While bancassurance is going from strength to strength in Europe and Asia, it seems to be struggling in North America – largely due to regulatory intervention and market dynamics. This is according to DBRS Ltd (DBRS), which asserts that while Europe has a strong and well-embedded distribution framework for bancassurance, with Asian markets fast catching up, as more insurers and banks look to diversify their revenue streams, this is not the case in the US.
DBRS sees bancassurance as a key channel for the global distribution of insurance products, particularly life products, which have generally outperformed other segments via this specific conduit. Banks are keen on this channel because it means that they are less dependent on net interest income – which can be problematic during times of compressed interest rates, for example – while insurers can enjoy higher sales without the attendant raised distribution expenses.
“Generally, insurance sales in the US are sourced through brokers who reach out to numerous insurance providers looking for the best deal for their clients,” said DBRS in its new commentary, Bancassurance: North America Trails Europe & Asia. “The broker is then paid a commission from the insurance company once a policy is sold to a customer. As a result, owning an insurance underwriter under a bank in the US does not necessarily offer a competitive advantage as consumers will likely reach out to a broker to see if a better policy can be found.
“Moreover, given the size of the established insurance companies in the US, there is a limited viable supply of potential bank buyers. Given these dynamics, some banks have entered the insurance business by buying insurance brokerages and hiring brokers. This avenue has been more attractive, as brokers generate fee income while requiring little capital since they are not underwriting the policies. Nonetheless, banks have found this to be a very difficult business to meet or exceed profitability targets.”