Intense market competition between banks has led to a substantial decrease in the interest margins of the traditional banking products. Commission and fees from the selling of insurance products will supplement their earnings.
Banks also see this as an opportunity to increase the productivity of staff since they now have the chance to offer a wider range of products and services to clients
2. Operating expenses: The high operating expenses of bank branches have led many banks to decrease their branch network. There is thus the need to utilize the branches and bank staff more efficiently - making them as profit centers and bancassurance can boost this.
3. Customer needs: Customer preferences regarding investments are changing and with respect to medium-term and long-term investments, there is a trend away from traditional deposits towards insurance products ( e.g. unit linked products) and mutual funds where the return is usually higher than the return on traditional deposit accounts.
4. Customer Retention: Banks are experiencing the increased mobility of their customers, who to a great extent, tend to have accounts with more than one bank. There is therefore a strong need for customer loyalty to an organization to be enhanced and this can be done by banks and insurers forming partnerships to provide their clients with a wide range of bank and insurance products from one source - a one stop shop approach.
5. Wide network: Banks aims at taking advantage of widespread branch network across the country in the distribution of insurance products.
For the Insurers:
6. Source of new business: Previously unreached clients- the bank's client base may well be "virgin territory" for the insurance company because of geographic and demographic reasons. Thus the Insurance Company establish market share without having to build a wide agency network and incur the extra cost involved.
7. Over dependence reduced: Insurance Companies will reduce their overdependence on traditional agents by making use of the bank's network.
8. New Products: In collaboration with the banks, insurance companies should be able to develop new financial products.
9. Services: Insurance companies also should be able to share services with the banks.
There is no standard model of entering into bancassurance which is "best" for every insurer and any bank, hence there is need for a proper strategic business plan before a decision to adopt a particular model is taken and the main scenarios are:
Business and operating models
Bancassurance takes various form that differ from one country to the others, hence there is no standard operating models to combine banking and insurance activities. Of course the "right" answer as to which model to deploy depends on where the bank is starting from and what its long-term bancassurance strategy is.
To enter into this business, financial institutions can choose from different contractual relationships which diverge from the level of integration and can be summarized into the following scenarios:
Pure distributor
The first developed operating model is the pure distribution agreement, a contract under which the bank acts as an intermediary (agent) of insurance companies. This arrangement, also known as the multi-tie approach, allows banks to offer to their retail customers, insurance products produced by more than one insurance company which agree to pay distribution commissions to the bank.
Strategic alliance
This model can be defined as the exclusive version of the pure distribution agreement since the banks sell insurance products of only one particular third party insurer.
Profits and risks are shared between both entities: banks take sales regulatory risk while insurance companies take all manufacturing risks.
Both models allow banks and insurance companies to take advantages of the mutual know-how and technical resources without making large financial investments. Indeed, these two co-operation arrangements do not require start-up costs and can be implemented quickly as fixed costs are already sustained by the existing activities. Banks can choose which insurance providers can fit their customer needs and select the best ones in terms of image and quality of products while at the same time insurers gain access to the bank's customer base.
However the ease of entry of these models implies also an ease of exit from the alliance due to the lack of commitment of both parties. As the level of integration is low, banks and insurance companies remain independent and continue to act as separate institutions. The lack of flexibility to launch new products and the uncertain long-term value creation may appear weaker than one in-house product solution. Moreover, distributors' incentive to sell is highly correlated with their remuneration, as these products will compete against other products (either banking products or insurance products sourced from other insurers if the distribution agreement is not exclusive).
In Europe, the countries where these models are most popular are Germany and United Kingdom. Distribution agreements are often on an exclusive basis in Germany, but in UK multi-tied bancassurance distribution is developing. Outside Europe also USA, Japan and South Korea adopted this kind of arrangements.
Joint Venture
Another approach to set up a bancassurance agreement is the creation of an Insurance Joint Venture by a bank in partnership with an existing insurance company. The new company is jointly owned and requires capital from both parties which will receive their proportionate share of revenues. The ownership percentage can vary but banks and insurers usually aim to have balanced cross-shareholdings to stabilize the alliance and fix the structure of both entities.
The Joint Venture produces its insurance products and distributes them only through the banking network. Bank typically takes distribution risk and both insurer and bank take manufacturing risks. This structure ensure a strategic partnership between the institutions, as banks and insurers can leverage each others' competitive advantages and make joint decisions while keeping the independence and the possibility to dismiss the partnership. In addition, the Joint Venture arrangement allows the transfer of partners' expertise and a clear definition of responsibilities.
In the long term this kind of alliance can be difficult to manage due to potential conflicts that may arise. Other potential disadvantages can be found in the limited customer ownership and the lack of control over leads.
