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A practical approach to blend insurance in the banking network

Panayiotis G. Artikis
University of Piraeus, Piraeus, Greece, and

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Stanley Mutenga and Sotiris K. Staikouras

Cass Business School, City University, London, UK
Abstract
Purpose The purpose of this paper is to look at the main empirical ndings related to the bank-insurance model and to outline the market practices across the world. The market dynamics underpinning the bancassurance phenomenon are analyzed alongside discussions of the various bancassurance products and bank-insurance modes of entry. Design/methodology/approach The paper presents a brief survey of the bank-insurance trend and provides an insight into the underlying dynamics and corporate structures of nancial conglomerates. Findings There is an uneven success of the bancassurance phenomenon across the world. It is not clear whether re-regulation is the cause or response to globalization, and vice versa, which in turn both shape the bancassurance arena. A number of incentives for the formation of nancial conglomerates are identied. Finally, three modes of entry have been documented to reect market realities. Originality/value The paper will be of value to those interested in nancial conglomerates, banking and insurance. It is suitable for academics and practitioners alike. Keywords Financial institutions, Banks, Insurance services Paper type Research paper

1. Introduction Over the past decades, fundamental changes in the industry of nancial intermediation, such as deregulation and advances in technology, had a visible impact on the provision of nancial services. Deregulation, in various parts of the world, has made exible the provision of nancial services and promoted competition among nancial institutions. This is mainly due to the removal of signicant restrictions that have previously hampered the horizontal and, to a greater extent, the vertical expansion of nancial rms[1]. Technological progress has also increased protability and facilitated faster processing and monitoring of multiple activities at even lower costs (Berger (2003), Berger and DeYoung (2006)). One of the most prominent transformations undergone by the nancial services industry has been the emergence and expansion of bancassurance (or bank-insurance). It naturally falls under the umbrella of corporate restructuring with mergers and acquisitions[2] being more frequently mentioned. With the level of competition rising, banks were soon to be found in a situation where prot margins were falling; while
The Journal of Risk Finance Vol. 9 No. 2, 2008 pp. 106-124 q Emerald Group Publishing Limited 1526-5943 DOI 10.1108/15265940810853896

The authors would like to express their gratitude to Antonis Ntatzopoulos and Argyro Banila for providing valuable comments, as well as to the anonymous referees for their constructive feedback. Special thanks are due to Maria Agathokleous and Sahad Al-Mosawi for excellent research assistance. The usual disclaimer applies.

insurers started to feel the pressure on their protability ratios, as a result of high distribution costs and lower product pricing due to competition. The earliest recorded usage of the term bancassurance is detected in France, in the 1980s. Its appearance is associated with the development of the consumer and mortgage credit as well as the liberalization of the nancial markets. There is not a single denition for bank-insurance, as it depends on strategy adopted by the institutions involved. Leach (1993) denes bancassurance as the involvement of banks, savings banks and building societies in the manufacturing, marketing or distribution of insurance products. Theoretically, there are several potential benets for banks and insurers that can be exploited via the joint manufacture and/or distribution of their services (Staikouras, 2006). The banking and insurance industries have been moving closer together, a process triggered by deregulation, globalization, changing nancing needs, reduction of trade barriers, protable opportunities, foreign direct investment, and geographical expansion. Nonetheless, there is no clear convergence in the literature of whether this is a desirable and effective corporate restructuring. Positive size-related effects are reported by Johnston and Madura (2000), which are in line with Carows (2001a) signicant stock price increases for large banks and life insurers on account of deregulation. At the same time, Carow (2001b)[3] hints a word of warning, as insurance values are plummeting as a result of court rulings to allow banks to sell annuities and insurance products. Nurullah and Staikouras (2008) nd increase in protability and no risk change only between banks and insurance broking rms. Finally, in an excellent paper, Fields et al. (2007) open avenues for future research by examining synergy effects for bidder rms. The current study takes a practical as well as academic stand on this issue aiming to illustrate the bank-insurance process. The paper aspires to enrich practitioners, academics and graduate learners with the numerous issues surrounding the emergence of nancial conglomerates. It complements the existing literature by exploring the determinants of the bank-insurance interface, discussing the benets to the consumers, and pointing out issues that worth extra consideration before a plan is set up. The study also looks at the available bank-insurance products, the market-based modes of entry, and presents the broad dynamics shaping the bank-insurance corporate structure. Finally, a brief overview of the empirical ndings and the development of the phenomenon across the world are provided. The paper is organized as follows. Section 2 provides an overview of the literature. Section 3 looks at the development of the bank-insurance phenomenon across the world. Section 4 discusses the underlying market dynamics and the motivations behind this corporate restructuring trend. Section 5 generalizes the modes of entry and discusses the available hybrid products and services. Section 6 summarizes the main ideas and concludes the paper. 2. A brief look at the literature The stream of research exploring the bank-insurance experience can be categorized into three general approaches. That is, one observes: (1) Theoretical articles examining the roots of the phenomenon, its social implication, the role of regulator, management issues, cultural inuences (at corporate/regional level) and so forth.

