Donald Joshua Jaganathan: Nailing down the winning strategies in
bancassurance
Keynote address by Mr Donald Joshua Jaganathan, Assistant Governor of the Central Bank
of Malaysia, at the 15th Asia Conference on Bancassurance & Alternative Distribution
Channels: "Nailing Down the Winning Strategies in Bancassurance", Kuala Lumpur, 6 May
2014.
* * *
It gives me great pleasure to be here at the 15th Asia Conference on Bancassurance &
Alternative Distribution Channels. This conference takes place at an exciting time for the
insurance industry in Asia. After decades of strong growth and modernisation, Asia has
achieved remarkable standards of living, with hundreds of millions lifted out of poverty and a
middle-class population of over half a billion. Structural reforms following the Asian financial
crisis have enabled the region to remain resilient throughout the global financial crisis of
2008/2009. Post-crisis, the vibrant economies in Asia have continued to be a pillar for global
recovery, with this year's GDP for developing Asia projected by the IMF to grow 6.7%1.
Insurance markets have also grown in tandem with the economy. Over the past decade, total
premium in emerging Asia2 increased by 10% per annum for life business and 13% per
annum for non-life business on average3 and is projected to grow 11% this year and 10%4 in
the next. The insurance industry, however, cannot be complacent and take this story for
granted. Our past successes have been as much a result of foresight in pursuing new
opportunities as a firm resolve in confronting new challenges. Even as insurance markets
continue to mature in Asia, forces of change are already underway that will transform the
landscape in which insurers operate and drive the development of new business models and
delivery channels.
In the coming decade, insurance business in Asia will be profoundly shaped by social and
economic transitions. I will briefly touch on five areas: (i) demographic shifts, (ii) increasing
affluence, (iii) greater connectivity from new technologies, (iv) more intense competition and
(v) a renewed focus on financial inclusion.
Firstly, while countries in Asia are at different stages of demographic transitions, what is
unique to Asia is the speed at which populations are ageing. For example, the US took
72 years for the population over age 65 to double from 7% to 14%. Most countries in
Southeast Asia are expected take 20 to 25 years, while Korea and Singapore are expected
to take less than 20 years5 Asia will have a much shorter timeframe to ensure an adequate
social safety net is in place to support an aged society. Greater reliance will therefore be
placed on the insurance sector to keep pace with the growing demand for old age protection
and healthcare funding.
Secondly, increasing affluence and a growing middle-income population will be a key driver
of demand both in terms of quantity as well as quality. With greater affluence, households will
also become more empowered in expressing preferences and more discerning in making
financial decisions. Insurers will need a more tailored approach in ensuring their distribution
capabilities are able to effectively deal with different customer segments.
Thirdly, advancements in information and communication technology (ICT) have given rise to
an era of instantaneous connectivity. According to certain estimations, Internet and
smartphone penetration rates in Asia have reached 32%6 and 43% respectively in 20137
Beyond offering new channels for delivery of products and services, ICT has opened up new
ways of doing business. The Internet has evolved from being merely a tool for insurers to
provide information on products into a competitive marketplace and platform for exchange. In
more advanced economies, for example, aggregators have intensified price competition in
personal lines insurance business. The advent of "big data", encompassing technologies
ranging from social media to telematics, will significantly augment insurers' analytical
capabilities to enable a more responsive and personalised customer experience, foster
process innovation and provide strategic agility through quicker time-to-market.
Fourthly, with globalisation and progressive liberalisation of insurance markets in Asia driving
increased competition, the search for growth through new customer segments and improved
margins from efficient operations will continue to intensify. In certain markets, players have
shifted away from expensive face-to-face channels towards offering simple products through
more cost efficient direct marketing channels. Such channels have also enabled insurers to
make inroads into previously uninsured segments thereby going beyond just winning market
share towards expanding the insurance marketplace.
