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.
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