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(2) Performance-related studies focusing on the risk-return characteristics, protability, and efciency of nancial conglomerates. (3) Papers concentrating on the stock market reaction upon the declaration of regulatory changes, acquisition announcements, and any other event that could change the corporate structure of the traditional banking and insurance rm. Qualitative studies Non-technical research explores the qualitative aspects of the bank-insurance structure, which are generally overlooked, yet very important. A number of authors have documented the roots of the trend, its expansion at certain parts of the world, as well as the challenges that lie ahead for the implementation of such corporate restructuring (Morgan et al. (1994), Molyneux et al. (1997), Benoist (2002), Dorval (2002), Falautano and Marsiglia (2003)). Others have focused on new markets such as Greece, where the phenomenon had been in effect in a de facto mode (Kalotychou and Staikouras, 2007) for a long time; while elsewhere evidence is provided that there are signicant cross-selling opportunities that mostly arise from consumer unawareness regarding insurance offerings by banks and their willingness to buy these new products (Lymberopoulos et al., 2004). Research on the bank-insurance game shows that the growing interaction between the two sectors will eventually be translated into some form of collaboration and/or intense competition (Szego, 1986). Saunders (1994) discusses the benets and costs associated with the relaxation of the regulatory barriers between banks and commercial rms. This work is nicely complemented by the investigation of the effects of universal banking on investment efciency, on banking risk, and on social welfare (John et al., 1994). Furthermore, Kist (2001) and Flur et al. (1997) study the synergies that can be achieved by integrating insurance, banking and asset management under one provider of nancial services. Bergendahl (1995) analyses the dynamics of protability and identies ve key factors that are crucial for its success i.e. customer base, available branches, insurance specialists per branch, staff knowledge, and the cross-selling ratio. More recently, Van den Berghe and Verweire (2001) examine the potential advantages and disadvantages of nancial convergence at three levels: consumer, market, and macro level. They provide general recommendations from a managerial as well as a regulatory perspective. Voutilainen (2005) discusses the forces that lead to the creation of strategic alliances and proposes six different structure models. He also denes nine criteria, which managers can use in order to achieve the most successful alliance model. Market realities regarding the integration between banking and insurance sectors are explored in Staikouras (2006). He proposes a three-dimensional-radar-shape approach for the bancassurance model, identies its risk/success dynamics, and elaborates on the exogenous and idiosyncratic drivers that are crucial for the survival of hybrid corporate ventures. Performance related studies Part of the research has concentrated on the risk-return attributes of universal banking and nancial conglomerates. One of the early studies unveils that non-banking activities are less risky and thus can be used to diversify the risk inherent in the commercial banking rm (Heggestad, 1975). Such diversication could engulf real

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estate, fund management, insurance, and broking activities. Using accounting and stock market data Brewer (1989) nds no evidence of bank-holding company (BHC) risk (stock return volatility) associated with non-banking activities. When only risky rms are examined, this relationship becomes negative and signicant. Saunders and Walter (1994) conclude that while bank expansion into the insurance business reduces risk, the latter does not hold for expansion into the securities business. Recently, in Sigma, 2007, the Swiss Re team cites high correlation between banking and insurance risks accompanied by strict capital requirements under the Basel II framework. The latter may dishearten the development of the integrated bank-insurance models, since there are no economies of scale to be exploited. Simulation approaches emerged as a research tool of drawing insight into alternative scenarios under plausible assumptions. Boyd et al. (1993) generate random merger simulations between BHC and non-bank nancial rms. They suggest that mergers between BHCs and life/non-life insurance rms can be risk reducing; whereas mergers with securities or real estate companies are likely to increase BHC risk. Estrella (2001) also nds that both banks and insurers can experience diversication benets when convergence materializes. While Laderman (2000) suggests that life/non-life insurance is risk reducing, he also nds (contrary to the above) that securities underwriting reduces the probability of bankruptcy. In a similar framework, Genetay and Molyneux (1998) obtain mixed evidence on risk. They report signicantly lower failure probabilities, but no changes in return on assets volatility for bank-insurance combinations. Recently, Lown et al. (2000) conclude that mergers between BHC and securities/P&C rms would modestly raise BHC risk. Mergers between BHCs and life insurers, however, lower the risk of both rms. Others who have employed a portfolio approach suggest that both securities and insurance activities have no signicant effect on market risk premiums of universal banks (Allen and Jagtiani, 2000). Examining the performance of US nancial holding companies, Stiroh (2004) nds diversication benets when these rms expand into fee-generating and other non-interest income activities. However, these benets are offset by the volatile nature of these activities. Based on accounting gures, Vander Vennet (2000) nds that nancial conglomerates are more cost efcient than their specialized peers, and suggests that further de-specialization could lead to a more efcient banking system. Using European data, Nurullah and Staikouras (2008) reveal an increase in volatility and the probability of bankruptcy when banks merge with general and life insurance companies, and nd that the most favorable combination is banks with insurance broking rms. Event study approaches Announcement in nancial markets have always been the subject of investigation, as they sometimes prompt interesting reactions. In the US, a number of court rulings have prohibited banks to enter into the insurance business of marketing and originating annuities as well as other insurance products. During that period insurance rms experienced excess equity returns, while subsequent reversals of those rulings triggered equity losses (Carow (2001b), Cowan et al. (2002)). The research implies that when annuities are seen as a general nancial product, available to banks, and not as an exclusive insurance provision, then investors interpret this as unfavorable and value-destroying. In a somewhat similar framework, Cybo-Ottone and Murgia (2000)