Finally, there is a renewed focus on financial inclusion to ensure that all segments of society
benefit from economic growth. This includes ensuring that everyone is adequately protected
from catastrophic events and other adverse shocks. Swiss Re has estimated the mortality
protection gap in South and East Asia to be around USD32 trillion8. Closing these gaps
would require a clear vision to which all stakeholders, from the insurance industry to the
Government and financial regulators, must aspire through stronger collaboration and
coordinated initiatives. In this regard the Bank aims to increase the insurance and takaful
penetration rate in Malaysia, defined as number of policies per population, to 75% by 20209
supported by other measures to promote the long-term sustainable growth and development
of the industry as outlined in the Life Insurance and Family Takaful Framework (LIFE
Framework).
In the environment I have just described, insurers can no longer afford to rely solely on
traditional business models and delivery channels. Instead, insurers must be aligned to the
broad diversity of consumer needs and preferences, while also being flexible to adapt as
these needs and preferences change over time. Such a market will see the emergence of a
diversity of business models from multi-channel strategies to specialised players focused on
single channels such as direct marketing, financial advisers or bancassurance. Still others
will realise the fortune at the bottom of the pyramid10 through microinsurance. Specialisation
is also expected to occur along the supply chain with new players, including from
noninsurance sectors such as retailers, adding greater value with innovations in areas ranging
from branding and marketing to data enrichment.
Bancassurance, financial advisers and direct channels
While the possibilities for alternative distribution channels are extensive, I will address three
areas that are already showing great promise for our markets here in Asia, namely:
bancassurance, financial advisers and direct channels.
Bancassurance presents a unique proposition for insurers to widen their outreach while
maintaining acquisition costs at manageable levels. By leveraging on banks' existing branch
network and customer base, which are well established throughout most markets in Asia,
insurers are able to scale up very quickly into geographical areas and customer segments
that might not be accessible by existing channels. It is therefore not surprising that
bancassurance is the fastest growing global channel for insurance. In China, bancassurance
sales increased by 415% within 5 years from 2004 to 200911. In Malaysia, bancassurance
accounted for 36%12 of new life insurance business premium and 39%13 of gross
contributions for Takaful business in 2013. At the current penetration level of 5% of the
banking population, there remains significant room for growth. Under the LIFE Framework,
the Bank has envisaged a bancassurance penetration target of 10%14 as part of the move
towards diversification of insurance distribution channels in Malaysia. Rationalization of
incentive structures proposed under the framework are aimed at improving persistency
through more widespread adoption of needs-based selling, product strategy reviews and
quality post-sales service. These measures are also expected to shift the mix towards
protection and savings products from credit-related insurance that currently dominates this
channel in particular for bancatakaful15.
Financial advisers on the other hand have the advantage of providing advice to consumers
on overall financial planning by growing, managing and protecting personal wealth to meet
specific financial goals. With increasing affluence, a growing segment of consumers with
more complex financial needs and goals will require the sort of comprehensive service that is
delivered by financial advisers. In addition, financial advisers may be perceived to be more
independent than tied agents, which will be important as consumers become more
discerning. As a relatively new channel in most of Asia, the primary focus is to establish
public confidence through raising professional and ethical standards of financial advisers.
This is a key focus under the LIFE Framework for Malaysia. In addition, the Bank will reduce
paid-up capital requirements for financial advisors to encourage new entrants.
Previously consisting mainly of tele-marketing and direct mailing, direct distribution is today
considered an important channel by most insurers, in view of the new possibilities enabled by
the high levels of internet penetration and proliferation of mobile devices such as
smartphones and tablets. Social media has become a vital platform for business to engage
with consumers and build their brand as well as being a rich data source in its own right on
today's fast moving consumer trends. The availability of instantaneous information has tipped
the balance of power in favour of consumers. One such innovation is the aggregator, which
has seen an increase in utilisation of 44% and 50% for motor and home insurance
respectively in just a short period from July 2012 to April 201316 according to a report on the
insurance market in Asia-Pacific. In Malaysia, the high levels of internet banking and mobile
banking penetration of 52.2% and 12.7% respectively17 augurs well for direct insurance
models. In fact, in the general insurance and takaful sector, direct channels already have
achieved significant market shares of 10% and 14% respectively18. For the life insurance and
family takaful sector, the LIFE Framework envisions greater adoption of direct channels such
as internet platform and walk-ins for pure protection products.
