From Pay-to-play to User Centricity: the future of Bancassurance

“It just didn´t feel like there was a fit.”

We are sitting with the Founder-CEO of one the fastest growing digital-banks in the country. They are adding a 4-digit number of accounts per… day. Number of insurance contracts they have sold? Zero.

He tells us that some Sales Directors of larger insurance companies already knocked on their door. They presented products they that their users “surely would be interested in”. They put a ton of money on the table. But – he thinks it wasn´t a good fit. He didn´t close any agreement.

Bancassurance in the old days

Insurers that have a considerable share of bancassurance usually grew that business based on either one of the following pillars:

·       They are insurers within a banking group, selling through their “sister companies”;

·       They paid huge sums of up-front money to secure exclusive, long-term agreements with bank partners;

Talking about the latter type, besides money (upfront, commissions, sales bonuses), some of the following aspects have usually been considered by banks looking for insurance partners:

·       Variety & quality (incl. innovation) of the insurance products;

·       Claims (and other) service quality;

·       Ability to train the bank sales force to sell the products;

·       Call-center capacity for outbound campaigns selling to cardholders;

 …. among others. But make no mistake, money has been the most important factor.

 That´s how the bancassurers grew (relatively) big and that´s what their playbook looks like. But let´s face it – apart from insurance included in financing (cars, houses,…), there are very little success stories of (traditional) bancassurance. Selling insurance through the bank advisor (in the branch) has never really worked – how can you expect someone to sell insurance when they are already asked to push the banking products? And those call-center outbound campaigns? Hated by the clients, huge cancelation rates and massive complaints.

 The world is changing – and the banking world especially, with the digital banks (or “neo-banks”, “challenger banks”) being a new breed.

 Bancassurance in the new world

 “What I found most surprising is that they never even once asked me about what our users look like or what insurance needs they might have.”

 Customer centricity, building and iterating your product based on customer feedback and data, is what most neo-banks have put at the heart of their business practice. Bancassurance -how is has evolved to date- has not put the (end-)customer at the center, but the distributor: the bank. Pay to play – who pays more money get´s the deal.

 Those days seem to be over. In the new world, other qualities will play a key role, evolving around Customer Centricity (the user! not the distributor!) in multiple ways:

·       Needs discovery, leading to a relevant insurance product offer (“That list of 20 different Assistance services that were included seems strangely off.”);

·       Ability to quickly launch new products and adjust them afterwards;

·       All digital – from APIs/webservices for quoting, policy issuing and premium collection to a 100% digital claims process

“Physical documents in the claims process? I thought they were kidding me.”

This touches on two topics that have -traditionally and notoriously- been weak points of legacy (bank-)assurers: Agility and Digital Capabilities. Not surprisingly, almost all insurers I have contact with -and/or worked with- are running their “Digital Transformation” programs.

“SDKs? The bancassurance director looked at me perplexed.”

But for bancassurers, I believe these requirements are even more pressing than for Agent-Distribution-based insurers: the new breed of banks has no problem saying “no” - customer centricity is more important than short-term money. The big bancassurers might sit on long-term agreements with legacy banks - but the growth lies at digital bancassurance with neo-banks.

Bancassurance from a neo-bank´s perspective

After the WeWork debacle, we are seeing a shift across the board in all verticals and investor types: growth is not everything any more, founders are under pressure to go from a “user-generating” to a “unit-economics” storyline. Probably rightfully so. Unit Economics – profitability on a single product/single sale basis – is a challenge for digital banks: most give away debit accounts for free. They mostly still lack higher-margin products like credit cards, other types of financing products or sales of mutual funds. I guess they make money -if at all- from floating (investing) deposits.

Among the possible products to offer, insurance is highly attractive in terms of margins: think 10-30% of premiums as gross margin (commissions). The problem lies in the implementation:

·       Which products should you offer? What is relevant to your target group?