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suggest positive value creation for domestic banks and for a very small sample of bank-insurance deals. In contrast, Delong (2001) nds that diversifying mergers in terms of geography, activity, or both do not create value. At the same time, the merger announcement of Citicorp-Travelers Group has sparked equity gains in nancial institutions of similar nature. Johnston and Madura (2000) and Carow (2001a) reveal signicant favorable share price increases for commercial banks, insurance companies, and brokerage rms. The effects of the Financial Services Modernization Act (1999) have also been examined by Carow and Heron (2002) who nd negative abnormal returns for foreign banks, and highly positive reactions by investment banks and insurance companies. Analogous results are also reported by Hendershott et al. (2002) and Neale and Peterson (2005). Using stock market data, Fields et al. (2007) adeptly provide evidence of positive bidder wealth effects that are related to economies of scale, potential economies of scope, and the locations of the bidders and targets. In a similar vein, Staikouras (2007) unveils signicant abnormal returns surrounding the announcement of bank-insurance ventures. When the sample is separated on the basis of the bidders nature, then bank-bidders earn signicant positive returns, while the insurance-bidders experience signicant losses. Finally, the analysis unveils either signicantly negative or insignicant returns for insurance divestments by banks. 3. Bancassurance in practice The new hybrid form of nancial intermediation has an uneven presence across the world. Bank-insurance has been set up successfully in France, Spain, Portugal, Italy, and in the Benelux Region. The German, Greek[4], Swiss, and the UK markets have been slow in the implementation of such corporate restructuring. The various global bank-insurance structures differ depending on the legal, geographic, cultural, operational, demographic, and tax-related features of the region(s) examined (Staikouras, 2006). Penetration rates and complexity of bank-insurance structures vary mostly in relation to the extent of market liberalization and the length of time such changes have been in place (Sigma, 2007). It is therefore the structural differences in individual countries that are held responsible for the evolution of the phenomenon. The following paragraphs will briey draw a picture of how the trend has progressed across the world. Europe The Second Banking Directive (1989) in Europe paved the way for bancassurers, whose ventures now control on average 35 per cent of life insurance sales. Bank-insurance is the dominant distribution channel in countries such as Belgium, Finland, France, Italy, Norway, Spain and Portugal where it controls over 50 per cent of sales. In France, the phenomenon has witnessed a vivid progress with life insurance sales increasing from 40 per cent in 1990 to 66 per cent in 2001. In Spain and Portugal, bank-insurance controls 77 and 80 per cent of the life insurance premiums respectively. Similarly, the Italian model has experienced notable expansion following the Amato Law (1990), and accounts for 58 per cent of the life insurance market. Turning to the non-life arena, the interface between bankers and insurers has not set a good precedent. It is worth noting that the non-life insurance markets are mainly dominated by insurance agents. Contrary to the above, in countries such as Germany, Greece, The Netherlands and the UK, the traditional distribution networks still lead the market. In the UK, the

Financial Services Act (1986) has limited the ability of bank branches to sell insurance products. Nevertheless, banks in the UK are gradually moving from manufacturers into distributors. The competition arena between banks and insurers is likely to widen after the proposed reforms in CP121 and the ndings of the Sandler and Pickering reports[5]. Likewise, the bank-insurance model in Germany has not yet realized its full potential accounting for only 23 per cent of the generated premiums. The Greek model is quite interesting as it passed from its de facto mode to its de jure implementation and enjoys a mere 15 per cent with substantial growth opportunities (Artikis et al., 2008). Finally, Switzerland has maintained its own distinctive approach to nancial services provisions. The Americas In the US, despite the passage of the long-anticipated Gramm-Leach-Bliley Act (1999), the phenomenon is still struggling to bear fruit. Moreover, the fact that corporations do not share the same information system does not facilitate any rapid development. The US Congress is promoting and encouraging the hybrid business entity under the same holding company. The well-discussed case of Citigroup did not last for long, as the bank rushed into divesting its insurance arms. The typical explanation seems to be the incompatibility between the cyclical nature of the insurance business, the short-term-high-growth banking culture, and the reported low prot margins (Sigma, 2007). Along these lines is the Canadian market where bank-insurance has not met considerable success. The only exception is the province of Quebec. Canadian banks, which are supervised by the Federal Authorities, are restricted on using their large databases and branch networks for insurance marketing, but they are only allowed to sell travel and loan protection insurance. In Latin America, deregulation is under way in most of the countries with the exceptions of Argentina, Chile and Colombia, where restrictions still apply. In Brazil, the growth engine of the region, bank-insurance is the dominant distribution channel accounting for 86 per cent of all individual life premiums. The ten largest banks and/or insurers have chosen this route as their main distribution outlet. Argentinean and Colombian regulators require insurance products to be sold through separate intermediaries rather than one insurer, something that is common in other countries. In a similar vein, but within a rather more relaxed environment, Chile restricts the direct sale of insurance services via banks, unless the insurance product accompanies a banking transaction. Regardless of any restrictions, banks generated 19 per cent of the non-life premiums in 2003 and used these products to hedge their loan exposures to natural catastrophes (Sigma, 2007). Moreover, banks are not allowed to own insurance companies, yet the bank-insurance combination can be achieved within a holding company structure. Mexico allows the combination of all nancial services at a holding company level, while participating companies are free to cross-sell their products to each others clientele. It is mandatory, however, for every insurance policy to involve an agent. Interestingly banks are the principal private pension suppliers in the market based on the 1997 pension reform. Asia and Australia The trend is still in its infancy in Japan, as only a limited range of insurance products are sold via bank branches. The liberalization was done in stages as in 2001, banks

