While the concept of insurance sold through banks dates back to the 19th century, the present model of bancassurance – which has expanded beyond consumer credit, currency theft and home insurance to include such products as savings insurance and annuity investment contracts – was developed in advanced insurance markets in the 1980s. It was during the 1990s, however, when rapid expansion saw the segment transform into something resembling today’s market. A new regulatory regime ushered in by the Europe-wide Second Banking Coordination Directive allowed financial institutions to operate across the economic bloc without gaining individual licences from member states, and the resulting competition between large universal banks prompted them to seek new revenue streams by cross-selling non-traditional products.
Local Market
Bancassurance in Saudi Arabia was developed on the back of this new momentum, first appearing in the local market in the form of the personal financial savings plans that were introduced in 1998. Until recently, the Saudi Arabian Monetary Agency (SAMA) has encouraged the provision of insurance products through banking channels by adopting a flexible regulatory stance to bancassurance. By 2002 banks had moved beyond personal savings cover to offer general lines such as motor insurance to their customers, and by 2014 a wide array of lenders had established tie-ups with insurers to offer bancassurance services. These arrangements take one of two forms. In the case of Alinma Bank, Al Rahji Bank, Riyad Bank, SABB and Saudi Hollandi Bank, the bank owns the insurance agency with which it partners to provide bancassurance products, such as the tie-ups between Alinma Bank and Alinma Tokio Marine and Al Rahji Bank and Al Rajhi Cooperative Insurance. The remainder of the bancassurance alliances in the Kingdom are between lenders and independent insurance affiliates: Arab National Bank with AIG, National Commercial Bank with Al Ahli Takaful, Banque Saudi Fransi with Allianz Saudi Fransi and Bank AlJazira with AlJazira Takaful Taawuni.
However, despite the firm foothold bancassurance has established in the Saudi Arabian market, it remains relatively undeveloped. Simple savings programmes form the bulk of the business conducted, with a typical programme open to customers between 18 and 60 years of age and offering subscription levels from as little as SR280 ($75) per month for a minimum duration of seven years. Moving beyond such basic offerings has proven to be a challenge for local providers, not least due to the fact that the concept of insurance is a relatively new one in the Kingdom and the industry as a whole has yet to completely shake off the doubts surrounding its compliance with the principles of sharia. However, many industry participants point to the sector regulations as a further block to bancassurance development in the Kingdom.
Regulation
The region’s regulatory bodies have taken a number of different approaches to bancassurance governance. Kuwait has made no regulatory provision for the channel at all, while Bahrain follows an appointed representative model, which places an emphasis on a well-qualified sales force. The UAE, Qatar and Oman have all introduced bancassurance regulations of some kind, often with limitations on how many tie-ups banks are allowed to establish with different insurers.
Saudi Arabia has a comprehensive regulatory framework by which bancassurance activity is governed in the form of the Insurance Intermediaries Regulation of 2011. The key precepts are that bancassurance is only allowed to be sold through an insurance agency approved by SAMA, that the agency staff must have a minimum Insurance Foundation Certificate qualification and must be properly and regularly trained, that staff selling or marketing bank products must not also sell insurance products, and that insurance products must not be bundled with bank products. When the current regulatory regime was introduced three years ago, it represented a tightening of existing controls, which has made the task of selling insurance through banks a more complex one. “The new 2011 regulations were a challenge. Previously, the relationship manager in the bank could advise customers on insurance products and cross-sell them. SAMA put an end to this, and this in turn has limited growth,” Husam Malaikah, head of product development and distribution at SABB Takaful, told OBG. Compelled to effectively duplicate staff to develop bancassurance, it is little wonder that banks are less enthusiastic about the concept than before. Nevertheless, SAMA’s regulation is designed to ensure that the nascent industry develops according to international best practice, and that bancassurance products are distributed by a workforce that understands insurance principles. Achieving a balance between probity and facilitating growth will remain the regulator’s main challenge as the governing framework surrounding bancassurance continues to develop.
Mutual Advantage
The long-term growth of bancassurance in Saudi Arabia, however, seems certain. For the Kingdom’s banks, the development of bancassurance promises to deliver a new revenue stream and a greater diversification of their activities.
Moreover, the fact that this new revenue is recorded as non-interest income (i.e. fee income) means that banks are able to diversify some of their net interest rate margin risk without undermining their profitability. In addition, the cross-selling of services in a single branch is both a competitive advantage and a means of increasing customer loyalty. According to a study carried out by the American Bankers Association, the more products a bank sells to a given customer, the more likely he or she is to stay with it.
Bancassurance holds equally clear advantages for the Kingdom’s insurers, which see the channel as a useful means to diversify their distribution methods in the face of increasing competition. By pairing with a bank to sell insurance products, they gain access to new consumer segments and achieve lower cost per unit of sale, as well as the ability to work with their banking partner to achieve synergies in areas such as fund management. Customers also benefit from the bancassurance model: beyond the obvious advantage of being offered a holistic service which makes accessing a range of financial products easier than before, customers benefit from a stronger relationship with their bank.
Looking Ahead
Challenges to bancassurance growth in Saudi Arabia remain, however. In addition to regulatory issues, there is also the question of sales culture: the sale of insurance products differs to that of other banking products such as loans and credit cards in that insurance is “sold” rather than “bought”. Customers are frequently unaware of the insurance services available from their banks, and therefore bank staff are required to identify potentially interested clients. This also means that advertising increases in importance.
If banks can overcome these obstacles, there should be significant rewards for them, their insurance affiliates and their customers, and it is likely that in the coming years an increasing number of Saudis will use their bank branch to access a full array of protection products, from education, medical and travel insurance to an increasing variety of investment policies.
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