Bancassurance Principles and Practice · 1A1 Role of the Financial Services Sector Facilitate...
Transcript of Bancassurance Principles and Practice · 1A1 Role of the Financial Services Sector Facilitate...
THE INSURANCE INSTITUTE OF UGANDA
TRAINING DEPARTMENT
Bancassurance Principles and Practice
Bancassurance Principles and Practice
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Copyright Page
Contributors:
JONAN KISAKYE – DIP.CII, AWB, MBA, BA (SS)
BASHABE SIMON – DIP.CII, AWB, MSC. MGT, PGD (MM), BCOM
AMBROSE KIBUUKA – ACII, BSC. STAT
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BANCASSURANCE PRINCIPLES AND PRACTICE CIU 207
Course Description
This course is aimed at introducing Bancassurance to the
learners. Bancassurance is the selling of insurance and banking products
through the same channel, most commonly through bank branches. This
course introduces Bancassurance to the learner and covers the major aspects
of the process of bancassurance.
Course Objectives
i) Understand the distribution channels and operations of the one-stop
customer service centre.
ii) Understand complete financial planning services to its customers under one
roof and the competitive edge.
iii) Understand the opportunities for sophisticated bancassurance product
offerings.
iv) Understand the benefits of greater customer lifecycle management of
insurance and bank institutions.
Learning outcomes
i) Have knowledge about the distribution channels and operations of the
one-stop customer service centre.
ii) Appreciate the financial planning services to its customers under one roof
and the competitive edge.
iii) Provide the bancassurance product
iv) Appreciate the benefits of greater customer lifecycle management of
insurance and bank institutions.
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Course Content
Topic Description Lesson details
1. The Financial Services Sector
Meaning of the financial services sector Role of the sector Banking and its regulation
Bank products Distribution channels in banking
Insurance and its regulation Pensions and its regulation
2. Introduction to Insurance
What is insurance The principles of insurance The insurance process
Sharing of risks Main insurance products Distribution channels in insurance
3. Introduction to Bancassurance
Meaning of Bancassurance Evolution of bancassurance
Case examples Benefits of bancassurance
Challenges of bancassurance Critical Success Factors for
Bancassurance
4. Bancassurance in Uganda and its
Regulatory Framework
Bancassurance in Uganda Legislation Governing Bancassurance
in Uganda Emerging Trends in Bancassurance
5. Bancassurance Models and Strategies
Bancassurance Models Bancassurance Strategies
Bancassurance Process and Documentation
6. Non-Life Bancassurance Products
Introduction – General Product Features
Accident and sickness
medical insurance
Travel Insurance
Home insurance for buildings and contents
Motor insurance
Business All Risks Policy
Takaful
7. Life Bancassurance Products
Introduction – Life Product Features
Life Product Categories
Other Products
Riders
8. Saving, Investments and
retirement planning. Saving s and investment needs
The need for savings and investment
advice
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Personal factors affecting choice of
savings and investments products
Main types of savings and investment
products.
Retirement planning needs
Personal factors affecting retirement.
Retirement planning products
9. Fact-Finding in Bancassurance
Definition
Objectives of fact-finding
Fact-finding methods
After the fact-finding
10. Good and ethical client service
Professionalism and ethics in the sales process
Presenting Recommendations
Acceptance and rejection of
recommendations
Product Switching
Customer complaints and claims
handling
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Table of Contents
GENERAL INTRODUCTION ............................... Error! Bookmark not defined.
COURSE CONTENT ........................................ Error! Bookmark not defined.v
CHAPTER 1: THE FINANCIAL SERVICES SECTOR .......... Error! Bookmark not
defined.
Introduction ................................................................................................. 1
Learning Outcomes ...................................................................................... 1
1A Financial services Sector ..................................................................... 2
1B Banking .............................................................................................. 2
1C Banking Regulation in Uganda ............................................................ 3
1D Main Banking Products ....................................................................... 4
1E Distribution Channels in Banking ....................................................... 6
1F Insurance ............................................................................................ 7
1G Insurance Regulation in Uganda .......................................................... 7
1H Pensions ............................................................................................. 8
1I Pensions Regulation in Uganda ........................................................... 8
Chapter Summary ..................................................................................... 10
Test Your Understanding ........................................................................... 11
CHAPTER 2: INTRODUCTION TO INSURANCE .............................................. 12
Introduction ............................................................................................... 12
Learning Outcomes .................................................................................... 12
2A What is Insurance ............................................................................. 13
2B The Insurance Process ....................................................................... 17
2C Risk Sharing in Insurance ................................................................. 19
2D Main Insurance Products ................................................................... 21
2E Distribution Channels in Insurance ................................................... 22
Chapter Summary ..................................................................................... 24
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Test Your Understanding ........................................................................... 24
CHAPTER 3: INTRODUCTION TO BANCASSURANCE .................................... 25
Introduction ............................................................................................... 25
Learning Outcomes ...................................... Error! Bookmark not defined.5
3A Definition of Bancassurance .............................................................. 26
3B Evolution of Bancassurance .............................................................. 27
3C Benefits and Disadvantages of Bancassurance ................................... 28
3D Benefits and Challenges of Bancassurance ........................................ 30
3E Critical Success Factors for Bancassurance ....................................... 32
Chapter Summary ..................................................................................... 33
Test Your Understanding ........................................................................... 33
CHAPTER 4: BANCASSURANCE IN UGANDA AND ITS REGULATORY
FRAMEWORK ............................................................................................... 34
Introduction ............................................................................................... 34
Learning Outcomes .................................................................................... 34
4A Bancassurance in Uganda ................................................................. 35
4B Legislation Governing Bancassurance in Uganda ............................... 37
4C Emerging Trends in Bancassurance in Uganda .................................. 38
Chapter Summary ..................................................................................... 41
Test Your Understanding ........................................................................... 41
CHAPTER 5: BANCASSURANCE MODELS AND STRATEGIES ........................ 42
Introduction ............................................... Error! Bookmark not defined.42
Learning Outcomes ...................................... 4Error! Bookmark not defined.
5A Models of Bancassurance .................................................................. 43
5B Bancassurance Strategy .................................................................... 46
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5C Involvement of Insurers and Banks at Different Stages of
Bancassurance .......................................................................................... 48
Chapter Summary ..................................................................................... 50
Test Your Understanding ........................................................................... 50
CHAPTER 6: NON-LIFE BANCASSURANCE PRODUCTS ................................ 52
Introduction ............................................................................................... 52
Learning Outcomes .................................................................................... 52
6A General Features of the Product ........................................................ 53
6B Accident and Sickness Insurance ...................................................... 53
6C Travel Insurance Policies ................................................................... 55
6D Home Insurance for Buildings and Contents ...................................... 55
6E Motor Insurance Policies .................................................................... 55
6F Business All-Risks Policies ................................................................ 56
6G Takaful .............................................................................................. 56
Chapter Summary ..................................................................................... 58
Test Your Understanding ........................................................................... 58
CHAPTER 7: LIFE BANCASSURANCE PRODUCTS ........................................ 59
Introduction ............................................................................................... 59
Learning Outcomes .................................................................................... 59
7A Introduction ..................................................................................... 60
7B Life Product categories ....................................................................... 61
Chapter Summary ..................................................................................... 68
Test Your Understanding ........................................................................... 68
CHAPTER 8: SAVINGS, INVESTMENT AND RETIREMENT PLANNING .......... 69
Introduction ............................................................................................... 69
Learning Outcomes .................................................................................... 69
8A Savings and Investment Needs ........................................................... 70
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8B Need for Savings and Investment Advice ............................................ 71
8C Personal Factors Affecting Choice of Savings and Investment Products
…………………………………………………………………………………………71
8D Main Types of Savings and Investment Products ................................ 73
8E Retirement Planning Needs ................................................................ 75
8F Personal Factors Affecting Retirement Planning Needs ....................... 75
8G Retirement Planning Products and Their Uses ................................... 77
Chapter Summary ..................................................................................... 80
Test Your Understanding ........................................................................... 81
CHAPTER 9: FACT-FINDING IN BANCASURANCE ......................................... 82
Introduction ............................................................................................... 82
Learning Outcomes .................................................................................... 82
9A What is Fact-finding? ........................................................................ 83
9B Objectives of Fact-finding .................................................................. 83
9C Methods of Fact-finding ........................ Error! Bookmark not defined.
9D After Fact-finding .............................................................................. 91
Chapter Summary ..................................................................................... 93
Test Your Understanding ........................................................................... 93
CHAPTER 10: GOOD AND ETHICAL CLIENT SERVICE IN BANCASSURANCE 94
Introduction ............................................................................................... 94
Learning Outcomes .................................................................................... 94
10A Professionalism and Ethics in the Sales Process ................................ 95
10B Impact of Ethics on Business ............................................................. 98
10C Presenting Recommendations to Clients ............................................ 99
10D Acceptance and Rejection of Recommendations ............................... 100
10E Product Switching ........................................................................... 102
10F Customer Complaints ...................................................................... 103
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Chapter Summary ................................................................................... 105
Test Your Understanding ......................................................................... 105
FURTHER READING ................................................................................... 106
CHAPTER ONE
THE FINANCIAL SERVICES SECTOR IN UGANDA
Introduction
This chapter aims at introducing the student to the financial services sector in
Uganda, its role and the main players relevant to Bancassurance.
The student is guided to appreciate the various players in the sector including
banks, insurance and pensions. The importance and regulation of these key
institutions is highlighted and the roles of the different regulators.
Unit Structure
The Financial services sector
The role of the Financial services sector
The main players in the Financial services sector in Uganda:
- Banks and banking regulation
- Insurance and insurance regulation
- Pensions and pension regulation
Learning outcomes
After completing this chapter you should be able to:
Have a fair understanding of the Financial Services Sector.
Explain the role of the Financial services sector
Understand banks and banking regulation in Uganda.
Understand the main bank products and distribution channels.
Understand Insurance and insurance regulation in Uganda
Understand pensions and pensions regulation in Uganda
Study guide
In this chapter the student is introduced to the Financial Services sector as a
foundation to understanding the interaction between banks and insurance
companies. The banking, insurance and pensions products and regulations
form a basis and foundation for the subsequent chapters and discussions.
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THE FINANCIAL SERVICES SECTOR IN UGANDA
1A The Financial Services Sector
The financial sector is the set of institutions, instruments, and the regulatory
framework that permit transactions to be made by incurring and settling debts. The key players in the financial sector are banks and insurance companies
with the main focus of the industry being financial management which includes investment, lending of money, insurance and pensions.
The financial services sector or industry comprises firms that offer financial services to commercial and retail customers, these include banks, insurance
companies, capital markets, investment companies and pensions providers among others.
1A1 Role of the Financial Services Sector
Facilitate payment systems including cheques, credit cards, online payments, mobile payments.
Economic growth through availability of capital for investment.
Job creation through direct and indirect employment.
Insurance and risk management which enables and stimulates investment.
Long term investment through shares and bonds through capital markets
Offers investment opportunities through foreign investment.
Pensions, retirement planning and management.
For the purposes of this course, we shall limit our scope to the two main
institutions that are relevant and applicable to bancassurance that is Banks
and Insurance companies and by extension the pensions sector:
1B BANKING:
A bank is a financial institution that accepts deposits from the public and
creates credit.
According to the business dictionary, a bank is an establishment authorized by
a government to accept deposits, pay interest, clear cheques, make loans, act as an intermediary in financial transactions and provide other financial
services to its customers. The core activity of banks is to act as an intermediary between those with
financial means at their disposal (depositors / people who lend money to banks at an interest) and those who are in need of funds (borrowers / people who
borrow money from banks and pay interest)
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1B1 The Uganda Banking Sector: There over 25 commercial banks in Uganda today and over 10 MDIs, the main
commercial banks are under the Uganda Bankers Association (UBA) an
umbrella organization for commercial banks licensed and supervised by Bank
of Uganda.
UBA lobbies government and other stakeholders and represents Ugandan
banks on the local and international scene. It also enables stakeholders like
government, consumers and others to get feedback from the banking sector.
The training arm of the banking industry in Uganda is the Uganda Institute of
Banking and Financial Services (UIBFS). It provides training and consultancy
services for Uganda’s financial sector.
1C Banking Regulation in Uganda
Bank of Uganda supervises and regulates all Banks and other financial
institutions in Uganda under the Financial Institutions Act 2004, this Act has
now been amended to the FIA (amendment) 2016, regulated institutions by
BoU include:
Commercial Banks
Credit Institutions
Microfinance Deposit Taking Institutions (MDIs)
Forex Bureaux
Money Remitters
1C1 Role of Bank of Uganda (BOU)
The Bank of Uganda’s core activities include:
Issuance of Uganda's national currency/legal tender, the Uganda Shilling (UGX)
Regulation of money supply through Monetary Policy Banker to the Government of Uganda
Banker to Commercial Banks Supervision and regulation of Financial Institutions Management of the country's external/foreign reserves
Management of Uganda's external debt
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Adviser of Government on financial and economic issues
1D The Main Banking Products
The main type of product offered by banks is deposit accounts, these are
mainly categorized into two, that is current accounts, and savings account.
1D1 Current accounts
They are also referred to as transaction accounts, checking accounts, or
demand deposit accounts.
A current account is a deposit account or "on demand" account and is available
for frequent and immediate access by the account owner or to others as the
account owner may direct. This type of account provides security for the
account holder, easy access to their finances and supports frequent money
transactions whenever needed. Access to funds is usually through the use of
cheques and electronic transfers.
1D2 Savings accounts
A savings account is one of the simplest types of bank deposit accounts
available, letting the customer store their money securely while earning
interest. The rate of interest is dependant on the type of bank, amount of
money deposited, prevailing interest rates in the market and the period the
bank holds customers deposits. Access to funds from a savings account
through withdrawals is limited and may be subject to notice.
1D3 Loans and Mortgages
The other major product offered by banks is loans and other lines of credit and
mortgages.
A bank loan is an agreement between the borrower and the bank that the loan
will be paid back in a specific amount of time at a specific interest rate. The
borrower asks the bank to loan the money they need to buy a certain item or
undertake a specified venture / business.
The bank normally looks at the applicants’ financial situation to determine
whether they will extend the credit facility or not and at what interest rate. The
loan can be secured with an asset or can be an unsecured loan.
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Interest from loans form one of the major sources of revenue for banks and
loans are essentially one of the core services offered by banks.
A mortgage on the other hand is a loan that a bank gives its customer to help
finance the purchase of a house. The house purchased then acts as collateral
in exchange for the money borrowed. A mortgage repayment is normally on a
monthly basis and comprises of: the principal, interest, taxes and insurance.
1D4 Other Services / Products offered by Banks:
Safe keeping
Safekeeping is the storage of assets or other items of value in a protected area
such as a bank which is then legally liable and responsible for the stored items. Banks offer safe custody services at a fee storing such items of value like
tittles, jewelry and other valuables.
Portfolio management
Banks are able to offer portfolio management services to those with no time,
little or no knowledge and expertise in investments but have substantial
amounts of money to invest in stock markets at a fee.
Collective investments
Banks also offer pooled investments or mutual funds mainly through unit trust
subsidiaries. Collective investments enable those seeking wide spread
investments without having the burden of day today decisions and those with
lower levels of capital to participate in capital markets.
Pensions
Some banks set up divisions or subsidiary companies that offer pension
business to their clients to help meet their needs for retirement planning.
Insurance
The core of this course is the convergence of Insurance and banking services.
Banks as part of their range of products offer life and non-life insurance
products to their clients, these are either with risk participation through
setting up insurance subsidiaries or without risk participation through
distribution of insurance products on behalf of insurance companies.
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1E Distribution Channels in Banking
Banks interact and service their customers in a number of ways or distribution
channels and these include but are not limited to the following:
Branches: Banks open branches in several areas within regions where
they operate in addition to their head offices to bring services closer to
customers.
Internal sales teams: These are normally salaried employees of banks
that help distribute bank products to corporate and retail customers.
Agency banking: By licensing agents to offer services to customers on
behalf of banks.
Internet banking: Through the use of banks’ websites and internet
services to offer customers banking experiences.
Mobile banking: By empowering customers to transact with banks and
transfer money and make payments using mobile devices like smart
phones.
Automated teller machines (ATMs) and points of sale (POS) machines
that enable customers to withdrawal and make payments for different
services and products.
