By Nefissa Sator and David Schraub
The first countries to embark on this Bancassurance adventure were France and Spain, respectively in the ‘70s and ‘80s. Recognized as a distribution model in developed countries (Southern Europe, Norway) and emerging countries (Asia, Latin America), Bancassurance remains marginal in the United States. Some key requirements in its development, described below, have probably not been met. To attempt an analysis, let us first describe how Bancassurance developed in France and what its characteristics are.
Bancassurance: No Legal Definition but a Way of Distribution in an Integrated Model
Do not look for the regulation, Bancassurance is not formally defined. It is generally a distribution channel where insurance products are sold by banking networks. However, this definition is too simplistic regarding its organizational and operational implications in an integrated model. It is not enough to have insurance contracts available from bank tellers to be considered real Bancassurance.
The natural collaboration between banks and insurers is usually via mortgage insurance when banks need to insure against the risk of losing future scheduled payments and homeowners need to insure against the risk of losing their homes in case of death or disability or loss of employment. In France, there is no legal obligation for such coverage, but banks typically make it a requirement for issuing loans. The idea of Bancassurance is to skip intermediaries for the insurance of mortgage loans and to create an entity within the group to become the insurer of its own clients.
The French government, via insurance laws, has facilitated access to loans and insurance. More specifically, the French government enacted a law to allow access to mortgage insurance, initially only for people with HIV and in case of death (Belorgey agreement – 1991). They later extended it to severe precondition applications (AERAS agreement – January 2007). AERAS stands for Assurer et Emprunter avec un Risque Aggravé de Santé which translates in English to Ensure and Borrow with Increased Health Risk. AERAS made it possible for individuals with especially high disability risk to obtain insurance. It also limits the benefit’s exclusions and premium increases.
Examples of individuals considered to have severe preconditions are those who have been cured from cancer two years ago or who have contracted HIV but don’t show symptoms. These risks would typically be excluded by the insurance contract through the medical underwriting process. But these risks can be covered with the risk pooling mechanism. These two laws had an important impact on the Bancassurance’s development in France.
More than a partnership with distribution agreements between the two parties, Bancassurance in France has developed in an integrated model. Banks have created dedicated insurance subsidiaries, i.e., dedicated captive legal entities with insurance licenses and whose capital is owned wholly or partly by the bank. The bank is involved in the governance of the insurance company, its management, its profitability and sustainability.
That said, major cultural differences are noted between insurers and banks and do not facilitate the reciprocal understanding of each other’s business model. That is why it is essential that the insurance entity masters the business of insurance. The regulator understood this tension and supports the clarification of roles and responsibilities. The responsibility of all insurance operations are assigned to the insurer, including those delegated back to the bank as marketing, sales, advertising, client communications, etc.
For the bank, the objective is to diversify its sources of income and to mobilize its network using a broader product range. In turn, this enhances customer satisfaction and loyalty. The trust relationship between the bank advisor and its clients is an asset leveraged facilitating the sale of insurance products tailored to clients’ needs. Of course, the banking network must be trained properly to sell these insurance products.
For insurers, it is to their advantage to leverage the positive image of the bank, its presence and location in the country and the strength of its network. The bank provides a very large base of potential customers and allows insurers to diversify their distribution channels.
For the consumer, a one-stop shop with a single partner for all its banking, savings and insurance needs is convenient.The cross-selling of complementary products is advantageous for both entities. Some examples of complementary products could include mortgage loan and home owner’s insurance, consumer credit/auto loan and auto insurance, savings account and life insurance.
Despite the differences in cultures between the two entities, the insurance products sold by banks started with the traditional insurance company products. Banks leverage their knowledge and their relationship with its customer to jump start insurance discussions. Commoditized insurance, like simplified-issue yearly-renewable term life and disability products, are now the most popular followed by P&C products, such as auto and home owner’s insurance. Individual health, covering the gap between state coverage and cost, and long-term care (LTC) products are also offered. Two Bancassurance companies lead the individual LTC insurance market by contract number, despite the medical underwriting process slowing down the sales process. Life insurance and accident insurance products “Garantie Accident de la Vie—GAV” have been widely distributed in France through the Bancassurance channel.
Dedicated products are also offered, such as insurance linked to a credit card covering the outstanding debt. Nowadays, Bancassurance is turning toward businesses with products like directors and officers (key employee) insurance and defined contribution plans, for example.
A key to Bancassurance’s success is the training and preparation of the banking network for the sale of insurance products. This means that marketing and sales teams of both entities must work together on the strategic plan, marketing, sales force training, understanding of customer needs, and development of simple products. So the subsidiary needs to train the holding company’s employees for the joint benefit of the group, who had to invest heavily into sales force training to access new sources of diversified financial flows.
