First published in ITIJ 124, May 2011
Bringing banking and insurance products together gives consumers added value and financial institutions added profit. Roger St Pierre looks into the bancassurance phenomenon
Where once companies were encouraged to diversify – spreading their activities, and therefore their risk, across disconnected business sectors – perceived wisdom in recent years has been to return to core values. But, to stay successful, businesses need to grow, so the hunt now is for complimentary partners who are operating in sectors that are different but in some way related, providing a real synergy, and whose distribution channels can be exploited to access a bigger consumer base. Hence the emergence of bancassurance.
‘Each to his own’ is a well established business principle: insurance companies have a wide range of financial products; banks – through their branch networks and high-profile sales and marketing muscle – have the means for taking those products to a waiting public. It's a perfect mix. Or, at least, that’s the theory.
A proven model
BIM (the Bank Insurance Model) allows the insurance company partner to concentrate on devising and underwriting the product, maintaining a much-reduced direct sales staff, while the bank takes care of sales and marketing. The insurance company supports bank staff through advertising and marketing campaigns, product information and ongoing sales training. The bank provides an established client base and an over-the-counter interface. Insurance policies are processed, administered and underwritten by the insurance company, sold by the bank and the resultant revenue is then shared.
It’s usually a happy marriage. For the insurance company, the dowry is the bank’s extensive customer base and the ease with which insurance can so often be sold as an add-on to a banking product. Most mortgages include an obligation to take out buildings insurance, and sometimes life assurance too, to protect the loan. While the borrower is normally free to trawl the market for appropriate cover, many borrowers find it more convenient to purchase cover there and then while arranging the loan – even though a far less expensive policy may well be available elsewhere in the marketplace. The same principle of consumers being willing to pay more in exchange for simplicity and convenience applies to travel insurance, which is an easy over-the-counter sell when the customer is in a bank branch to collect their foreign currency.
The same principle of consumers being willing to pay more in exchange for simplicity and convenience applies to travel insurance, which is an easy over-the-counter sell when the customer is in a bank branch to collect their foreign currency.
Personal loan insurance, unemployment insurance, health cover and credit card cover are all logical add-ons for banks to market to their customers – and they can all represent high margin business, thanks to the dual impact of often higher prices and much reduced overheads. The latter is a valuable cost benefit of using bank counter and telephone staff – who are already in place to perform other functions – as a sales force. Sales synergies through cross-selling products, having a bigger customer base and a larger sales force, plus the usual costs savings associated with economies of scale, make bancassurance an enticing game plan.
Is the UK catching up?
Says Peter Hayman, of PJ Hayman: “Here in the UK, it fits in with the banks’ desire to phase out so-called free banking and replace it with a premium account package, which bundles together all sorts of added-value products, including such things as car breakdown cover and travel insurance, for a single, fixed, monthly charge. Lloyds Bank, for instance, claims its £25-a-month Premier account includes £1,127 worth of annual benefits.” (Lloyds’ current bancassurance arrangement is due to come up for tender later this year).
So, where travel insurance was once bundled together with tour packages by travel agents, now it’s the banks that are benefitting from the added value it represents. So why are many British consumers resistant to what sounds like a good deal? “Sadly, the banks have lost a lot of trust and credibility in recent times, creating a certain resistance to bundled packages,” says Hayman.
Comments Alex Minajew, business development manager at Europ Assistance: “That means that most travel insurance is still sold as a stand-alone – and very price sensitive – product, marketed on the Internet by aggregators, but banks are nibbling into the market.”
As premium bank accounts grab more and more market share, it’s inevitable that they will take a lot of volume out of the travel insurance pot. After all, if they get automatic cover as part of their banking arrangements, why would customers want to take out a separate travel insurance policy and end up paying twice?
Other nations have long been used to paying for their personal banking and are happy to embrace one-stop solutions to their needs. Consequently, over the past decade or so, bancassurance has had a major market impact in countries like France, Spain, Austria and Germany and is fast becoming a worldwide phenomenon.
Strength in numbers
Previously prohibited in the US, this marriage between bankers and insurers was recently legalised in that country when the Glass-Steagall Act was repealed as a result of the passage of the Gramm-Leach-Bliley Act. But bancassurance has yet to take off in the US in a big way. Most insurance sales over American bank counters are related to the insurance of the banks’ own products, like mortgages and loans.