1F INSURANCE
The details of insurance and principles that govern insurance are the basis of
chapter two of this book. Here we shall only look at the insurance sector as a
whole and how it is regulated.
1F1 The Uganda Insurance Sector
The insurance industry in Uganda today comprises of 21 Non-Life Insurance
Companies, 8 Life Insurance Companies and one Reinsurance Company
(Uganda Re).
Uganda Insurers Association (UIA) is the umbrella body that brings together all
insurers and reinsurers in Uganda by adopting a common strategy and
promoting close industry cooperation. UIA also influences enactment of
favorable legislation and represents the views of its members locally and
internationally.
The Insurance Institute of Uganda (IIU) is the training body of the Insurance
Industry in Uganda.
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IIU develops and conducts training activities for its members and is also the
representative insurance professional body under the Law.
1G Insurance Regulation in Uganda
The Insurance Regulatory Authority of Uganda is a government body mandated
under the Insurance Act (amended) 2011, to regulate, monitor and license all
players in the Uganda Insurance industry.
In 2013, IRA directed every insurer in Uganda to form separate companies
dealing in life business and general business / non-life business. The objective
was to prevent a downturn in one type of business from spreading risk across
the two businesses and the entire industry.
IRA regulates and licenses a number of insurance industry players including
the following:
Insurance Companies (Insurers)
Loss Assessors
Loss adjusters
Insurance surveyors
Investigators
Insurance Brokers
Insurance Agents
Among others
1G1 Role of Insurance Regulatory Authority of Uganda (IRA)
Establish standards for the conduct of insurance and reinsurance
business;
License all persons involved in or connected with insurance business, including insurance and reinsurance companies, insurance and reinsurance intermediaries, loss adjusters and assessors, risk inspectors
and valuers; Approve texts of policies proposal forms; Approve minimum rates of insurance premiums and maximum
commissions in respect of all classes of insurance;
Safeguard the rights of insurance policyholders and insurance beneficiaries to any insurance contract;
Provide a bureau to which complaints may be submitted by members of
the public; Advise the Government on adequate insurance protection and security
for national assets and national properties;
Promote a sound and efficient insurance market in the country;
Supervise and control transactions between insurers and re-insurers;
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Ensure strict compliance with this Act and regulations made under it and any other law relating to insurance; and
Undertake other functions as the Minister may designate.
1H PENSIONS
Pension schemes are savings and investment plans tied to the provision of
pension benefits for the individual and their dependants, contributions paid
into a retirement pension scheme can not be accessed or withdrawn until
retirement or earlier death
1H1 Uganda Pensions Sector
The pensions sector is one of the key non-banking financial sectors that is a source for long term finance for investment. It is a long term savings vehicle
that permits the population to provide for old age retirement among others and a safety net in general against a variety of unforeseen future consumption requirements.
Currently, the pension sector in Uganda is composed of; the Public Service Pension Scheme, which is a Government scheme catering for the pensions of civil servants; the National Social Security Funds, which receives mandatory
pension contributions from all private sector employers with five or more staff, and their employees; and a number of occupational pension schemes to which various large employers and their employees make additional contributions,
over and above the NSSF mandatory contribution.
1I Regulation of the Uganda Pensions sector
The Uganda Retirement Benefits Regulatory Authority (URBRA) is a government owned semi-autonomous agency, established by the Uganda
Retirement Benefits Regulatory Authority Act 2011. It is responsible for regulating establishment, management and operation of retirement benefits schemes in Uganda in both private and public sectors and supervising
institutions which provide retirement benefit products and services.
1I1 Role of Uganda Retirement Benefits Regulatory Authority (URBRA)
Regulate and supervise the establishment, management and operation of
retirement benefits schemes in Uganda, in both the public and private sectors.
License retirement benefits schemes in Uganda.
License custodians, trustees, administrators and fund managers of
retirement benefits schemes;
Approve an actuary or auditor of any retirement benefit scheme.
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Protect the interests of members and beneficiaries of retirement benefits schemes including the promotion of transparency and accountability.
Improve understanding and promote the development of the retirement benefits sector.
Promote the stability and integrity of the financial sector through ensuring stability and security of retirement benefits schemes.
Ensure sustainability of the retirement benefits sector with a view to promoting long term capital development.
Advise the Minister on all matters relating to the development and operation of the retirement benefits sector.
Implement Government policy relating to retirement benefits schemes.
Promote public awareness of the retirement benefits sector.
Any other function conferred upon it under the URBRA Act 2011.
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Chapter Summary:
The financial services sector comprises of banks, insurance companies,
capital markets, investment companies and pensions providers among others.
The roles of the financial services sector include:
Facilitating payments
Job creation
Insurance and risk management
Long term investments
Pensions and retirement planning
A bank is a financial institution that accepts deposits from the public
and creates credit.
Banks in Uganda are regulated by BOU under FIA 2004 (Now amended
2015).
Banks offer a range of products to customers and these include
Deposit accounts
Loans and mortgages
Banks distribute their products through a number of channels which
include:
Branches
Internet
ATMs
Agents
Insurance companies are regulated by IRA under the Insurance Act
(amended) 2011.
Pensions are long term savings vehicle that permits the population to
provide for old age and retirement.
The pensions sector is regulated by URBRA under the URBRA Act 2011.
Sample Questions
1. What is the Financial Services Sector?
2. List the roles of the financial services sector to the economy.
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3. Explain the two main deposit bank products?
4. Identify two other bank products besides deposit products.
5. Describe the different distribution channels used in Banking.
6. What is the role of any of the following regulatory bodies?
- Bank of Uganda.
- Insurance Regulatory Authority of Uganda
- The Uganda Retirements Benefits Regulatory Authority.
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CHAPTER TWO
INTRODUCTION TO INSURANCE
Introduction
This chapter aims at introducing the student to insurance, principles that
govern insurance contracts, the products and distribution channels in
insurance. It aims at ensuring appreciation from the student exposed to
insurance for the first time.
Unit Structure
What is insurance
The principles of insurance
The insurance process
Sharing of risks
Main insurance products
Distribution channels in insurance
Learning outcomes
After completing this chapter you should be able to:
Define insurance
Explain the principles of insurance
Explain underwriting and claims processes.
Describe sharing of risks in insurance
Highlight the main insurance products
Identify the main distribution channels in insurance
Study guide
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In this chapter the student is exposed to the guiding principles of insurance
and the insurance processes which will form the foundation for the rest of
chapters and the course unit.
INTRODUCTION TO INSURANCE:
2A what is Insurance:
Insurance can be defined as the process of passing on or transferring the risk
of loss from one party the insured to another the insurer at a fee called
premium.
Insurance is a contract between two parties that is the proposer and insurer at
a fee.
Insurance can further be categorized into two:
General/Non-Life insurance characterized by and includes all businesses and
classes arranged on an annual basis, renewable on expiry and premiums are
paid at inception or at renewal.
Life insurance characterized by long term business that is usually longer than
one year, with a defined insurance benefit at inception and based on the life
assureds life.
2A1 Principles of insurance
Any contract must fulfill and satisfy certain requirements including offer,
acceptance, consideration, capacity to contract and form.
In addition to the above requirements, for an insurance contract to be valid
there must be six essential principles commonly known as principles of
insurance:
- Insurable interest
- Utmost good faith
- Indemnity
- Contribution
- Subrogation
- Proximate cause.
Each of these is discussed briefly below:
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1. Insurable Interest
Insurable interest is the basis or core of insurance and can be defined as the
legal right to insure arising out of a financial relationship between the insured
and the subject matter of insurance recognized at law.
For an insurance contract to be valid, the proposer must have insurable
interest in the subject matter of insurance whether a property in non-life
insurance or a life to be assured under life insurance.
Application of insurable interest:
Property insurance:
Ownership
Agent acting for a principle
Custodian of property – Bailee
Joint owners
Life Insurance
Unlimited insurable interest in own life and life of a spouse.
Creditor / Debtor relationship to the amount of the loan.
Employee / Employer (Key-man insurance) to extent of the value of
services rendered.
Partnerships to the limit of their financial obligations to each other.
Assignments of life policies which transfers one’s interest in the policy to
another.
Essentials of Insurable Interest:
- Property / right to insure – subject matter of insurance.
- Legal interest / relationship between the insured and subject matter of
insurance.
- Interest must be valued financially or would lead to financial loss to the
insured.
- Interest must be current not future hope of acquiring interest.
When does insurable interest exist?
- Marine insurance: insurable interest only arises at the time of loss.
- Life Insurance: Insurable interest only arises at inception.
- Property or general insurance: Insurable interest exists at inception,
during the policy and at loss. If the property is sold, insurable interest
seizes.
2. Utmost good faith
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Insurance contracts are contracts of utmost good faith as the insured knows all
about the risk unlike the insurer. This duty however is mutual and requires
the insurer and insured to deal openly and honestly with each other and reveal
all material facts during the process leading to formation and duration of the
contract.
There is therefore a contractual duty between the insurer and insured in the
following ways:
- To tell the truth and not misrepresent any matter relating to the
insurance contract.
- To disclose all relevant information and not conceal or hide material
facts.
3. Indemnity
All insurance contracts are contracts of indemnity, the only exception is in life
and accident insurance which are benefit policies where an agreed figure or
sum is set at inception of the policy.
Indemnity is the process of putting the insured back to the same position they
enjoyed just before the loss, there should not be a benefit or profit made by
insured.
Determining indemnity:
- Property / General insurance: based on the value of the property at the
time and place of loss.
- Life and accident policies: agreed benefit at inception or the sum assured
/ insured
- Liability insurance: based on court settlements or awards.
Methods of indemnity / compensation:
- Cash payments.
- Repair e.g. in motor
- Replacement e.g. glass insurance
- Reinstatement or settling loss on the basis of new for old e.g. rebuilding a
lost property.
4. Contribution
Contribution arises where there is more than one insurance policy covering the
same loss or double insurance. It’s the right of one party to call upon another
to contribute to a loss / claim, either equally or to a ratable proportion.
Contribution only arises in the following circumstances:
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- There two policies of indemnity and therefore excludes life assurance and
other non indemnity policies.
- Covering the same subject matter
- A common peril covered by the two policies e.g. fire.
5. Subrogation
Subrogation supports the principle of indemnity. It ensures that the claimant
is not paid twice or more than indemnified. This arises in situations where the
insured can claim under the insurance policy and on another person who
caused the loss.
The insured would ideally choose either to claim on the policy and is
compensated and as such the legal right or claim against another person who
caused the loss passes to the insurer, or pursue the claim with the third party
and not claim against the insurance contract.
Contribution and subrogation are commonly known as corollaries of the
principle of indemnity and only apply to contracts of indemnity. In life
assurance policies, the person is free to buy as many life policies as they can
afford and each would ideally pay to the full benefit stated in the policy.
6. Proximate cause
The risk insured against must be the cause of the loss, if it is excluded the
claim is not payable.
The proximate cause is the active, dominant, efficient cause that sets in motion
a chain of events which brings about a loss. This dominant / most direct cause
must be an insured peril e.g. fire and there is no liability if it is an excluded
peril e.g. dangerous sports and pursuits.
Life offices are usually keen on the cause of death mentioned on the death
certificate to ensure that no claim arising out of an excluded peril like suicide
is paid.
Claim payments / classes of risks:
- An insured peril – claim is payable and is mentioned as insured in the
policy.
- An exclude peril – claim is not payable and is stated as excluded in the
policy.
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- An uninsured peril – claim is not payable, though insurable these are not
mentioned in the policy.
Indemnity, subrogation and contribution do not apply to life insurance as no
amount of money or value can be attached to life. Life policies are benefit
policies and on death the agreed sum assured at inception is payable even if it
makes the life assured or dependants better off financially.
There however protection products like Income Protection Insurance and
Critical Illness Insurance whose aim is to provide an income to cope with the
associated lengthy periods of illness.
2B The insurance process:
Insurance is a unique product whose quality can only be determined at
underwriting and when a loss occurs. This is because at underwriting the
quality of risks brought into the common pool will determine profitability and
at the time of loss the way the claim is handled will have important marketing
repercussions for the insurer.
2B1 Underwriting:
This is the processing of assessing the risk presented for insurance and
deciding whether cover is to be granted or not. If accepted or granted at what
terms, conditions, exclusions and cost / premium.
Underwriting involves measuring risk exposure and determining the premium
that needs to be charged to insure that risk.
The person who accepts or declines the risk is called an underwriter
2B1AFunctions of an underwriter:
1. To identify and calculate the risk of loss from the policyholders, the
underwriter decides whether or not to accept a particular risk after
securing factual information from / about the applicant, evaluating the
information and deciding on acceptance / declinature.
2. To determine the appropriate price / premium, terms, conditions and
exceptions while recording the appropriate classification and rating
information.
3. To estimate the potential exposure, check retention and arrange
reinsurance where required.
Bancassurance Principles and Practice
18
4. To confirm terms, draft the policies to cover the risk and issue the policy
/ document.
5. Obtain quality new business meant to enhance profitability of the
insurance company.
6. Develop new products and enhance existing ones to ensure
strengthening of customer relationships and achieve maximum premium
growth.
7. Obtain feedback from the market to ensure that products, terms and
premium are maintained at competitive levels.
8. Maintain robust risk inspection and survey programs to ensure that
policy terms are related to quality of risk and provide risk improvement
advice to customers.
2B1B Examples of Underwriting Considerations / Factors:
Life Insurance
Underwriter may consider the following aspects before accepting or declining
the risk:
- Age
- Occupation
- Current health status
- Gender
- Medical history
- Leisure activities
- Family medical history
- Etc.
Property Insurance (Building)
The underwriter may consider the following factors before accepting or
declining the risk:
- Occupation / use
- Construction material
- Safeguards like installation of fire extinguishers
- Etc.
2B2 Claims processing:
A distinction should be made between a loss and a claim
Bancassurance Principles and Practice
19
A loss is the occurrence of an insured event which gives rise to financial
disadvantage on the part of the insured e.g. fire or accident.
A claim on the other hand is a request by the insured to the insurer to be
compensated under an insurance policy following a loss.
It should be noted that not all losses result into a claim due to exclusions and
conditions in the insurance policy.
A poor claims performance / service can impact the relationship between the
insurers and their clients in the following ways:
1. Claims handled unfairly and / or slowly can give bad word of mouth,
publicity or even unwelcome press and media attention.
2. Claims overpaid will impact on profitability.
3. Omissions to chase recoveries by way of contribution, subrogation,
salvage and reinsurance will also affect profitability.
4. Claims handled fairly and efficiently will eventually give a company a
solid and dependable reputation.
2B3 The claims process / stages:
- Notification / contacting the insurer: reporting the loss to the insurer by
phone, fax, email or letter.
- Completion of a claim form and attaching necessary documentation like
police reports, death certificates as required.
- Claim processing: if the claim is not payable the insured is immediately
informed, if payable a file is opened capturing the details of the claim.
- Adjusting the claim to quantify the extent of loss.
- If any fraud is suspected investigations are carried out especially in life
to understand the circumstances surrounding the death or accident.
- If no further details are required by the insurer the claim is usually
settled.
2C Sharing Risks - Insurance, Co-insurance and Reinsurance
- Client / insured – Direct insurer - Reinsurer - Retrocessionaire
Co-insurance
2C1 The Insured:
This is the individual, merchant or company in need of insurance.
There three broad categories of Insureds:
a) Retail / Individual:
Bancassurance Principles and Practice
20
Individuals in their personal capacity in need of products like life assurance,
Personal accident, motor, buildings and contents insurance etc.
b) Small and medium Enterprises:
This is where risks are grouped into relatively simple underwriting sectors such
as small shops, offices, restaurants, cottage industries, etc.
In Uganda companies are now venturing into micro insurance which targets
small businesses but excluding obvious heavy risks, underwriting is simplified
with common terms and conditions.
c) Corporate:
These are large buyers of insurance and include large organizations in telecom,
banking, energy, mining, hospitality etc.
Here the classes are big enough to require and warrant individual underwriting
and pricing.
2C2 Co-insurance:
If one insurer does not have enough capacity to underwrite or take on all the
risk from the insured or client, the insured may have to co-insure with more
than one insurance company. Each of the participating insurers would have a
separate contractual relationship with the insured and would pay a claim by
way of a fixed percentage share up to the risk assumed.
