"Nobody loves a woman because she is handsome or ugly, stupid or intelligent. We love because we love."
Apr 22, 2007
Apr 15, 2007
What is love?
"It takes a minute to have a crush on someone, an hour to like someone, and a day to love someone... but it takes a lifetime to forget someone."
Apr 14, 2007
Bancassurance Model
The Bancassurance model shows the ways in which the banks and insurance companies enter into Bancassurance. It refers to the operating structures for the banks to market insurance products (Smit and Lugt 2000; Swiss Re No.7/2002; Florido 2002; Nigh and Saunders 2003). The choice of a suitable model depends on the related laws of nations and the objective conditions of both players. However, the simplest structure of Bancassurance is through a distribution agreement, which is commonly used in KSA. Integrated Bancassurance has developed in parallel to the dramatic expansion of the European life insurance market since the mid-1980s. This expansion has relied mostly on savings-type insurance products, a significant portion of which are very close to traditional banking products such as fixed-income securities or mutual funds. Europewide, Bancassurance has been far more successful selling savings-type products than risky products such as those relating to longevity or disability.
There is no single way of entering into Bancassurance which is “best” for every insurer and every bank, Munich Re (2001). The choice of a suitable Bancassurance model depends on the particular cultural and regulatory environment of the host country. As in all business situations, a proper strategic plan drafted according to the company’s internal and external environmental analysis and the objectives of the organization is necessary before any decision is taken. There are many ways of entering into Bancassurance. The main scenarios are the following, Munich Re (2001):
# One party’s distribution channels gain access to the client base of the other party.
This is the simplest form of Bancassurance, but can be a “missed opportunity”. If the two parties do not work together to make the most of the deal, then there will be at best only minimum results and low profitability for both parties. If, however, the bank and the insurance company enter into a distribution agreement, according to which the bank automatically passes on to a friendly insurance company all “warm leads” emanating from the bank’s client base, this can generate very profitable income for both partners. The insurance company sales force, in particular usually only the most competent members of the sales force, sells its normal products to the bank’s clients. The cooperation has to be close to have a chance of success. For the bank the costs involved – besides those for basic training of branch employees – are relatively low.
# A bank signs a distribution agreement with an insurance company, under which the bank will act as their appointed representative.
With proper implementation this arrangement can lead to satisfactory results for both partners, while the financial investment required by the bank is relatively low. The products offered by the bank can be branded.
# A bank and an insurance company agree to have cross shareholdings between them.
A member from each company might join the board of directors of the other company. The amount of interest aroused at board level and senior management level in each organization can influence substantially the success of a Bancassurance venture, especially under distribution agreements using multidistribution channels.
# A joint venture: this is the creation of a new insurance company by an existing bank and an existing insurance company.
# A bank wholly or partially acquires an insurance company.
This is a major undertaking. The bank must carefully define in detail the ideal profile of the targeted insurance company and make sure that the added benefit it seeks will materialize.
# A bank starts from scratch by establishing a new insurance company wholly owned by the bank.
For a bank to create an insurance subsidiary from scratch is a major undertaking as it involves a whole range of knowledge and skills which will need to be acquired. This approach can however be very profitable for the bank, if it makes underwriting profits.
# A group owns a bank and an insurance company which agree to cooperate in a Bancassurance venture.
A key ingredient of the success of the Bancassurance operation here is that the group management demonstrate strong commitment to achieving the benefit.
# The acquisition (establishment) of a bank that is wholly or partially owned by an insurance company is also possible.
In this case the main objective is usually to open the way for the insurance company to use the bank’s retail banking branches and gain access to valuable client information as well as to corporate clients, allowing the insurance company to tap into the lucrative market for company pension plans. Finally, it offers the insurance company’s sales force bank product diversification (and vice versa). This form is used in many cases as a strategy by insurance companies in their effort not to lose their market share to bancassurers.