Advantages to banks of JVs
􀂃 Access to knowledge and expertise e.g. product development, risk management
􀂃 Access to tools and resources e.g. IT systems
􀂃 Smaller investment and potential for lower costs
Advantages to insurers of JVs
􀂃 Growth in business volumes and market share
􀂃 Potential to achieve economies of scale
Joint Venture agreements are very popular in Southern Europe countries such as Italy, Spain, Portugal and Greece.
Merger and Acquisition
This type of model is represented by the combination and integration of two separate corporations either through merger or control acquisition. For instance, a bank can partially or completely owns an insurance company which thus becomes an integrated subsidiary of the bank (and vice versa). In this case the bank controls the insurance subsidiary, it is in charge for implementing the integration process and has the responsibility for both distribution and manufacturing risk. The bank sells and underwrites branded subsidiary insurance products, while the insurer sells its own branded products as well.
In that venture, common strategies are set and the strengths of both partners can be exploited. Some of the services can also be specifically designed for the banking customers or others redesigned to meet the needs of a potential new clientele.
Financial conglomerate
In this business model a group or a holding company owns both a bank and an insurance company which agree to collaborate in a bancassurance partnership and use their networks to sell their products. A key ingredient of the success of the bancassurance operation here is that the group management demonstrate strong commitment to achieving the benefit.
Under these structures companies are able to define a common strategy and develop fully integrated products and offer a broader range of financial services to clients, restricting the competition.
The integrated models approach allows economies of scale as companies can take advantages from the existing infrastructure, respective networks and know how. Operations are integrated and companies have direct access to profits, and value creation is fully retained.
At the same time, the fact that conglomerates visibly run both banking and insurance activities with typically a common brand name does not necessarily mean that there is much interaction and integration between the two.
The potential disadvantages are that
Clashing business cultures between the banking and insurance activities.
Loss of independence
Potential difficulties in post-merger integration
Insufficient co-ordination of strategies, leading to less than seamless integration and duplication of investments and infrastructures.
Higher risk concentration, or high-risk correlation (e.g. high equity gearing of banking and insurance business or asset mix).
Countries where the model is most widespread: France, Spain, Belgium, UK, Ireland
New company
A bank establishes from scratch a new insurance company as its subsidiary. Greenfield operations involve substantial capital and a whole range of knowledge and skills which will need to be acquired. This approach can be very profitable for the bank if the insurance company will make underwriting profit as bank have direct access to profits and full control over the insurance company. Another advantage is determined by the same corporate culture. On the contrary aside from the high investment, banks could meet difficult enter into the market due to lack of expertise.
In recent years several medium size banks have moved from fully owned insurance subsidiaries to having a joint-venture with an insurer by selling part of their stake in their insurance subsidiary.
This move has enabled banks to realize the value of their life business and given traditional insurers the opportunity to build up their presence in bancassurance.
The trend away from full ownership will be accelerated in some markets as a result of the banking crisis.
As reported by XXX study-paper
In Spain for example, Generali and Aviva have built up their bancassurance distribution by acquiring stakes in companies which were previously 100% owned by banks. AXA has formed a similar joint venture with BMPS in Italy.
More banks are likely to consider the sale of all or part of their insurance operations in order to raise capital.
With recent changes impacting the income and profit generated from core
banking products, as well as capital availability and risk appetites, many banks
are reassessing their models and there are already a number of major changes
being made. Some banks have divested or are considering the sale or significant
restructuring of their insurance businesses, driven by the capital challenges, risk
appetite and best use of resources
The approaches listed above represent a general classification of all bancassurance models that banks and insurance companies can arrange.
Clearly, the choice of the most appropriate form of ownership depends on a variety of factors, for instance it is affected by the kind of relationship that could be established among the partners. As a matter of fact, the level of influence each management has on the other and the characteristics and quality (e.g. strengths and weaknesses) of the chosen partner can strongly affect the success of the business.
Other relevant key factors are described in the next paragraph (section).
Naturally a wide range of factors affect the positive or negative development of Bancassurance.
Key factors affecting Bancassurance development
Risk appetite
decisions are being made based on risk appetite and whether the banks want to drive non-risk-bearing
income only, risk-bearing income, or a combination of both.
Insurance and banking businesses are, of course, fundamentally about taking on and
managing risk but they involve different types of risk. Non-life insurance is mainly about
short and long-term underwriting risk, whereas life insurance tends to be a combination
of underwriting and long-term market risks. In general, banks can have limited appetite
for these insurance risks.
The power that any bank has to influence the level of risk they are taking on in
an underwriting entity may be limited, because usually the expertise for running the
business lies with the insurance partner.
Insurers entering into partnerships with banks need to be aware of extra risks arising
from these arrangements when compared to direct distribution, such as credit risk
from the banks if the bank collects the premiums. Upside profits are also usually limited
through profit share arrangements.
Life versus non-life
Our research considered attitudes to both life and non-life, with a wide range of views
expressed regarding the classes of business banks should manufacture or distribute.