For example a factory valued at Ushs.50 Million co-insured between different
insurers (X, Y and Z) with a total loss would be shared as below:
Value: Ushs. 50 Million
Loss: Ushs 50 Million
INSURERS RISK
ASSUMED Ushs
CLAIM
PAYABLE Ushs.
X 10,000,000 10,000,000
Y 20,000,000 20,000,000
Z 20,000,000 20,000,000
TOTAL 50,000,000 50,000,000
Co-insurance is therefore the sharing of risks amongst many insurers.
Whilst all insurers have a legal contract directly with the insured, it is possible
for a lead insurer (who introduces or offers the risk to fellow insurers) to issue
Bancassurance Principles and Practice
21
and service the policy 100% amount and note the co-insurers’ shares by
endorsement.
2C3 Reinsurance
This is the method where by an insurer (ceding company / reinsured) passes
on some or all of the risk to a reinsurer or another insurance company to avoid
financial consequences from the risks it has assumed or accepted.
Reinsurance can either be on a case by case or a one off that is facultative
reinsurance or treaty reinsurance where an agreement for automatic
acceptance of risks within the agreement exists between the insurer and
reinsurer.
Reinsurance is therefore the passing on of all or some of the liability assumed
by an insurer to a reinsurer. In simple terms it is the insurance of insurers.
Reinsurance arises where the insurer does not have capacity to take on all the
risk, instead of declining the business, the insurer will accept it in full and
then pass on a portion to reinsurers either by way of a percentage or an
amount above its retention.
The reinsurance contract is between the insurer and the reinsured and should
the reinsurer for any reason fail to pay the claim, the insurer is still liable to
the insured for the full amount.
In Uganda the main reinsurance company is Uganda Reinsurance Company
commonly known as Uganda Re.
2C4 Retrocession:
Retrocession is the reinsuring of reinsurers. It is the process of ceding or
passing on to another reinsurer all or part of the reinsurance it has assumed.
The retrocessionaire is the reinsurer of the reinsurance company and the
ceding reinsurer is known as a retrocedant. The retrocession agreement has no
relationship with the insurer in any way.
2D Main insurance products
Bancassurance Principles and Practice
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2D1 General insurance products
- Fire and related perils
- Domestic package insurance
Buildings, contents, all risks, workmen’s compensation, owners and
occupiers liability.
- Accident insurance
All risks, goods in transit, burglary, glass and fidelity guarantee and
bonds.
- Liability insurance
Public and product liability, professional indemnity, workmen’s
compensation, employers’ liability, directors’ and officers’ liability.
- Transport / Motor insurance
Third party, Comprehensive.
- Marine and Aviation
- Engineering and construction insurance
Boiler explosion, contractors all risks, electronic equipment, machinery
breakdown.
- Medical / health insurance.
2D2 Life insurance products
- Individual products:
Term assurance, whole life, life of another, joint life, critical illness,
income protection, endowments, funeral covers, personal retirement
plans, unit trusts, annuities etc.
- Group / corporate products:
Group life assurance, Group credit life assurance, Group last expense,
Group critical illness, Group income protection, Pension administration
etc.
2E Distribution channels in insurance / intermediaries
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23
The Ugandan insurance market is characterized by a number of intermediaries
who sell insurance on behalf of insurers both life and non-life and these
include:
1. Insurance Agents: in Uganda agents are licensed by IRA and are tied to
one insurer transacting either life or non-life insurance. They are paid by
commission depending on standards rates issued by the regulator, to
date there over 1000 agents in Uganda.
2. Insurance Brokers: these are licensed by IRA and are free to transact
with any insurer for purposes of insurance business. They are employed
by the insured although paid by insurers on a commission basis on
business forwarded on rates determined by IRA. In Uganda today there
over 20 insurance brokers.
3. Banks: although yet to take off, this is a relatively new channel in
Uganda. The Financial institutions act 2004 has been amended to cater
for bancassurance and only await guidelines for banks to embark on
bancassurance.
4. Internal sales force: insurers hire marketers and sales forces that are
paid a salary to look for business. These are permanent employees of the
insurance companies and as such do not earn commission off sales
closed or business brought to the books of the insurer.
5. Branches: Insurance companies open up branch offices in various parts
of the country / districts in bid to bring services closer to the customers.
Many insurers today operate branches in most of the major towns in
Uganda.
6. Internet: the emergence and development of the telecommunications
sector has meant that the internet is more available and cheaper than
before. Most insurers have websites where company information is
available in addition to products, reporting claims, getting quotations
and other services. The advent of smart phones has also led to the
development of insurance applications geared towards bringing services
closer to the customer and ensuring that more people are reached by
insurers in a bid to increase and grow premiums.
Bancassurance Principles and Practice
24
Chapter Summary:
Insurance is a contract between two parties that is the proposer and
insurer at a fee called premium.
Principles of insurance include:
Insurable interest
Utmost good faith
Indemnity
Contribution
Subrogation
Proximate cause.
The insurance process includes although not limited to underwriting and
claims processes.
Risk sharing in insurance takes the form of co-insurance and
reinsurance.
Insurance products can be divided under two broad categories that is
Non-Life insurance products and Life insurance products.
Distribution channels in insurance include:
Agents
Brokers
Banks
Internal sales force
Branches
Internet
Sample Questions
7. Define insurance.
8. Briefly explain the principles of insurance.
9. What is underwriting and how important is underwriting in insurance?
10. Differentiate between a loss and a claim.
Bancassurance Principles and Practice
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11. Explain insurance, co-insurance, reinsurance and retrocession.
12. Identify the main channels of distribution in insurance.
CHAPTER THREE
INTRODUCTION TO BANCASSURANCE
Introduction
Bancassurance is a new concept in insurance distribution. In this chapter we
shall define the term bancassurance, examine the origins and evolution of
bancassurance and discuss the benefits and disadvantages of bancassurance.
Unit Structure
Definition of bancassurance
Evolution of bancassurance
Case examples
Benefits and challenges of bancassurance
Critical Success factors for bancassurance
Learning outcomes
After completing this chapter you should be able to:
Define bancassurance
Explain the origin and the evolution of bancassurance
Explain the benefits and challenges of bancassurance
Describe the factors determining success of a bancassurance
arrangement
Study guide
Bancassurance Principles and Practice
26
In this chapter and the rest of this unit, the student should already be familiar
with the meaning of insurance and the principles governing it. Here we build
on that knowledge to introduce a specialist area of insurance – bancassurance.
3A The Meaning of Bancassurance
3A1 Definitions
Bancassurance is the selling of insurance products through banks.
It can also be defined as an arrangement between a bank and an insurance
company where insurance products are sold to the bank’s customers generally
through its branches.
Bancassurance is the process of using a bank’s branches, sales networks and
customer relationships to develop sales of insurance products.
Banks and insurance companies enter into a partnership where the bank sells
the tied insurance company’s products to its clients.
Insurance companies are looking at growth in premiums and bancassurance
provides that opportunity in terms of banks selling insurance products to
existing customers who are already using banks for financial services.
Banks are also looking for additional revenue streams and value addition to
current customer relationships amidst competition, bancassurance satisfies
both objectives.
The bank acts as an intermediary, helping the insurance firm reach its target
customer in order to increase its market share and premium turnover. The
Bancassurance Principles and Practice
27
customer sees bancassurance as a bonanza in terms of reduced price, high
quality products and having a one-stop shop for financial products and as
such everybody is a winner under the bancassurance model of insurance
distribution.
Therefore, the insurer achieves distribution of its insurance products through a
banks distribution channel (branches and salespeople). Through the
established banking networks, the bank is able to easily sell insurance
products that do not require technical underwriting.
The bank has to design a system of reaching its customers through the bank’s
personnel and sales representatives. The idea is for the bank personnel and
sales representatives to identify customers with insurance needs, recommend
products to satisfy the needs, close the sale or refer to bancassurance
personnel for guidance.
Research: Functions and roles of insurance companies and banks and
what you would find as similarities between these two sectors.
3B The Origin and Evolution of Bancassurance
Bancassurance emerged in the 20th Century and it is now a standard practice
in most developed countries. The first countries to venture into the field were
Spain and France.
Bancassurance is a French term and its universal use shows that the model is
more developed in France. It started in the 1960s but only came into full effect
in 1980s when the law was changed to allow banks to sell insurance products.
It started with Life especially short and mid term products associated with
lending and with growth in the market expanded to motor, health and later
investments.
Bancassurance Principles and Practice
28
The Spanish began their adventure in the 1980s and the main drive was for
banks to bypass middlemen for loan protection and insure their own banking
clients themselves. This was done through banks setting up subsidiary
insurance companies or acquiring a stake in existing companies with the most
famous being BANCO DEBILBAO (BBVA) Group acquiring a majority stake in
EUROSEGUROS SA. However their control was initially only financial since
Spanish law prohibited banks from selling life insurance. This legal barrier was
removed in 1991 and as a result today the top five Spanish bancassurance
companies control one third of the market.
From a purely historical point of view, the real pioneers of bancassurance were
the British with the creation of Barclays Life in September 1965. This
subsidiary was not a great success in the UK, and nor, for that matter, was the
concept of bancassurance.
Success in France and Spain was followed by implementation of
bancassurance in other European countries.
In India a number of insurers have already tied up with banks to offer
bancassurance through select products and this includes other Asian
countries like Malaysia, Singapore and South American countries like Brazil.
In some countries, bancassurance is still largely prohibited (Uganda inclusive
as of May 2015), but it was recently legalized in countries like USA when the
Glass-Steagall Act 1993 was repealed after the passage of the Gramm-Leach-
Bliley Act 1999.
Banks are now a major distribution channel for insurers, and insurance sales
are a significant source of profits for banks. The latter partly being because
banks can often sell insurance at better prices (i.e. higher premiums) than
many other channels, and they have low costs as they use the infrastructure
(branches and systems) that they use for banking.
Bancassurance Principles and Practice
29
3C Case Examples
3C1 Success Stories:
Bancassurance has been successful in the following countries; Brazil, France,
Italy Portugal, Spain, Malaysia. Market share of insurance placed through
Bancassurance has shown important growth and exceeds 40% of Life business
and 10% for non-Life business in each of the markets.
3C2 Where Bancassurance has shown limited growth:
Canada, USA, UK, China, Germany, Japan, Korea etc have shown growth that
is below 40% in Life products and 10% in Non- Life Business
3C3 Reasons for limited growth:
USA: Regulatory issue; only in 1999 did the Gramm-Leach-Bliley Act (Named
after its promoters Sen. Phil Gramm, Rep. Jim Leach, Rep. Thomas Bliley)
remove obstacles to banks selling insurance which were in place since the
1933 Glass-Steagall Act.(Named after its sponsors: Sen. Carter Glass and Rep.
Henry Steagall.
The USA life market was already mature with Life insurance sold mainly
through Agents which made it difficult for a new distribution channel to be
successful.
Germany: Agents in villages handle life business for families from generation to
generation as a culture and as such there has been little inroads for any other
distribution channel including bancassurance.
UK: Customers normally buy insurance online and on telephone, this seems to
be more convenient and cheaper than bancassurance especially for non-life
business. On the side of life there is group life insurance cover provided by
Bancassurance Principles and Practice
30
employers and many employees have life cover through their contracts of
employment.
3C4 The African Experience:
South Africa is the most sophisticated and mature market in Africa, others
include Ivory Coast and Mozambique.
Insurance products are sold mainly as part of bank products through credit life
insurance bundled with mortgages and personal loans, motor insurance with
car loans in addition to stand alone products like funeral expenses insurance
cover.
In Kenya a number of banks have partnered with insurance companies
through subsidiaries that act as agents of insurers, offer a range of both life
and non life products with flexible payments through mobile money, direct
debit and even IPF (insurance premium financing).
3D BENEFITS AND CHALLENGES OF BANCASSURANCE
3D1 BENEFITS
For Banks For Insurers For Customers
Diversified new
revenue stream
Expand customer
base/Increase in market penetration
Convenience/One stop Shop
/Access to a wide range of financial services
Expand product offerings
Improve sales effectiveness & after sales service
Competitively priced insurance products as Insurers pass on cost savings arising from lower
distribution costs
More productive use of customer database and
branch network
Enhance ability to segment markets to support more effective
product design and marketing efforts
Effective use of technology & higher investments in human resource development leading to
improved customer service
Bancassurance Principles and Practice
31
Reduces credit risk Cost savings & Increased profitability
Buying of insurance from trustworthy source
Builds customer loyalty
Lower distribution costs
Reduced risk to family/business
Builds brand value
Immediate access to
new markets
Better match between customer
needs and solutions provided
Minimal capital required to set up
Develop new financial products more efficiently
Increased sensitization through marketing
Enhances product value
Increased Brand value and Trust.
Attractive pricing due to lower costs.
Increased deposits Joint Product development
3D2 Challenges
The table below shows the major challenges associated with bancassurance.
Target Market: Formal Sector is target market for most insurers
Retention: Low renewal retention due to clients’ perception that insurance is pegged
on credit (i.e. loan condition)
Claims: Poor level claims service affecting the bank’s ability to deliver satisfactory
service. This negatively impacts the bank’s brand negatively.
Intermediary perception as a threat: Many brokers and agents are resisting the
advance of bancassurance because they fear loss of business to banks
Banks become too powerful: Bancassurance gives banks complete control of the
financial services sector thus making them too big to fail. They would require
government bail outs in the event of financial stress.
Bancassurance Principles and Practice
32
Others include:
Privacy and data protection since insurance and banks share customer
information.
Unethical practices by bancassurance advisers.
Mismatch of needs due to insufficient fact finding process.
Cannibalism by the insurance company where they tend to want to sell
more to bank customers.
When volumes are high the bank can choose to set up its own insurance
company or use it as a bargaining power to float its business to others
for a higher pay.
3E Critical Success Factors for Bancassurance
Product and process simplicity requiring minimum technical
underwriting and be easy to understand.
Affordability – the product should be attractively priced.
Executive commitment – management of both the bank and the insurer
should be committed to the arrangement
Automation and integration – The processes should be as automated as
possible and the insurer and bank’s systems should be well integrated.
Knowledge – proper training of bank staff handling bancassurance
business.
Existence of proper regulatory framework for both Banks and Insurers in
terms of guiding laws and regulations.
Spotting, training and retaining high quality employees
Must Generate growth and customer loyalty – the arrangement should
make economic sense for both companies.
Choose your bancassurance model carefully to maximize your assets.
Product design responsive to customer needs.
Incentives to key personnel involved in bancassurance selling.
Any arrangement should protect both parties over a long term.
Bancassurance Principles and Practice
33
Chapter Summary:
Bancassurance is selling of insurance products through banks
Bancassurance originated from France and Spain and other European
countries followed thereafter
Bancassurance benefits the bank, insurance company and customer in
the following ways:
o Bank – generating more income on top of interest income
o Insurance company –increase of market share and premium
turnover
o Customer – One-stop access to both banking and insurance
services
The major challenge of bancassurance is low retention levels of
customers who stop insurance once they have cleared their loans with
the bank
Critical success factors for bancassurance are:
o Affordability
o Ease of product understanding
o Executive commitment by both companies
Sample Questions
1. Define bancassurance and briefly explain how it operates
2. What are the benefits of bancassurance to:
Bancassurance Principles and Practice
34
a. The bank?
b. The insurance company?
c. The Customer?
3. What are the disadvantages of bancassurance?
4. Explain four critical success factors of bancassurance?
CHAPTER FOUR
BANCASSURANCE IN UGANDA AND ITS REGULATORY FRAMEWORK
Introduction
In Uganda, bancassurance is fast-becoming a new avenue of distribution for
insurers and an additional source of income for banks in addition to their
interest income. In this chapter, we review the progress of the Ugandan
insurance and banking sectors in embracing bancassurance. We shall also
review the relevant legislation governing bancassurance in Uganda.
Unit Structure
Bancassurance in Uganda
Legislation Governing Bancassurance in Uganda
Emerging Trends in Bancassurance
Learning outcomes
After completing this chapter you should be able to:
Describe how bancassurance is being carried out in Uganda
Explain the regulations governing bancassurance
Describe the trends emerging in bancassurance in Uganda
Study guide
Bancassurance Principles and Practice
35
In this chapter the learner is expected to progress from the introductory
elements of bancassurance and dig deeper into the regulatory environment and
current status of bancassurance in Uganda.
4A Bancassurance in Uganda
Bancassurance as defined earlier is being carried out in Uganda with
Insurance companies entering partnerships with banks for their mutual
benefit.