The best way of entering Bancassurance depends on the strengths and weaknesses of the organization and on the availability of a suitable partner if the organization decides to involve a partner. Whatever the form of ownership, a very important factor for the success of a Bancassurance venture is the influence that one party’s management has on that of the other. An empowered liaison between respective managements, with regular senior management contacts, as well as sufficient authority to take operational and marketing decisions, is vital. Regular senior management meetings are also a vital element for a successful operation. There must be a strong commitment from the top management to achieving the aims in the business plan.
All range of Bancassurance business models mentioned above that exists in the world falls into the following three main categories, Fitch (2006):
1. Partnerships ( Distribution Agreements)
In this model, the insurance company distributes its products partly, though not exclusively, through a banking channel. In addition, there is no dedicated legal entity to underwrite this business, which is in practice directly accounted for on the insurer’s balance sheet. In line with efforts to strengthen revenue capacity and promote business differentiation, banking institutions have formed strategic alliances with other types of financial institutions. This model is usually implemented when either regulation or tax treatment does not allow a close integration of banking and insurance activities. Under this model, the insurance company typically pays distribution commissions to the bank, which are in turn offset by entry and management fees charged to policyholders. The business logic for such a model is the recognition by a bank of a real need to be in a position to offer (mostly life) insurance products to its customers while being unable or unwilling to develop such expertise internally.
2. Joint Ventures
This business model relies on a more or less balanced shareholding between one or several banks and an insurance group in a joint venture insurance company. This joint venture distributes its products only through the network of its banking parent(s). In addition, the relationship between the bank and the insurer is sometimes reinforced by a strategic shareholding. The joint venture typically pays distribution commissions to the bank, which are in turn offset by entry and management fees charged to policyholders. In addition, the bank also benefits from the joint venture's profitability through dividends paid. As in the case of the partnership model, the business logic for creating a joint venture is a recognition by a bank of a real need to be in a position to offer (mostly life) insurance products to its customers with an intention to build up expertise in this area. Typically, the joint venture is granted exclusive access to market insurance products through the bank's network. However, the joint-venture business model is also very popular in non-life insurance.
3. Captives ( Financial Services Group)
According to this model, an insurance company markets its products almost exclusively through the distribution channel of its banking parent. In such cases, the ownership by the bank in the insurer is typically very high, often 100%. The captive insurance company typically pays distribution commissions to the bank, which are in turn offset by entry and management fees charged to policyholders. In addition, the bank also benefits from the insurer's profitability through dividends paid. When compared to the partnership model or a joint venture, the logic for the captive business model is the recognition by the bank of a real need to be in a position not only to offer (mostly life) insurance products to its customers but also to keep the full know-how and profitability of the business in-house. The insurance captive becomes an important tool of the bank's marketing policy and is a separate legal entity only due to regulatory constraints. Nevertheless, it is very important that the bank management has sufficient understanding of the insurance business. Depending on the group structure, the insurance captive may be a direct subsidiary of the bank or a sister company, both owned by the same holding company. This difference in terms of legal structure generally reflects the significance of the business written by the insurance captive through non-group channels. All over the world, new financial groups with substantial banking and insurance activities, emerge. In the US, where the regulatory environment still prohibits the full integration of banking and insurance activities, the merger between Citicorp and Travellers Group, completed at the end of 1998, has increased the interest in the topic. It is thought that the Travellers-Citicorp merger could push other firms into similar partnerships and removes the legal barriers, separating banks from insurance companies.
However, Many large European institutions are structured as “conglomerate” with separate bank and insurance subsidiaries held by a common holding company. The fact that conglomerates very visibly run both banking and insurance activities does not necessarily mean that there is much interaction between the two. Thus, Fitch (2006) prefers to use the term "Bancassurance" only when the two businesses are run in an integrated manner.
Apr 11, 2007
Apr 10, 2007
What is love?
"Love is like a spice. It can sweeten your life - however, it can spoil it, too".
Confucius
Do you need love?
"I have never met a person whose greatest need was anything other than real, unconditional love. You can find it in a simple act of kindness toward someone who needs help. There is no mistaking love. You feel it in your heart. It is the common fiber of life, the flame that heals our soul, energizes our spirit and supplies passion to our lives. It is our connection to God and to each other."