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were allowed to own an insurance subsidiary; the 2002 reform allowed banks to distribute annuities; and the 2005 reform lifted the restrictions on the distribution of other single premium products through banks. Banks and insurers have applauded deregulation by pursuing the formation of multi-ties, mainly in the form of non-exclusive distribution agreements. The Japanese Financial Services Agency and the respective Life Insurance Association are now planning to progressively allow banks to distribute all insurance products by 2007. South Korea also adopted a piece meal approach to liberalization, which is expected to be completed in 2008. Conversely, in Australia and Hong Kong bank-insurance interface is a fact. Deregulation, during the 1980s and 1990s, led to the surfacing of new institutions, which came into direct competition with established life insurers. The emerging trend was an outcome of the changing market forces (Keneley, 2004). As a result of this change, bank-insurance now claims 56 per cent of the premiums. Emerging markets such as Singapore, India, China, Indonesia and Philippines are added to the picture. These markets started their deregulations process since 2002, and the interaction between the two sectors is not highly developed. India is moving with a fast pace, but the overall bank-insurance share is less than 5 per cent of life insurance premiums. Nevertheless, the share of new business grew from 0 to 20 percent within the last two years; while the distribution of life insurance products via bank branches is expected to be further boosted by the pensions reform, which is under way. In a somewhat similar vein, the model in China has not yet taken off. However, the removal of geographical restrictions on foreign insurers and banks, at the end of 2006, is seen as step for the bancassurance development. Although the regulation does not signicantly constrain bancassurers, the model accounts for only 5 per cent or less of life insurance premiums. Nevertheless, this gure might be misleading, given that its penetration is noticeably higher (approximately 20 per cent) in major cities. 4. Market dynamics and incentives to bancassurance Three decades ago, a capital budgeting decision would have probably been restricted to borrowing from a domestic bank; while clear-cut regulatory boundaries determined the operations of nancial intermediaries, both at a geographic and services provision level. Nowadays, both corporations and individual investors are faced with a variety of choices available either nationally or across the world. But why are globalization and regulatory innovations linked to the bank-insurance experience? They are simply two vital market dynamics that shape the banking and insurance industries in modern nancial markets. It is worth noting, however, that these two market forces are closely linked and interact with each other. It is actually difcult to discern whether globalization is the cause or response to re-regulation, and vice versa. Figure 1 illustrates the forces that contribute to the bank-insurance development. Globalization of nancial services has made its presence felt. Many regions/countries have managed to leverage on this situation to generate growth and reduce poverty. At the same times, the phenomenon has given rise to nancial instability in emerging markets. Globalization has integrated markets across the world, and has contributed to the advances in nancial innovation. Developments in information and computer technologies[6] accelerated product engineering and services enhancement. Interaction among nancial markets has brought wider access to economic capital and has increased the underwriting ability of insurers. The

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Figure 1. Market dynamics and bancassurance

competition among nancial intermediaries has intensied pushing further the boundaries of corporate restructuring. The later comes in the form of consolidation and/or corporate interaction between banks and insurance rms. Over the last decades, nancial markets have witnessed a noticeable change in the relationship between banking and insurance rms. This is due to the twin pressures of European integration and re-regulation (Diacon, 1990). In fact, the institutionalization of bank-insurance can be viewed as a game where the sequence becomes one of nancial innovation, re-regulation and avoidance; which in turn give rise to a series of lagged reactions where regulation and avoidance embrace each other. A vivid example is the Citicorp merger with the Travelers insurance rm. Despite the fact that the formation of Citigroup is the symptom of hunting superior prots through nancial innovation; it is still one of the triggering factors behind the realignment between state laws and economic realities. Re-regulation can alleviate pressure on prot margins and encourage insurers/banks to form distribution alliances/channels (interface) or move towards merging and acquiring (consolidation) each other. Globalization and re-regulation can have a signicant impact both at a national and international business level. For instance, the overall process could put upward pressure on unemployment, but it could equally produce a more dynamic economy via higher productivity growth. The bank-insurance approach opens up insurers choices regarding distribution channels and wider customer access, while reducing reliance on agency networks. Thus, it can generate an alternative income for the banking rm and reduce the insurers distribution costs. Consolidation in the nancial services industry aims to generate the desirable economies of scope and scale that would not exist if business entities compete separately. Consolidation could be seen as a by-product of intense competition, where the latter can squeeze the margins of banks and insurers. Consolidation, however, can contribute to market polarization and force

