achievement insurance (bank savings plans) 133.2.3 Pure investment products 133.3 Simple standardized package products 133.4 Other products 14

4 Distribution channels 154.1 Types and characteristics 154.2 Cultural issues in distribution 19

5 Remuneration packages and incentive schemes 215.1 Objectives of remuneration and incentive schemes 215.2 Remuneration of agency forces and agency management 225.3 Remuneration of bank employees 23

6 Training 256.1 Sales force training for bancassurers 256.2 Bank employee training for bancassurers 266.3 Continuous training and supervision 266.4 Quality customer service 26

7 Operational procedures for bancassurance sales forces 287.1 Allocation of bank branches to the sales force 287.2 The referral system 307.2.1 The basic principles 307.2.2 An overview of the proposed system 307.3 The branch referral process 327.4 Guidelines for allocating commissions 34

8 Contract review processes 35

Appendix: Examples of rules for allocating commissions 37

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Bancassurance in PracticeMunich Re Group

Introduction

One of the most significant changes in the financial services sector over the pastfew years has been the appearance and development of bancassurance. Bankinginstitutions and insurance companies have found bancassurance to be an attract-ive and often profitable complement to their existing activities. The successesdemonstrated by various bancassurance operations, although not all of themhave been successful, have attracted the attention of the financial services sector,and further new operations continue to be set up regularly.

The purpose of this report is to inform the reader about ways in which a banc-assurance operation can be set up. The report discusses the various observedmethods in use today under each of the following headings:

Contractual relationships between bank and insurer Product ranges Sales channels Remuneration methods and training in bancassurance operations

The report does not seek to cover all aspects of banking or of insurance oper-ations, but concentrates on the special needs of a bancassurance operation in the above areas.

The focus on Europe is deliberate since most developments in bancassurance upto the mid-1990s took place in Europe. This report is timely, however, becausebanks and insurers in other parts of the world, e.g. the USA, Canada and Asia, arenow developing bancassurance operations. In doing so, they seek to learn fromthe experiences of European bancassurers.

Bancassurance covers a wide range of detailed arrangements between banks andinsurance companies, but in all cases it includes the provision of insurance andbanking products or services from the same sources or to the same customerbase.

Because there is a wide diversity of strategies, there is no standard model forbancassurance, even within a country. Available literature also shows a widerange of possible descriptions of bancassurance:

The Life Insurance Marketing and Research Associations (LIMRAs) insurancedictionary defines bancassurance as the provision of Life insurance servicesby banks and building societies.

Alan Leach, in his book, European Bancassurance Problems and prospectsfor 2000, describes bancassurance as the involvement of banks, savingsbanks and building societies in the manufacturing, marketing or distribution ofinsurance products.

For the purpose of this report, the definition of bancassurance which will be usedis the following:

Bancassurance is the provision of insurance and banking products and servicesthrough a common distribution channel and/or to the same client base.

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Bancassurance in Practice Munich Re Group

1

This report contains seven further chapters as follows:

Chapter 2 Entering into bancassurance analyses the reasons why banks and insurancecompanies enter into bancassurance arrangements and presents possiblearrangements.

Chapter 3 Bancassurance products analyses principles for the development of bancassur-ance products and describes bancassurance-specific products.

Chapter 4 Distribution channels is devoted to the main features of the distribution chan-nels used by bancassurers, the product lines of each channel and to the culturaldifferences in bancassurance.

Chapter 5 Remuneration packages and incentive schemes presents the basic principles fordesigning remuneration and incentive schemes for bank staff and for sales agentsin a bancassurance operation.

Chapter 6 Training looks at the need for continuous training of staff and suggests basictraining topics for each distribution channel. This chapter also covers quality cus-tomer service in a bancassurance operation.

Chapter 7 Operational procedures for bancassurance sales forces describes processes formanaging the bancassurers sales forces including the referral process.

Chapter 8 Contract review processes discusses the need for and the headings coveredunder legal contracts in a bancassurance operation.

The study is based on existing literature and on the many personal interviews anddiscussions which the author has had during his visits to many European banc-assurers in the UK, Ireland, Portugal, France, Spain, Germany and Greece. It isalso based on the authors experience from the practices that have been imple-mented at the authors employer, EuroLife Ltd.

EuroLife was established in 1989 as a joint venture between the Bank of Cyprus(the biggest financial institution in Cyprus) and Manulife Financial of Canada.EuroLife was set up and operates using bancassurance concepts. Its success hasbeen such that within three years the company achieved top ranking in new busi-ness in the Cypriot insurance market.

Eurolife, along with many bancassurers, operates a referral system for its special-ist agents. This report refers to several aspects of the system. However, a numberof bancassurers, e.g. in France, Spain and Portugal, operate largely without theuse of agents primarily by bank employees selling over the counter. The authorbelieves that this report is relevant to both types of bancassurer and a good por-tion of the contents is also relevant to the over the counter concept.

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Introduction Bancassurance in PracticeMunich Re Group

Entering into bancassurance

2.1 Ways of entering into bancassurance

There is no single way of entering into bancassurance which is best for everyinsurer and every bank. As in all business situations, a proper strategic plandrafted according to the companys internal and external environmental analysisand the objectives of the organization is necessary before any decision is taken.

There are many ways of entering into bancassurance. The main scenarios are thefollowing:

One partys distribution channels gain access to the client base of the otherparty. This is the simplest form of bancassurance, but can be a missed oppor-tunity. If the two parties do not work together to make the most of the deal,then there will be at best only minimum results and low profitability for bothparties.

If, however, the bank and the insurance company enter into a distributionagreement, according to which the bank automatically passes on to a friendlyinsurance company all warm leads emanating from the banks client base,this can generate very profitable income for both partners. The insurance com-pany sales force, in particular usually only the most competent members of thesales force, sells its normal products to the banks clients. The cooperation hasto be close to have a chance of success. For the bank the costs involved besides those for basic training of branch employees are relatively low.

A bank signs a distribution agreement with an insurance company, under whichthe bank will act as their appointed representative. With proper implementationthis arrangement can lead to satisfactory results for both partners, while thefinancial investment required by the bank is relatively low. The products offeredby the bank can be branded.

A bank and an insurance company agree to have cross shareholdings betweenthem. A member from each company might join the board of directors of theother company. The amount of interest aroused at board level and senior man-agement level in each organization can influence substantially the success of abancassurance venture, especially under distribution agreements using multi-distribution channels.

A joint venture: this is the creation of a new insurance company by an existingbank and an existing insurance company.

A bank wholly or partially acquires an insurance company. This is a majorundertaking. The bank must carefully define in detail the ideal profile of the tar-geted insurance company and make sure that the added benefit it seeks willmaterialize.

A bank starts from scratch by establishing a new insurance company whollyowned by the bank. For a bank to create an insurance subsidiary from scratch isa major undertaking as it involves a whole range of knowledge and skills whichwill need to be acquired. This approach can however be very profitable for thebank, if it makes underwriting profits.

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A group owns a bank and an insurance company which agree to cooperate in abancassurance venture. A key ingredient of the success of the bancassuranceoperation here is that the group management demonstrate strong commitmentto achieving the benefit.

The acquisition (establishment) of a bank that is wholly or partially owned byan insurance company is also possible. In this case the main objective is usual-ly to open the way for the insurance company to use the banks retail bankingbranches and gain access to valuable client information as well as to corporateclients, allowing the insurance company to tap into the lucrative market forcompany pension plans. Finally, it offers the insurance companys sales forcebank product diversification (and vice versa). This form is used in many casesas a strategy by insurance companies in their effort not to lose their marketshare to bancassurers.

The best way of entering bancassurance depends on the strengths and weakness-es of the organization and on the availability of a suitable partner if the organiza-tion decides to involve a partner.

