Definition of Bancassurance and How It Differs From Conventional Insurance

Before deciding to use bancassurance, there are some things that need to be known first, such as the definition, history, economics models, benefits, and differences with conventional insurance. The following is the explanation – Bancassurance is an insurance product marketed through banking services. Thus, the bank will provide insurance products to its own customers.

Generally, the types of insurance offered can be in the form of life, health, or property insurance. So what is the difference between bancassurance and insurance in general?

In this article, we will discuss the meaning, history, business model, benefits, and differences of conventional insurance.

What is bancassurance?

Bancassurance is the result of a partnership between a bank and an insurance company. Insurance companies market their products through insurance companies.

It can be said that this cooperation is a symbiosis of the spirit of reciprocity, meaning mutual benefits, between insurance companies, banks, and customers themselves. Benefits to customers include:

  • It is simpler to locate an insurance provider.
  • Get two services from the same location at once.
  • Customers who take part in bancassurance can access credit facilities from some banks, including credit cards and mortgage loans.
  • According to The Finance, Indonesia’s bancassurance industry is still expanding. This indicates that more and more people are signing up.

History of Bancassurance

The European continent is where bancassurance initially gained popularity. In 1860, the first transaction was officially documented. At that time, mortgage-related insurance was first offered for sale by the Belgian CGER Bank (the Caisse Générale d’Epargne et de Retraite).

But in France, the phrase “bancassurance” didn’t become popular until 1980. By using this phrase, it is implied that insurance product sales take place through the bank’s distribution network.

Furthermore, Germany was the first country to develop the idea of bancassurance, which was created as the main means by which insurance companies could offer their products more effectively and conveniently through banks globally.

This insurance strategy was successful in providing up to 35% of premium income in the European life insurance market, with particular success in France, Italy, Belgium, and Luxembourg.

This insurance practice started to expand to the United States in Europe. But each state experiences development differently.

Because of the Glass-Steagall Act, which was passed in 1933, this method was initially prohibited in the US.

Due to this rule, US banks are not permitted to collaborate with any other financial service providers, such as insurance firms. This approach did not become extensively used in the US until the US government repealed this restriction in 1999.

It’s interesting to note that this insurance practice is virtually as old in Asia as it is in Europe. The Agricultural Development Bank in Nepal offered financing for the purchase of livestock in 1987, complete with insurance against livestock risks, despite not directly involving insurance companies.

The Difference Between Bancassurance and Ordinary Insurance

Difference between bancassurance and conventional insurance The main difference lies in the marketing channels for insurance products. In terms of products, the products offered are more or less similar to general insurance products, namely life insurance, education insurance, unit insurance, and property insurance.
However, there are differences between bancassurance and regular insurance, including:

  • Paying your bancassurance premium is easier because you only need to approve a direct debit from your bank savings account. So you don’t have to worry about late payments on premiums. This can avoid policy invalidation due to a forgotten payment.-
  • The transaction process will be handled by a bank that generally has a high standard of service.
  • Additional benefits are often offered to customers, such as retirement or education savings plans.
  • Customers will be supported by the bank in filing insurance claims.

Bancassurance Business Model

Tasked with serving customers using insurance services, Bancassurance has two business models. Insurance products offered through this business model are differentiated by the following interests:

1. Integrated

With an integrated model, the bank has full control over the insurance services chosen. The bank will arrange premium payments, selected insurance programs, and asset management for you. This integrated business model will be offered in a unified form.

2. Not integrated

Banks have access to premium payment services and other basic insurance needs. However, there are several types of insurance products that banks cannot offer.

Bancassurance Regulations

Based on Financial Services Authority Regulation (POJK) Number 23/POJK.05/2015, marketing of insurance products can only be carried out if there is approval from the OJK. Through POJK Bancassurance, insurance sales transactions will be legally supervised.

3 Bancassurance Business Cooperation Methods

Determining the insurance business model cannot be separated from several considerations. Some of these considerations are the minimum qualifications required for selling insurance products.

In addition, it also considers licensing related to the types of products that can be sold by banks and, no less important, the relationship between the bank and the insurance company.

Bancassurance consists of three different cooperation methods or business models, namely:

1. Integrated

In this model, banks have a major influence on insurance activities, starting from the types of insurance programs offered to customers, premium collection, and asset management.

Banks can collect premiums by making direct debits from customers’ accounts at the bank.

In this business model, the offered insurance products are combined with bank service products and offered in the form of a bundle.

2. References

In this collaboration, the bank references insurance products without making them a condition for getting banking products.

So the bank is only tasked with offering products and providing facilities to insurance companies so they can market their products through the bank. Then the bank will also help provide customer data that the insurance company needs.

