The use of “bancassurance", which is a compound word derived from the French words for ‘bank’ and ‘insurance’, has been increasingly gaining popularity and importance in the Turkish financial sectors over the last decade; so much so that it is practically a necessity for all insurance companies and banks to understand and remember the particularities of this method.
Bancassurance, in a broad sense, is an arrangement between a bank and an insurance company that allows the bank to sell the insurance company’s products to the bank’s clients through its network. The most typical example of bancassurance is achieved by way of a contract between the bank and the insurance company, which sets forth the terms and conditions of the cooperation between the two entities. Still, other means of cooperation between banks and insurance companies, including joint ventures formed by a bank and an insurance company, full integration between a bank and an insurance company by way of a merger or acquisition, the incorporation of an insurance company by a bank, and cross shareholding (which, if relating to a Turkish entity, would be subject to the limitations specified in Articles 196 and 201 of the Turkish Commercial Code No. 6102), also fall under the scope of the term “bancassurance”.
Bancassurance is a highly profitable business model for insurance companies, as it gives them access to the wide client base of banks. While insurance agents build up a customer base specifically to sell insurance products, banks do not have to look for new customers to sell such products as they can simply sell them to their existing clients. Another crucial advantage of bancassurance is in economies of scale. Compared to other insurance intermediaries such as insurance agents and brokers, banks have an extensive number of personnel, which greatly reduces the effort required to sell the products. Banks greatly benefit from selling insurance products as well, not only directly by receiving commission from insurance companies, but also by improving customer satisfaction and loyalty by offering them insurance products bundled with other financial products.
Bancassurance in Turkey
While Turkish insurance companies have been using banks as a source for reaching out to clients since the 1980s, due to a lack of trust towards banks on the insurance companies’ part, this method has not been sufficiently favoured and has not effectively achieved its purpose. Following the refinements in the legislation applicable to insurance companies and banks in the early 2000s, the use of bancassurance for selling insurance products started to gain importance in the sector. Today, nearly half a century after the first use of the term “bancassurance” in France, most, if not all, Turkish insurance companies use the bancassurance method, albeit with varying degrees of commitment. According to the information published by the Insurance Association of Turkey, in 2019, 26.4% of all premium generated by insurance companies was paid under insurance policies sold through bancassurance. Bancassurance is undisputedly the preferred method for selling life insurance products, with an 83.4% share in premium generated from life insurance policies. The share of bancassurance in non-life insurance premium generation is only 15.2%, a share drastically lower than that of insurance agents (60.1%) but still higher than that of insurance brokers (13.7%). This evidently shows that there is still untapped potential in the area of bancassurance, especially with respect to non-life insurance products.
Under Turkish law, a bancassurance agreement would be categorized as a mixed contract (karma nitelikli sözleşme), given the variety of obligations taken on by each party under these agreements, although the predominant characteristics of the agreement would be that of a contract of agency (acentelik sözleşmesi). Hence, the applicable provisions of laws relating to commercial agents, and to the extent that these provisions are silent on an issue, the principles under the Turkish Code of Obligations relating to the contract of mandate, would apply to bancassurance relationships.
There are also a limited number of specific provisions of Turkish law that directly regulate the issue of bancassurance. The applicable banking legislation explicitly lists insurance agency and private pension intermediary services among the types of activities that banks may carry out, and the applicable insurance legislation sets out a limited number of rules on the registration of banks that engage in bancassurance to the registry kept by the Union of Chambers and Commodity Exchanges of Turkey (Türkiye Odalar ve Borsalar Birliği), the reporting requirements applicable to such banks, etc. One law that ought to be kept in mind when engaging in bancassurance is Law No. 6502 on the Protection of Consumers. According to this law, when extending loans or mortgages to consumers, banks must not take out insurance policies unless the consumer consents to this in writing or through a permanent data storage device. These provisions further stipulate that the consumer is free to select an insurance company of their choosing to take out insurance (i.e., banks cannot require customers to obtain insurance from a specific insurance company) to the extent that the terms of the insurance policy to be issued by that company coincide with that of the loan or mortgage, as applicable.