Whatever the form of ownership, a very important factor for the success of a banc-assurance venture is the influence that one partys management has on that of theother. An empowered liaison between respective managements, with regular se-nior management contacts, as well as sufficient authority to take operational andmarketing decisions, is vital. Regular senior management meetings are also avital element for a successful operation. There must be a strong commitmentfrom the top management to achieving the aims in the business plan.

2.2 Reasons for banks to enter into bancassurance

The main reasons why banks have decided to enter the insurance industry areaare the following:

Intense competition between banks, against a background of shrinking interestmargins, has led to an increase in the administrative and marketing costs andlimited the profit margins of the traditional banking products. New productscould substantially enhance the profitability and increase productivity.

Financial benefits to a banks performance can flow in a number of ways, asbriefly outlined below:

Increased income generated, in the form of commissions and/or profits fromthe business (depending upon the relationship)

Reduction of the effect of the banks fixed costs, as they are now also spreadover the life insurance relationship

Opportunity to increase the productivity of staff, as they now have the chanceto offer a wider range of services to clients

Several European countries have made considerable regulatory changes regard-ing the banking and insurance sectors. Although regulatory changes vary fromcountry to country there has been a pan-European trend towards the univer-sal bank and the limitations of the past no longer exist. Banks are now able tooperate across a broader range of activities, including insurance, via legallyindependent risk carriers. The insurance companies and banks are not compet-

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Entering into bancassurance Bancassurance in PracticeMunich Re Group

ing within just the life insurance industry and banking industry respectivelyanymore but within the wider financial services marketplace.

Customer preferences regarding investments are changing. For medium-termand long-term investments there is a trend away from deposits and towardinsurance products and mutual funds where the return is usually higher thanthe return on traditional deposit accounts.

This shift in investment preferences has led to a reduction in the share of per-sonal savings held as deposits, traditionally the core element of profitability fora bank which manages clients money. Banks have sought to offset some of thelosses by entering life insurance business.

Life insurance is also frequently supported by favourable tax treatment toencourage private provision for protection or retirement planning. This prefer-ential treatment makes insurance products more attractive to customers andbanks see an opportunity for profitable sales of such products.

The high operating expenses of bank branches have led many banks todecrease their branch network, as shown in the following table. The need formore efficient utilization of branches and bank employees is today as pressingas ever. However, in Italy the number of branches has increased due to thenoticeable development in bancassurance. In the future, in view of ongoingconsolidation, the bank branch networks will probably decrease as well.

Analysis of available information on the customers financial and social situa-tion can be of great help in discovering customer needs and promoting ormanufacturing new products or services. Banks believe that the quality of theirclient information gives them an advantage in distributing products profitably,compared with other distributors (e.g. insurance companies).

The realization that joint bank and insurance products can be better for the cus-tomer as they provide more complete solutions than traditional standalonebanking or insurance products.

For example, a policyholder takes out a permanent assurance with the aim offunding future education costs. At the same time, the policyholder can take outa loan (mortgage) and assign the life policy to the bank as beneficiary. For thebank the benefits are increased sales and a more widely based relationshipwith the customer than would be possible with bank products only.

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Bancassurance in Practice Entering into bancassurance Munich Re Group

Country Branches Change Branches per Change1999 199099 million pop. 199099

1999

Belgium 6,964 24% 680 DecreaseGermany 44,711 14% 540 DecreaseItaly 27,088 51% 470 IncreaseFrance 25,512 4% 430 DecreaseSwitzerland 2,973 29% 409 DecreaseNetherlands 6,357 26% 400 DecreaseUnited Kingdom 15,473 26% 260 DecreaseSweden 2,130 37% 240 Decrease

Source: European Central Bank

Banks are experiencing the increased mobility of their customers, who to agreat extent tend to have accounts with more than one bank. Therefore there isa strong need for customer loyalty to an organization to be enhanced.

Client relationship management has become a key strategy. To build and main-tain client relationships, banks and insurers are forming partnerships to providetheir clients with a wide range of bank and insurance products from one source.It is believed that as the number of products that a customer purchases from anorganization increases the chance of losing that specific customer to a competi-tor decreases. M. Pezzulo of the American Bankers Association quoted the fol-lowing odds against losing a customer:

Current account only 11 Deposit account only 21 Current and deposit account 101 Current, deposit and loan 181 Current, deposit and other financial services 1001

Population growth rates have slowed significantly during the last decades inthe western industrialized countries and this decrease in birth rates in conjunc-tion with increasing life span will have a significant impact on the age structureof the population in the future. As a result it is likely that there will be increas-ing pressure on public pension systems and an increasing need for additionalretirement provisions or long-term investment products. Banks see an oppor-tunity to meet clients growing needs in this area while making a profit.

Banks are used to having long-term relationships with their customers. Bankshave developed skills in deepening the relationship with their customers overtime, for example by marketing extra services such as deposit funds or taxationadvice.

Life insurance operations are also used to managing a relationship over thelong term with their customers. This allows similar skills to be practised and thebancassurer can make use of the best that each partner has to offer.

Apart from the benefits that can be derived from the possible wide spread ofbranches across the country, bancassurers can have a competitive advantageover traditional insurers (non-bancassurers), derived from the provision of cus-tomer service through automated teller machines (ATMs). In particular the banc-assurer can provide its customers with an ATM card that can be used to gainaccess to any ATM and request information such as cash values, unit price, pol-icy status, next premium due date, loan accounts, surrender values, etc.

This channel of customer service can easily be extended so that the customercan gain access to information regarding his bank accounts and insurance pol-icies through his personal computer.

Finally the Internet can be considered as an additional customer service chan-nel since the customer can gain access to information regarding his bankaccounts and insurance policies through this network as well.

2.3 Benefits from bancassurance for insurance companies

Insurance companies have identifed a number of benefits from involvement inbancassurance:

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Entering into bancassurance Bancassurance in PracticeMunich Re Group

Source of new business previously unreached clients: the banks client basemay well be virgin territory for the insurance company and so a new sourceof business. Possible reasons:

Geographic: the banks clients are in a territory where the insurer has only alimited presence (if any), e.g. because the insurers agency structure there islimited.

Demographic: the banks clients may form a very different group (e.g. by age,sex, purchasing habits) to the one which the insurer has previously courted.For example, an insurer who previously concentrated on high net worth indi-viduals (HNWIs) can now gain access to a wider range of customers whowill not all be HNWIs.

Source of new business wider range of products (including banking products):the insurance company hopes to attract further business, from both existingand new policyholders, because of the fact that it can offer a wider range ofservices than before, i.e. it can give its customers access to banking as well asto insurance services.

Source of new business products not otherwise feasible: the economics of thebancassurance operation may allow the insurer to offer products which are notfeasible through the insurers existing channels. For example, sales costsincurred under existing channels may force premium rates for a product to beuncompetitive, so the product is not sold. The costs via the bancassurancechannel may be low enough to make it feasible.

Administration economies of scale: the insurance company can offer to carryout the adminstration activities of the bancassurers business, if for example thebancassurer is a separate company. Combining the bancassurers business withthe other business of the insurer can produce economies of scale in administra-tion costs (including capital expenditure). This in turn allows the insurer toimprove profitability and to price future products with narrower margins, whichhelps to make the insurers products more competitive.

Finally, for both bank and insurer there is a great opportunity to learn and tomake improvements in their own operation. Each gets exposure to the others dis-tinctive management styles, its objectives and measures and the pressures whichit can exert and which it feels. The benefit comes when either company canimplement changes as a result of the learning process.

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Bancassurance in Practice Entering into bancassurance Munich Re Group

Bancassurance products

This section analyses the guiding principles for the development of bancassur-ance products and describes how these products are structured.

All life insurance products are by nature products which belong to the widerfinancial services sector. For a bancassurance operation in particular, however, thedecision on the types of insurance products which it wants to sell is very closelybound up with the methods of distribution which it plans to use. This is becausethe effort and expertise needed to sell a given product must be appropriate to theskills and cost base of the chosen distribution method. A product which is veryhard for the available distribution channels to sell is not going to be successful forthe operation, whether in terms of sales volumes or of profits.

