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Avoiding Financial Supermarkets….What is Bankassurance?

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Convergence (Photo credit: Malcolm Tredinnick)

Sometimes spelt Bancassurance…A bit like the name suggests it is the complete integration between banking and insurance. In its simplest form it is the distribution of insurance products through a bank’s established distribution channels. The result is a banking corporation that can offer banking, insurance, lending and investment products to its customers.

ING (a major Dutch Bank) for example has been an active developer of bankassurance in the Asia and Pacific regions. ING expanded into Australia and New Zealand by entering into a funds management and life insurance joint venture with ANZ. Since then it has negotiated more than 200 bank distribution agreements. In Brazil, five of the eight largest insurance groups belong to banks, and in Mexico 16 out of 64 insurers belong to a financial group. In Singapore bankassurance claims a market share of 24 per cent of new business in the life insurance sector, while Malaysia and Thailand claim 6 per cent and 2 per cent respectively. Japanese (April 2001) and Korean (August 2003) banks are the newcomers in the insurance market place. The phenomenon is also well-developed in Australia. The banks, which have 56 per cent of all premiums, own 43 per cent of assets in the Australian life insurance sector. (See “The Separation of Banking from Insurance: Evidence from Europe”, Mohamed Nurullah and Sotris K. Staikouras in Multinational Finance Journal, 2008, Vol. 12, no 3/4, pp 157-184).

According to the Reserve Bank of New Zealand: Bulletin, Vol. 67, No. 2, the Australian and New Zealand banking markets are highly integrated and interdependent. Currently in New Zealand, insurance can be offered in bank branches. Most of the major banks have partnership relationships with particular insurers. For instance, ANZ has a partnership with Vero, ASB with Australian IAG Group (and subsidiaries State Insurance, NZI, AMI, IAG). BNZ also sells insurance products.

This method provides an easier way for foreign insurance companies to enter a new marketplace allowing it to leverage off the local bank’s market. Banks use bankassurance to increase their income via commissions and profit-sharing agreements.

Those who suggest we reduce or better, eliminate restrictions on bank involvement in insurance retailing, believe that consumers would benefit. The benefits suggested include:

  • improved coverage in access to insurance;
  • increased convenience
  • lower prices for insurance products and services (though I suspect this is a myth).
  • competition among insurance providers would increase, which would ultimately result in an improved service and better prices for consumers ( I wouldn’t count on this either).

Banks argue that they have a cost advantage by providing insurance in terms of physical infrastructure costs and staffing costs and this allows them to spread those costs over more financial products and services (which probably equates to more profit and nothing more).

There is no doubt that banks favour the expansion of their insurance related activities. It is likely that these increase flexibility in in-branch referrals and foster inter branch sale of all insurance products and services.

I postulate that the growing involvement of banks in the insurance industry here in New Zealand is of some concern. Firstly a good bank customer is not necessarily a good insurance customer. Just as banks are in the business of managing credit repayment risk, insurance distributors are in the business of managing claims risk. This mismatch typically creates lender referrals plagued with a poor claims history or require insurance solutions that an acquired agency cannot solve or cannot afford to solve.

Investments banks, insurance companies, reinsurers and insurance brokers are also coming together to jointly form catastrophic property and liability insurance companies to write high limits of traditional insurance. Some examples include significant capitalizations from J.P. Morgan for the formation of Bermuda-based EXEL, Limited and Mid-Ocean Reinsurance, and Morgan Stanley’s investment in ACE, Limited.

The opposite trend is also taking place. For example, a number of large insurance companies and insurance brokers develop capital management companies. American International Group established AIG Capital Management, a division focusing on global investment banking. And we all know what trouble they got into in the 1990s……..

In 1992, Marsh & McLennan established a new division, Marsh & McLennan Risk Capital, to focus specifically on investment activities, primarily in the insurance industry.

From these examples, it is clear that investments and risk are considered to be complementary. This can also be seen in the redefinition of the reinsurance company, Swiss Re’s mission and core business statement: “the mission of Swiss Re Group is to be the authority on managing capital and risk, based on the core competencies risk transfer, risk financing and asset management“.[1]

The more integrated these large corporates become the more at risk both systemically and financially the rest of us are!

 ~Future Proofing for a sustainable, participatory, democratic society.

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[1] Policy issues in insurance: insurance regulation liberalisation and Financial Convergence, Insurance Issues and Regulation and Supervision in the OECD Countries, No 3., Organisation for Economic Co-operation and Development, p 196.

Author: Sarah-Alice Miles

Love to write, create and watch the clouds move across the sky - these days in the Netherlands. 'Art allows us to find ourselves and lose ourselves at the same time'.

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