As the end of year approaches and many of you will be preparing your tax deduction documents, it is important not to forget about the Baht 50,000 entitlement on life insurance premium that you can use. As for those of you who are first time buyers of life insurance policies, but dreaded the "hard sell" techniques of most insurance agents, then you are in luck because in this issue of Insurance column, we shall explore a relatively new distribution channel for life insurance products via branches of commercial banks. Although, the products line up at bank branches may not be fully comprehensive but it should be enough for the vast majority of us who just want to make use of the Baht 50,000 tax deduction.

Khun Sara Lamsum  Khun Kaida Kietfuengfung

To get an inside story on the subject, the author talked to two of the leading players in Thailand's Bancassurance scene: Khun Sara Lamsum, President of Muangthai Life Insurance and Khun Kaida Kietfuengfung, Marketing Director of SCNYL.

The term "Bancassurance" may be new to many of us but the concept of banks selling insurance products is not new. As the name suggests, the concept started in France in 1980, "Banc" means banks and "Assurance" means insurance and when you put the two words together the meaning becomes clear. Bancassurance has achieved remarkable success in some markets, particularly in Europe, it is not uncommon to find over half of the life insurance business being transacted by banks. In France, Portugal and Spain, banks handle over 60% of life insurance business.(See Table 1)

However, in the UK and the Netherlands, the success rate is much lower due different market practices.

Banks and insurance companies are attracted to bancassurance for different reasons, which also influence the way their co-operation takes place. Banks are drawn to the idea of bancassurance to secure an additional source of fee income and to leverage off their customers base. As for the insurance companies, the attractions are just as inviting: the ability to tap into the huge customer base of banks; reduced distribution costs from traditional agents and develop new financial products more efficiently in collaboration with their bank partners.

In the case of Thai banks, the need to diversify their sources of income is even more urgent as pointed out by both Khun Sara and Khun Kaida. Both of their bank partners Kasikornthai Bank and Siam Commercial Bank are the two most successful banks that have embraced bancassurance in a big way.   Asian and in particular Thai banks have seen better days. Their return on equity has largely been on the decline over the past decade and the Asian financial crisis in 1997 made things worse, leaving many banks with heavy burden of non-performing loans even after substantial debt liquidation efforts,

Fundamental to the predicament of Thai banks are the narrowing of interest margins and deteriorating asset quality. In addition, the 1997 crisis has highlighted the lack of stringent credit culture among many banks, particularly state-run ones, whose names I won't mention. This is reflected in the high level of "recurring" non-performing loans, more than is justified by the cyclical economic conditions. The subsequent introduction of tighter credit controls means that banks are more cautious to lend, particularly at a time when economic volatility is running high and global credit risk is rising due to the war on terror and record high price of oil. The situation has led banks to seek more stable and less volatile fee-based income. Sales of insurance products to these segments of the market will play an increasing role in the overall return of banks.

While bancassurance currently accounts for only a small share of insurance distribution (Table 2) but a confluence of factors is expected to underpin the growth of bancassurance in Thailand as follows:-

Financial Deregulation. It was not that long ago when the primary role of commercial banks was restricted to taking deposits and lending money but today, the advancement of financial market integration and globalization meant that the walls dividing banks and insurance companies, asset management firms as well as securities companies have been removed. Hence, everyone is moving towards the "universal" bank concept where practically every financial products can be sold by bank managers. This deregulation has led to waves of mergers and tied-ups between banks and insurance companies. Kasikornthai Bank has just signed an exclusive distribution agreement with Muangthai Life Insurance, while, New York Life has taken a majority stake in the life insurance arm of SCB and renamed the company SCNYL. Cardiff Life has joined force with Thai Military Bank and Max Life has signed a distribution agreement with Siam City Bank and the list is expected to grow longer by the day as all the major players gear up for greater competition in the field of bancassurance.

Balance Sheet Burden of Insurance Companies. The Asian financial crisis in 1997 not only dealt a heavy blow to commercial banks but also to insurance companies. Although, none of the life insurance companies in Thailand had to be rescued but may of them are keen to look for means to lower their operating cost ratios. According to Khun Kaida, the sale commission paid to insurance agents in Thailand must be one of the highest in the world, currently at 40% of first year premium. That's why New York Life is extremely keen to exploit SCB's depositors' base in order to reduce operating cost. Surveys have found that distribution through banks can be more cost effective than through traditional agents (see Table 3).

Increasing Sophistication of Consumers. Due to the low propensity to buy life insurance policies coupled with poor reputation of traditional sale agents, wealthy consumers are increasingly keen to take control of the choice and design of insurance products and are more receptive to innovative distribution. Moreover, in Thailand, people tend to hold bank managers in higher regard than insurance salesman. This is where Khun Sara will be putting a lot of emphasis on regarding his venture with K-Bank. The main concept is "Seamless Integration" whereby K-Bank will take the lead and Muangthai Life shall play the supporting role in the background. As far as the customers are concerned, they will be dealing with the K-Bank brand but the engine inside is Muangthai. Although, it has often been argued that in Thailand, wealthy people don't visit bank branches, only messengers do but according to Khun Sara, this is not the case upcountry, where bank managers still have a lot of influence and connections in the area. Moreover, in big cities like Bangkok, K-Bank among others, are spending huge amount of money in developing their private banking business where tailored made financial products can be sold to their more affluent customers.

According to Khun Kaida, bancassurance can uncover insurance potential otherwise untapped by traditional channels. "If an insurance agent has to spend the same amount of time and effort in selling a life policy to two people, it's only natural that he will chose the one with higher income first". This is where bancassurance will open up a new and potentially wider market for insurance companies (see Table 4).