The diagram below shows the relationship between product complexity andrequired sales effort and expertise.

Relationship between product complexity and required sales effort

Figure 1

Apart from the traditional insurance products, bancassurers have developed spe-cial products in order to fulfil certain needs which emanate from banking transac-tions, or to improve certain products in order to make them more attractive anduseful to the customer. These products can be broken down into three categories:

Finance and repayment products Depositors products Simple standardized package products

These are discussed in turn in Sections 3.1 to 3.3. Section 3.4 lists further insur-ance products which might also be attractive to bancassurers customers.

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3

Distribution Increasing gross margins in products

Active

Passive

Simple Complex Products

3.1 Finance and repayment products

The concept of this group of products is fairly simple. A financial institution whichgrants loans or credit to individuals is concerned that, in the case of early deathor permanent disability of the borrower, the outstanding loan or credit amountmay not be recoverable. This will happen where

the financial standing of the surviving family means that outstanding amountsmay not be easily recoverable, or

when the repossession of the item purchased by the loan amount might not besaleable, or

when any resale amount is not sufficient for the repayment of the loan.

Along with the financial loss, the lender also runs the risk of damaging its reputa-tion among customers, since it will acquire the reputation of repossessing itemson the unfortunate death of its clients, and the harassment of the unfortunatespouse and family.

The borrower on the other hand has similar concerns. He does not wish to leavean outstanding loan to be repaid by his family after his death. He is also con-cerned about his possible inability to repay the loan or credit amount if hebecomes permanently disabled.

A category of products that can satisfy both parties is the finance and repaymentproduct, the best known of which are the following.

3.1.1 Credit insurance

Credit insurance can be offered in cases where a loan is granted to the customerand serves as additional security for the bank and financial protection to the cus-tomers property in the case of his death prior to the repayment of the loan.

This normally involves a decreasing term life cover with an initial sum insuredequal to the amount of the loan. The sum insured would decrease in line with therepayment of the loan amount. Upon the death of the insured person the amountpayable would be equal to the outstanding loan amount, with or without theaccrued interest at that time.

If the outstanding loan amount decreases on a predetermined basis, then it ispossible to calculate the appropriate premium at the date on which the loan wasgranted. In cases where the loan amount fluctuates according to the needs of theborrower or due to fluctuations in interest rates, a monthly premium based on theoutstanding loan amount is a more equitable solution, provided that the outstand-ing amount is available for calculating the premium.

Annual premium or single premium contracts can be offered in cases where theloan amount at all periods can be predetermined. Where the loan amount canfluctuate, single premiums are not permitted. In the case where a single premiumis charged the premium amount is frequently added to the loan amount.Almost all loans covered under credit insurance schemes are of short repaymentduration, i.e. up to 5 years.

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Bancassurance in Practice Bancassurance products Munich Re Group

In cases where this scheme is a compulsory part of a loan the premiums chargedcan reflect the fact that there is no selection against the insurer on medicalgrounds (antiselection). In such cases the company can limit itself to simplifiedunderwriting. The reduced processing costs can be passed on in the form oflower premiums.

In cases where this scheme is not compulsory, however, further medical or occu-pational questions are asked for underwriting purposes. The extra work involvedmay force premiums to be increased.

Permanent total disability benefit may be offered together with the decreasingterm insurance since the ability of the borrower to repay the loan may depend onthe borrower maintaining his income. In some cases temporary total disabilitybenefit covering the instalments payable is also offered.

It is also possible for a bank to pay the premiums, which are very low, and usethis as a marketing tool in order to attract new customers and sell its productsmore easily. The marketing tool is to offer free protection in the case of deathor permanent total disability. The bank will include the cost of protection in theinterest rate charged to borrowers.

Credit insurance is suitable for arrangements such as

mortgage loans, business loans, personal loans, hire purchase arrangements.

This cover can also be issued as a group policy covering all customers. The mas-ter policy remains with the bank and a certificate of insurance is given to eachcustomer.

3.1.2 Overdraft insurance

Usually banks offer overdraft facilities to their customers. This is automatic creditup to a pre-agreed amount. For salaried customers this amount is usually two orthree times their monthly salary. This facility has no repayment term provided thesalary is deposited in the bank and the credit always stays within the pre-agreedamount.

In the case where the customer who was using the credit facility dies, this amounthas to be repaid by the heirs of the deceased. This practice usually creates prob-lems for both the heirs and the bank. Overdraft insurance can help.

Overdraft insurance can be offered in two different ways:

a) The cover is equal to the credit facility used and a monthly premium is paidaccording to this amount. In the case where the customer dies and this creditfacility has been used, the outstanding amount due will be repaid to the bankby the insurance company.

In deciding whether to offer this option, the insurer must consider the risk thatpeople who know their health is very poor can sharply increase the amount ofcredit taken shortly before their death.

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Bancassurance products Bancassurance in PracticeMunich Re Group

b) The cover equals the maximum pre-agreed credit facility. In case of death theoutstanding amount due will be repaid by the insurance company. If there isan excess between cover and the outstanding amount due this amount will bepaid to the heirs of the customer. Premiums in this case can be paid on amonthly or annual basis.

In overdraft insurance the premium is usually adjusted every year according tothe age of the customer. A maximum age for this benefit usually exists. The pre-mium can be paid by the customer or by the bank as an offer to its customers.

This type of product is suitable for arrangements such as

overdraft facilities, credit cards, unstructured debts.

3.1.3 Capital repayment

For loans offered for mortgage, educational, personal or business reasons arepayment scheme through an insurance policy is possible. The customer isgranted the loan and he pays to the bank only the loan interest. He also takes outan endowment that has a cover equal to the loan amount and with a durationequal to the repayment period of the loan.

The premium is selected so that the maturity payout is very likely to be able tocover the full loan amount. The policy is always assigned to the bank and servesas a repayment tool whether the customer survives or not.

These products have proved particularly attractive to customers in countrieswhere life insurance products enjoy favourable tax treatment, or where interestrates charged by lenders on loans repaid by insurance policy proceeds are lowerthan for capital repayment loans.

Due to the high investment element of these products, the premiums for suchproducts are much higher than those of the credit and overdraft insurance that wehave mentioned above, although the total cost of the loan to the borrower maynot be very different.

3.2 Depositors products

The second category of these special products consists of the so-called depos-itors products. The main types of depositors products are:

3.2.1 Depositors insurance

This benefit is designed to attract the public to deposit money with a particularbank. It can be offered in all deposit accounts but usually a minimum depositamount is required. The level of cover is usually determined by factors such asprice and underwriting.

A possible product is level term insurance with the premium rate changing everyyear. Another possibility is to offer accidental death cover. Reasonable limits mustbe set regarding maximum age and maximum amounts. The premium in this

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case is usually paid by the bank but it can also be paid by the depositor with aproper marketing approach. The amount of cover is usually a multiple of the cashbalance in the deposit account. In the case of death of the depositor, this cash bal-ance is increased accordingly.

The following table shows a possible scale.

3.2.2 Objective achievement insurance (bank savings plans)

This policy can be offered in special deposit accounts where systematic depositsare required to reach a predetermined objective amount at maturity. However, ifthe depositor dies or suffers total permanent disability, the difference between hisobjective amount and the cash balance of the account is paid to the depositor orthe depositors estate in addition to the cash balance. This can be offered by adecreasing term insurance only or in combination with permanent total disabilitybenefit.

In cases where the deposit amounts are not predetermined it is advisable to offercoverage that is a multiple of the average cash balance amount during the pre-ceding 6 or 12 months, so that problems of antiselection can be reduced. How-ever, it would still be possible for a customer to increase the account balancerapidly and gain significant life cover without underwriting.

