In New Zealand, individuals typically purchase home insurance as part of the process associated with the purchase of a home. Empirical evidence has shown that consumers who group insurance choice together with other major choices such as the purchase of a property, tend to rely on disproportionately simple choice strategies when making insurance decisions. This is exacerbated by the interface between insurance and banking in New Zealand.The homeowner applies for a mortgage, asks about insurance and is referred by the bank to that bank’s ‘preferred insurer’. A decision is made by the unsuspecting homeowner, often on the spot, without any thought to the consequences or the quality of the different insurers’ claims-handling processes or practices or reputation.
What has become abundantly clear in Canterbury is that the quality between insurers and the service they provide varies drastically. You cannot afford to have a bank determine vicariously who your insurer is to be. The choice of insurance service provider is a decision that the home owner should take consciously and not simply because ‘your ‘ bank recommended them. Banks and their insurance partners have mutually beneficial business relationships and both have something to gain in you buying their product. Your decision could and will mean the difference between immediate resolution of a claim or a wait of several years and considerable legal expense if you have chosen the wrong insurer. I know I did.
I find it extraordinary that banks do not show more interest in the insurers with which they ‘partner’, together with their reputations and performance toward their clients – it is, after all, the banks’ assets at risk. There is no doubt that a bank’s reputation can be adversely affected by the insurer with whom they are partnered.
Where there is poor handling of claims and delays in settlement the bank is automatically linked with the insurers poor performance. Consequently the bank tries to have any visible ties with the insurer and its’ market product under the insurer’s own brand. New Zealand banks do this remarkably well.
I have certainly written to my bank since the earthquakes and expressed my dissatisfaction with its chosen insurance partner. I have also heard of others changing their bank as a result of the bank’s association with an insurer they feel has failed to perform its obligations adequately. Banks should remember that if they associate with a ‘poor insurer’ they will lose clientele. Once again we see an environment where the needs of the customer are not the primary concern but rather corporate profit margins are the sole motivator.
Some countries favour complete integration between banking and insurance while others allow limited retailing of insurance by banks (e.g. Canada and New Zealand).
Banking and Insurance are sometimes referred to as ‘the two sides of the same coin’. Banks are diversifying into insurance business and, to a lesser degree, insurance companies are making inroads into the banking arena. Banks are more aggressive than insurers and due to their cross-business strategic activities, could be referred to as ‘financial supermarkets’. Networking and alliance formation are growing trends in the financial sector. This often takes the form of a joint venture of a large bank which has a well-developed customer database with a large life insurer with strong product/channel experience which when combined, develop a powerful network. For banks and insurance companies, such convergence has created a new field in the financial services world, namely the ‘Bankassurance’ phenomenon. “It is a global movement which is gradually breaking down the traditional barriers between the various businesses of supplying financial products and services“. I will write more about Bankassurance in the next post.
The benefits of combining banking and insurance are clear:
“maximize the efficiency of product development, especially hybrid products, implement the one door principle [customer is offered as many products as possible at one place during one customer event] as effectively as possible, compromise conflicting earnings logics as well as possible, maximize the efficiency of customer relationship management, optimize cost and revenue synergies, minimize channel conflicts, optimize required solvency capital, maximize investor power, maximize the efficiency of sales management“. (Comparing Alternative Structures of Financial Alliances, Raimo Voutilainen, The Geneva Papers, 2005, 30, (327-342)pp, 333).
What is not so clear for the consumer are the risks involved in combining banking and insurance, certainly there is likely to be a greater lack of transparency and increased financial risks.
The biggest risk for banks is image risk i.e. intangible reputational risk. The combination of banking and insurance can also lead to monopolistic behaviour which detract from some of the economic benefits that ‘unrestrained laissez-faire’ is expected to yield. One sided information sources and incentive problems also have the potential to cause disruptive effects when activities are combined under the same roof.
Conflicts of interest and large size, help to breed fraud and undermine the safety and soundness of companies. The linkages help to compound problems and can indirectly extend the benefits of the “safety net” set up by authorities to prevent systemic crises. There is always the risk of instability and insolvency. Within the creation of large financial groups, problems in one part of the organisation have the ability to infect other parts of the operation. In the current economic global market place, the risk of instability grows enormously. ANZ Banking Group’s chief executive says,
“Australian banks have sufficient liquidity to deal with the credit crunch caused by the unfolding debt crisis in Europe. If credit markets in Europe were to stay closed for another six months, then that would be a different thing but I am not that pessimistic“. http://money.msn.co.nz/businessnews/other/8390812/anz-funding-costs-rising-on-euro-crisis
Well, I am not that optimistic either and do believe that insurance and banking should remain separate. Our (i.e. we the consumers) financial health depends upon it. In Europe there are moves toward separating banking and insurance e.g. the ING has separated out these functions.
So to all those property buyers out there, consider your insurance provider very carefully, don’t just accept the Bank’s suggested provider.
~Future Proofing for a sustainable, participatory, democratic society.
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