Things are very different in China, where banks and insurance companies are now free to buy each other, and international bancassurance partnerships are finding rapidly expanding success.
Globally, the synergy benefits of bancassurance have led to a rash of mergers and acquisitions and there has also been an impact on the world of wealth management, where Lombard International Assurance developed a new internationally practised concept dubbed ‘privatebancassurance’. Said a Lombard spokesman: “This combines private banking and investment management services with the sophisticated use of life assurance as a financial planning structure to achieve fiscal advantages and security for wealthy investors and their families.”
There’s also an approach known as HIM (Hybrid Insurance Model), where the insurer retains a full sales force of its own and may use insurance brokers or agents as well as having a sales relationship with a bank.
Key players from the financial institutions met recently in Rome for Fleming Europe’s fourth annual Bancassurance Forum to debate the present market situation and prospects for the future of BIM and HIM. Stephan Moltzen, head of insurance product management at Deutsche Bank, was decidedly upbeat at the meeting: “2011 will, I believe, be the most successful year of the past half-decade for the bancassurance model.”
However, Moltzen signalled some cautions: “The banking crisis had a major impact and caused a stumble in end-user confidence, but the public is regaining confidence and now believes banking staff can provide the valid advice and assistance they need.”
Glenn Lottering, a senior director at Oracle, predicts ongoing breakthroughs in terms of technology, including new avenues like iPad apps or apps for android tablets and some interesting moves where carriers employ FMCG (Fast Moving Consumer Goods) executives who know how to actually drive the market and the development of these apps, really trying to understand what their customers’ needs are and where the market is moving in terms of connectivity. “There is a shift away from product centricity towards customer centricity, where carriers are for the first time actually looking to the customers to determine their needs and are then designing suitable products,” Lottering believes.
where travel insurance was once bundled together with tour packages by travel agents, now it’s the banks that are benefitting from the added value it represents.
Jean Orgonasi, head of global partners and distribution at BNP Paribas, told the meeting: “Packages that include insurance products are now systematically offered to clients who come into our branches to purchase bank products. There is a need to maximise these moments where clients and distributors actually meet face to face in order to better interact. Establishing sophisticated consumer profiles would allow us to better understand the client’s needs, and thus better target products that would interest them. As these products become increasingly complex, banks and their insurance partners must work more closely together to effectively impact the market.”
Aviva makes an interesting case study. Comments a spokesperson: “The company’s Aviva subsidiary currently has more than 90 bancassurance agreements with banks and building societies around the world, 50 of them in Europe.” Many of these deals are long-term, but Aviva has such a wide spread it is not in any sense dependent on any one partner. Sales so far total more than £7 billion and the giant is showing 15 per cent annual growth. Among other regions, Aviva is greatly increasing its geographical footprint in Asia.
A renewed strategic partnership with RBS gives Aviva an exclusive seven-year distribution deal for protection, life and pension products. The new distribution arrangement will see RBS selling Aviva’s protection and pensions products to customers on a sales commission basis through its distribution channels in the United Kingdom, including through its wholly owned subsidiaries, National Westminster Bank and Ulster Bank.
Additionally, 2011 has seen the birth of a new, exclusive five-year deal with Santander that gives Aviva access to some 1,300 bank branch outlets across the UK. Other partners include Barclays, HSBC, ABN Amro, UniCredit, Banco Populare, DBS, Industrial Bank, CIMB Group, UBI Banca, NDB Bank. “We continue to seek opportunities to extend our bancassurance business as part of our multi-distribution model,” comments Aviva finance director Mark Dearsley.
Meanwhile, Industrial & Commercial Bank of China has struck a major bancassurance deal with AIA, the Asian subsidiary of AIG, which is at present trying to sell AIA so it can pay down some of the billons of dollars it owes to the US taxpayer. Unshackled from the woes of its parent, AIA is out to consolidate its position as the leading foreign assurer in China. The only foreign company currently to own its Chinese operating licence outright, AIA already has 17 Chinese bancassurance agreements in place, giving access to more than 1,000 bank branches and 25,000 agents nationwide. In 2009, AIA earned $US1.1 billion of premiums in China, some 10 per cent of its Asian total.