As with depositors insurance, accidental death cover is another option. Wherereasonable limits are set regarding maximum age and maximum amounts of cov-erage, this product can offer attractive profit margins.

3.2.3 Pure investment products

These products have no insurance elements, i.e. no risk. They have traditionallybeen the domain of banks, but in some countries they enjoy favourable tax treat-ment if they are offered by an insurance company.

3.3 Simple standardized package products

These products are usually group policies which combine covers and which costthe customer less than if they are bought individually. These products are usuallysold over the counter by bank employees, so they need to be uncomplicated. Anexample would be household insurance together with waiver of premium ondeath cover.

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Bancassurance products Bancassurance in PracticeMunich Re Group

Cash balance Multiplied by Amount to be paid in(in US$) case of death

Up to 5,000 1 Cash balance5,00019,999 2 2 x cash balance20,000 and over 3 3 x cash balance with a

maximum of US$ 100,000

3.4 Other products

The objective of product development in most cases is to offer the widest possiblerange of products so as to enable sales people to select the most suitable plan foreach customers specific needs. A further range of products which the bancassurerwants to offer to clients could include:

Whole life Endowment Unit-linked products Term insurance products Family income benefit Waiver-of-premium benefit Permanent total disability benefit Income replacement benefit Accident and sickness products Hospitalization products Pension products

In deciding whether to offer these further products the bancassurer would need toconsider whether these can be effectively sold by the employees and agentsinvolved in the bancassurers sales operation.

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Distribution channels

4.1 Types and characteristics

The type of distribution channels that a company uses affects the design and pric-ing of its products, as well as the way in which the products are promoted andperceived in the marketplace.

Some bancassurers started out by selling simple products which could be sold inlarge volumes but which usually had low margins to cover expenses and profits.If we compare how products and distribution are related to the profits of anorganization, we will come to the conclusion that the more complex the productssold are, the higher the required margins will need to be. Figure 1 shows this rela-tionship.1

Many banks entered bancassurance with a defensive strategy in their attempt toavoid market share erosion by insurance companies. Very soon, though, they real-ized that they could gain market share if they expanded their product range,developed a sales culture within their organizations, created a multi-channel dis-tribution stucture and exploited the potential of the customer information that canenable the identification of customer needs.

Bancassurers make use of various distribution channels:

Career agents Special advisers Salaried agents Bank employees Corporate agencies and brokerage firms Direct response

Using the broker channel, where the broker advises the customer and selectsfrom among products offered by a number of companies, can also be attractive tobanks. However, it is not understood as bancassurance (where there is a relation-ship with a particular insurance company). For the insurance company, this chan-nel has disadvantages in that it is difficult to forecast how much business theinsurer will receive from the broker. Insurers do not favour the broker channel inbancassurance.

The main characteristics of each of these channels are:

Career agents: career agents are full-time commissioned sales personnel hold-ing an agency contract. Although some insurance companies offer such con-tracts to part-timers, within bancassurance operations such people are usuallyexcluded.

Career agents are generally considered to be independent contractors. Conse-quently an insurance company can exercise control only over the activities ofthe agent which are specified in his contract. Despite this limitation on control,career agents with suitable training, supervision and motivation can be highlyproductive and cost effective. Moreover their level of customer service is usual-ly very high due to the renewal commissions, policy persistency bonuses, orother customer service-related awards paid to them.

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4

1 Cf. Chapter 3, p. 9.

However, many bancassurers avoid this channel, believing that agents mightoversell out of their interest in quantity and not quality. Such problems withcareer agents usually arise, not due to the nature of this channel, but rather dueto the use of improperly designed remuneration and/or incentive packages.

Special advisers: special advisers are highly trained employees usually belong-ing to the insurance partner, who distribute insurance products to the bankscorporate clients. Usually they are paid on a salary basis and they receiveincentive compensation based on their sales. Otherwise they present the samecharacteristics as those of career agents, with the exception of their trainingwhich focuses on the group and business insurance sectors.

Salaried agents: salaried agents have the same characteristics as career agents.The only difference in terms of their remuneration is that they are paid on asalary basis and they receive incentive compensation based on their sales.Some bancassurers, concerned at the bad publicity which they have receivedas a result of their career agents concentrating heavily on sales at the expenseof customer service, have changed their sales forces to salaried agent status.

Bank employees: bank employees can usually sell simple products. However,the time which they can devote to insurance sales is limited, e.g. due to limitedopening hours and to the need to perform other banking duties. A furtherrestriction on the effectiveness of bank employees in generating insurance busi-ness is that they have a limited target market, i.e. those customers who actuallyvisit the branch during the opening hours.

In many set-ups, the bank employees are assisted by the banks financial ad-visers. In both cases, the bank employee establishes the contact to the clientand usually sells the simple product whilst the more affluent clients are at-tended by the financial advisers of the bank which are in a position to sell themore complex products. The financial advisers either sell in the branch butsome banks have also established mobile sales forces.

If bank employees only act as passive insurance sales staff (or do not activelygenerate leads), then the bancassurers potential can be severely impeded. How-ever, if bank employees are used as active centres of influence to refer warmleads to salaried agents, career agents or special advisers, production volumescan be very high and profitable to bancassurers. The branch manager of thebank has a decisive position: he generates the prospect lists, which are turnedover to the sales people in the branch. Furthermore, he has to motivate hissales people to sell, to control the volume of business sold directly via thebranch, and to monitor the warm leads.

Set-up/acquisition of agencies or brokerage firms:

In the US, quite a number of banks cooperate with independent agencies orbrokerage firms whilst in Japan or South Korea banks have founded corporateagencies. The advantage of such arrangements is the availability of specialistsneeded for complex insurance matters and in the case of brokerage firms the opportunity for the bank clients to receive offers not only from one insur-ance company but from a variety of companies. In addition, these sales chan-nels are more conceived to serve the affluent bank client.

Direct response: in this channel no salesperson visits the customer to induce asale and no face-to-face contact between consumer and seller occurs. The con-sumer purchases products directly from the bancassurer by responding to the

16

Bancassurance in Practice Distribution channels Munich Re Group

companys advertisement, mailing or telephone offers. This channel can beused for simple packaged products which can be easily understood by the con-sumer without explanation.

The figure below illustrates the relationships between product complexity, profit-ability, distribution channels, the degree of training required, and the acquisitioncosts.

Product complexity, distribution channels, training and margins

Figure 2

It seems very difficult for a single distribution channel to successfully reach thebancassurers goals and specific target markets. Many bancassurers are usingmultiple distribution channels. This way they avoid becoming locked into onechannel and they can offer services to a greater number of target markets.

Multiple distribution channels provide another valuable feature. They enable theenterprise to offer customers multiple options for access. Therefore, if a customerwants to see someone about a particular service on one day but wants to transferfunds at a later date, e.g. on a Saturday night, the availability of both branchoffice and 24-hour telephone access increase the service value to that customer.

However, conflicts may arise among the various channels and also within chan-

17

Distribution channels Bancassurance in PracticeMunich Re Group

Margins for expense andprofit

High

Low

Level ofsales training

High

Low

Product complexity

Complex products Group pension plans Asset management

Demanding products/Customers Estate management (taxes) Endowment plans

(with profits, revalorization)

Ordinary products Unit trusts Mortgage endowments Mortgages

Simple products Credit insurance Loan covers Deposit accounts Unit-linked products Term insurance

Very simple products Personal accident

Specialadvisers

Mobile sales force/

Salaried agents

Bank staff

Bank staff/Tellers(minimum training)

Direct response

nels under a multi-channel system. To avoid this it is necessary that

it is clear to all which products each channel may sell;

colleagues within a channel are motivated to cooperate;

there is communication of the importance of every link in the distributionprocess;

cultural differences are communicated and respected;

the goals of every partner in the distribution process can be fulfilled by theprocess;

the specific role and performance expectations of each channel member areclearly stated, understood and accepted;

communication between channels is encouraged;

channel leadership is strong and committed to success. Figure 3 shows a pos-sible structure for assigning responsibilities between bank employees and spe-cialist sales staff depending on product complexity. Developing and communi-cating structure is necessary for an organization to reduce the risk of cross-channel conflict.