Points to Consider When Negotiating a Bancassurance Agreement
As evident from the above, Turkish law gives considerable room to the parties to lay down comprehensive contractual arrangements to govern their bancassurance relationship. While not confined to the points listed below, when negotiating a bancassurance agreement, the parties should particularly give careful thought to:
- Exclusivity: Many bancassurance agreements, particularly those executed among top-tier banks and insurance companies, include exclusivity terms which should be diligently ascribed without leaving room for doubt as to which aspects of the exclusivity are applicable. If the bancassurance relationship involves exclusivity only with respect to certain products, the contract should leave no room for doubt as to which insurance products fall within the scope of exclusivity.
- Upfront payment: In addition to the commission to be paid to the bank by the insurance company for each insurance product sold, the bancassurance agreement may also require that an upfront amount be paid to the bank (especially where exclusivity is involved), and this amount may be repaid to the insurance company or future commission payments may be reduced if the bank underperforms.
- Decisions on future changes: A bancassurance agreement usually gives the bank far more power than an insurance agent or broker would have with respect to the insurance products to be sold. As a result, the bank and the insurance company may need to cooperate and work together on various issues relating to the insurance products. Typical examples of this include, among others:
- New products: The agreement may allow the bank to request the development of a new insurance product to be distributed via the bank’s distribution network or for a revision to be made to an existing product. Such new product may be one that does not exist in the market at all or a product that is available in the market but is not within the portfolio of the insurance company.
- Product withdrawal: Either party may have the right to request for the other party to cease the distribution of a specific insurance product by the bank if there are material commercial grounds to do so.
- Market testing: Either party may have the right to request market testing for a specific insurance product (in terms of competitiveness of insurance premiums and insurance coverage), which may eventually give rise to the right to request changes to the pricing of such products.
- Network extension: The agreement should determine the consequences of possible extensions to the bank’s network by way of a merger with, or acquisition of, other financial institutions or their assets. It may be necessary to treat such network extensions differently based on their size. For instance, the scope of the agreement may automatically be extended to include the network at no additional cost to the insurance company or for a fixed price increase if the rate of extension is below the rate specified in the agreement, whereas the price may be significantly increased and/or the insurance company may be given the right to decide on whether to include the new network within the scope of the agreement if the rate of extension is above such predetermined rate.
- Confidentiality and data privacy: Due to the nature of the bancassurance business and the extent that personal data is processed by the parties when issuing policies, the importance of confidentiality and data privacy provisions is heightened significantly. The contract should be clear on the obligations of both parties relating to these issues.
- Service level agreement: Customarily, a service level agreement or schedule is attached to the bancassurance agreement, which defines the service levels to be provided by the bank and the insurance company as the distributor and developer of the insurance products. The parties should particularly take the time to accurately identify which responsibilities will remain with whom, especially since some of these (e.g., handling customer complaints, achieving IT integration, developing training materials, etc.) may be joint responsibilities and what level of performance is achievable.
- Goodwill indemnity: Given that the predominant characteristic of a bancassurance agreement is that of a contract of agency, when entering into the contract, the parties should consider the outcome of a possible claim for goodwill indemnity by the bank following the termination of the bancassurance relationship. This is one of the most important items in consideration of the upfront fee explained above.
- Limitation of liability: Although the parties usually try to limit their liability under the contract to the fullest extent possible, it should be noted that exclusions of liability are not valid where liability arises from wilful misconduct or gross negligence. Moreover, the exclusion of liability may not be possible at all (even for slight negligence) by virtue of the applicable Turkish principles, which provide that the exclusion of liability for slight negligence is not valid where a service or profession is carried out under a permit granted by the law or competent authorities.