Banks act as intermediaries and place business with their partner insurance
companies. This is intended to protect the banks from losses in the event that
a borrower dies before completing repayment of a loan or the asset bought on
mortgage is destroyed by an insured peril.
The above arrangement due to lack of an existing legal framework is still at an
informal stage and takes any of the following methods:
Referrals: Loans officers in disbursing loans are supposed to ensure that
the bank’s interests are catered for incase of any eventuality and this is
risk management. The officers refer bank clients to insurance companies
and agents of their choice who then issue a policy with a lien clause
making the bank a party to the insurance contract.
Banks have also shortlisted or prequalified insurance companies that
their customers can deal with based on requirements that the bank feels
are able to cater for the interests of the institution and their clients.
Bancassurance Principles and Practice
36
Customers are then free to deal with any of the pre-qualified insurers for
purposes of providing insurance policies.
Certain Banks also have interests in certain insurance companies either
as sister companies, subsidiaries or by virtual of having the same
shareholders. These therefore take up a vast majority of the bank’s
insurance business e.g. Crane Bank and Goldstar Insurance, Stanbic
Bank and Liberty Life etc.
Banks have also partnered with insurance companies and repackaged
their product features to include free insurance cover for example
Barclays Bank Personal Loan comes with free life insurance, Finance
Trust Bank has a loan product that comes with free medical cover.
The bank would pay the partner insurer premium which is embedded in
the product cost but in such a way that the client would not be able to
feel it.
Banks have also formed subsidiary companies that are run by a
principal officer who is a licensed Agent of a preferred insurer. Any need
for insurance within the bank is then channeled through the subsidiary
that in turn places it with the insurance company and commission is
paid to the bank through the licensed agent, examples include DTB and
DFCU Bank.
Research: In what other forms is bancassurance carried out in Uganda
currently bearing in mind that there is no enabling law at the moment.
Macro-economic growth and the development of banking and insurance sectors
across much of sub-Saharan Africa has been very impressive in recent years
with the number of bank account holders rising exponentially. Moreover,
regulatory authorities in the region have begun to acknowledge the potential
value of bancassurance for the further development and diversification of the
financial services industry. As a result, banks are already a growing
distribution channel for selling insurance and are set to become even more
prominent in future.
Bancassurance Principles and Practice
37
A key factor driving the development of bancassurance in Uganda is the
presence of international and regional banking and insurance groups (often
originating from South Africa) that have begun to leverage their experience in
this field in sub-Saharan Africa. Although not an exhaustive list, these include
groups such as Standard Bank Group, Bank of Africa Group, Barclays,
Ecobank, Standard Chartered and AIG, Jubilee Insurance, Old Mutual,
Prudential and Sanlam, among insurers.
Given that bancassurance is successful in a number of countries around the
world including South Africa it is not surprising that many banks in sub-
Saharan Africa are seeking to grow the revenues that they generate from
insurance.
It is therefore crucial in Uganda’s case that the intended Law is passed as soon
as possible for interested banks and insurers to fully take advantage of
bancassurance and the potential benefits that come along.
4B Legislation Governing Bancassurance in Uganda
The banking sector is regulated by the Bank of Uganda under the Financial
Institutions Act (FIA) 2004. The relevant section of this piece of legislation to
the subject of bancassurance is section 37 worded as below:
37. A financial institution shall not engage directly or indirectly for its own
account, alone or with others in trade, commerce, industry, insurance or
agriculture, except in the course of the satisfaction of debts due to it in which
case all such activities and interests shall be disposed of at the earliest
reasonable opportunity
The Bank of Uganda, in a bid to join the regional trend of liberalizing the
financial services sector to allow banks to transact insurance business, had
proposed amendments to the FIA 2004 with proposals, inter alia, to repeal the
above provision and allow banks to transact insurance business.
Bancassurance Principles and Practice
38
As of May 2015, the proposed bill had received cabinet approval and was set
for parliamentary debate and approval by end of the same year.
Parliament eventually passed the amendments and the president assented to
the bill on 19th January 2016, as such the FIA 2004 had been amended to FIA
(amendment) Act 2016 as follows:
115D. Banks engaging in bancassurance business:
1. A financial institution shall not engage in bancassurance
in Uganda as a principal or agent without prior
authorization of the Central Bank.
2. A financial institution wishing to engage in the business
of bancassurance shall do so in a format and manner
prescribed by the Insurance Regulatory Authority of
Uganda after consultation with the Central bank.
3. The bancassurance business activities of any financial
institution shall comply with the Insurance act.
On the Other hand, the Insurance Industry is regulated and supervised by the
Insurance Regulatory Authority of Uganda (IRA) set up under the Insurance
Act (as amended) 2011, this legislation replaced 1996 statute which didn’t
allow bancassurance hence the current informal dealings between insurers and
bankers which bear all the hallmarks of bancassurance.
With the amemdment of the Financial Institutions Act, IRA is currently waiting
for Bank of Uganda to issue guidelines such that banks can formally be
licensed as Agents of Insurance Companies.
Other relevant legal developments involve the proposed liberalization of the
pension sector which will break the monopoly of National Social Security Fund
(NSSF) and open the sector up for other providers.
Bancassurance Principles and Practice
39
Life Assurance companies dealing in pensions will therefore be in position to
deal with banks under bancassurance; the Relevant Legislation in this case is
the URBRA Act. 2011.
4C Emerging trends in bancassurance in Uganda
4C1 Proposals put forward by the IRA regarding bancassurance
The following proposals have been put forward by the Insurance Regulatory
Authority (IRA) regarding bancassurance:
Any commercial bank will be allowed to undertake insurance business as
the agent of licensed insurance companies and this will be on a
commission basis with no risk participation.
Banks will not be allowed to operate as brokers.
Each Bank that wishes to sell insurance shall have its head office and
branches licensed.
Each bank or branch office that wishes to sell insurance shall have a
designated Officer to handle all insurance matters and activities. The
Officer shall have at least a Certificate of Proficiency in Insurance (COP)
or any other approved qualifications.
The head office or branches shall have a designated place within the
bank premises (Insurance desk) for insurance services.
Banks (head office and branches) may become agents for up to four
insurance companies, in line with the consumer protection guidelines of
Bank of Uganda.
The Agents shall be required to provide evidence of membership to the
Insurance Institute of Uganda.
Fee Payable - a fee payable to the Authority for issue or renewal of
license to act as a bancassurance Agent shall be recommended by the
Authority
Commission payments – a Bancassurance Agent shall be paid or
contracted to be paid by way of commission amount not exceeding the
commission percentages as approved by the authority.
Bancassurance Principles and Practice
40
Every Bancassurance Agent (head/branch) shall maintain a register
which shall contain the insured name, address, premium, and the rate,
telephone no, policy no., date of commencement of the policy and any
other details which will always be updated and reviewed by the authority,
an appropriate claims register will also be maintained.
Authority’s right to inspect bancassurance agents -The Authority will
assign officers to undertake inspections of premises of the
Bancassurance Agent to ascertain and see whether the business is
carried on as per the Act and Regulations and also to inspect the books
of accounts, records and documents of the bancassurance Agent.
There are strong grounds for being optimistic that the industry will undergo a
profound transformation in the coming decade. This transformation will be
driven by legislation that is before Parliament to amend the Financial
Institutions Act (FIA) 2004. The legislation will enable commercial banks to
undertake bancassurance, as in the case of many African countries, such as
Ghana and South Africa.
You are encouraged to keep abreast with all developments in the regulatory
framework surrounding bancassurance.
4C2 Expected impact of bancassurance in Uganda
Qualified personnel: increased training and capacity building of staff.
Product design: Bancassurance business will need to design the right products
that integrate well with the bank's current and emerging products.
Customer confidence: The impact of global financial crisis has negatively
affected many customer‘s confidence in the financial service profession.
Bancassurers need to act carefully to win back trust and loyalty
Bancassurance Principles and Practice
41
Optimizing the bancassurance relations: The goals, objectives need to be
aligned properly
Competition: competition will lead to shading off some companies out of the
game.
Increased use of Insurance Premium Financing (IPF)
Chapter Summary:
Bancassurance is carried out to a small extent in Uganda due to lack of
proper regulatory framework.
Banks are regulated by Bank of Uganda under the Financial Institutions
Act 2004 which is yet to be amended to accommodate bancassurance.
Insurance companies are regulated by the Insurance Regulatory
Authority under the Insurance Act 2011 which allows banks to be
licensed as Agents of Insurance Companies.
IRA has put in place proposals to be followed when the FIA Act 2004 is
eventually amended to allow bancassurance as expected.
The eventual implementation of bancassurance in Uganda is expected to
have an impact on the financial industry in terms of qualifications and
training, increased competition, wider product range and many others.
Sample Questions
1. How is bancassurance carried out in Uganda?
2. What proposals have been put forward by the IRA regarding
bancassurance in Uganda.
3. What is the expected impact of bancassurance on the financial
Industry as a whole?
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42
CHAPTER FIVE
BANCASSURANCE MODELS AND STRATEGIES
Introduction
This chapter will look at the different arrangements used by the banks and
insurance companies, the strategy for success of bancassurance, how both
parties participate in the different arrangements chosen, process and
documentation.
Unit Structure
Various models of bancassurance
Involvement of each party in bancassurance
Bancassurance strategy
Bancassurance process and documentation
Learning outcomes
After completing this chapter you should be able to:
Explain the different arrangements/models under bancassurance
Show how different parties get involved in the various models.
Strategy for bancassurance
Describe the bancassurance process and documentation.
Study guide
Bancassurance Principles and Practice
43
In this chapter the student should be having a clear understanding of the
meaning of bancassurance and the critical factors required for the success of
bancassurance
5A Bancassurance Models
Bancassurance started in form of mutual distribution agreements between
banks and insurance companies. However, these have evolved into five typical
arrangements/models:
5A1 Pure Distributor (referral)
Under this arrangement, bank staff refer sales opportunities or leads for the
sale of insurance products to the insurer with whom they have an
arrangement, the bank staff receive initial queries for insurance and these are
passed on to the insurance company for follow up .
The bank can also give the insurer access to bank customers whom they can
contact for insurance sales opportunities e.g. by being given space within bank
branches, this is the simplest model to implement with low level of involvement
by the bank and requires minimal investment by both parties.
The major challenge with this model/arrangement is providing least customer
experience which is less than satisfactory given that the sales process is
lengthened by the need for a separate referral.
It’s also the least integrated arrangement in terms of the bank and insurance
provider working together hence low levels of commission paid and all costs if
any are met by the insurance company.
5A2 Pure distributor (corporate agency)
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44
Under this model, the bank is the corporate agency playing an active role in
selling insurance company’s products at a commission.
It is slightly more challenging for the bank to implement than the pure
distributor (referral) arrangement as it requires bank staff to have more
knowledge of insurance and a direct relationship with the customer in the sales
process.
There is more interaction between the bank staff and the prospective
customers as they sell financial products together with simple insurance
products. Investment requirements for the bank are relatively low and the
opportunity for profits slightly higher than in the referral arrangement.
More complex insurance products are sold by dedicated insurance sales
personnel hired by the bank.
5A3 Strategic Alliance Model
Under this Model, there is a tie-up between a bank and an insurance company.
The bank only markets the products of the insurance company. Except for
marketing the products, no other insurance functions are carried out by the
bank.
Under this arrangement, the bank and insurance company, develop an even
more joined up approach to the distribution of insurance products. The
relationship is designed to enable the two parties to pursue a set of agreed
goals while remaining independent organizations.
The bank and the insurance company undertake product designing and
development together with bank products having insurance features.
The bank undertakes marketing of insurance products and the investment
required from the bank is greater.
There is an increased level of expertise from the bank as it undertakes some
level of underwriting especially with integrated systems for simple insurance
products underwriting and claims processing.
5A4 Joint Venture
Under this model, the bank and the insurance company have a business
agreement in which they agree to develop, for a set period of time a new
bancassurance business.
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45
They both invest in the business and own it jointly. Both the bank and the
insurance company have joint control and consequently sharing its income
costs and assets. The arrangement demonstrates strong commitment by both
parties for the success of the venture.
Some of the features under this model would include joint product
development, sales and marketing with the bank handling customer service
and the insurer handling claims processing and customer retention.
5A5 Full Integration Model:
This model entails a full integration of banking and insurance services. The
bank sells insurance products under its brand acting as a provider of financial
solutions matching customer needs.
The Bank controls sales and insurer service levels including approach to
claims. Under such an arrangement the Bank has an additional core activity
almost similar to that of an insurance company.
The most common method of operation under this model is where a bank sets
up its own insurance business within its corporation and undertakes all the
insurance transactions including product development, risk management,
profits, training, claims, etc, e.g. HSBC Bank in Asia set up HSBC Life
Insurance Company.
Research: Disadvantages and advantages of each of the above models.
5A6 Involvement of insurers and Banks at different stages of
bancassurance
The diagram below shows how the key business processes in insurance are
shared between the bank and the insurance company under the different
bancassurance models.
Pure
distributor
model-
referral
Product
development
Sales and
marketin
g
Customer
experience
Claims
processing
Retention
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46
5B Bancassurance Strategies.
Customer satisfaction is the basic rule in bancassurance. Bancassurance
operators have put the customer at the very heart of their thinking and
development strategies.
This means;
Providing full range of financial products (insurance and banking)
through a single sales network.
Providing good claims management as good as the best traditional
insurance providers.
At the Insurance level the strategy should aim to achieve the following:
Increase in market share / market penetration.
Increase in gross written premium.
Development of new distribution channels
5B1 Product and Process Simplicity
Corporate
Agency
Strategic
alliance
Joint venture
Insurer
Insurer/
Partially
bank
Insurer
Insurer
Insurer
Insurer
Bank
Insurer
Insurer
Insurer
Insurer
with
inputs
from
banks
Bank and
insurer
Bank and
insurer
Insurer
(some
help from
bank)
Insurer
(some
help from
bank)
Bank and
insurer
Bank and
insurer
Bank
Insurer
Insurer
Bancassurance Principles and Practice
47
• In collaboration with insurance companies design simple, attractively priced
products easily understood by bank employees.
• The insurance products should where possible be integrated in the banking
products so as to ease selling.
• Disclosure of any fees borne by the client and which insurance company is
providing cover for which risk.
5B2 Training staff.
• Focus training on personnel who are at the customer touch points.
• A massive training program to be done in the distribution network to create
awareness and interest in insurance.
• This will build up expertise and there by reinforce the trust that customers
feel for their bankers in their additional insurance role.
• Training is an essential element in motivating a sales network whose
background is banking
5B3 Customer Profiling / Target Marketing:
• Bank ICT division to undertake customer profiling of Bank customers and
segregate them in Market segments. Bases for segmentation can be by net
worth, profession or age.
• Look at current and potential customers of the bank across all lines
• This should be followed by customer risk investment profile analysis/fact
finding to match the available products to the needs of the customers while
taking account of their investment risk profile.
• Identify opportunities available in the bank customer base and offer right
financial planning product or solution.
• use the lifecycle stages (from childhood to retirement) as at each stage there
separate needs.
• use the event trigger approach where by emphasis is on the events that take
place in the customers’ life e.g. birth of a child, purchase of an asset like a
house or car, retirement, business set up etc.
5B4 Embedding insurance products on the existing bank products.
• The products offered by the bank to be analyzed and suitable insurance
products identified as riders.
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• Because of volumes expected, the products cost (premium) will be relatively
cheap.
• Examples of products in this category include personal accident, salary
protection, purchaser’s protection plan cover, credit life cover, child
education policy.
5B5 Promote the use of Insurance premium financing
• This will be an important selling tool as customers who are unable to pay
the full premium at one go, are paid for and the amount recovered in
installments hence affordable.
• The interest rate charged by the bank on the IPF should be competitive as in
most cases the client already has another facility with the bank
5B6 Incentives (Critical to motivate bank staff)
• In collaboration with insurance underwriters suitable incentive programs
to be put in place to reward:
The lead generators
The sales person closing the sales and have achieved or surpassed their
targets.
• Create competition amongst the bank branches
• Promotional campaigns to bank customers
5B7 Profit sharing agreements
• Profit sharing agreements/structures for suitable insurance products to be
put in place.
• Appropriate cash back agreement to be put in place in products where
applicable.
5B8 Promotional Materials
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• Promotional materials i.e. brochures, fliers developed jointly with marketing
division should be printed and released to all bank branches, bank’s point
of sales and reception areas.