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smaller entities aside or put them entirely out of business. The above dynamics has led nancial markets to embrace what is known today as the bank-insurance model. The bank-insurance phenomenon tries to navigate the parties involved (banks, insurers, customers) through the postulated advantages and potential downsides. The banking rm is clearly beneted as an extra source of income, in the form of commissions or underwriting prots, surfaces. Banks seek to enhance their protability prospects by expanding their business and selling new products. The effect on xed costs would be visible as the business is spread over a wider range of services. The idea of one-stop shopping would appeal to the public and could lower the possibility that banks can lose customers to a competitor. The latter crucially depends on the quality of services provided. The bank-insurance activity will give the opportunity to the bank to utilize its network of branches more efciently and thus cope with high operating branch expenses, especially for remote units. Banks also add value to their core products and thus gain a competitive advantage (reputation-wise) to the banks with standalone core products. Insurance companies are faced with the markets rising competition and with pressure for cutting off expenses. There is a growing need to lock in sources of business that will result to new ows of income. In this respect, the bank-insurance structure will offer a new distribution network (bank branches) and a new distribution method (bank personnel hybrid product specialists) and therefore will reduce its dependence to agents and increase its customer base. Cost savings can then be used for the development of new and more competitive bank-insurance services. Insurers prole will also benet from its alliance/cooperation with the bank, as the latter enjoys a stronger brand name. Finally, the valuable feedback derived from a closer relationship with their customers (via bank branches) will enable them to develop and distribute tailor-made products. The latter is very topical when one takes into account the publics increasing concerns regarding retirement and/or long-term investment products. The consumer is an integral part of the bank-insurance equation and probably the most important one, as it will either welcome or discard the new nancial conglomerate. Based on the reduced costs, previously mentioned, consumers are expected to enjoy lower premiums; while competition will offer superior products and more services available. The latter can be further enhanced as consumers will only have to make a single stop at their nancial supermarket. Banks are, or were until recently, more advanced in the area of information and technology, and thus would be able to offer more and simplied methods of transaction. If the above are coupled with tax-advantaged insurance products, available only through banks, then one may be able to see the bank-insurance activity thriving. Nonetheless, the above do not come without potential concerns that worth extra consideration[7]. The implementation of the bank-insurance strategy should be sensibly planned and well prepared for any eventualities. Strong commitment from the management of the parties involved is vital, while cultural difference should be carefully integrated. Dealing with dispute cases of signicant value is something that the banks need to be well prepared. Marketing techniques of insurance and banking products are usually different, which in turn could be entirely dissimilar when it comes to marketing of such hybrid services. Remuneration and compensation is again an area that both parties should work together, as they both have different criteria to allocate

resources. Finally, organizational and operational factors, such as branch environment, marketing plans, dissemination of information, suitable IT support, will play a critical role in the survival of the new hybrid nancial intermediary. 5. Bancassurance products and modes of entry An analysis of the bank-insurance model embraces the products and services provided, given that they are crucial to any corporate success. At the same time, the issue of the distribution channels is raised, and a direct link between the products and these channels is dened. That is, it is vital that the corporate entity provides the require platform for an efcient and cost effective product distribution and services provision. The most commonly sold products in this market are life insurance, health care protection, and unit-linked products. Bank-insurance products Various insurance services, offered via bank-insurance channels, are characterized by the nature of protection they intend to deliver. Consumer-oriented products are built on the premise of ethics as they seek to transfer risk away. With an insurance policy one pays a premium to avoid risk and preserve wealth. Essentially, demand for insurance protection assumes that risk-averse individuals prefer certain wealth to that same level of expected wealth with risk. In other words, a certain amount of loss would hinder individuals more than the same gain would benet them. The question usually asked is why would people buy insurance from banks? The simplicity of obtaining banking/insurance services from the same trusted source is probably the most direct answer. Products like mortgages, loans, credit, overdrafts, and investments can be easily bundled with insurance protection. These credit-based products, when issued in an ideal world, require customers to be risk-free to ensure that their obligations are met. In a risky environment, however, undiversied individuals face perils in the form of premature death, morbidity, unemployment and loss of assets. If these risks occur, credit-based product users could default on their obligations affecting both lenders and borrowers wealth. At the same time, the cost of originating business, adverse selection, and moral hazard associated with the insurance coverage is reduced with the sale of such products. Finance and repayment products insure a borrower against the events of early death, permanent disability or loss of assets during the loans life. Banks also view insurance protection attached to their products as a public relations instrument. By making sure that insurable perils are covered, banks can present a positive image that they are not as litigious as insurers. Since perils like premature death, loss of assets, morbidity, and/or unemployment are outside the customers control, any recovery of owed amounts is viewed as unfair and with pique. Should any of the perils covered under the insurance policies occur, banks will not go through a litigation process to recover unpaid sums. Table I provides a list of insurance products attached to banking services. The most common of these hybrid products is credit insurance, which usually accompanies mortgages, business and personal loans. By paying a premium the customer is nancially protected and the loan is secured. Credit insurance also serves as a marketing tool, if the bank offers it freely in conjunction with a loan agreement. Overdraft insurance[8] is another product, which covers the customer up to the