Elizabeth Kubler-Ross
Apr 7, 2007
How are you?
"You are beautiful...when you let friends have their space, when you believe, when you laugh, or are moved to tears, when you let it just roll right off your back, when you talk about your dreams, when you help a turtle across the road, when you try to do the right thing even when it comes out wrong, when you love."
Love Words
"A man over time falls in love with the woman he is attracted to, and a woman over time becomes more attracted to the man she loves."
Jennifer Wilkinson
Apr 4, 2007
Apr 2, 2007
Love Words
"I have never met a person whose greatest need was anything other than real, unconditional love. You can find it in a simple act of kindness toward someone who needs help. There is no mistaking love. You feel it in your heart. It is the common fiber of life, the flame that heals our soul, energizes our spirit and supplies passion to our lives. It is our connection to God and to each other."
Elizabeth Kubler-Ross
Love Quote of the Day
"Love is the expression of simplicity in emotion, the unattainable longing that comes so unexpectedly, with great subtlety and bliss."
Luen Dao
The Driving Factors of Bancassurance
In fact, there are a number of driving factors lying behind the formation of Bancassurance strategy. Banks see Bancassurance as a way of creating a new revenue flow and diversifying its business activities. By entering insurance and expanding non-interest-income (i.e., fee income), banks can diversify some of their net interest rate margin risk without sacrificing profitability. The economies of scope is another factor.Banks may be able to sell insurance at a lower cost than the independent, small agencies/brokerages by targeting its existing, sizable customer base; taking advantage of their significant brand awareness within their geographic regions; and using their existing employees as an insurance sales force. Cost economies of scope might exist also with respect to transaction costs. In addition, by diversifying their business into insurance, banks might fully exploit their brand name and provide “one-stop banking” for its existing customers. The latter increases the number of products per customer and reduces the possibility of losing customers to competitors. The entrance of banks into insurance might provide deeper penetration into the insurance market, especially the middle-income market.
Estrella (2001) examines direct measures of potential diversification gains from consolidation of financial firms. His results indicate that there may be bilateral diversification gains from mergers involving the banking and insurance industries. Estrella points out that these gains are not limited to life insurance as suggested by the previous authors, but extend to nonlife insurance companies, which actually lead to larger diversification gains than with life insurance companies. He also shows that life insurance and nonlife insurance have relatively large correlations with regard to each other, but also with regard to large banks. One of the main reasons that banking-insurance combinations enhance diversification is not lack of commonality, but that the insurance industries are already highly diversified compared to other financial sectors. Also, Boyd (1993) used hypothetical cross-product mergers and simulations and found risk reduction effects from these deals.
The emergence of Bancassurance contributed to overall efficiency, an increase in economies of scope and an increase in productivity of both banks and insurance companies in some of the European countries. Similarly, to what Swiss Re, (No.7/2002) reported, that Bancassurance has led to lower, report or stable distribution cost compared with career agents in Asia. Economies of scope may arise from both the production and consumption of financial services (Saunders and Walter, 1994). A larger scale production of elements common to these various financial services can lead to cost advantages through economies of scale. Several specific cost advantages which have been identified include: gains through concentration of risk management, administration functions, and integrated product development; marketing economies in the common delivery of different services; better information access and sharing of information across different product groups; reputational and pecuniary capital to be shared across different products and services; and enhanced potential for risk management through diversification gains. On the consumption side, economies of scope may derive from: the potential for lower search, information, monitoring and transaction costs; negotiating better deals because of increased leverage; and lower product prices in a more competitive environment. The empirical evidence on the existence of economies of scope between banking and insurance service is very limited, however. One of the few studies is Carow (2002). He analyzed the Citicorp - Travelers Group merger that increased the prospects for new legislation removing the barriers between banking and insurance. He finds that the merger resulted in a positive wealth effect for institutions most likely to gain from deregulation. Life insurance companies and large banks (other than Citicorp and Travelers Group) had significant stock price increases, while the returns of small banks, health insurers, and property/casualty insurers were insignificantly different from zero.