• Brochures for individual products should also be developed.
5C Bancassurance process and documentation
Bancassurance process and documentation starts with identification of risk at
the customer touch point, followed by completion of the proposal form which is
forwarded to the insurer for issuance of cover.
The process is illustrated by the diagram below:
Risk identification at the
customer touch point.
Proposal form is forwarded to
the insurer for cover by the
agency.
Completion of the insurance
proposal form by the customer
and forwarded to the Bank
assurance personnel
Insurer issues cover and a debit
note.
Agency debits the branch
account and credits the insurer’s
account net of commission.
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50
Chapter Summary
The bancassurance arrangement follows five models:
Pure distributor - Referral
Pure distributor – Corporate agency
Strategic alliance
Fully integrated model
Joint venture
Strategy for bancassurance includes:
Product and process simplicity
Training staff
Customer profiling
Incentives
Profit sharing agreements
Promotional materials.
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The bancassurance process and documentation involves:
Risk identification
Completion of proposal form
Forwarding of proposal form to insurer
Issuance of cover
Agency debiting the branch account
Sample questions
1. Describe the different models used in bancassurance
2. Explain four strategies of bancassurance
3. State how both the bank and insurer gets involved in the different
models of bank assurance
4. Illustrate the bancassurance process and documentation
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CHAPTER SIX
NON-LIFE BANCASSURANCE PRODUCTS Introduction
This chapter discusses the various products/policies under the non-life
category that are most frequently distributed through the bancassurance
channel.
Unit Structure
Introduction – General Product Features
Health Insurance
- Personal Accident
- Critical Illness
- Medical Insurance
Travel Insurance policies
Home Insurance for buildings and contents
Motor Insurance policies
Business All Risks Policies
Takaful
Learning outcomes
After completing this chapter you should be able to:
Identify the various non-life insurance products offered under
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53
bancassurance
Explain the features of non-life insurance policies sold through
bancassurance
Study guide
Having understood the operation of bancassurance, in this chapter the learner
will build on this knowledge and get to know more of the non-life products that
can be sold through bancassurance.
6A Introduction – General Product Features
The key distinction between life and non-life insurance products is the
duration of cover and the subject matter of insurance. Life insurance products
are usually arranged for a duration ranging from three years to the life
assured’s whole life. On the other hand, non-life products are short term with
most being renewable annually.
Construction or engineering covers can have a longer period of insurance to
match the duration of construction and commissioning.
Life cover is intended to cushion the beneficiaries from the financial impact of
the death of the life assured while non-life cover is usually used to insure
property and the insured’s legal and professional liability.
In the sphere of bancassurance, most products offered under the non-life
category protect the insured against loss arising from damage to their property.
This property ranges from houses and their contents to business, motor
vehicles and other assets.
The types of insurance policies offered and the motivations for selling them are
the subject of this chapter.
5B Medical Insurance
6B1 Accident Insurance
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Accident insurance covers the insured against the financial impact of
accidental death or injury. The cover is usually arranged as a Personal Accident
policy and spells out various monetary benefits which are payable in the event
of an accident. Among the benefits provided under the policy are the following:
Death benefit – usually a multiple of the insured’s monthly salary or an agreed
amount.
Temporary Total Disability (TTD) benefit – here the amount payable in the
event of temporary total disability is defined. It is usually based on a formula or
an agreed amount payable per day for the duration of disability up to a
maximum amount.
Temporary Partial Disability (TPD) benefit – here the amount payable in the
event of temporary partial disability is defined. In this context, partial disability
occurs where the injured person is not able to carryout all the work he/she
would otherwise have done had the accident not happened. He may for
example be advised to work fewer days in a week or shorter hours per day.
Permanent Partial Disability (PPD) benefit – here a benefit is paid based on
the continental scale of benefits for permanent partial injuries such as
accidental loss of a limb or an eye. The compensation is determined as a
percentage of the death benefit using percentages in the continental scale.
The cover can be extended to cover medical expenses, the cost of artificial
appliances, transport and incidental costs, funeral expenses and other benefits
up to pre-agreed monetary limits.
6B2 Critical Illness Insurance
Critical Illness insurance is also popular in the bancassurance model. This
insurance provides compensation in the event of the insured falling critically ill
and unable to attend to his normal work routine. It also has a component for
providing medical treatment under such circumstances.
Under critical Illness cover, a lumpsum payment is made to the insured upon
the diagnosis of any of the specified or listed diseases in the policy e.g. stroke,
heart attack, cancer and kidney failure, the purpose of the benefit would
usually be meeting the high costs associated with treatment of any of the listed
diseases.
Critical illness can be provided as a stand alone or part of an endowment,
whole life or term assurance policies.
6B3 Medical Insurance
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The purpose of medical insurance is not to provide a cash benefit to the
insured but to pay for medical treatment of the insured or any other person
covered by the policy.
Medical policies are usually available in three different forms:
Comprehensive Policies cover a wide range of medical costs in the hospital of
the insured’s choice, use of private rooms, ambulance costs, home nursing and
sometimes travel insurance.
Standard policies normally offer the same hospital choice as comprehensive
policies but may exclude extras such as travel insurance and offer less
generous terms for outpatient treatment.
Budget policies provide basic medical care with the insured having no choice
as to which hospital they may use. Other features like ambulance costs,
outpatient treatment and amount the policy will pay in claims in any one year
are limited.
The range of medical policies varies with premium rates, policy selected, the
number of people covered and their ages.
6C Travel Insurance policies
Travel insurance products are usually highly standardized and simple to
understand. These two characteristics make travel insurance an ideal
insurance product for distribution under bancassurance.
Travel insurance is a packaged policy covering various risks of travelers. Inter
alia, it covers medical expenses incurred while travelling, costs of travel
cancellation or delay, costs of replacing lost luggage, death benefits and many
other extensions.
The product can be sold to both frequent and infrequent travelers ranging from
three months to annual policies through bancassurance.
6D Home insurance for buildings and contents
Home insurance is another insurance policy that should ideally be sold to the
masses. All home owners and tenants run risks of fire, burglary, flooding, theft,
power surge, etc. If such risks materialize, the home owner stands the risk of
losing their assets and having to start from scratch in reconstructing and
reequipping the home. Such risks can be transferred through an appropriate
home insurance policy.
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It should be noted that the building insurance covers the main structure and
all fixtures and fittings within and around the structure.
The contents insurance on the other hand covers household goods and
personal effects belonging to the insured or any member of the insured’s
household.
Insurers often offer the building and contents policy as one or under a
comprehensive cover but there also situations where each is offered separately
for example in a case of a tenant and landlord taking a contents and buildings
insurance respectively.
6E Motor insurance policies
This is one of the most popular forms of insurance in the world. More and more
people own cars and on a daily basis, run risks associated with being on the
road.
The appropriate cover recommended for all vehicle owners is comprehensive
motor insurance. This covers the vehicle owner against various risks such as
theft of the vehicle, accidental damage to the vehicle, liability to third parties
for bodily injury and or property damage, etc.
While motor insurance can be sold to all bank clients who own vehicles, banks
are keen on recommending it to clients to whom they have advanced car loans.
It is in the interests of the bank for the car to be insured with the bank being
named as the first loss payee through the incorporation of a lien clause in the
policy. In the event of theft or total loss of the vehicle, the proceeds of
insurance are first used to clear the borrower’s outstanding loan with the bank.
The borrower receives any amounts in excess of the outstanding loan amount
including interest.
With product innovation and development there is a wide range of policies
under motor insurance beyond the usual motor private, motor commercial and
motor cycle insurance.
Given the dangers associated with driving on Ugandan roads which are narrow
and congested, all vehicle owners are encouraged to take up motor insurance.
6F Business All Risks Policies
Business all risks policies are specifically tailored to meet the needs of small
and medium sized enterprises (SME) - as defined. The policies are packaged to
Bancassurance Principles and Practice
57
cover all insurable risks to which the business is exposed. They typically cover
the businesses’ physical assets, people and liability to third parties.
These policies are recommended by banks to all their customers who occupy
the SME space. Some banks require clients seeking loans to set up or expand
such businesses to take up insurance.
The SME sector is fast growing in Uganda and products of this nature will
continue to be needed to meet the insurance needs of the many firms in this
market segment.
6G Takaful
Islamic banks have to sell insurance products that comply with the tenets of
sharia law. This need gave rise to a whole new area of finance called Takaful
(Islamic finance).
Banks and insurance companies which have Muslim clients have developed
products which appeal to Muslims and comply with their religious convictions.
A full consideration of the features of such products is beyond the scope of this
text.
It is worth noting that many banks as seen in earlier chapters tend to sell these
products as part of or enhanced features of current or new bank products.
Insurance is therefore embedded onto current bank products for example
personal accident and medical insurance with personal or group loans, motor
comprehensive with car loans and home insurance with home loans.
Research: what are some of the other non-life insurance products that you
would recommend to be sold under bancassurance?
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58
Chapter Summary
Non-Life or General insurance products are short term and renewable on
an annual basis.
Some of the products sold under bancassurance in the Non- Life category
include but not limited to the following:
- Health Insurance
- Travel Insurance
- Home Insurance
- Motor Insurance
- Business all risks Insurance
Takaful Insurance is largely provided alongside Islamic banking that is
Banca-Takaful.
Sample questions
1. What are the benefits under a Personal Accident policy?
2. Distinguish between Critical Illness Insurance and Medical Insurance.
Bancassurance Principles and Practice
59
3. What is the difference between buildings insurance and contents insurance
under the Home insurance policy?
CHAPTER SEVEN
LIFE BANCASSURANCE PRODUCTS Introduction
This chapter discusses the various products/policies under the life category
that are most frequently distributed through the bancassurance model.
Unit Structure
Introduction – Life Insurance Product Features
Main product categories:
- Finance and repayment products
- Depositors’ products
- Simple standardized package products
Other products:
- Whole life products
- Endowments
- Term assurance products
Additional benefits offered as riders
Learning outcomes
After completing this chapter you should be able to:
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60
Explain the main key features of life insurance policies sold through
bancassurance
Explain each life insurance product type offered under bancassurance
Recommend appropriate Life Insurance Products for various
categories/segments of customers
Study guide
This chapter introduces you to the life assurance products sold under
bancassurance. The range of products discussed is not exhaustive as various
products are continuously innovated and launched to match dynamic
customer needs. The reader is encouraged to pick an interest in the products
offered through various bancassurance partnerships in Uganda.
7A Introduction – Life Insurance Product Features
This section analyses the guiding principles for the development of
bancassurance products and describes how these products are structured. All
life insurance products are by nature products which belong to the wider
financial services sector. For a bancassurance operation in particular, however,
the decision on the types of insurance products which it wants to sell is very
closely related to the methods of distribution which it plans to use. This is
because the effort and expertise needed to sell a given product must be
appropriate to the skills and cost base of the chosen distribution method. A
product which is very hard for the available distribution channels to sell is not
going to be successful for the operation, whether in terms of sales volumes or
of profits. Figure 5 below shows the relationship between product complexity
and required sales effort and expertise.
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61
7A1 Relationship between Product Complexity and Required Sales Effort
Distribution
Active
Passive
Product
Simple Complex
From the figure above, it is clear that simple products which are straight
forward do not require a lot of sales effort unlike complex products that involve
a lot of skill, technical knowledge and time to sell.
7B Life Product Categories
Apart from the traditional insurance products, bancassurers have developed
special products in order to fulfill certain needs which emanate from banking
transactions, or to improve certain products in order to make them more
attractive and useful to the customer. These products can be broken down into
three categories:
i. Finance and repayment products
ii. Depositors’ products
iii. Simple standardized package products
Let us look at these categories in detail.
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62
7B1 Finance and Repayment Products
The concept of this group of products is fairly simple. A financial institution
which grants loans or credit to individuals is concerned that, in the case of
early death or permanent disability of the borrower, the outstanding loan or
credit amount may not be recoverable. This will happen where
the financial standing of the surviving family means that outstanding
amounts may not be easily recoverable, or
when the repossession of the item purchased by the loan amount might
not be saleable, 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
reputation among customers, since it will acquire the reputation of
repossessing items on the unfortunate death of its clients and the harassment
of the unfortunate spouse and family. The borrower on the other hand has
similar concerns. He does not wish to leave an outstanding loan to be repaid by
his family after his death. He is also concerned about his possible inability to
repay the loan or credit amount if he becomes permanently disabled. A
category of products that can satisfy both parties is the finance and repayment
product. Some of the best known products in this category are:
a) Credit insurance
Credit insurance can be offered in cases where a loan is granted to the
customer and serves as additional security for the bank and financial
protection to the customer’s 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 insured equal to the amount of the loan. For example, if the
amount of loan taken is UGX 10,000,000, then the policy will have an initial
sum assured of UGX 10,000,000. The sum insured would decrease in line with
the repayment of the loan amount. Upon the death of the insured person the
amount payable would be equal to the outstanding loan amount, with or
without the accrued interest at that time. If the outstanding loan amount
decreases on a predetermined basis, then it is possible to calculate the
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63
appropriate premium at the date on which the loan was granted. In cases
where the loan amount fluctuates according to the needs of the borrower or
due to fluctuations in interest rates, a monthly premium based on the
outstanding loan amount is a more equitable solution, provided that the
outstanding amount is available for calculating the premium. Annual premium
or single premium contracts can be offered in cases where the loan amount at
all periods can be predetermined. Where the loan amount can fluctuate, single
premiums are not permitted. In the case where a single premium is charged
the premium amount is frequently added to the loan amount. Almost all loans
covered under credit insurance schemes are of short repayment duration, i.e.
up to 5 years. In cases where this scheme is a compulsory part of a loan the
premiums charged can reflect the fact that there is no selection against the
insurer on medical grounds (anti selection). In such cases the company can
limit itself to simplified underwriting. The reduced processing costs can be
passed on in the form of lower premiums. In cases where this scheme is not
compulsory, however, further medical or occupational questions are asked for
Underwriting purposes. The extra work involved may force premiums to be
increased.
Permanent total disability benefit may be offered together with the decreasing
term insurance since the ability of the borrower to repay the loan may depend
on the borrower maintaining his income. In some cases temporary total
disability benefit covering the installments payable is also offered.
It is also possible for a bank to pay the premiums, which are very low, and use
this as a marketing tool in order to attract new customers and sell its products
more easily. The marketing tool is to offer “free” protection in the case of death
or permanent total disability. The bank will include the cost of protection in the
interest rate charged to borrowers. Credit insurance is suitable for
arrangements such as:
mortgage loans,
business loans,
personal loans,
hire purchase arrangements.
Bancassurance Principles and Practice
64
This cover can also be issued as a group policy covering all customers. The
master policy remains with the bank and a certificate of insurance is given to
each customer.
ii) Overdraft insurance
Usually banks offer overdraft facilities to their customers. This is automatic
credit up to a pre-agreed amount. For salaried customers this amount is
usually two or three times their monthly salary. This facility has no repayment
term provided the salary is deposited in the bank and the credit always stays
within the pre-agreed amount. In the case where the customer who was using
the credit facility dies, this amount has to be repaid by the heirs of the
deceased. This practice usually creates problems for both the heirs and the
bank. Overdraft insurance can help. Overdraft insurance can be offered in two
different ways:
The cover is equal to the credit facility used and a monthly premium is
paid according to this amount. In the case where the customer dies and
this credit facility has been used, the outstanding amount due will be
repaid to the bank by the insurance company. In deciding whether to
offer this option, the insurer must consider the risk that people who
know their health is very poor can sharply increase the amount of credit
taken shortly before their death.
The cover equals the maximum pre-agreed credit facility. In case of death
the outstanding amount due will be repaid by the insurance company. If
there is an excess between cover and the outstanding amount due this
amount will be paid to the heirs of the customer. Premiums in this case
can be paid on a monthly or annual basis. In overdraft insurance the
premium is usually adjusted every year according to the age of the
customer. A maximum age for this benefit usually exists. The premium
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,
Bancassurance Principles and Practice
65
credit cards,
Unstructured debts.
iii) Capital repayment
For loans offered for mortgage, educational, personal or business reasons a
repayment scheme through an insurance policy is possible. The customer is
granted the loan and he pays to the bank only the loan interest. He also takes
out an endowment that has a cover equal to the loan amount and with a
duration equal to the repayment period of the loan. The premium is selected so
that the maturity payout is very likely to be able to cover the full loan amount.