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Insurance coverage Life insurance Term Whole life Endowment Unit-linked Health insurance Critical illness Medical expenses Personal accident Permanent disability

Risk intended to transfer

Products

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Mortality risk, plus a investment risk if they are Credit insurance cash value policies and not unit-linked Capital repayment Overdraft insurance Depositors insurance Morbidity risk and loss of income

Table I. Bancassurance products

Unemployment insurance

Loss of income

overdraft facilitys amount. Capital repayment services are suitable for mortgages, business and personal loans, for which it is agreed that periodic installments will include only the loan interest while the initial capital will be paid in a predened future date. To ensure capital repayment the customer will take out an endowment (in parallel with the loan) i.e. a life insurance policy designed to build up a capital-sum for that future date. Technically, coverage is sold separate from the banking product, as underwriting is done either by an independent insurance company or an insurance division within the banking group. The rainbow bank-insurance services are delivered through the same conduit. In some countries, banks are not allowed to employ conditional selling. It should be pointed out, however, that banks are more likely to require the insurance certicate on credit-products of high value and long-term nature. Riders[9] can also be added on to policies for waiver-of-premium, if the policyholder has an accident/sickness, which has caused some form of disability. The packaging of bank-insurance services is certainly determined by the existing corporate structures as well as the complexity of the insurance products. Death, personal accident, and/or unemployment protection are less complicated products and can be easily sold by banks. It is worth noting that the development of bancassurance has mainly been through the mass-market, where standardized products requiring short time interface are easy to sell through the banking network. It is hoped that other markets will follow the North American market lead of focusing on high-net-worth customers, as a conduit to developing high margins, multifaceted and bespoke products (Sigma, 2007). Whilst standardized products meet protection requirements of both the lenders and borrowers, commission paid on them is quite thin. More sophisticated products incorporating investment elements such as whole-life and endowment insurance are sold by highly qualied advisors. The latter are located on site and employed either by the bank or as tied insurance agents. The sophistication of such products makes it difcult to attach them to banking services, as these require dynamic and aggressive distribution channels, and are also subject to stricter mis-selling regulations. Despite the lifting of regulatory restrictions across the globe, penetration rates still remains low on complex life products in countries where banks

are forbidden to cross-sell using their client databases or where outright exclusion of banks from participating in insurance business exists. Banks also sell these products for reasons other than credit protection. They are used for marketing purposes, to earn high commission, and for tax-advantaged investments helping customers meet their nancial goals. On the marketing side, they often use depositors insurance products in order to attract new depositors or to increase sales of credit cards. Depositors are insured against accidental death or disability up to an amount relative to their deposits; or they are offered a level-term insurance policy, namely a policy with a predened term (duration) that will pay the same benet amount if death occurs at any point during the term. The nancial goals oriented insurance is a policy suitable for bank savings plans, where regular deposits are made until a predened amount is saved. More specically, the policy will cover, in the event of the depositors death/disability, the remaining deposit amounts so as the intended savings amount is achieved. On the other hand, there are investment bank-insurance products that lack the insurance element and are distributed via insurance companies because they enjoy a favorable tax treatment. Products in Table II have nothing to do with the banks exposure to default risk, but are sold on the basis of brand strength. Bundling banking products with non-life insurance reduces the cost of originating business and adverse selection, since advancing the mortgage is conditional on buying insurance. Although insurance and mortgages are packaged together, low switching costs mean that lapse rates for insurers are high. This cannot be said for cash-value life policies, as these have high end-loadings on policies lapsing in the rst few years. In the same vein home insurance, motor insurance are being sold when banks advance the loan. They are not bundled with the associated loans, as switching costs are low and banks purely sell them for the commission they earn. Travel insurance is another secondary banking activity in issuing travelers checks and foreign currency. These products are sold over the counter, online and/or over the phone since they do not require sophisticated underwriting. Non-life products are not an integral part of bank-insurance, as they are not used by banks to protect the customers credit position. They are not bundled with banking products as they are renewable every year and can be easily lapsed without incurring any switching costs. Non-life services can be seen more as brand-assurance than bank-insurance products as they are also sold by retailers or traders. It can also be argued that brand-assurers may enjoy more public trust than the traditional insurance provider. Finally, personal pensions are long-term tax advantaged savings that can be
Insurance coverage Risk intended to transfer General insurance Car insurance Home insurance Pet insurance Travel insurance Retirement income Personal pensions Long-term care Pure risk/physical perils affecting the property insured Products Car loans Mortgages Banking services Travelers checks Savings products

