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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