A banking network for the sale of insurance products is an important concept in France as the sales force is not a dedicated insurance sales force. Account managers and bank tellers know banking products that represent the overwhelming majority of their day-to-day life. Insurance products are a fraction of their activities. They have been trained well enough to sell simple insurance products in addition to their core bank business. A “Common Answers to Common Questions” leaflet is the cheat-sheet frequently used by these individuals. Most complex products are out-of-reach of this network. It is not uncommon to see higher lapse rates in Bancassurance compared to traditional insurance sold via a dedicated sales force, likely due to the sales methodology and lack of understanding and time spent on a needs analysis.
The establishment of a strong communication between the bank and the insurer is required for continuous sales force support, training and incentive to sell insurance products. One hurdle is overcrowded shelf space: this network is often found with (too) many products to sell. The insurer plays an important role in this sales support.
A key to success will be to obtain buy-in from the bank and its network that selling insurance makes sense. They should be made aware that selling insurance generates value for the entire group through the payment of distribution fees and through the economic value generated by the insurance portfolios. Another benefit is that this insurance income will also strengthen the capital of the group. Other benefits include the insurer’s contribution to reducing reputation risk and strengthening the protective image of the bank with clients.The collaboration between the two entities is not limited to sales and marketing teams. It is a multitude of fine tuning at different stages of the product development process and sales process. It also requires leveraging the knowledge of the customer, as well as, monitoring of sales, reserves, and risks. Also key are important information technology (IT) and operational components.
There is no legal framework for Bancassurance. Its development wasn’t triggered by a law or a reform. Each legal entity is tied to its regulatory framework and abides by its codes. The insurance operations are logged within a licensed insurance company. That insurer is usually a captive of the bank, which is acting as a broker or sales agent. This implies the group governance hangs on the strategic and functional organization of the relationship between various legal entities within the group.
The insurer is fully responsible for all the insurance operations, including the ones delegated back to the bank like sales distribution. Noticeable examples include the sign-off on all contractual language, all commercial writing, all illustrations and other documents handed to the client. The insurer is also responsible for product pricing, administering temporary discounts if applicable sales tools, and the retention of the legally binding signed contracts by the client.
Important IT enhancements are needed to link the bank and insurance company’s tools and client databases. Typically, each entity’s tools and database warehouses are tailored to each business’ need. Thus, IT is another field where subject matter experts on both sides need to work together.
This clear delineation of ownership reinforces the good management and governance of Bancassurance activities. In France, the bank and insurance regulatory bodies merged in Jan. 2010. Now, the protection of depositors and policyholders, as well as the financial stability of the system, are under a single roof. This eases the control of the Bancassurance activities. Note this merger was not a required element for the development of this distribution channel, as Bancassurance was well established and flourishing before the merger of the regulatory bodies.
Internal controls are another check to ensure processes are compliant with the appropriate regulation. The distribution agreements have to be written, signed and applied. The compensation process needs to be documented and enforced. Banks should organize internal audit reviews of its subsidiaries and insurance captives should control its distribution channels stationed in the banks. Therefore, it is important to describe the various processes (commercial, management, accounting, etc.) in a process repository to allow for the identification of all stakeholders in each step and monitor the appropriate implementation of these processes.
After Bancassurance, Assurbanque?
The development of “Assurbanque” is the response of traditional insurance companies to Bancassurance; the insurers created their own captive banks.
The insurance regulatory framework allows insurers to extend their activities beyond insurance operation as long as the new activities remain minor to the overall insurance activities. Insurance companies are also allowed to become the financial broker for bank operations and payment services.
The development of Assurbanque remains very limited as insurers have to heavily invest in a banking platform, adapt their tools and culture, and improve their customer intelligence. Insurers need to be able to administer banking transactions like checking account management, saving account management, and mortgage issuing and servicing.
Over the past several years, insurers have invested a significant amount of time and money on customer relationship management (CRM) projects to improve their customer intelligence, to better understand customer needs, and to better communicate with their clients. This could be the intermediary step needed for the Assurbanque to take off.
Among the Assurbanque pioneers are the large insurers: Allianz, which bought Dresdner Bank and created its own bank in 2000, Axa Group, and Groupama. The mutual insurers have decided to go the partnership route.
What’s next in France? Banks demonstrated that they can be basic insurers. Insurers are trying to be non-sophisticated banks. Mutual insurers are partnering with Commercial Unions. The Internet is breaking up face-to-face relationship-based models offering cheaper commoditized products. It appears distribution of financial products will keep evolving in France.
What’s next in the United States? Could this model be replicated, overcoming cultural and regulatory barriers? Or will we just have to wait for Amazon to take over?
Nefissa Sator, fellow of the French Institute of Actuaries IA, CERA, is the CEO of Forsides Actuary North America. She can be contacted at firstname.lastname@example.org.
David Schraub, FSA, CERA, MAAA, fellow of the French Institute of Actuaries IA, is staff fellow—Risk Management for the Society of Actuaries. He can be contacted at email@example.com.