At one end of the range it was felt that a bank should manufacture and distribute non-life
and solely distribute life. On the other hand, we also found examples where the opposite
view of manufacturing and distributing life and only distributing non-life products
prevailed.
The extent of exposure to market risk depends on the type of products the bank is
intending to write and the assets that the insurance entity is proposing to hold to back
the liabilities. The longer-term non-life risks associated with long-tail business (such as
motor liability) and certain life insurance products (such as fixed annuities) will have
larger elements of credit risk.
While there is no consensus on any "best" option, this does illustrate the differences
in types of risk between classes of business and the attitudes to those risks, and the
common theme was that insurance is regarded as a specialty for which banks need to
have the right capabilities in place.
Competitive advantage and differentiation
Where banks operate the distribution-only model, banks are using capacity and products
supplied by large insurance providers, and this has led to a lack of differentiation in
products on offer from competing banks. This has encouraged banks to manufacture
products themselves or provide additional benefits to obtain clear competitive
advantage and sustainable differentiation
Market entry strategies
We have seen situations where using a bank's own insurance operation can be a market entry
strategy if no local or international insurance provider has the ability to support the required
product in the region. In the case of non-life business, typical net retention levels will be kept
low and an insurance company used to front and support the local operation with a reinsurer
providing the majority of the capacity. This is an option being utilized where the bank is looking
to provide a consistent global insurance proposition to certain customer groups.
Profitability
Another area that was discussed during the research was profitability on the capital employed
by the various insurance models within the banks. One question raised was, 'Is capital a scarce
resource or, provided the business meets the required hurdle rate, will the bank support it?'.
Manufacturing some lines of insurance is a capital-intensive business and it can be hard to
achieve target returns on equity (ROE) (e.g. in non-life business it can be difficult to achieve
more than 12%-14% ROE, whereas ROE's of 18%-20% are regularly achieved in the banking
and asset management sectors). A number of companies cited returns on capital as a primary
reason for their decision on which model to adopt and on whether they should have an
insurance entity or not.
The return differential is largely attributable to the high distribution and administrative costs
associated with insurance, as well as significant levels of capital required of insurers by rating
agencies and regulators. Insurance can also involve much longer-term underwriting and asset/
liability management risk than banking in addition to the large ongoing capital investments
needed to achieve a successful insurance business. Our research demonstrates that insurers
have a long-term view while banks often take a more short-term view. We observed a wide
spectrum of opinions on the attractiveness of insurance business - in some cases it was
becoming of greater importance, contributing in excess of 20% of group profits and ROCE that
outperformed the banking operations. Others in the market are reported to be looking to divest
their insurance businesses, because the capital strain meant that they should focus on their
core banking capabilities and insurance was not providing the required level of ROCE to support
sustained investment.
Capital
Some interviewees felt that capital requirements could have a major impact on the
bancassurance models. The manufacture and joint venture models risk a significant capital
impact on the bank holding partners as a result of Basel III and Solvency II. The banks' ability to
treat insurance capital as part of their overall capital could be affected. One participant says,
'I believe that banks will no longer have life manufacturing vehicles going forward, driven by
the impact of Basel III and Solvency II capital requirements. Increasingly there will be a shift
towards non-life manufacturing to access profit streams.'
Those organizations that hold less than a 20% share in the insurance business will avoid the
additional cost to the business. This could trigger a major structural change in bancassurance
joint venture structures with a more capital efficient model being 80% insurer owned / 20%
bank owned or indeed a move away from ownership and joint ventures to formal distribution
deals, with one respondent saying, 'All banks are re-examining their insurance businesses with
some looking to sell parts, reduce joint ventures and move to distribution-only'.
A number of those surveyed say that they are undertaking projects to assess the operating
models and product offerings for bancassurance going forward, with one chief executive seeing
the implications of Solvency II as an opportunity in light of the institution's existing risk-based
capital model and well-capitalized position.
Basel III and Solvency II have the potential to cause significant capital pressure
for banks that hold a greater than 20% share in a joint venture or that have an
owned manufacturing model. This is significant for the industry and bancassurers
are currently assessing the potential impacts. France, the Nordics and the UK
represent the major focus for these changes.
Regulatory focus
There is a broad consensus that regulation will continue to increase for insurance
and bancassurance across Europe.
Those interviewed mostly agreed that increased regulation and transparency is
good for the customer and the industry, and should therefore be welcomed. Such
changes will ultimately help in delivering a better service and enhanced value for
the customer
Inevitably, those surveyed felt that the increased regulation will result in higher
costs for the industry and for customers. It will also potentially increase complexity
for the customer and front-end staff in the sales and service delivery of insurance
through the banks. The right balance must be found between the industry and
the regulator in order to achieve the advantages that regulation can bring while
containing the costs and managing the complexity