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Longevity risk

Table II. Product predisposed more to brand-assurance than bancassurance

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sold alongside other investment products offered by the bank. What makes personal pensions suitable for selling with other banking services is that they are dened contribution products so banks do not have to underwrite mortality or investment risk. Banks use their balance sheet strength and investment expertise when selling retirement income products while earning the desired commission. Modes of entry Corporations aspire to grow quickly and to reduce painful start-up expense overruns. Banks with their huge networks and large customer bases offer insurers an opportunity to do this efciently. The discussion so far has concentrated on the products provided by the new corporate entity, but it would be helpful to briey review the fundamental corporate co-operations/structures implemented for the provision of these products. Although there is no standardized model designating a successful approach to bank-insurance ventures, three main modes of entry seem to dominate the market practice(s). Figure 2 presents these hybrid corporate structures along with their basic characteristics. The two-dimensional illustration in Figure 2 portrays the level of integration, between the banking and insurance intermediaries, and the amount of resources (human/nancial capital) needed to be devoted. The human capital does not necessarily reect an increase in the number of employees, but it also refers to the necessity of having employees with specialized and complete knowledge in both insurance and banking services. At the intersection of axis, cross-sector corporate arrangements exhibit the lowest integration required, as well as the minimum investment needed. As one moves away from the axis, the need for more integration and resources becomes evident. The multi-tie or referral is the basic form of bank-insurance strategy where the banking is used as a distributor of insurance products. The insurer aims to bypass the expensive agent with limited access to customers, and starts to networking with the bank for access to the highest possible middle income segment of the market. Access to the rural sectors though traditional routes falls very expensive. A tie-up with a bank can give the insurer a cheap access to these areas. The introduction of the Freedom of Services Directive in Europe, has also led insurers using banks to sell products without establishing ofces in the respective countries. The banking institution can build distribution alliances with various insurers to diversify its risk exposure(s) and increase the choice and quality of insurance services provided. Any insurance

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Figure 2. Main modes of bancassurance entry

promotion is made over-the-counter (bank branches), on the internet (online banking), direct (telephone banking) or customers are referred to a particular insurer. The structure of the joint venture follows up from the rudimentary corporate alliance; yet it is more integrated, since it calls for mutual commitment of resources and expertise. It usually comes in the form of an autonomous arm governed by both the insurer and the bank specializing in bank-insurance provisions. The setting up of such collaboration entails long negotiations of the two partners on the structure of the venture, the sharing of information, each partners contribution in resources/expertise, and the sharing of responsibilities. This partnership requires strong and long-term commitment and it also calls for a cultural blending between the two entities. Apart from the start-up investment, the bank and the insurer share, by their percentage participation, the underwriting risk as well as the underwriting prot. Regarding their own activities the two parties remain autonomous and have their own strategic planning. The model with the most integrated nature, an extensive capital commitment, an adequate pool of skilled professionals, and a strong presence (branded) in the market is probably the corporate groups (conglomerates[10]). Unlike the previous mode, nancial conglomerates take full advantage of the underwriting prot, but bear all the underwriting risks as well. This structure allows for the development of a wide variety of bank-insurance services aiming to reach large market segments. Furthermore, efciency gains are expected, given that knowledge, skills, costs, information and expertise are shared within the group. None of the aforesaid modes of entry could be regarded as the most preferential. The selection of the bank-insurance model will be affected by a number of factors, including socio-demographic, cultural and regulatory constraints (Staikouras, 2006). For example, the nancial group option is the most widespread model in the Netherlands, Belgium and France, while the distribution agreement model is the most common in the UK, Germany and Italy. Nonetheless, the success of each one will ultimately depend on the collaboration and the management commitment in achieving the common business goals set. In Europe, the expected implementations of the new insurance solvency framework Solvency II, and the Basel II, for the banking industry, are anticipated to have an impact on the bank-insurance interface. Conclusions The bank-insurance model is a form of corporate restructuring that has emerged in the 1980s as a result of the evolving nancial landscape. The latter is characterized by an intense competition and a trend towards deregulation and calls for further integration. This paper has reviewed the bank-insurance trend and has approached the phenomenon from an applied standpoint without scarifying the underlying academic rigor. Both academics and practitioners have devoted time and resources to understand and study the emergence of nancial conglomerates and universal banks. There is no unanimous answer as to whether the phenomenon is a success or not, but at the same time research has not ruled out the viability of such trend. Marked differences are observed in the penetration rate of such interface, as well as in its success among various countries. The latter is even more apparent among EU countries where nancial markets are less heterogeneous.