The policy is always assigned to the bank and serves as a repayment tool
whether the customer survives or not. These products have proved particularly
attractive to customers in countries where life insurance products enjoy
favourable tax treatment, or where interest rates charged by lenders on loans
repaid by insurance policy proceeds are lower than for capital repayment loans.
Due to the high investment element of these products, the premiums for such
products are much higher than those of the credit and overdraft insurance that
we have mentioned above, although the total cost of the loan to the borrower
may not be very different.
7B2 Depositors’ Products
The second category of these special products consists of the so-called
depositors’ products. The main types of depositors’ products are:
a) Depositors’ insurance
This benefit is designed to attract the public to deposit money with a particular
bank. It can be offered in all deposit accounts but usually a minimum deposit
amount is required. The level of cover is usually determined by factors such as
price and underwriting. A possible product is level term insurance with the
premium rate changing every year. Another possibility is to offer accidental
death cover. Reasonable limits must be set regarding maximum age and
maximum amounts. The premium in this case is usually paid by the bank but
it can also be paid by the depositor with a proper marketing approach. The
amount of cover is usually a multiple of the cash balance in the deposit
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account. In the case of death of the depositor, this cash balance is increased
accordingly.
b) Objective achievement insurance (bank savings plans)
This policy can be offered in special deposit accounts where systematic
deposits are required to reach a predetermined objective amount at maturity.
However, if the depositor dies or suffers total permanent disability, the
difference between his objective amount and the cash balance of the account is
paid to the depositor or the depositor’s estate in addition to the cash balance.
This can be offered by a decreasing term insurance only or in combination with
permanent total disability benefit. In cases where the deposit amounts are not
predetermined it is advisable to offer coverage that is a multiple of the average
cash balance amount during the preceding 6 or 12 months, so that problems of
antiselection can be reduced. However, it would still be possible for a customer
to increase the account balance rapidly and gain significant life cover without
underwriting. As with depositors’ insurance, accidental death cover is another
option. Where reasonable limits are set regarding maximum age and maximum
amounts of coverage, this product can offer attractive profit margins.
c) Pure investment products
These products have no “insurance” elements, i.e. no risk. They have
traditionally been the domain of banks, but in some countries they enjoy
favorable tax treatment if they are offered by an insurance company. A detailed
discussion of investment products can be found in chapter 7 of this Study
Text.
7B3 Simple standardized package products
These products are usually group policies which combine covers and which
cost the customer less than if they are bought individually. These products are
usually sold over the counter by bank employees, so they need to be
uncomplicated. An example would be household insurance together with
waiver of premium on death cover.
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7B4 Other Products
The objective of product development in most cases is to offer the widest
possible range of products so as to enable sales people to select the most
suitable plan for each customer’s specific needs. A further range of products
and riders which the bancassurer wants to offer to clients could include:
a) Whole life products
These provide permanent protection and pay a sum of money upon death of the
life assured.
This can be non-profit whole life policy where a fixed amount of money is paid
on the death of the life assured.
With profit whole life policy that pays a guaranteed sum plus bonuses upon the
death of the life assured.
Unit linked policies which are flexible and allow the policy holder to choose the
level of cover between the minimum and maximum depending on their level of
contribution and the policyholder can change the amount of cover within these
set limits anytime.
b) Endowment products
These are similar to whole life products except that endowment policies have a
fixed term chosen at inception and pay out upon maturity whether the client
lives to see their fulfillment or not.
c) Term assurance products
These are policies that remain in place for a fixed period of time chosen at the
inception of the policy, it can range from a few weeks to a number of years.
d) Pension products (discussed further in chapter 7 of this Study Text)
7B5 Riders (additional benefits attached to the main basic policy) such as:
Family income benefit
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Waiver-of-premium benefit
Permanent total disability benefit
Income replacement benefit
In deciding whether to offer these further products the bancassurer would need
to consider whether these can be effectively sold by the employees and agents
involved in the bancassurer’s sales operation.
Research: what are some of the other life insurance products that you
would recommend to be sold under bancassurance?
Chapter summary
The effort and expertise needed to sell a given product must be
appropriate to the skills, the more complex the product the more
skills and time needed.
Life bancassurance products can be broken down into three main
categories:
- Finance and repayment products
- Depositors’ products.
- Simple standardized package products
Other products include:
- Whole life Products
- Endowment Products
- Term assurance Products
Additional benefits can also be offered as riders and these include:
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- Family income benefit
- Waiver-of-premium benefit
- Permanent total disability benefit
- Income replacement benefit
Sample questions
1. Discuss the three main categories of life bancassurance products.
2. Differentiate between whole life policies, endowment policies and term
assurance policies.
3. List three benefits that can be offered as riders under bancassurance.
CHAPTER EIGHT
SAVINGS, INVESTMENT AND RETIREMENT PLANNING
Introduction
This chapter will look at the different savings and investment needs, the need
for savings and investment products, personal factors affecting choice of
savings and investment products, saving and investment products, retirement
planning s needs and products.
Unit Structure
Savings and investment needs.
Need for savings and investment advice.
Personal factors affecting choice of savings and investment products.
Main types of savings and investment products.
Retirement planning needs.
Personal factors affecting retirement planning needs.
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Retirement planning products.
Learning outcomes
After completing this chapter you should be able to:
Explain in details the savings and investment needs.
Describe the need for savings and investment advice.
Discuss the factors affecting choice of savings and investment products.
Explain the main types of savings and investment products.
Explain the personal factors affecting retirement planning needs.
List the various retirement planning products.
Study guide
In this chapter the student should be knowledgeable about the bancassurance
strategy, success factors for bancassurance and bancassurance life products.
8A Savings and investment needs
Most people need the help of a savings or investment program to achieve their
financial objectives in life. People who have no existing capital will need to
accumulate it by saving from income. People who already own capital will need
to invest it wisely to preserve and increase its value.
People without capital will need to save it from income in order to accumulate
enough money to provide themselves, and their families with some expensive
essentials of life and most of its luxuries. The precise reasons for saving money
are unique to each individual but the most common reasons are to create
enough capital to:
Build an emergency fund to help the families survive the unexpected
financial difficulties;
Produce the purchase price of a substantial item such as a car, a yacht
or a dream holiday;
Put down a substantial deposit on the purchase of a house
Provide education for children;
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Pay for children’s weddings and wedding expenses or help children set
up their own homes;
Set up in business or re-equip an existing one;
Supply a good retirement income for life.
Some of these reasons for saving apply to everybody at some time or other. For
example, the existence of an emergency fund may mean being able to feed
one’s family and avoid losing one’s home during a period of unemployment.
Failure to save for pension purposes will usually lead to extreme poverty in old
age. All people must be shown how important it is to make provision for such
essential needs.
A distinction must also be made between long term and short term saving.
Short term usually refers to saving period of five years or less. Short term
saving, therefore, includes a few months’ savings to buy a present or to pay for
next year’s holiday. It also includes saving for a few years to build an
emergency fund, put down a deposit on a house or buy sufficient furniture to
set up home.
Long term saving is reserved for savings period of 10 to 15 years or more.
Such savings may be undertaken to achieve a specific purpose such as to
repay a house purchase loan in 25 or 30 year’s time, to build an adequate
retirement fund over, say, 30 or 40 years to pay for a world tour at retirement.
Equally, saving needs have no further specific aim than to build up capital to
use in the future.
8B The need for saving and investment advice
One of the major reasons why professional advice on savings and investment is
needed is that people do not know how to identify their own savings and
investment needs. This is partly that they do not know the financial analysis
planning process; partly because they are guided more by wishes (or perceived
needs) than by the actual needs.
A further reason for professional advice lies in the fact that most people are
unaware of the full range of financial products available to them. They are
therefore not in a position to match their needs to the most suitable form of
investment. Even people who have amassed fortunes from their own
businesses are often not knowledgeable about the opportunities available to
using financial planning products and techniques.
Even investors who are aware of the main forms of investment open to them
find there is a bewildering choice of each kind of product. Very few people have
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the ability to compare products in order to identify which is most suitable for
their needs and which is likely to be the best value for their money. Equally,
few people are able to evaluate providers and their ability to produce good
investment performance in the future.
Most savings and investment products are quite complex and need a skilled
adviser to explain them. The distinction between guaranteed and unguaranteed
returns needs to be fully understood, as does the negative effect of any risks
attaching to unguaranteed benefits.
For all these reasons, people need expert advice from advisers. Without help,
far too many people will make inappropriate investments. Worse still, many
more will do nothing. They will never accumulate the capital they need or they
will continue to hold in appropriate investments.
8C Personal factors affecting choice of savings and investment
products
The key suitability criterion for recommending any savings or investment
product is that it must match the client’s investment objectives. However, there
are a number of constraints on what can be achieved for the client. Amongst
these are the client’s personal and financial details.
The main personal and financial details on which a client’s savings and
investment requirements depend are:
The time available to achieve the financial objective ;
The amount of disposable income and / or capital available ;
Existing assets and liabilities including realistic expectation of
inheritance ; and
The client’s attitude to risk (or ‘risk profile’)
The adviser needs to be well briefed on the details that reveal the position in
each of these areas.
Time
Time is important in several different ways. In the first place, the length of time
that the savings or investment product will remain in force determines what
can be achieved. For example, any sum of money invested at a given rate of
return will grow to twice as much in 20 years as it will in 10.
Amount of disposable income or capital
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The amount of a client’s disposable income or capital is a critical factor in
determining the advice that should be given to a client. Nobody should be
encouraged to commit more to saving and investment than they can genuinely
afford.
Existing assets and liabilities
Advisers must also consider the client’s current or existing assets and liabilities
as these affect both the size of the client’s need and the ability to finance it. For
example, people with little disposable income may well have surplus liquid
capital which can be used to support a series of regular contributions over a
period of time.
Tangible (fixed) assets
Tangible assets such as the client’s home or assets used in a business are
rarely available for conversion into other forms of investment. If they are sold,
they have to be replaced.
Tangible assets are more important in protection planning than investment
planning. Often, tangible assets have been bought with borrowed money and
life assurance is necessary to repay such debts and preserve the assets for the
client’s estate in the event of death.
Tangible assets can, however, provide security for borrowings to meet other
financial needs.
Invested assets
Invested assets represent money invested in deposit accounts, investment
property and stock market securities. Such assets can be realized and
reinvested if this is in the client’s interest. Details of invested assets should be
studied carefully to ensure that the client’s investment meet their investment
objectives, and are diversified and appropriate to their risk profile.
Liabilities
Finally, advisers must take account of the client’s liabilities (debts). In any
winding up of the client’s affairs, debts have to be paid out of value of their
assets. Thus, the client only effectively owns net assets, i.e. total assets minus
total liabilities. It is important to see that appropriate measures are put in
place to repay debts and free up the clients assets for personal use.
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8D Main types of savings and investment products
The precise savings and investment products available to any adviser depend
on the country in which the adviser works. This section sets out in a generic
sense the main types of products available across the world. These are;
Cash deposit accounts;
Government securities;
The share capital of companies;
Endowment policies;
Annuities;
Packaged (or pooled) investment.
For each, we shall give a brief outline the way the product works and its uses
for investors.
Cash deposit accounts
Cash deposit accounts are run by banks and other authorized deposit takers.
Deposit accounts can operate on a regular savings basis or a vehicle for the
investment of lump sums. In essence, the investor lends money to the bank or
other provider in return for interest of other periodic payments.
Banks, and other lending institutions, offer a number of different products.
Typically, they will offer:
Instant access accounts from which money can be withdrawn at any
time;
Notice accounts which require a period of notice such as 30 days or 90
days before a withdrawal can be made;
Fixed rate bonds for periods of one, two or five years during which no
withdrawals may be made.
The longer the notice required for withdrawal, or the term of the bond, the
higher the interest rate provided. Each type of account is usually tiered so
that larger deposits receive higher rates of return than smaller investments.
Typically, an account will offer five or six different levels of interest rate each
one associated with a defined size of deposit.
Fixed interest securities and government securities
Fixed interest securities or bonds are issued by governments, companies and
other official bodies as a method of raising money to finance their long-term
borrowing requirements. In return for lending money to these institutions, the
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owner of a bond is entitled to receive regular interest payments and usually a
repayment of their capital at the end of a pre-determined period.
They cannot be called in before their official maturity date. However, investors
can sell them on the stock market at any time without needing to refer to the
original borrower.
Fixed interest securities have certain common characteristics. They generally:
Carry a fixed rate of interest, known as the coupon;
Have a fixed redemption value; and
Are repaid after a fixed period, at the redemption date.
Company shares
Companies raise money to build and expand their businesses in two main
ways. One method is by raising corporate loans by methods very similar to
those used by governments. Companies issue corporate bonds, loan stocks or
debentures with fixed or variable rates of interest redeemable on fixed date in
the future. Normally, corporate loan stocks will provide higher rates of interest
than the government stocks because companies are regarded as less secure
borrowers than governments. The weaker a company’s finances, the higher the
interest rate it must offer to borrow money. However, some successful
multinational companies may well be safer borrowers than some governments
and this will be reflected in the interest rates both have to pay.
Research: what are endowment policies, annuities and pooled
investments?
8E Retirement planning needs
It is difficult to identify and quantify an individual’s precise retirement planning
or pension needs. As we shall see the individual’s need for retirement income
will vary with the age at which retirement takes place, the extent to which
other people will be dependent on the pensioner and the lifestyle the pensioner
wishes to follow in retirement.
The basic assumption is that most people need to retain at least the same
standard of living in retirement as they enjoyed while working. Some people
may want higher spending levels in retirement enabling them to undertake
activities they have had inadequate in the past. A broad consensus of opinion
has emerged over the years (encouraged by pension providers) that people
should aim for a retirement income of two thirds of their final annual salary
from work. It is also thought that people who retire in good health should
choose pension that increases in value to protect them against the effects of
inflation.
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However the two thirds figure is only a guide. We need to make a realistic
estimate of the income each pensioner will actually need. If we start with the
client’s present income, we can possibly reduce this to allow for several
changes that may take place in the client’s situation before or at retirement.
These include:
The end of the cost maintaining and educating children;
The end of loan repayments on the family home;
The cession of high work related expenditure (including business
clothing and travel to the place of work).
8F Personal factors affecting retirement planning needs
The main personal factors that on an individual’s retirement planning needs
are:
Age;
Dependants;
Income;
Other assets and liabilities;
State pension provision( where applicable)
Each of these is significant when undertaking financial planning and during
retirement itself. Let us now take a short look at each as they might affect your
clients.
Age
The age at which an individual’s future retirement needs are reviewed is
important. In the first place, present age determines the time to retirement and
the period remaining in which to provide an adequate pension fund. It,
therefore, affects the level of contribution needed to produce the pension the
client needs.
Income
A client‘s earned income is a key determinant of the level of pension required at
retirement. Unless the pension bears a reasonable relationship to earnings
while working, the pensioner’s standard of living will fail. Income also
determines money available for contributions. The greater the surplus of
disposable income after normal expenditure, the larger the contribution that
can be easily afforded.
Dependants. The number of dependants a client has at the financial planning
stage, their ages, will have a large influence on the client’s financial planning
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priorities. The number of dependents will also materially affect the amount of
money available for pension contributions.
Other assets and liabilities
The client’s existing assets (for example: savings and investment as well as
tangible assets including property) can have important impact by reducing the
amount of retirement income that has to be generated from specialist pension
products. The value of a client’s assets at retirement is reduced by any large
liabilities which have to be offset against them.
State/ national pension provision (where applicable)
Not every country will have a state pension scheme that covers all its citizens.
In countries with state pension schemes, two important considerations arise.
The first consideration is whether or not the individual is entitled to the full
state pension.
State pension schemes may lay down minimum conditions that must be
satisfied before anyone can qualify for a full state pension.
8G Retirement planning products and their uses
Pension’s schemes are either funded or unfunded. Let’s start by considering
what this means.
8G1 Funded pension scheme
Contributions into a funded pension scheme are used to build up a fund of
investments to provide pension benefits at retirement.
Theoretically, a pension fund can invest in any assets that can hold or increase
their value. Funds can invest in cash, equities, property, fixed interest stocks,
loans to companies, works of art, state enterprises or even in the business of
the company providing pensions for its employees. In practice, the state
usually defines acceptable and unacceptable investments for pension
arrangements in its own country. In particular, there may be tight restrictions
on the extent to which a pension provider can invest in its own business or
business premises.
