In the United States, Bancassurance was banned until the repeal of the Glass Steagall Act in 1999. It has not caught on as a practice for most forms of insurance.
There is no simple way of entering into bancassurance which is “best” for every insurer and every bank. The company’s internal and external environmental analysis and the goals of the company have to be clear and concise before a strategic plan is agreed upon.
The simplest form of bancassurance is that one party’s distribution channel can have access to the clients of the other organisation. When a bank and the insurance company enter into a distribution agreement and the bank automatically passes ‘warm leads’ from its client base to a competent, friendly insurance company, a very profitable relationship can result from such an agreement.
BIM (Bank insurance model) is a relationship between a bank and an insurance company. Using the banks sales channel, the insurance company uses the bank’s sales channel to sell insurance products to on-sell its particular policies to the bank’s client base. Bank staff and bank employees, even tellers become the point of contact and sales to the bank’s clients. Commission is shared between the bank and the insurance companies, however, the policies are managed by the different insurance companies.
Insurance companies ensure that the staff in the banks involved in the sales of insurance products are provided with product information, sales training and marketing campaigns and the BIM model has shown to be a very effective distribution channel.
Many feel that banks have too great a control over the financial industry as well as creating too much competition with existing insurance companies.
In China, bancassurance products have exploded across several product lines. However, in certain countries, bank insurance is largely prohibited. Most sales in U.S. Banks are life insurance, property insurance and mortgage insurance.
Traditional Insurance models (TIM) have to have larger sales teams and also work with third party agents and brokers. BIM (known as the Bank Insurance Model), is very popular in European countries such as Spain, France and Austria,and is also crossed with TIM for what is known as HIM (Hybrid Insurance Model). HIM is a combination of TIM and BIM.
Privatbank Assurance is pioneered by Lombard International Assurance which is a globally used wealth management company. This concept combines private banking and investment management services. Lombard applies expertise to create innovative wealth structuring solutions to meet the unique needs of high net worth clients using life assurance in conjunction with sophisticated financial planning.
Insurance activity in a bank is integrated with the usual bank processes and is referred to as “Integrated Models”. The bank collects the premium, normally by a direct debit order from the client’s bank account at that particular bank.
The workflows are automated between the bank and the insurance companies. The bank receives a commission for these transactions. For more sophisticated products, the bank’s staff has the support of specialised insurance advisors.
Certain life insurance products can only be sold by financial advisors who have obtained a minimal qualification and this is referred to as “Non-Integrated Model” so due to these rules, branch staff have been limited by regulatory constraints. Banks set up a team of financial advisors who are authorised to sell regulated insurance products. Mailing and telesales is the means by which the advisors target the bank’s clients. These financial planners are employed by the bank and they usually receive a salary plus commission from the bank.
Good reasons for banks to enter into bancassurance:
Due to the intense competition between banks, there is an increase in administration and marketing costs. As well as shrinking interest margins, there are limited profit margins in traditional banking products. New products such as bancassurance can increase production and therefore enhance profitability
Income that is generated is increased in the form of commissions from the insurance company.
The bank’s fixed costs are spread with the help of the insurance company bearing some of the costs.
The bank staff have more products to offer clients so this increases the productivity of the staff and in turn the efficiency of the bank.
The return on traditional deposit accounts has been of such a nature that customer preferences are changing and they are regarding insurance products and mutual funds in a more favourable light with regard to medium-term and long-term investment.
The main core of profitability for banks has been savings held as deposits for clients. By entering the life insurance business, the banks have found a way to offset some of their losses.
Favourable tax treatment of life insurance which is there to encourage private provision for protection and retirement planning make the purchase of insurance products more attractive to clients, thereby assisting the banks to increase profitability.
For example, the client wants to fund future education costs. He/she takes out permanent assurance. Simultaneously the policyholder can take out a mortgage loan and the bank can have the client assign the policy to the bank as beneficiary which results in a more widely based relationship with the customer.
The benefits of bancassurance for insurance companies:
Source of new business – previously unreached clients.
Source of new business – wide range of products (including banking products).
Both bank and insurers get exposure to the other’s distinctive management style and thus the great opportunity to learn and make improvements in their own operations.