According to Capita (2006), Banks have a number of competitive advantages in the provision of insurance products. First, they have much better information on individual consumers—seen as key to pricing risk effectively. Second, the banks may be able to bring enormous economies of scale, particularly if they are part of a major global network. Michael Porter identified two basic types of competitive advantage, which are cost advantage and differentiation advantage. A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself.
According to Capgemini Analysis (2006), customers have become more self-sufficient, price-sensitive, and less loyal . Moreover, insurers and distributors can no longer assume a satisfied customer will be loyal when the relationship is tested.
Estrella (2001) examines direct measures of potential diversification gains from consolidation of financial firms. His results indicate that there may be bilateral diversification gains from mergers involving the banking and insurance industries. Estrella points out that these gains are not limited to life insurance as suggested by the previous authors, but extend to nonlife insurance companies, which actually lead to larger diversification gains than with life insurance companies. He also shows that life insurance and nonlife insurance have relatively large correlations with regard to each other, but also with regard to large banks. One of the main reasons that banking-insurance combinations enhance diversification is not lack of commonality, but that the insurance industries are already highly diversified compared to other financial sectors. Also, Boyd (1993) used hypothetical cross-product mergers and simulations and found risk reduction effects from these deals.
The emergence of Bancassurance contributed to overall efficiency, an increase in economies of scope and an increase in productivity of both banks and insurance companies in some of the European countries. Similarly, to what Swiss Re, (No.7/2002) reported, that Bancassurance has led to lower, report or stable distribution cost compared with career agents in Asia. Economies of scope may arise from both the production and consumption of financial services (Saunders and Walter, 1994). A larger scale production of elements common to these various financial services can lead to cost advantages through economies of scale. Several specific cost advantages which have been identified include: gains through concentration of risk management, administration functions, and integrated product development; marketing economies in the common delivery of different services; better information access and sharing of information across different product groups; reputational and pecuniary capital to be shared across different products and services; and enhanced potential for risk management through diversification gains. On the consumption side, economies of scope may derive from: the potential for lower search, information, monitoring and transaction costs; negotiating better deals because of increased leverage; and lower product prices in a more competitive environment. The empirical evidence on the existence of economies of scope between banking and insurance service is very limited, however. One of the few studies is Carow (2002). He analyzed the Citicorp - Travelers Group merger that increased the prospects for new legislation removing the barriers between banking and insurance. He finds that the merger resulted in a positive wealth effect for institutions most likely to gain from deregulation. Life insurance companies and large banks (other than Citicorp and Travelers Group) had significant stock price increases, while the returns of small banks, health insurers, and property/casualty insurers were insignificantly different from zero.
According to Capita (2006), Banks have a number of competitive advantages in the provision of insurance products. First, they have much better information on individual consumers—seen as key to pricing risk effectively. Second, the banks may be able to bring enormous economies of scale, particularly if they are part of a major global network. Michael Porter identified two basic types of competitive advantage, which are cost advantage and differentiation advantage. A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself.
According to Capgemini Analysis (2006), customers have become more self-sufficient, price-sensitive, and less loyal . Moreover, insurers and distributors can no longer assume a satisfied customer will be loyal when the relationship is tested.