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A mixture of factors determines the level of success in the bank-insurance implementation. The integration of global nancial markets, the regulatory framework, the structure of the particular market, the publics preferences towards products/services are all critical factors that interact to favor or hinder the development of the phenomenon. Banks and insurance companies enter into this game when they both judge it is advantageous. They both seek increased protability, which they expect to spring from the wider range of nancial products marketing, the more efcient use of their distribution networks, the strengthening of their market image, and the improved services provided to their customers. From the consumers perspective, lower distributions costs will benet customers when they are translated to cheaper and more competitive products. The clientele will also benet from the easier and quicker access to a wider variety of nancial services provided a single business entity. Some of the critical factors for the bancassurance failure relate to the diverse corporate cultures inherent in the two sectors, improper regulatory and supervisory environment, as well as lack of proper management. Finally, the variety of corporate integration models simply corresponds to various levels of integration. It is worth remembering, that there is no optimum structure that will guarantee success and long-term survival in the bank-insurance arena. In any case, the model(s) selected will have to suit the regulatory, cultural and nancial attributes of the particular market. Taking into account the ndings so far, one may wish to extend the literature by looking into the reasons behind the formation of bank-insurance ventures as well as the subsequent sell-offs such as those of Citigroup and Credit Suisse. An empirical investigation of how stock markets react to these hybrid forms of corporate restructuring will also contribute to our understanding of this trend. Another interesting issue is how decisions are taken by the management of these nancial conglomerates, with the approach being both positive and normative[11]. Last but not least, it would be useful to explore how well these institutions have served the economic society as well as the needs of individual tax-payers. In other words, do we deal with a product-oriented cross-selling organization or a customer-centered nancial provider?
Notes 1. The use of the terms horizontal and vertical in describing the expansion of nancial services is often employed in order to distinguish between mergers or acquisitions involving companies operating in different sectors and those involving companies operating in the same sectors, respectively. 2. For an excellent discussion on the issues surrounding mergers and acquisitions see Sudarsanam (2003). 3. In essence, Carow (2001b) examines the theory of contestable markets, where structures other than perfect competition may be optimal. 4. The Greek market appears to be a pioneer in the implementation of bancassurance, in the sense that the phenomenon existed in a de facto mode for decades (Kalotychou and Staikouras, 2007). 5. In January 2002, the FSA published the Reforming Polarization: Making the market work for consumers, Consultation Paper (CP121) document, which seeks ways of differentiating regulatory requirements to reect the lower risk prole of certain investment products. The

6.

7. 8. 9. 10.

11.

FSA proposes two signicant reforms in CP121: (1) the creation of a new type of adviser, a distributor or multi-tie, who can offer products from a panel of product providers; and (2) the replacement of the commission based system with a dened payment agreement scheme. One of the triggering factors was the UKs 27 billion savings gap between what people are saving and what they need to afford a decent retirement. In July 2002, HM Treasury published a report by Mr Ron Sandler, former chief executive at Lloyds of London, on the retail savings market. The aim was to counteract what he saw as a market failure. In particular, his concern centered on the availability of a wide range of complex products, which required relatively costly regulatory requirements over the sales process. This, he believed, acted as a barrier to the purchase of products by consumers who could benet from straightforward, lower risk products. Finally, at the same time Allan Pickering, former chairman of the National Association of Pension Funds (NAPF) and partner at Watson Wyatt one of the big four actuarial rms, makes 52 recommendations for the pensions industry. Amongst the key ones are: (1) a new pensions act to consolidate all existing private pensions legislation, (2) a new more proactive regulator, (3) a better, more targeted approach for communicating with pension scheme members, (4) more exibility to modify schemes, (5) allowing employers to make membership of their occupational pension scheme a condition of employment and (6) the ending of compulsory indexation for dened benet pensions, and compulsory survivors benets. Strictly speaking there are three main factors that have contributed to nancial globalization. That is: (1) advances in information technology, (2) liberalization of national markets through entry of foreign businesses, and (3) opening of national economies through lowering trade barriers. For a detailed analysis on organizational and strategic issues see Staikouras (2006). The overdraft facility is an automatic credit offered by banks up to an amount of two or three monthly salaries of the customer Another name for endorsement or a special provision that is not contained in the base policy contract, but that legally adds further benets or considerations. The Joint Forum denes nancial conglomerates as any group of companies under common control whose exclusive or predominant activities consist of providing signicant services in at least two different nancial sectors (banking, securities, insurance). The Joint Forum was established in 1996 under the aegis of the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO), and the International Association of Insurance Supervisors (IAIS), in order to take forward the work of the Tripartite Group on a range of issues relating to the supervision of nancial conglomerates. The theories of corporate management endeavor to address the issues: 1) how managers should act (normative approach) and/or 2) based on the fact that managers act in this way, what does it tell us about their decisions in other words, how decisions are made (positive approach). The latter attempts to explain the behavior of managers arising from the separation of ownership and control (agency theory).

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