Client targeting, sale and service:Division of labour between insurance company and bank

Figure 3

18


Client targeting/Needs analysis

Bank employee

Contactingthe client

Bank employee

Bank employeesells alone

Standardproducts only

Sale

Three possibilitiesof selling life insurance

Bank employeeand insurancesales expert sell together

Standard products +

Complex business

Service

Bank employee +

Insurance sales expert

Sales expertsells alone

Complex businessonly

4.2 Cultural issues in distribution

The managers of banks and of life insurance companies can come from quite dif-ferent cultures. There may be differences in the way of thinking and businessapproaches of bankers and managers of insurance companies. These differencescreate a communication and implementation problem in bancassurance opera-tions.

Banks are traditionally demand-driven organizations with a reactive selling phil-osophy. Life insurance organizations are usually need-driven and have an aggres-sive selling philosophy.

It has been observed that this friction at the level of bank employees and lifeinsurance salespeople arises from

differing philosophies towards selling,

the jealousies of bank employees regarding remuneration of life sales staff, and

fears of cannibalization of deposits, e.g. the bank employee fears that thesalesperson encourages withdrawal of bank deposits, putting the bank employ-ees job in greater jeopardy.

As a result the team spirit is negatively influenced and, since this is a crucial fac-tor for the success of any operation, it has to be confronted.

Cultural differences between the banking and the insurance industries must beunderstood, respected and lived with in order for the bancassurance venture tosucceed.

The development of a single culture is another possible solution but this requiresa very strong commitment from the top management. This commitment must becontinuously conveyed to all bank employees and life insurance agents. One wayof achieving this is to develop a statement of mission for the new organizationand to get the staff to commit to fulfilling this statement. This can help to ensurethat there is a common path for the bank and the life insurer.

Many organizations try to overcome these cultural differences through the elim-ination of insurance sales people and the provision of insurance products andservices exclusively through bank employees. However this practice creates infour major problems:

By eliminating the sales force, bank employees are forced to cross borders to adifferent profession where different skills are required and where the competi-tion practices are different.

The products that bank employees offer are usually simple packaged productsor pure investment products in many cases without a risk element.

However, simple packaged products are not always the best solution for thecustomer who is undoubtedly the centre of any success. Since the insuranceindustry offers tailor-made products and services to its customers, the bancas-surers who are using only bank employees to distribute their products will feelthe pressure to switch to better products or to develop the proper distributionchannels. All over the world, more and more consumers are becoming better

19

Distribution channels Bancassurance in PracticeMunich Re Group

informed and seek to buy the most appropriate product through a preferreddistribution channel.

Using only bank employees to sell insurance can severely limit the success ofthe bancassurer. The banks target market is then only the customer-base of thebank accessible to bank employees, e.g. those who come into the branch. Moreand more, bank customers can manage their affairs without entering the bankbranch and are therefore inaccessible to bank employees.

Customer service offered in conjunction with the insurance policy is likely to berelatively poor since it is limited to banking hours. Insurance company agentscan offer customer service at times more likely to suit the customer.

20


Remuneration packages and incentive schemes

5.1 Objectives of remuneration and incentive schemes

Compensation packages and incentive schemes are critical factors for the successof bancassurance. The way compensation is allocated encourages the distributionchannels to act according to what the organization feels is important. Compensa-tion objectives should also contribute to the overall objectives of the organization.A compensation program, therefore, must be tailored to the needs of an organiza-tion and its employees.

To raise productivity and lower costs in todays competitive economic environ-ment, organizations are increasingly setting compensation objectives based on apay-for-performance standard.

In bancassurance operations the need is to motivate each of the following groups:

Bank employees involved in generating leads and sales

Sales agents (if the bancassurer uses that approach)

Bank branch management (for their effort in managing life insurance salesthrough the branch network)

Sales agency managers (if at location)

Motivation is particularly important for the sales agents out in the field for whomself-discipline is the key to success.

The remuneration terms should be attractive to each of the groups involved. Inparticular, the designer of the remuneration package should seek to develop apackage which helps each one of the groups to feel that they get a fair reward fortheir contribution.

The possible range of benefits and incentives in a life insurance agents compen-sation package is unlimited. Before proceeding to the design of the compensationpackage, an organization must consider the following:

The compensation package is perhaps the most important element in a salesorganization which will influence the volume of business, the costs, the prof-itability, the productivity and the customer care.

The way in which the package encourages certain behaviours and discouragesothers determines the kind of sales force a company attracts and retains.Indeed, it helps to set the tone for the whole sales organization within the com-pany. In order to maintain their competitive position, financial servicesproviders need to be sure they have the right people, in the right jobs, with theright skills, and at the right price.

A package therefore needs to be designed to attract and retain the kind ofpeople the company needs in order to develop the kind of sales organizationthe company wants.

21


5

In developing this package an organization must have clearly in mind the visionof how it wants to be in the future, not just now.

Before its implementation the package must be clearly communicated andexplained to every single person involved in the bancassurance venture.

Products are always designed to cover certain expenses. Lower incurred acquisi-tion costs will offer two important advantages: higher profitability to the companyand/or lower prices to the customers. On the other hand, lower costs imply lowerincome to sales personnel which may result in higher agent turnover. This in turncan lead to higher costs for the company (e.g. extra costs of recruitment, training,etc.) and consequently lower profitability. Where the policy is with profits, the pol-icyholder will also see reduced benefits. Product pricing is therefore another cru-cial factor and a careful balance between all parties must be achieved.

Bancassurers should seek to align the compensation package with their financialtargets. This encourages the sales force to work in a way which will make thosefinancial targets easier to achieve. For example, if the expected profitability ofproduct A is very low compared to product B, then the bancassurer will prefer itssales force to sell product B. It can encourage this by paying higher commissionrates on product B.

5.2 Remuneration of agency forces and agency management

Remuneration of insurance company agency forces has long been a matter fordebate and has also been an area of great development and change. Remunera-tion tools for agents of a bancassurer are commonly similar to those used forother insurance agency forces:

Initial commissions to encourage sale of new business Renewal commissions on persistent business Other fringe benefits pension, health insurance Guaranteed salaries (e.g. percentage of last years commission) Death-in-service benefits to cover the agents family Volume- and persistency-related commission loadings Other performance benefits, e.g invitations to conferences, or membership of

select groups such as the Million Dollar Round Table in the USA Financial support for staff in training, e.g. loans repayable when the agent

builds up income

For managers of agency forces, whose role is not to sell business but to get theiragents to do so profitably for the organization, remuneration packages caninclude further items which reflect this role. Examples include:

percentage of commissions earned by the agency team,

persistency bonus (e.g. share of renewal commissions),

rewards when members of the agency team reach specified targets (e.g. mem-ber of Million Dollar Round Table), or when the manager succeeds in improv-ing the agents performance (e.g. agent exceeds sales targets),

income protection measures in the event that agents in the team are reallo-cated to other teams by the organization (e.g. when agents move to an agencymanagement role).

22

Bancassurance in Practice Remuneration packages and incentive schemes Munich Re Group

Developing a package of benefits suitable for an agency force of a bancassurerinvolves setting suitable levels for each of these benefit types. Some benefits willbe product-specific (e.g. commissions), while others are independent of the prod-ucts or volumes being sold (e.g. death-in-service benefits as from a certain num-ber of years of service).

In setting benefit levels, distinctive features of a bancassurance operation whichneed to be remembered are:

The package needs to be one which will attract agents to work for the bancas-surer. Many bancassurers have attracted agents from existing company salesforces, so a benchmark for the bancassurer will be the benefits provided byinsurance companies to their sales forces.