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All occupational and private pension schemes are funded schemes. Some
schemes promise guaranteed pension benefits at retirement; others provide the
best pension benefits that can be bought with the fund which has accumulated
for a retiring member.
8G2 Unfunded pension schemes
Unfunded pension schemes make no investment to provide future pension
payments. When the pension for a member is due, the pension will merely be
paid from the normal income of the provider. For this reason most unfunded
schemes are state schemes that provide pensions for the citizen when they
reach state retirement age. State schemes for employees of central and local
government may also be unfunded schemes.
Most countries operate a three pillar pension system. The ‘pillar’ can be broadly
described as follows;
Pillar 1 A state –run pension system, offering very basic benefits
to people in retirement (may be means – tested)
Pillar 2 A funded system where contributions are made by employers
and often employees.
Pillar 3 Voluntary private funded retirement savings schemes.
8G3 State pensions
State(or national) pensions are usually paid out of a country’s general taxation
receipts, levied to provide a range of different welfare benefits which the state
pension may be only one . State pensions are often paid at the subsistence
level. They represent a higher proportion of the pre- retirement income of the
lower paid than of the well paid. State pensions may provide a basic old age
pension only or may supplement the basic pension with an additional scheme
for higher paid employees.
State pensions are rarely adequate for anyone except low earners. However, if
available, a state pension is, at least, a partial provision of an individual’s total
pension need and must be taken into account in the shortfall calculation.
Where a state scheme has two parts, a compulsory part and an optional part,
people should be advised to take up the optional part unless it can be clearly
and honestly demonstrated that an alternative product produces better value
for money. The decision will often depend on the client’s age and earnings at
the time.
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8G4 Occupational pension schemes
Occupational pension schemes are set up by employers to provide pensions for
their employees or certain categories of them. Originally, occupational pension
schemes are marketed as a way to attract, retain and motivate a good worker
force. These considerations still influence a large number of employers.
However, where they are used, there is now a general feeling that a pension
scheme is a normal part of remuneration and should be provided by most of
employers for all employees, including part time employees. Thus, it is not
uncommon for an employee to move from one employer to another, both of
which have occupational pension schemes.
Occupational pension schemes can be either self-administered or run by
pension consultants using the products of pension providers such as life
assurance companies. Often a scheme will be a hybrid, i.e. part of the scheme
is internally run and the rest is run by an insurance company or other
financial institution.
8G5 Personal pensions
Voluntary saving via personal pension s may be less of a priority owing to the
dominance of mandatory pension schemes in this region. The exception here
would be wealthier clients where affordability is less of a barrier to saving.
Personal pensions are products that provide pension benefits for one person
(the member) only. They originated to provide people who were unable to join
occupational pension schemes with similar benefits and tax concessions as
those that scheme members enjoyed. Eligibility for personal pensions was,
therefore, granted to self- employed, any employees who were ineligible for
membership of their employer’s scheme and employees working for employers
who did not provide a pension scheme. Eligibility has also been extended to
employees who decline to join their employer’s scheme or, subsequently, opt
out of membership. In some cases even the unemployed may be eligible
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Chapter summary
Most people need the help of a savings or investment program to achieve
their financial objectives in life.
Major reasons for the need for savings and investment advice are:
People don’t know how to identify their investment needs
Most people are unaware of the full range of financial products available
to them.
Lack of ability to compare products in order to which is most suitable for
their needs and which is likely to be best value for their money.
Most savings and investment products are quite complex and need a
skilled advisor to explain them.
Personal factors affecting choice of savings and investment products are :
Time
Amount of disposable income
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Existing assets and liabilities
Main types of savings and investment products are :
Cash deposit accounts
Government securities
Share capital of companies
Personal factors affecting retirement planning needs are:
Age
Dependants
Income
Other assets and liabilities state pension provision
Retirement planning products are :
State pensions
Occupational pension schemes
Personal pensions.
Sample questions
1. Explain in details what savings and investment needs are.
2. Describe the need for savings and investment advice.
3. Discuss the factors affecting choice of savings and investment products.
4. Explain the main types of savings and investment products.
5. Explain the personal factors affecting retirement planning needs.
6. List the various retirement planning products.
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CHAPTER NINE
FACT-FINDING IN BANCASURANCE
Introduction
This chapter will look at the different objectives of carrying out fact-finding, the
fact finding methods and the after fact finding process in bancassurance.
Unit Structure
Definition
Objectives of fact finding.
Methods of fact finding.
After fact finding.
Learning outcomes
After completing this chapter you should be able to:
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Explain the objectives of carrying out fact finding in bancassurance.
Explain the various methods of fact finding.
Describe the after fact finding process.
Study guide
In this chapter the student should be very conversant with, the sales process,
the different arrangements under bancassurance, process and documentation
and the different strategies for success of bancassurance.
9A Definition of Fact –finding
Fact finding is the process of collecting data and information based on
techniques which contain sampling of existing documents, research,
observation, questionnaires and interviews among others.
Fact –finding is the process of obtaining answers to a long series of questions
about the client’s personal circumstances, finances and ambitions for the
future and advising on the best suitable product.
Many questions require detailed factual answers; others seek statements of
principle such as the client’s personal attitudes, feelings and concerns.
Advisers are trained to help clients discover and understand financial goals
and insurance needs and recommend suitable solutions.
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9B The objectives of fact- finding.
The primary objective of fact-finding is for the adviser to identify what needs
the client has in each of the four financial planning areas namely:
Life and health protection
Savings and investment planning
Pension planning
Personal and commercial insurance lines planning
Good fact-finding must assemble the information to enable the adviser to
quantify the total amount of each need, the provision that already exists to
meet the need, hence the shortfall amount which still has to be provided.
Such a precise identification of needs requires knowledge of the personal
details of each client, their dependants, finances and employment status. This
process requires details of existing insurance covers. It also requires an
understanding of the client’s personal aims, desires and objectives of the
future. Good fact-finding will reveal, not only those needs dictated by reason,
but also those caused by emotional considerations.
The other objective of Fact-finding is to help identify the client’s available
contribution to invest in financial planning products. This information is
derived from a detailed analysis of a client’s income from all sources and of the
out-goings on which it is spent. It also requires a detailed review of the client’s
existing capital resources and the liabilities that must be offset against them.
Thirdly, fact finding also seeks to uncover any anticipated changes to the
client’s circumstances which will affect their current financial position. For
example is a client expecting a pay rise or an inheritance in the near future; or
are they expecting to start a family, to buy a bigger house or to become
unemployed? Each expected change in financial circumstances will have an
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effect on the contribution a client can continue paying in the future. This helps
to define the amount to which clients can afford to commit themselves now.
Fact-finding also seeks to build up a personal profile of each client:
What do clients want to achieve for themselves and for their families in
the future?
To what extent are parents prepared to make financial sacrifices for their
children?
Why are the client’s thoughts and plans the way they are?
What are their attitudes to different forms of insurance, investment and
what level of risk does their psychological profile allow them to take?
Such information complements other facts in determining the client’s needs
and helping the adviser to prepare recommendations in line with the client’s
beliefs and values.
Fact-finding helps the adviser and the client identify those needs that must
temporarily be deferred. Most clients particularly young people with
children, often have financial planning needs they cannot currently afford to
finance in full. Fact-finding has to establish those needs that concern
clients most and establish with the clients their priorities for allocating
funds to different financial planning products.
When all this information has been assembled, discussed and analyzed, the
adviser can fulfill the ultimate objective of fact-finding: to recommend the
products or portfolio of products that best meets the client’s needs for the
contribution they can afford to pay now and sustain in the future.
Fact-finding’s additional objective is to identify products the client will need
in the future and plan review dates to see when these can be funded.
Without a full fact-find there is no way of knowing precisely what any
individual‘s needs are. Even an individual who approaches an adviser to
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buy a specific product should be offered a full fact –find to see if it is the
type of product most suited to that individual’s needs.
Good fact-finding is the key to good financial planning. It identifies a client’s
financial planning needs and points towards those that are top priority for
the client. Without good fact-finding, advisers have no means of knowing
whether or not the products they recommend are suitable for client’s needs.
9C Fact –finding methods
Before purchasing a policy, the financial adviser will go through the fact-
finding process with the client so that they understand what decisions are
involved, the options available and their rights as consumers.
A fact-finding process involves progressive stages and methods during which a
financial adviser gathers pertinent information, identifies and analyses client’s
financial needs.
9C1. Fact –finding interviews
Some product sales people carry out short fact-finds lasting only a few
minutes. The sole purpose of these fact-finds is to justify the sale of the
product the sales person is trying to sell. The product might well have shown
no relationship to the client’s main needs but it will earn him a good
commission. This approach to fact finding is no longer acceptable and should
not be used.
Interviews are the most commonly used technique in collecting information, the
purpose being to find, verify, clarify facts, identify requirements and gather
ideas and opinions. It’s between an interviewer (adviser) and the interviewee
(client) and requires good communication skills for the interaction to be useful.
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Interviews dedicated to fact-finding may take up to an hour to complete. They
require that the adviser should have no pre-conceived ideas of what a client
may need. Advisers must also not decide in advance the product they hope to
sale. The client’s financial planning needs must be determined solely by the
information collected from the client.
The normal fact-finding interview follows a prepared structure. Typically the
interview structure moves through the following stages.
Making the client feel comfortable and relaxed
A discussion of priorities and the client’s
personal concerns
Explanation of the fact-finding process and its
purpose
The information gathering session
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The adviser may be required to prepare recommendations with in a budget
fixed by a client or alternatively, there may be no cost constraints on
recommendations. The interview may take place at the adviser’s office, on the
client’s premises or in the client’s home.
After the fact-finding interview, the adviser goes away to carry out a more
comprehensive analysis of the information and, if necessary seeks any special
guidance required.
Advantages:
Interviews provide a full analysis of client’s financial planning needs and
funds available to meet them.
Interviews also provide the benefit of non-verbal clues to the adviser
which may reveal other needs that are hidden or unsatisfied.
It ensures that the adviser remembers to collect all information
necessary since the interview is structured.
It prepares the client for the fact-finding process and also to place the
costs in context of the client’s planning needs and other expenditure.
Disadvantages:
Interviews can be time consuming for both adviser and client.
Success of the interview is dependant on good communication skills of
the adviser to keep the client’s interest and attention focused on their
needs.
There is a tendency of the adviser taking a leading role in the interview
and exerting undue pressure biasing the client on what products are
suitable.
9C2. Fact-find questionnaires
There are two main types of fact-finding questionnaire;
Fact-finding forms
An agreement in principle, of the main problems
to be addressed by the advisors report
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Computer fact-finding programs
1. Fact-finding forms
Fact-finding forms are used by many firms and their advisers, either as their
primary tool or as a back-up system in the event of computer failure. The forms
are several pages long and are normally completed during an interview between
the advisor and the client. On completion of the fact-finding form the adviser
takes it away to prepare recommendations and calculates cost of the client
2. Computer fact-finding programs
Computerized fact-finding programs can be used in one of two ways. In some
cases, the adviser records information manually during the interview and
subsequently inputs the data into a computer. Alternatively, the adviser may
use a computer during the interview and type the client’s answers straight into
the computer. At the end of the meeting, the adviser prints out the completed
fact-find questionnaire, including such information as the client’s priorities,
risk profile and personal concerns. Often computers are programmed to
quantify each need, select suitable products and show cost benefit analyses to
clients on the screen.
Advantages:
It’s a faster method of collecting information as at the end of the
interview the adviser simply prints out the completed questionnaire.
Disadvantages:
The process of filling in a form or entering information into a computer
can be obstructive and can slow down the adviser’s response to client’s
reactions.
This method at times often appears to the client as an uncaring or
unnecessary interrogation.
9C3. Fact-finding without client interviews
The direct marketing of financial products has introduced the regular use of
methods of fact-finding that do not involve face to face interviews. The two
methods used are;
Fact-finding by telephone
Fact-finding by post
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(ii) Fact-finding by telephone
This is most appropriate where a potential purchaser wishes to investigate
whether or not they want to buy a specific product or service.
Using advertising and marketing literature a financial firm invites clients to call
in for advice on its products and services. When potential clients ring, a
telephone interviewer asks a standard series of questions about their needs,
the product features they require and any existing arrangements they have
with other providers.
The interviewer will also have a chance to outline key features of the product
the client is interested in highlighting any benefits and exclusions that apply.
Responses during the telephone interview are recorded on the computer and
form the basis of the contract if the client eventually accepts to make a
purchase or a detailed quotation can be sent for the caller to accept, reject or
renegotiate.
(iii)Fact-finding by post.
Fact-finding by post is also normally initiated by a provider inviting existing
and potential clients to send in their details. The client’s needs, interests and
personal data can be sent in by letter. Fact-finding by post enables potential
clients to complete a fact-finding instrument in their own time and at their own
convenience. If they need to check or undertake research to provide the
answers to some questions, they can do so before returning the form. There is
no chance that an unethical advisor can influence their answers.
Advantages:
Fact- finding by telephone saves time as the interview is short and
straight to the point.
It also provides two way communication between adviser and client as
each can seek for clarification and more information.
The call is initiated by the client and as such the adviser is dealing
with an interested client from the onset and a sale can easily be
concluded on phone.
Fact-finding by post eliminates any bias or influence caused by the
presence of an unethical adviser.
Allows the client to fill the form at their own time and pace and also to
undertake research to provide more accurate answers.
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Disadvantages:
Potential clients who call must know or have an idea of what they
want / need before contacting the service provider.
The absence of an advisor in fact-finding by post means there is no
expert to help the client interpret questions accurately.
The adviser also misses on non-verbal clues available in face to face
interviews.
Fact-finding by post is irrelevant for complex products and only
appropriate where the client understands the processes and knows
what is required.
Repeated contacts by writing only often weaken the personal
relationship between the client and adviser.
9C4 Content of fact finding questionnaires / where information would
be collected:
A fact finding questionnaire will contain a number of sections providing
relevant details about the client sub divided into the following:
- Personal details of the client including birth, health, names etc.
- Family details like children and dependants.
- Employment details especially with regards ton occupation, employer
and other sources of income.
- Financial details regarding assets and liabilities and their current values.
- Existing protection and savings plans, insurance policies, current
endowment policies, surrender values, maturity dates etc.
- Pension arrangements, name of the scheme, type of scheme, dates
joined, retirement age etc.
- Monthly income and expenditure analysis to see funds available for
contribution and where a reduction can be made. Information here
includes accommodation, feeding, utilities etc.
- Financial planning objectives and considerations where the client’s
ambitions and objectives are highlighted for the family, children and
generally for the future.
- Other professional advisers including lawyers, bankers, accountants,
insurance brokers etc that client consults regularly.
- Future changes like inheritance, birth of a child, change of career,
completion of professional qualification.
- Housing situation in terms of current mortgages, rent, move to a bigger
or smaller house, etc.
9D After the fact find
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The process of analyzing information and drafting recommendations to the
client that takes place after the fact find should be methodical and include a
series of checks. Therefore after reviewing the client’s fact finding
questionnaire, a number of stages are necessary that fall into a broad
category of evaluation and making recommendations.
Evaluation
Making
recommendations
9D1 Evaluating fact-finding information
Financial advisers will analyze all information gathered and evaluate the
client’s financial situation in relation to their objectives.
Evaluation further assists the adviser to know whether the client has made
adequate financial provision to meet predictable and unpredictable needs.
9D2 Making recommendations
The analysis and evaluation of the information provided form the basis for
recommendations made.
The adviser will customize solutions and provide options that can
reasonably meet the client’s objectives. The basis of recommendations will
Set out each identified need in priority order
Research information necessary to prepare a unified
financial recommendation
Carry out shortfall calculations
Identify suitable products
Prepare quotation and cost benefit analysis
Draft a report and presentation
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also be explained as well as costs and charges involved and the features of
the recommended products.
The needs of the client are listed against the products, and for each need
the adviser identifies and records appropriate products, compares the costs,
benefits, period, risk coverage, considering all these factors the adviser is
able to come up with a suitable product for each need.
The adviser is required to present to the client the recommendations in
writing, a copy of the fact-find form and a needs analysis.
Research: what would constraint peoples’ abilities to implement desired
financial plans or what circumstances would affect financial advice.
Chapter Summary
The major objective of fact finding between the advisor and the client is
to identify what needs the client has.