3. Distribution system

In this collaboration, the bank is tasked with marketing and explaining to customers in detail the insurance products offered. Offers can be made by banks either directly or via telemarketing.

Bancassurance consists of three different cooperation methods or businesses.

Benefits of bancassurance

Of course, there are good reasons why this type of insurance is so popular. From a bank and insurance company perspective, this product benefits both parties through the distribution of commissions from the sale of the insurance product.

1. Benefits for the bank
Banks can make a profit by selling customers additional products, including insurance products. This way, the bank’s income can automatically increase.

2. Benefits for the insurance company
Meanwhile, it is easier for insurance companies to realize profits in the form of additional consumers because they are supported by the bank’s presence. This makes it easier for insurance companies to reach more potential customers.

3. Benefits for customers
Customers have the opportunity to save by using insurance. Customers can withdraw or increase their savings at any time without affecting the protection the insurance provides.

In addition, customers can also buy insurance when investing because there are a number of products that combine investment and protection. So customers can benefit from a number of advantages.

Another benefit is the ease of adding protection to insurance. Generally, customers also receive offers to add life protection.

In addition, because it is available at banking branch offices, it is not only easier for customers to buy and access information related to the products they buy, but it also makes it easier to submit insurance claims and closures.

Advantages of the Bancassurance Method

Insurance services from Bancassurance can provide easy access to insurance products for customers. Some of the advantages of the bancassurance method include:
• Pay premiums automatically with autodebit.
• Obtain reference product offers.
• The insurance transaction process is fully serviced by the bank.

Bancassurance Risks

As reported by Finder, here are some risks you need to be aware of when buying this insurance product:

1. Funding is not guaranteed by LPS.

Bank customers’ funds are secured by LPS, or the Deposit Insurance Corporation, so that their funds remain safe even in the event of a bank crisis or even collapse.

However, funds dedicated to the purchase of insurance products do not include those guaranteed by LPS. There is a risk that the money will disappear if the program crashes.

2. There is a monopoly.

Circular 12/35/DPNP of the Bank of Indonesia of December 23, 2010 on the implementation of bancassurance stipulates that banks must provide at least three insurance companies.

This is intended to give clients the freedom to not give the impression that they are forced to opt for this type of coverage.

This regulation deals with bancassurance products offered in conjunction with banking services. For example, when a mortgage program is offered with life insurance, services. For example, when a mortgage program is offered together with life insurance,

3. Inappropriate governance

There is a risk of governance that is not in accordance with the rules, which can be detrimental to customers. An example is when a number of banks ask for a prepaid license fee from an insurance company in a bancassurance partnership.

This is contrary to OJK regulations regarding good corporate governance for insurance companies.

This rule clearly states that insurance companies are prohibited from offering or giving something to other parties that can influence decision-making in insurance transactions.

So before choosing the most appropriate product, don’t just rely on the bank’s ability to check the health of the insurance company; you also have to check it yourself.

4. Short-term vs. long-term

Funds for this product are usually managed as long-term investments to get maximum results.

If there is a termination of the contract or disbursement of the policy in the short term and the insurance company does not provide adequate liquidity, customers may find it difficult to withdraw their investment and policy returns.

5. Investment losses
Unit-linked insurance allocates a portion of funds for investment, and each investment has a risk of loss. This also applies if the product uses a unit link scheme.

How to Register for Bancassurance

To become participants, of course, we must be registered as customers of a bank that cooperates with an insurance company.
In these bank branches, there is usually a special booth from the cooperating insurance company. In this booth, we can ask questions about the products offered. Including the benefits of being a customer.

So, there is no need to go to the related insurance company. There’s no need to deal with an insurance agent, either. Our data as bank customers can be directly copied by insurance officers, so the process is faster.

Tips for Choosing the Best Bank in Indonesia

To get the best bancassurance product, see the tips below:

• Understand the information about the insurance that you are going to buy through the insurance’s official website or a bank officer. You can also inquire about insurance products through an insurance broker.

• Compare several products with premium price indicators and the benefits offered. Adjust the existing benefits to your needs, and you should avoid buying unnecessary ones because they only burden premium costs.

• Read insurance reviews and don’t jump into a transaction. Especially with life insurance, you have to be committed to the product for the long term.

• Check the legality of your chosen product through the Financial Services Authority’s (OJK) website.
Before deciding to take out insurance, you should first look at your personal financial situation. In addition, see what we must protect ourselves from, whether health, life, property, funds, or something else.***

Calculate the premium allotment per month that is deposited to be adjusted to income. Do not let it be because you are desperate to take insurance and then your finances fall short because some are allocated to pay premiums.

If possible, consult with people who have experience with a particular product. Who knows? There is enlightenment that can help us make a choice.***

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