The bancassurer must be able to explain to the agent the reasons for the par-ticular structure (e.g. as part of the interview process). Differences between abancassurance and an insurance company package must correspond with thedifferent objectives of the bancassurer for its agents, for example the fact thatbancassurer agents are expected to give higher levels of customer service thaninsurance company agents.

For a bancassurer with several channels, the terms must be considered for eachchannel separately to make each channel attractive to both potential agents andto the operation. One aspect in looking at terms for each channel is to bear inmind the opportunities each channel has for selling business and generatingincome. For example:

The special adviser is competing with specialists for high-premium corporatebusiness, where a warm lead seldom comes from the branch office. The rolemay also involve giving a lot of service and advice to the client, which in andof themselves do not generate income for the agent.

The career agent focuses mainly on selling, if possible from warm leads. Hecan sell a wide range of products and his potential clients are accessible dur-ing business hours and also after business hours.

Remuneration terms must reflect the selling and servicing demand (as well asopportunities) available to each group.

Some (at least) of the business sold by the agency force is due to warm leadsprovided by the bank. In turn, the agent has to do less prospecting and lesswork to make the sale. The initial commission paid to the agent should reflectthis. The proportion not paid to the agent can be used, among other things, toreward the bank branch and its employees for their effort in making the sale.

5.3 Remuneration of bank employees

The remuneration depends on whether the bank employee or the banks financialadvisers are involved in the sales process or whether the bank employees areproviding warm leads. Any commission payable by the insurance company is, asa principle, to be credited to the banks profit centre for the bancassurance opera-tion. The banks management sets the commission level for each manager andemployee engaged in the bancassurance operation.

23

Remuneration packages and incentive schemes Bancassurance in PracticeMunich Re Group

Selling in the banks branches (by employees or by financial advisers):

For simple packaged products the payment of commission to the bank employ-ee is not recommended since these products have low profit margins and donot require particularly great selling efforts. Instead employees could berewarded with gifts and/or salary increments based on their selling perform-ance in promoting both banking and insurance products. Such performancecould be quantified via the use of a points system where by the various prod-ucts are allocated as a number of points.

For compulsory products linked to banking facilities no commission or otherbenefit will be offered since these do not require any selling effort on the partof employees. If, however the financial advisers of the bank are selling usuallythe more complex products like in the case of special advisers of the insurancecompany the remuneration to the bank may be the full commission for a par-ticular plan. The financial advisers are usually paid on a salary basis and theyreceive incentive compensation based on their sales.

Warm leads: In return for providing warm leads, the bank will get a share, say 50%, of thenormal first year commissions. The actual split might be agreed upon the basisof the work done by each of the agent and the bank employee in achieving theaverage sale, which may vary, for example, by product type.

A basis is needed for allocating this amount between branch staff (who providethe warm leads) and the banks owners. A possible basis would be:

Bank employees: 25% Bank profitability: 25%

50%

The bank employees commission can be split as follows:

Employee who generates the warm lead: 15% Branch group award: 10%

The structure shown above generates benefits as follows:

Financial rewards for employees who generate warm leads

Financial rewards for managers and other staff of the bank branch who havesupported bank activities while the assurance business was being generated

Recognition of the branchs contribution to bank profits (which can be reflectedin the performance rating by the bank of the branch management)

Group awards or bonuses are more desirable when the contribution of the indi-vidual employee is either difficult to distinguish or depends on group coopera-tion.

24

Bancassurance in Practice Remuneration packages and incentive schemes Munich Re Group

Training

Training is a critical part of overall business performance. But even before anytraining starts, it is important to determine

who needs to receive training, what kinds of training are required, who will be responsible for providing training and for testing what the student

has learned from the training.

This chapter of the report focuses on the training needs of the people in the vari-ous distribution channels in a bancassurance venture, where these differ from thetraining of sales forces in a life insurance operation and from the training ofbranch staff and management in a banking operation.

In addition, the need for quality customer service is discussed, as is its implemen-tation in a bancassurance operation.

6.1 Sales force training for bancassurers

Sales agents and their managers in any selling organization, including insurance,develop a range of knowledge and skills, for example

product knowledge, application of selling techniques, and motivation skills.

Here we concentrate on the types of necessary training for sales staff and salesmanagers in a bancassurance operation.

a) Bank products and distribution channels: the sales force will need to have (atleast) basic knowledge of the banking products sold by the operation and ofthe range of distribution channels in force (not just the channels used to selllife insurance).

b) Building up a relationship with bank staff: in many cases, the sales agent isreliant on the quality and quantity of warm leads from bank employees. In turnthe sales agent can influence the value of leads either positively (by achiev-ing a high success rate in turning them into sales and commission) or nega-tively.

The sales agent needs to learn to cooperate with bank employees and mustlearn how to build effective relationships with people whose job motivationmay be very different to his/her own.

c) The banks expectations of customer service: the sales agent and sales man-ager must understand and be prepared to meet the standards for customerservice which the bank expects in respect of its customers. The banks stand-ards will cover not only insurance business but other relationships (e.g. bank-ing relationships) with the customer. The sales staff must be trained to imple-ment the standards.

25


6

6.2 Bank employee training for bancassurers

The bank employees will need to be trained in the following aspects of the insur-ance business:

Features of the insurance products sold How to identify and approach a potential customer Basic insurance needs Handling basic objections Other distribution channels and products Expected roles Procedures Remuneration and incentive schemes Cultures Customer service

Much of this list will be new to staff used to banking transactions, so it is compara-tively long. However, proper and regular training of bank employees is key to thesuccess of the operation.

6.3 Continuous training and supervision

Apart from initial training, there should be further training to support the develop-ment of the agent or employee. Some ways in which this can be done are:

Agency meetings Bank branch meetings Area banking meetings In-house magazine Training circulars Area sales seminars Company library Video tapes Certified courses Lectures Training material booklets

A training activity record is a vital element for the manager of staff in a bancas-surance operation, whether bank counter staff or sales agents, since any weak-ness can be spotted immediately. If the manager regularly reviews the trainingneeds and achievements, he can identify where urgent training is needed.

The manager who is able to be proactive instead of reactive can contribute agreat deal to the success of the operation, since any weakness can be spottedimmediately.

6.4 Quality customer service

Quality customer service refers to every single activity that the company, itsemployees and the distribution channels undertakes for its customers. In all casesthe objective of every person in the company should be to give added value toevery transaction or communication, providing additional incentives to customersand enabling the company to

26

Bancassurance in Practice Training Munich Re Group

distinguish itself from competitors, improve its image among customers, keep its existing customers, attract new customers, and create additional sales among existing customers.

In a bancassurance venture quality customer service is even more importantbecause the bank refers its customers to the insurance company. The banks rela-tionship with the customer can be damaged by poor service from the insurer.

For this reason bank employees must be well informed about the customer ser-vice standards set by the insurer when they refer them to their customers. At thesame time the insurance company staff (including the administrators who willdeal with the customers questions in future) must be aware of the standardsexpected by the bank on behalf of their clients. These service standards shouldbe written down and agreed upon between the bank and the insurance company.

The first step in quality customer service is the development of the right mentalattitude amongst bank staff and sales force so that both parties recognize thattheir primary role is to satisfy the customer. Helping bank staff and sales force todevelop the awareness of their own abilities and inherent strengths, to conqueranxieties and to share their ideas and experiences will help the staffs perform-ance and help them to appreciate their customers concerns.

A two-way referral system, where the sales force refers customers to the bank forbanking facilities, can be helpful because trust will be enhanced. Bank employeeswill be more understanding and more willing to help.

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Training Bancassurance in PracticeMunich Re Group

Operational procedures forbancassurance sales forces

7.1 Allocation of bank branches to the sales force

The method by which bank branches will be allocated to the sales force should beknown to everybody in advance. In practice, some of the branches will have bet-ter results and greater potential than others and each field manager will be askingfor those branches to be allocated to his agency. A variety of methods for allocat-ing branches can be devised. The rest of this section describes one method usedin practice and then dicsusses its assumptions and limitations.