·       Which partner (insurer) should you work with? Which one has the abovementioned attributes (agile, digital)? (hint: very few)

·       Long-term agreement with money upfront or more short/medium-term with flexibility if the partner does not deliver? Probably multiple partners for multiple insurance product lines?

·       Only commission-based incentives? How about monetary incentives for the insurer to uphold certain service standards?

·       Digital integration – how to integrate critical processes (quoting, policy issuing, premium collection, service) between the insurer and the bank?

·       Or something entirely different: a marketplace strategy with multiple insurers per product line to be able to offer the best (lowest?) quote to the customer?

Traditional marriage or polygamy?

Let´s investigate that last point a bit more closely. There are some interesting plays in bancassurance, creating a marketplace – very similar to the price-comparison portals (“aggregators”) that have long been dominating markets like UK. In Mexico specifically, Santander (“Autocompara”) and Scotiabank (“FIU”) went in that direction with their car insurance offer. The obvious advantage is that customer get good deals for those products on the marketplace. But that´s also the weakness:

·       You have to standardize the product to make the price comparable – say goodbye to product innovation; you “standardize down” to the biggest common denominator;

·       Is price actually the most important factor? One could argue that customer satisfaction could be factored into the ranking – but in practice in never really happens.

The real disadvantage is that you would most likely not have a “close friend” (insurer) that you can develop new products with. Your bank is targeting freelancers? The insurance offer better be specifically developed for that target group.

The data game

At the end of the day, profitability in insurance depends heavily on how you manage data and statistical models. How is your process to discover new variables to explain the insured risks? How to get access to that data at the moment of underwriting? Especially here, there is large potential in bancassurance – and even more in digital banking models: usage of the data available to digital banks in insurance pricing and underwriting is the wet dream of any state-of-the art actuary. It is already very well studied that, for example, the credit score is heavily correlated with a variety of insurance risks. Imagine to use all the “alternative credit score” algorithms to find correlations with insurance risks.

What seems very promising in theory does actually not happen in reality -up to date- because the banks analytics team is located in a different silo (in a different company!) than the actuarial team of the insurer.

This type of “next generation risk intelligence”, with mutual learning from credit and insurance risk analysis will most likely happen in a close cooperation, not in a marketplace setup.

Convergence of FinTech and InsurTech– the “Finance Cockpit”

If we can take away one thing from Behavioral Economics, it´s this: people are lazy. We want to avoid (mental) effort, that´s why we usually don´t make rational decisions – we are cutting corners. 

Finance topics – incl. insurance – are not the most fun ones, for most people. They represent mental effort. Having to “open the mental box” of financial planning multiple times throughout the year because the go-to providers are different ones for each field (debit/credit card, insurance, house financing, consumer credit, investment,…) creates unnecessary mental effort.

How about a one-stop-shop, or “Finance Cockpit”, that has all personal finance topics in one place? This would merge different FinTech and InsurTech offers into one platform. I am not the first to bring this up – more qualified people like Frank Genheimer have talked about the Finance Cockpit before.

Neo-banks are probably the players who are best positioned to develop that offer: your “home base” of finance is your debit account, with the highest frequency of interaction with users, among finance/insurance topics.

For some of the products to be offered in that marketplace, the challenger-bank might opt to offer them themselves, others with partners (exclusive or multiple ones). That decision will not be easy, taking into account multiple factors:

·       What do the internal resources and knowledge about that product category look like? Is it convenient to create a full-blown internal team?

·       In how far is it a “commodity” product vs. how much potential is there for innovation?

·       Who would be potential partners available in the market(s) we operate in?

Within the InsurTech scene, my perception is that next-generation bancassurance is not getting the attention it deserves. The opportunities are big and legacy players usually do not fit the profile that is needed:

·       Customer-centricity instead of distributor-centricity

·       Agility in product development

·       All digital: APIs / weberservices for frictionless connection to the insurers back-end and a 100% digital claims service

·       Understanding of FinTech – neo-banks, neo-lenders, etc.

We at Mango Life certainly believe in a bright future of digital bancassurance.