Safeguarding consumer interests
The global financial crisis has shown that rapid financial sector innovation without due regard
to business conduct can result in large-scale losses to consumers and cause widespread
disruption to financial institutions and markets. As a result, there has been a renewed focus
on consumer protection and market conduct, with new institutional arrangements for conduct
regulation being established in some jurisdictions and strengthened enforcement frameworks
in others. Of importance in a conduct regulation framework is an emphasis on financial
institutions' having effective oversight arrangements to ensure that business is conducted in
a responsible manner.
With the Financial Services Act 2013 and Islamic Financial Services Act 2013, which came
into force in June 2013, the Bank has a clear mandate to foster fair, responsible and
professional business conduct among all financial service providers. The new legislation also
strengthens the protection of policyholders against disproportionate actions by providers to
void contracts in cases where misrepresentation by consumer was unintentional. In this
regard, greater responsibility will be placed on insurers to pose specific questions for
consumer insurance contracts, to obtain information for underwriting purposes. Against this
backdrop, the Bank has recently issued a Concept Paper on Prohibited Business Conduct
outlining practices that are assessed as providing misleading or deceptive information,
exerting undue pressure when marketing products and collusive business practices that may
result in unfavourable outcomes to consumers. The Bank is also developing standards of fair
and responsible business conduct that will require the board and senior management to
ensure high standards of fair dealing and professional conduct. While regulations governing
business conduct is applicable to all areas of an insurer's business, new distribution
channels will likely require a heightened vigilance in view of the potential for new types and
sources of risks.
In addition to strengthening business conduct practices, securing public confidence in a
market with diverse distribution channels will also require building the financial capability of
consumers. While this applies to all consumer segments, particular emphasis will need to be
placed on empowering lower income households and other groups that are currently
uninsured so that they are able to make informed decisions on the products and services
they need. Financial education initiatives must aim to increase consumer understanding of
insurance, including how to navigate in an environment with multiple delivery channels and
how to seek avenues for redress where products and services fall short of expectations.
Governance and risk management
Insurers pursuing new distribution strategies will need appropriate governance and risk
management to ensure that emerging sources of financial and operational risks are well
contained. Insurers' strategic planning process must take into account their competitive
positioning, the target risk / reward trade-off and financial capacity to absorb losses. Prior to
introducing a new distribution channel, insurers must ensure they have the capacity,
including the appropriate expertise and resources, to adequately manage and control the
risks associated with that channel and possible spillovers onto existing business. Policies
and procedures for managing and mitigating new types of risks will need to be developed
and implemented across the whole value chain, including product development,
authorisation, pricing, marketing, sales, post-sales servicing and portfolio management.
These will need to be designed to ensure that the insurer continues to operate within its
predetermined risk appetite and limits.
Success in the new insurance distribution landscape will require strong internal
communication flows to ensure that the governance and risk management across all
distribution channels are fully integrated with the insurers' operations and control functions.
New policies and procedures must be communicated in a timely manner to all relevant parts
and levels of the organisation and periodically reviewed in the light of changing
circumstances. In addition, more complex IT infrastructures that are central to many of the
new channels will require commensurate attention to IT-related risks, which include strategic,
compliance and business continuity risks.
Conclusion
The Austrian economist Joseph Schumpeter described "creative destruction" as "process ...
that incessantly revolutionizes the economic structure from within, incessantly destroying the
old one, incessantly creating a new one"19. As Asia transforms and replaces old social and
economic structures with new ones, so must the insurance industry revolutionise its business
models and paradigms. The challenges for insurers are significant, yet great rewards await
those who seize the opportunities presented by the new environment. In so doing, not only
will the industry benefit from growth but the public, who are the ultimate stakeholders, will
continue to enjoy rising standards of living and protection from adversity. With many in Asia
still not adequately insured, the imperative is clear - insurers must rise to the challenge and
chart new pathways towards success.
With that, I congratulate Asia Insurance Review for organising this most timely and relevant
Asia Conference on Bancassurance & Alternative Distribution Channels. To all the speakers
and participants, I wish you all a productive conference and thank you for your kind attention.