The first step in this allocation is to segment the banks branch network into dif-ferent areas so that the sales force can provide effective service to the branches.There are two main factors that will affect such a segmentation:

Distance: the distance between the bank branches and the agencys officesmust not be too great. This is so that the agents will find it easier to visit bankbranches on a daily basis and be ready to respond to any telephone call fromthe branch quickly.

Number of agencies: the number of agencies and agents in each area shouldbe sufficient so that they are able to cope with the number of customers gener-ated by branches in the area.

Certain rules should be followed before any allocation:

The allocation can be done every year at a specifie date. More frequent reallo-cations should be avoided so that the agency has enough time to organize thebranch business and establish good interpersonal and business relations.

The company can withdraw any branch from an agency at any time if the pro-duction results are very low. This will give the company the flexibility for minoradjustments within the year to cope with changing needs. It will also press theagencies to have maximum performance at all times.

The bank branches are allocated to the agency manager and it is his responsi-bility to assign them to his agents and inform the company accordingly.

The manager should not be allowed to personally sell any policies arisingthrough bank branches. His job is to achieve maximum results through hisagents.

The production objectives of every branch are set according to its size.

The following example shows in detail how branch allocation based on theabove-mentioned factors can be implemented.

Assumptions

1. In the district in question, we have 47 bank branches. Each branch is allocatedone of four possible production objectives regarding the number of policies

28


7

they are expected to sell each period (monthly/quarterly, etc.). These are asfollows:

2. In the same district we have five sales managers with a total of 74 agents. Thesales managers are identified by the letters AE. We also have last years (ormonths) performance for each sales manager, expressed as a percentage oflast years (months) target. We are going to assume that the percentage targetfor each sales manager in the next period is the same as that achieved in thelast period.

The branches can be allocated to every agency manager as follows:

where

Total expected production 700k =

Total of 100% target branches=

70 = 10

Expressed in words:

Column (4) = equivalent number of agents, if each agent has a 100% targetachievement

Column (5) = target number of policies for each manager through the branchesallocated to him/her

29

Operational procedures for bancassurance sales forces Bancassurance in PracticeMunich Re Group

Number of Production Total expectedbranches with objective productionthis objective(i) (ii) (i) x (ii)

15 20 30010 15 15010 13 13012 10 120

Total 47 700

Sales manager Number of agents Next years targetperformance

(1) (2) (3)

A 10 95%B 22 65%C 18 85%D 11 163%E 13 100%

(1) (2) (3) (4) = (2) x (3)/100 (5) = (4) x k

A 10 95% 9.5 95B 22 65% 14.3 143C 18 85% 15.3 153D 11 163% 17.9 179E 13 100% 13.0 130

Total 74 70.0 700

Having worked out the number of policies that each sales managers group (i.e.the value in Column 5) is expected to sell, the next step is to allocate branches.For example, sales manager A will be allocated branches which are close to hisagents. The total target for those branches will equal the total target for salesmanager A (i.e. 95 policies).

In the table above, Column 4 assumes that each sales manager had the sametarget production in the coming year as he/she achieved in the previous year.Because Column 5 is calculated from Column 4, then the result in 5, and thereforethe allocation of branches, also has the same assumption. The formulas could bedeveloped to use different types of production target assumptions.

Another important aspect which this formula does not consider is the ability ofthe sales manager to build good relationships with different branches. This aspectwill be included in deciding on the branch allocation, for example:

Are there branches with which the sales manager has been successful in thepast (where perhaps the relationship may be maintained)?

Are there branches where the sales manager has not had a successful relation-ship (and therefore should no longer work with that branch)?

With what types of branches has the sales manager been successful (and whatbranches should he perhaps take over in future)?

7.2 The referral system

As already discussed, warm leads can provide a strong competitive advantage fora bancassurance operation. An efficient system for managing referrals of warmleads is therefore vital. This section describes a process for managing referrals.

7.2.1 The basic principles

A formal and standardized referral system is needed. The responsibilities of allrelevant parties must be clearly defined and each party must know its responsibil-ities under the system. The proper operation of the system (once designed)should be safeguarded through a designed system of controls (that includes stand-ards, monitoring, review procedures, etc.).

The objectives of designing and implementing such a system are the following:

a) Maximization of the number of successful referrals through

the maximization of the total number of referrals, the optimization of the quality of referrals, the optimization of the quality of sales.

b) Promotion of accountability, transparency of activity and performance.

7.2.2 An overview of the proposed system

The following diagram represents the system for managing referrals.

30

Bancassurance in Practice Operational procedures for bancassurance sales forces Munich Re Group

Referral system

Figure 4

At the heart of the system is the branch referral process. This explains whodoes what, when and how, in order to properly generate, fully record and effect-ively monitor referrals in bank branches.

To make the referral system work effectively, it is essential to have the followingsystems in place:

a) Training system

A carefully designed and well-executed training system will provide all rele-vant parties with the necessary knowledge and will enable them to performtheir duties in relation to the referral process.

b) Selection procedures and system of allocation of branches to agents

Carefully designed and well-executed selection procedures will help safeguardthe quality of agents servicing bank branches and increase commitment on thepart of both the branches and the agents to the referral process.

Similarly, an intelligent system of allocation of branches to agents will helpensure that agents are allocated to branches on a sound basis that aims tosupport the development of the agent-branch relationship.

31


Training system

Selection proceduresand

system of allocationof branches to agents

Control systemBranch referral process

Measurement, evaluation andreward system (MER)

This involves:1. Defining job description2. Setting objectives3. Measuring activities/results4. Evaluating and rewarding

performance

c) Measurement, evaluation and reward system

A well-designed system of recording and measuring activity of bank staff andevaluating and rewarding performance, based on the recorded activity, willcomplement the existing staff appraisal system with regard to performance inrelation to the referral system. This encourages employees to be objectiveabout their performance in making referrals. It also encourages employees toidentify improvements to their performance and to the operation of the referralsystem.

d) Control system

An effective, non-bureaucratic system of controls will help mitigate the variousrisks that may undermine the smooth operation of the referral system.

Examples of controls here include:

Regular reporting of activity to the management of the bank and of the banc-assurer, for example, regarding the

number of new warm leads generated, proportion of warm leads converted into sales, lapse experience on in-force contracts.

The report should include comparable figures for earlier periods, resultsshould be split so as to allow sources of differences to be identified (e.g. bybranch and by product line).

Benchmarking of the bancassurers performance compared with other finan-cial institutions, to identify differences and to pinpoint where the bancassur-er might make improvements.

7.3 The branch referral process

The following diagram shows how the referral process could operate.

32


Figure 5

33


Is referral still active?

Start

Referrer identifiespotential customer

Referrer contactscustomer where possible

Referrer does not contact customer

Customer does not objectto seeing salesperson

Referrer fills in three-part referral slip

Part 1 (blue)Kept by the referrer

Part 2 (green) Referrer passes this part on to salesperson

Part 3 (yellow)Referrer gives this to coordinator

Salesperson obtains more informa-tion on each referral from referrer

Salesperson contacts customer withintwo working days of receiving referral

Coordinator updates BancassuranceActivity File (BAF) daily on newreferrals

Salesperson gives feedback tobranch coordinator once a week

Salesperson gives feedback to refer-rer within two days of taking referral

Coordinator updates BAF

Stop

Yes

No

Warm leadSemi-cold lead

Coordinator arranges to discuss case again

Salesperson follows up on referral

Salesperson updates coordinator

7.4 Guidelines for allocating commissions

A bancassurer must set clear rules at the outset for commission payments to thebank and to the sales force. Complications can arise, for example, when morethan one agent is involved with a client. The appendix describes several casesand suggests rules for dealing with such cases.