Without a full fact-find there is no way of knowing precisely what any
individual’s needs are.
Fact-finding method include:
Fact-finding interviews
Fact-finding questionnaire
Fact-finding without clients interviews
After the fact-find involves evaluation and making recommendations after
reviewing the fact-finding questionnaire and interviews.
Sample questions
1. Explain what is meant by fact-finding?
2. Give four major objectives of fact-finding.
3. Describe the different methods of fact-finding giving the main advantages
and disadvantages of each.
4. What are the two types of fact-finding method without interviews?
5. Explain what is involved in the after the fact-find.
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CHAPTER TEN GOOD AND ETHICAL CLIENT SERVICE IN BANCASSURANCE
Introduction
This chapter will look at professionalism and ethics in sales process, impact of
ethics on business, presenting recommendations, acceptance and rejection of
recommendations, product switching, and handling customer complaints.
Unit Structure
Professionalism and ethics in the sales process.
Impact of ethics on business.
Presenting recommendations.
Acceptance and rejection of recommendations.
Product switching.
Customer complaints handling.
Learning outcomes
After completing this chapter the student should be able to:
Discuss what level of professionalism and ethics is required in the sales
process.
Discuss the impact of ethics on business.
Explain what is involved in presenting recommendations.
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How to deal with acceptance and rejection of recommendations.
Explain what is involved in product switching.
Discuss the ways of handling customer complaints.
Study guide
In this chapter the student should be knowledgeable about the fact-finding
process, bancassurance strategy and suitability factors for the choice of
different bancassurance products.
10A Professionalism and ethics in the sales process
In running the affairs and functions of any business group, there is need for a
set of moral principles and standards commonly known as business ethics.
There is an increasing awareness throughout the world that bancassurance
advisors must behave in a professional way towards their clients at all times.
Exhibiting high standards of professional conduct and ethics is in the best
interest of the following parties:
- The advisors as it builds reputation and recommendation.
- The employer as it helps build trust with customers.
- The financial services industry as it helps build professionalism.
All members to professional bodies must adhere to a set of voluntary standards
or codes which include but are not limited to the following:
A commitment to behave ethically towards clients / ethical conduct
A code of professional conduct / ethical code.
A minimum standard of professional competence.
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A commitment to continuing professional development.
10A1 Ethical conduct:
Ethics can be defined as a set of moral principles, norms, values and standards
of conduct that govern an individual or group.
Ethics are those values we commonly hold to be ‘good’ and ‘right’.
Ethics is based on the study of situations and decisions that address moral
issues of right and wrong, others include truth, honesty, fairness, respect,
dignity and transparency among others.
Advisors with a record of good, honest dealings with clients build themselves a
good reputation, those that don’t behave ethically towards clients or are
dishonest in one way or another will not be recommended to other people.
The reputation of individuals affects not only their own standing in the
community but also that of their industry as a whole. Unethical conduct does
not only lead to suffering by the clients but is also subject to regulatory fines
and legal compensations leading to losses by companies.
The main reason for ethical conduct is each client’s moral right to be treated
properly and fairly in any financial transaction as seen from the emergence of
regulatory and legal bodies such as IRA, BOU and many others who ensure
that players act in an honest and ethical manner.
10A2 Ethical code/ Code of professional conduct:
All traditional professions, and newly emerging ones such as financial
planning, establish a professional body with a ‘code of conduct’ or ‘ethical code’
which is binding on its members.
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The code sets out the profession’s commitment to its members’ ethical conduct
in high level terms, often coupled with more specific regulation governing
specific responsibilities.
Any ethical code should highlight the following standards:
Acting honestly and fairly at all times
Acting in the best interests of each client.
Protecting the reputation of the industry.
Observing the highest professional standards.
Managing conflict of interest.
Not exceeding your area or level of competence.
Staying up-to-date.
The basic principle is that advisors should observe high standards of integrity
at all times. Personal integrity and honesty protect client’s interests, the
advisors reputation and public confidence in the industry.
When people take financial planning advice, they are often placing their future
happiness, or even economic survival, in the advisors hands. It is too important
a trust to be betrayed.
Personal integrity however needs to be supported by considerable professional
expertise so that advisors can act with due skill and diligence at all times.
10A3 Professional competence:
This involves knowledge and background of the adviser as they undertake their
daily activities of advising clients on financial, investment and insurance
products.
Because of the range of products available today, advisers must be well trained
and equipped to ensure that clients and other members of the public that they
interface with everyday are assured of competent service.
All advisers should atleast attain a certain minimum level of qualifications and
training by a professional examining body as proof of professional competence.
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10A4 Continuing professional development (CPD)
Because many factors affect advice given to clients, from interest rates, foreign
exchange rates, inflation, political affairs etc, advisers must stay uptodate with
new products and policies in an ever changing world and environment in which
they operate.
These changes affect product innovation and competition with new products
constantly coming on the market and old ones withdrawn.
Continuing professional development also helps advisers understand their
business more to the benefit of clients, the industry and for their own
professional growth. CPD activities include further studies, seminars,
trainings, regular readings and private studies among others.
10B Impact of ethics on business
Promoting standards of ethical behavior improves outcomes for consumers
and their perception of the financial services industry.
Good business ethics make good business sense for the firm, the
practitioner and for the sector as a whole.
A strong ethical culture helps in building trust and confidence among
consumers and therefore increases engagement in financial services.
A firm can strengthen its client relationship as a result of reputation for fair
dealing.
Critical to the encouragement of good business ethics is a strong training and
education process. The reason for this is that an advisor’s gap is often the
principle cause of non-compliance.
10B1 Impact of unethical behavior
A huge number of negative outcomes can occur when ethical standards are not
met. These include:
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Customers are sold products which carry a higher level of risk than they are
prepared to tolerate.
Customers are sold products that are unsuitable for their needs.
Customers feel that they are not being listened to or that they are being
pressurized to buy.
Customers are let down by empty promises or commitments.
Conflicts of interest arise and are not dealt with by the advisor.
High number of policies/products is cancelled owing to customer
dissatisfaction.
The reputation of a business that has behaved unethically is brought into
question.
Trust and loyalty from customer diminishes.
Businesses fail.
Customers no longer trust the financial services industry with their money.
10C Presenting recommendations to clients
When all the diagnostic work on the client fact –find has been completed in a
professional manner; the adviser is in a position to prepare a report for
presentation to the client. Good practice principles apply both to the content of
the presentation and to the skill with which it is delivered.
Recommendations are usually presented to the client orally at a meeting
arranged especially for this purpose. During the meeting, the adviser explains
the proposals or revised proposals and also helps the client to complete
product application forms.
10C1 Recommendations: presentation structure
The normal structure of a presentation meeting should be as shown below. A
high level of professional conduct and professional skills is required at each
stage.
1. Checking the client’s commitment to the needs is simple but
important procedure. It consists of reminding the client of the needs
and priorities agreed, in principle, during fact- finding. Care needs to
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be taken to confine each need to a simple statement. Over-elaborate
reminders will merely confuse the client.
If, for any reason, the client’s situation or concerns have changed, the
adviser may have to prepare a new set of proposals. Where, as usually
happens, the adviser has correctly interpreted the client’s concerns and
wishes, the adviser can proceed with the planned presentation.
2. Before explaining the recommendation in detail, the adviser should
explain the concept behind the proposals. This concept should be very
closely linked to the client’s needs and expressed concerns. Each item
should be linked so that the client will subsequently appreciate how
each detailed proposal fits into a single, coherent, overall plan.
3. In outlining the recommendation for each need, the adviser has the
duty to see that the client understands the key features of the product
recommended, why it is recommended and what disadvantages the
product may have for the client. For example, it is a failure for
professionalism if the client is not aware of any restrictions or risks
that may limit their right benefit in the future or may involve them in
an investment loss.
4. In some circumstances, there will be too much detail for it all to be
covered in the main presentation. However, professional conduct
requires that clients should understand the key features of each
product recommended before a sale is completed. Many advisers and
product providers these days produce key features sheets.
5. At the end of the presentation, the adviser sums up the proposals and
seeks the client’s authority to proceed. The extent to which client
approval is easy or difficult to obtain depends on the quality of the
proposals and the skill with which the presentation has been made.
Occasional open-ended questions, such as ‘what do you think about that, Mr.
X?’ or ‘how do you feel about the proposals, Mr. X?’ are valuable. They enable
the client to express fears and doubts in the context to which they belong. It is
best to deal with doubts and anxieties when they arise and to understand that
they need honest but sensitive handling.
It goes without saying that the adviser should explain points simply, in client-
friendly language. The adviser’s points should proceed in a logical order.
Wherever approved visual aids are available, they should be used to simplify
understanding. Above all, professionalism demands that all explanations and
all answers to questions should be accurate and honest. Any risks borne by the
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client should not be minimized by the incentive for potential gain. Finally,
clients should not be put under undue pressure to accept proposals about
which they are unconvinced or which they cannot afford. The client who does
not accept today may think differently after a few days of reflection.
10D Acceptance and rejection of recommendations
When a client accepts recommendations, it is often possible to complete the
documentation at the same meeting. However, complex cases, particularly
those involving the drafting of wills or other legal documents, may require
further meetings.
Even the completion of application forms, especially those for insurance and
pension products, calls for the adviser’s professional knowledge. Health
questions are difficult for the general public to interpret; pension questions
may require technical understanding; and questions on occupation and leisure
activities may require supplementary information not indicated on the
questionnaire.
Worse still there will be places where untruthful answers appear to be more
helpful to the success of the client’s application than the truth. For example
the client may not wish to disclose that they are overweight or have unhealthy
habits. Good practice demands that the adviser insists on truthful answers and
points out the moral and legal implications of misrepresentation and non-
disclosure.
Once the client’s business has been placed and the client’s financial plans
established, good practice demands that the adviser sets up a regular review
system with the client, say on a six –monthly basis. These review meetings
enable the adviser to provide continuing advice to the client and to update
financial plans as the client’s circumstances change. As mentioned earlier, the
client should also have a telephone helpline to adviser for any emergency help
required.
10D1 Rejection of recommendations
This can happen in two different ways. First, the client may decide not to go
ahead with the adviser’s proposals. This may mean any one of several different
things. Perhaps the client does not wish to proceed with financial planning at
the moment, or the client may genuinely want a few days to think about it or
consult someone else. Maybe the client has decided to accept proposals from a
competitor or maybe the adviser failed to present recommendations
convincingly. Good questioning technique may enable the adviser to uncover
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the reason and even remove the obstacle to acceptance of the proposals. Failing
this, the adviser must respect the client’s right to decline and seek to obtain
permission to re-approach the client at some future date.
What should an adviser do if a client accepts some, but not all of their
recommendations?
In such circumstances the adviser is in a difficult dilemma. The adviser is
unable to change the professional advice which is based on sound needs
analysis. On the other hand, the client has the right to ignore advice and invest
money in any way the client pleases. The professional way for the adviser to
proceed is to re-state the advice given and reasons for it. The adviser should
also explain the reasons why the client’s own instructions may not be in the
client’s best interests. The adviser may demonstrate these points with
scenarios of possible future events. In the event that the client still wishes to
act against the adviser’s advice, the adviser should express readiness to carry
out the client’s instructions. However, it should be made clear that the
transaction is not recommended by the adviser. Documents such as the fact-
find and the adviser’s recommendations should be endorsed to this effect and
signed by all parties.
10E Product switching and Churning:
One major industry concern for many years is product switching, though
hopefully this is now being brought under control with the growth of
professionalism. Unscrupulous advisers recommend to new clients that they
should surrender their existing insurances or investments and replace them
with products being sold by the adviser. The net result of these transactions
was usually that the client lost money and incurred new charges, one provider
gained new business at the expense of another and the adviser earned more
commission by selling unnecessary new products. It is still possible to meet
members of the public who have been advised to swap financial products by a
series of advisers over several years and have very little to show for it.
Repeatedly encouraging clients to switch policies or investments known as
churning is possibly the most unethical behavior an adviser can practice.
Churning is a very bad practice and should not happen. Again this is
increasingly being scrutinized by regulators.
However, it is not to say that switching should never take place. There will be
situations in which clients have been mis-sold policies that do not match their
needs. There will be times when clients are holding products that are not good
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value for money or they may desperately need to reduce expenditure or re-
schedule their debts. Unfortunately, in these situations clients are often all too
willing to cancel existing policies and may even volunteer to do so. In such
circumstances, it may occasionally be legitimate to advise the client to
surrender a product and, possibly, take out a more appropriate one. However,
such advice should only be given where a switch is clearly in the client’s best
interest. Even then, no surrender or switch should ever be recommended until
the adviser has explained what the client will lose as well as what the client
may gain from change.
10F Customer complaints
Customers are the life blood of any business and in an ideal world they would
all be satisfied with the products and service they enjoy from a company. A
company’s products, processes, communications, safe guards, and employee
behaviors are all designed with customer satisfaction in mind. This is
important to encourage customer loyalty and a long, hopefully profitable,
relationship.
However, from time to time things do go wrong from the customer’s point of
view and this can result in a complaint. Complaints should not be viewed by
the company as an entirely negative experience – they present an opportunity
for the company, as follows:
If you handle the complaint successfully, your customer is likely to prove
more loyal than if nothing had gone wrong.
The complaint may alert you to a problem experienced by many others
who silently took their custom elsewhere.
Not only is it morally right that companies should be concerned about the
grievances of their customers but, commercially, a satisfied customer is a good
customer.
10F1 Effective complaints handling
It is very important that the company receiving the complaint is not dismissive
of the customer’s problem- even if the company’s convinced that it’s not at
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fault. Complaints should be handled courteously, sympathetically and- above
all- swiftly.
The following stages are essential in the handling of each complaint:
It must be reported immediately to complaints department of the
product provider
Full details of the complaint and its source must be logged
A prompt written response must be made to the complainant
A full internal investigation into the complaint should be conducted
immediately by the product provider.
The firm’s decision, remedy or offer should be sent to the complainant
without delay
Dissatisfied complainants must be advised if they have the right to
pursue their grievance with another external body
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All actions should be recorded in writing, even those where the original
complainant, or any dealings with the complaint, were conducted orally.
Copies of all correspondence and notes of conversations must be held in
the specified files
Classification of complaints by type helps to produce a statistical analysis of
volume of complaints, their frequency and their source. In this way, companies
can identify organizational weaknesses and take remedial action to reduce
complaints in the future.
Research: what else in your view would constitute unethical behavior in
bancassurance?
Chapter summary
Ethics are widely defined as those values we commonly hold to be ‘good’
and ‘right’.
Any ethical code should highlight the following standards:
Acting honestly and fairly at all times
Acting in the best interests of each client.
Protecting the reputation of the industry.
Observing the highest professional standards.
Managing conflict of interest.
Not exceeding your area or level of competence.
Staying up-to-date.
Recommendation should be presented in the structure as follows:
Checking the clients commitment
Explaining the concept behind the proposal.
Making the client understand the key features of the product before
proceeding to the next step.
Seeking the client’s authority to proceed at the end of the presentation.
Complaints present an opportunity for the company as follows:
If you handle the complaint successfully, your customer is likely to prove
more loyal than if nothing had gone wrong.
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The complaint may alert you to a problem experienced by many others
who silently took their custom elsewhere.
Sample questions
4. Discuss what level of professionalism and ethics is required in the sales
process.
5. Discuss the impact of ethics on business.
6. Explain what is involved and structure of presenting recommendations.
7. How should the advisor deal with acceptance and rejection of
recommendations?
8. Explain what is involved in product switching.
9. Discuss the ways of handling customer complaints
FURTHER READING
Career Times (date?). Bancassurance: a growing concept. Career
Times Online Limited.
Chang, P. R., Peng, J. L., & Fan, C. K. (2011). A comparison of
bancassurance and traditional insurer sales channels. The
Geneva Papers on Risk and Insurance-Issues and Practice,
36(1), 76-93.
Davis, S. I. (2007). Bancassurance: the lessons of global experience
in banking and insurance collaboration. VRL KnowledgeBank.
Fiordelisi, F., & Ricci, D. O. (2011). Bancassurance in Europe: Past,
Present and Future. Palgrave Macmillan.
Kumar, R. V. V. (2006). Bancassurance: Trends and Opportunities.
The ICFAI University Press
Vikrant Sehgal Rahul Abrol (2006). Bancassurannce: The Indian
Perspectives
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