Another major new bancassurance partnership links the now 100-per-cent Resolution-owned Friends Provident insurance company with the banking arm of Tesco, the UK’s major supermarket chain. Bearing the Tesco Bank brand, a range of Friends Provident insurance products, adding to the existing 28 product lines – from credit card and personal loans to savings products – is now available via the Tesco website and a dedicated call centre, providing access to a six-million strong customer base.
In Turkey, Fortis Bank has inked an exclusive bancassurance deal with Zurich Sigorta AS. This arrangement is in anticipation of the projected merger between Fortis and TEB Bank, which is Zurich Sigorta’s current Turkish partner. It is anticipated that this move will elevate Zurich Sigorta from eighth to third ranked bancassurance operator in Turkey.
Last year, Mapfre – which is Spain’s largest indigenous insurance group – signed up with the Caixa Catalunya bank to create the third-largest bancassurance deal in Spanish financial services industry history, valued at €446 million, as well as making a deal in Portugal with the purchase of a 50-per-cent stake in Finbanco Vida, which at the same time will become the exclusive provider of insurance services for the bank’s 172 branches.
As premium bank accounts grab more and more market share it’s inevitable that they will take a lot of volume out of the travel insurance pot.
Nothing lasts forever, of course, and in Italy the Unipol Gruppo Finanziario (UGF) insurance group and France’s BNP Paribas bank announced in January that they would be terminating their BNL Vita bancassurance joint venture, which had given UGF access to some 2.6 million private customers, around 40,00 business and institutional customers and more than 850 branches.
Generally, though, the model seems to be working well – and it is joint ventures rather than mergers that seem the best way to go. But there are further alternatives that present themselves.
A 2009 report by Franco Fiordelisi and Ornella Ricci of the University of Roma Tre concluded: “The convenience of bancassurance as a distribution channel is relevant and consolidated while the success of insurance products with a high financial content is more volatile and strictly dependent on current market trends, necessitating a continuous revision of the business mix. The results we surveyed across the market seem to be in favour of joint ventures on the cost side and present a substantial parity among sample firms on the profit side.”
The duo’s research makes it clear that the existence of ownership links between the partners in a bancassurance arrangement do not necessarily represent the best strategy for the realisation of cost and revenue synergies between the banking and insurance fields of activity. Fiordelisi and Ricci recommend that the parties involved should consider the alternative of more flexible and reversible forms of co-operation, such as cross-selling agreements and non-equity strategic alliances.
Of course, there are dangers in this rapid development of the bancassurance model. Yes, bank current account holders have long been recognised as an under-exploited asset but then that ugly word ‘mis-selling’ entered the equation. Under-skilled, under-informed bank staff were being aggressively pushed by their superiors to pressure-sell add-on insurance products that in many cases were quite inappropriate. In the UK, this occurred particularly in the fields of payment protection insurance (PPI) and pensions. The result has been a rash of TV advertisements from law firms asking: “Have you, in the past six years, unknowingly purchased an insurance product you did not need and did not want and didn’t ask for?” – overnight creating a whole new compensation claims industry.
Among others, the self-employed, unemployed, retired, those with pre-existing conditions, and people who are covered elsewhere, were commonly sold totally inappropriate, unnecessary, and expensive policies bundled up with a loan and against which they would quite probably never be able to claim because of the list of exclusions.
Claims for compensation over PPI insurance mis-selling have run into tens of millions, while Lloyds’ bancassurance deal with Abbey turned into a disaster, with the banker being forced into making a £205 million provision for claims over mis-selling of endowment and pensions plans, bringing the total cost to Lloyds to an eye-watering £1 billion.
However, despite such pitfalls, bancassurance seems to be a growing development right around the world, with dreams of massive returns outweighing the nightmares of getting things wrong.
The sector, like Topsy, keeps on growing and is now global in reach. According to BNP’s Jean Orgonasi, “The Japanese market is on the rise, in savings and especially in protection. Taiwan is also seeing its protection market growing as is South America, where customers have a natural tendency to seek protection from the mishaps of life. Bancassurance is a great way to tap into this.”