Munich Re (2001) summarizes the reasons why banks have decided to enter the insurance industry area: (1) The intense competition between banks, against a background of shrinking interest margins, has led to an increase in the administrative and marketing costs and limited the profit margins of the traditional banking products; (2) Customer preferences regarding investments are changing. For medium-term and long-term investments there is a trend away from deposits and toward insurance products and mutual funds where the return is usually higher than the return on traditional deposit accounts; (3) The need for more efficient utilization of branches and bank employees is today as pressing as ever. According to Benoist (2002), life insurance products can bring immediate added value to a retail bank's customer service process and the bank sales force can sell them effectively; (4) Analysis of available information on the customer’s financial and social situation can be of great help in discovering customer needs and promoting or manufacturing new products or services; (5) The realization that joint bank and insurance products can be better for the customer as they provide more complete solutions than traditional standalone banking or insurance products; (6) There is a strong need for customer loyalty to an organization to be enhanced; (7) The increasing pressure on public pension systems and an increasing need for additional retirement provisions or long-term investment products; and (8) Banks are used to having long-term relationships with their customers. This allows similar skills to be practised and the bancassurer can make use of the best that each partner has to offer; (9) Bancassurers can have a competitive advantage over traditional insurers (non-bancassurers), derived from the provision of customer service through automated teller machines (ATMs). In particular the bancassurer can provide its customers with an ATM card that can be used to gain access to any ATM and request information such as cash values, unit price, policy status, next premium due date, loan accounts, surrender values, etc.
With regard to the other player, the insurance companies distribute their products through retail bank branches. They pay commission to the bank, like making payments to their agents and agencies. Nevertheless, Donne (2003), elaborated on the advantages for the insurers in a Bancassurance relationship on six aspects:
1. Ability to tap into banks’extensive customer base;
2. Reduced reliance on traditional agents by making use of the various channels owned by banks;
3. Shared services with banks;
4. Develop new financial products more efficiently in collaboration with their bank partners;
5. Establish market presence rapidly without the need to build up a network of agents;
6. Obtain additional capital from banks to improve their solvency and expand business.
However, Focus (2005) elaborated more two advantages for the insurance companies. Firstly, the insurance company often benefits from the trustworthy image and reliability that people are more likely to attribute to banks. Secandly, the insurance company also benefits from the reduction in distribution costs relative to the costs inherent in traditional sales representatives, since the sales network is generally the same for banking products and insurance products. Equally, Donne (2003) observed that banks have what insurers want: distribution, branch network, customer base, databases, regular contact, brand, reputation and customer loyalty. Of course, not everybody in the market agrees. Mr Claude Tendil, Chairman of Generali France, expressed this in an article published by La Tribune on February 28, 2005, where he admitted that he was “still hostile to the Bancassurance model” since, in his opinion, “it works in only one direction, to the benefit of the banks”.
To sum up, Bancassurance represents a strategy by which banks and insurers co-operate in a more or less integrated way to work the financial markets (Swiss Re No.7/2002). For both banks and insurers, there is a great opportunity to learn and to make improvements in their own operation.
With regard to the other player, the insurance companies distribute their products through retail bank branches. They pay commission to the bank, like making payments to their agents and agencies. Nevertheless, Donne (2003), elaborated on the advantages for the insurers in a Bancassurance relationship on six aspects:
1. Ability to tap into banks’extensive customer base;
2. Reduced reliance on traditional agents by making use of the various channels owned by banks;
3. Shared services with banks;
4. Develop new financial products more efficiently in collaboration with their bank partners;
5. Establish market presence rapidly without the need to build up a network of agents;
6. Obtain additional capital from banks to improve their solvency and expand business.
However, Focus (2005) elaborated more two advantages for the insurance companies. Firstly, the insurance company often benefits from the trustworthy image and reliability that people are more likely to attribute to banks. Secandly, the insurance company also benefits from the reduction in distribution costs relative to the costs inherent in traditional sales representatives, since the sales network is generally the same for banking products and insurance products. Equally, Donne (2003) observed that banks have what insurers want: distribution, branch network, customer base, databases, regular contact, brand, reputation and customer loyalty. Of course, not everybody in the market agrees. Mr Claude Tendil, Chairman of Generali France, expressed this in an article published by La Tribune on February 28, 2005, where he admitted that he was “still hostile to the Bancassurance model” since, in his opinion, “it works in only one direction, to the benefit of the banks”.
To sum up, Bancassurance represents a strategy by which banks and insurers co-operate in a more or less integrated way to work the financial markets (Swiss Re No.7/2002). For both banks and insurers, there is a great opportunity to learn and to make improvements in their own operation.
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