The key question in defining these rules for a bancassurance operation is, Whoowns the customer? The agent and the bank might each see themselves as theowner. The market trend seems to be, however, for the bank to take precedenceover a bancassurance agent, i.e. all clients referred to the agent are owned bythe bank and the bank is entitled to a share of commissions and profit on all busi-ness generated by the agent from the bank client.

34


Contract review processes

Setting up a bancassurance operation will involve a number of contracts. Depend-ing on the type of relationship being set up between a bank and an insurancecompany, these could include

tied agency agreements (the bank commits itself to distribution of life insuranceproducts of a single life insurance company);

administration management agreements, if the administration of the salesforce, or of the insurance contracts, is contracted to a third party. In the UK, forexample, this has been a popular means for banks and other deposit-takerssuch as building societies to set up new life insurance operations;

salesman agreements between the bank or the life insurance operation on theone hand and the life insurance salesman on the other.

Drawing up the contracts will involve legal advice and the contracts will be spe-cific to the particular relationship being planned. Because of this, this documentdoes not cover all aspects of the contracts, but instead highlights why well-drawncontracts make an important contribution to the continuing success of a bancas-surer.

It is important for all parties to agree on the standards expected of each party tothe agreement. By defining the standards right at the start of the contract, eachparty knows what is expected of him in the deal. Furthermore, with known stand-ards, the performance of each of the parties to the contract can be measured inparticular to see whether the agreed standards are being met.

Also, defining contract review processes within the contract allows the partiesto make changes in the nature of the relationship over time, when it benefits atleast one party. Types of change over time may include

a bank withdrawing from a tied agency agreement and setting up its own lifeinsurance operation;

a bank increasing its shareholding in the life insurance operation, on termsagreed under the contract, with the insurance company correspondingly reduc-ing its shareholding;

a life insurance operation seeking offers from third party administrators to takeover the administration of inforce contracts, e.g. to replace the existing admin-istrators.

It is also vital to have the contract define methods of arbitration, should the par-ties come to a disagreement.

35


8

Examples of standards by type of contract

a) Tied agency contract

The bank will commit itself to

marketing only the products of the life insurance company,

monitoring and reporting the numbers of leads generated by its staff andpassed on to the sales force of the life insurance operation,

providing facilities for the sales force at branch sites.

In return, the life insurance operation promises to

provide commissions to the bank on defined terms,

make payments due to the bank on specified dates,

manage the activities of the sales force so that they comply with the require-ments of the bank in relation to its customers,

provide for training of the bank employees.

b) Third party administration contract

The bank or life insurance operation will promise to pay for services on theagreed basis, on agreed dates. In return, the third party administrator willagree to

carry out specific activities (e.g. new business processing, administration ofexisting contracts, accounting for premiums and payments, supplyingrequired data for financial reporting),

meet agreed standards for carrying out operations (e.g. to complete newbusiness underwriting processes within five days of proposal receipt, toanswer 95% of the number of customer requests within one working day),

report regularly on actual performance against targets,

charge the bank no more than a specific amount per activity, for exampleUS$ 100 per new business process completed, with an itemized bill for pay-ment provided on agreed terms.

c) Contracts with salesmen will have the same requirements as contracts in insur-ance-only operations. Detailed terms will reflect the needs of the bancassurerbut the headings will be the same.

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Bancassurance in Practice Contract review processes Munich Re Group

AppendixExamples of rules for allocating commissions

The appendix describes a number of examples where more than one agent and/orbank branch may feel entitled to earn commission from an insurance sale. A pos-sible rule is given in each case. The set of examples and rules is one way of defin-ing a policy for use by the bancassurer.

a) An agent secures a policy as a result of a bank referral. Through that referraltwo other policies are completed.

The first policy is considered to be a policy through the bank. The other twopolicies are not, but the agent has the right to decide whether to take areduced commission and treat the further two policies as bank referrals.

b) An agent recommends the bankss banking facilities to a client.

If the client already has an insurance policy, the existing policy is not consid-ered as having come through the bank. But if the bank employee identifies thefact that the client has an insurance need which leads to a new policy beingcompleted, then the new policy is considered as having come through thebank.

c) Agent A visits a client and before he closes the sale the bank refers the clientto another agent, agent B, who completes a sale.

Since the client agrees to see agent B through the bank, the policy is consid-ered to have come through the bank. Agent B might unilaterally offer agent Aa reward for his efforts.

d) The bank employee recommends a policy to a client who does not have anaccount with the bank.

The policy is considered as having been sold through the bank branch.

e) Agent C finds a client who is a bank employee working in a branch where allleads are automatically passed on to agent D. Agent C completes the sale.

In this case, agent C would receive all the commission and the bank none, asthe bank did not provide a warm lead. Agent C may offer to share the commis-sion with agent D.

f) The client referred to the agent turns out to be a friend or relative of the agentor an existing client of the agent.

If a reference is given to the agent by the bank employee, the business rela-tionship between client and bank is stronger and as a consequence the policyis considered to have come through the bank.

37


g) A reference is given to agent E through the bank. The client is approached byanother agent F who ignores the existence of agent E. The policy is finally soldby agent F.

The policy is written as production of agent E through the bank. Agent E hasthe option of sharing commission on the policy with agent F while the bank inthis case will receive its commission as if it were a normal referral.

h) A reference is given to agent G through the bank. The client is approached byanother agent, agent H, who knows or learns during his visit to the client of theexistence of agent G and the bank reference.

The policy is considered to have come through the bank and is considered asproduction of agent G. No commission would be due to agent H, in order todiscourage client poaching within a company. Agent G would be encour-aged to at least partly compensate agent H for his work.

i) During an approach for recommendation, the client mentions to the bankemployee that he is being serviced by another agent or has already beenapproached by another agent of the same company.

The resulting policy is considered to have been sold through the bank andbelongs to the clients existing agent.

j) Although the client belongs to another agent, he does not mention anything tothis effect to the bank employee during the approach for recommendation.

The policy is considered to have come through the bank and belongs branchsagent. The branchs agent has the option to share the policy with the existingclients agent.

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Bancassurance in Practice Appendix Munich Re Group

2001Mnchener Rckversicherungs-GesellschaftCentral Division: Corporate CommunicationsKniginstrasse 10780802 MnchenGermanyTel.: +49 (0)89/38 91-0Fax: +49 (0)89/39 90 56http://www.munichre.com

Order number 302-00800

Responsible for the content:Operational Division: LifeRoger A. Klein

Picture credit:STOCK4B/Marc Oeder

This brochure is an updated version of the paper Bancassurance written byYiannis Violaris, EuroLife, Nicosia (Cyprus).

Bancassurance in PracticeContents1 Introduction2 Entering into bancassurance2.1 Ways of entering into bancassurance2.2 Reasons for banks to enter into bancassurance2.3 Benefits from bancassurance for insurance companies

3 Bancassurance products3.1 Finance and repayment products3.1.1 Credit insurance3.1.2 Overdraft insurance3.1.3 Capital repayment

3.2 Depositors products3.2.1 Depositors insurance3.2.2 Objective achievement insurance (bank savings plans)3.2.3 Pure investment products

3.3 Simple standardized package products3.4 Other products

4 Distribution channels4.1 Types and characteristics 154.2 Cultural issues in distribution

5 Remuneration packages and incentive schemes5.1 Objectives of remuneration and incentive schemes5.2 Remuneration of agency forces and agency management5.3 Remuneration of bank employees

6 Training6.1 Sales force training for bancassurers6.2 Bank employee training for bancassurers6.3 Continuous training and supervision6.4 Quality customer service

7 Operational procedures for bancassurance sales forces7.1 Allocation of bank branches to the sales force7.2 The referral system7.2.1 The basic principles7.2.2 An overview of the proposed system

7.3 The branch referral process7.4 Guidelines for allocating commissions

8 Contract review processesAppendixOrder number 302-00800

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