Bancassurance: lessons from the past

Once bancassurance in some European countries had become a success, banks in the UK jumped on the bandwagon in an attempt to reap the same benefits. However, the UK story has been relatively disappointing compared with that of other countries. There are lessons to be learnt from the mistakes made in the past; there are also new opportunities to be explored, and new business models to be tested with the imminent emergence of the depolarised world.

History

With the growth in the savings and pensions markets and the need to find higher returns, banks were tempted away from their traditional arena into the bancassurance world. They seemed to have clear advantages, given their wide-reaching branch networks that allowed them to use customer relationships and offered the potential for lower-cost distribution. Success seemed inevitable with their apparently large and warm customer bases.

The first of the banks to enter bancassurance were Barclays, HSBC, and Lloyds TSB. Other major institutions such as Abbey National, Halifax (HBOS), NatWest, and Royal Bank of Scotland were not far behind.

Different models used

In recent years there have been - in the main - two simple business models for bancassurance, largely as a result of the polarisation regulation: the ‘Vertical Integrator’ and the ‘Distributor’.

The ‘Vertical Integrator’ bought an insurance operation and ran it an in-house insurance company. The bancassurer sold products from only that in-house provider. Most of the early players opted for the ‘Vertical Integrator’ model - for example, Barclays, HSBC, Lloyds TSB, and Abbey National. The primary reasons for choosing this model were the belief that the model was operationally simpler, and the higher expected profits.

The ‘Distributor’ treated the insurance business as an IFA and sold products from multiple providers. This model was far less popular, and few players chose this route (one example being Bradford & Bingley).

More recently, a ‘Partnership’ model has emerged which is still coming down on the tied side of polarisation, but via partnering with an insurance company, rather than through acquiring an operation. For example, Barclays has shifted to this model, its partnership with L&G replacing in-house manufacture of insurance.

Overall, bancassurers in the UK have shown similar performance, which may mean that the secret ‘getting it right’ is not necessarily the business model adopted but other factors.

How has it gone overall?

With the original fanfare now a distant memory, the question is, ‘how has it all gone?’ The short answer is, ‘not as well as expected’. Bancassurance in the UK peaked at a market share of around 16% of the medium and long-term savings market, and is now hovering around 8%. In contrast, bancassurance penetration in France, Italy and Spain is in excess of 50%.

Model

Definition

Example

Vertically integrated (most)

Bank sells products from in-house insurance

Abbey National Barclays, HSBC, Lloyds TSB

Distributor

Bank treats insurance business as an IFA and sells products from multiple insurers

Bradford & Bingley

Partnership recent)

Bank forms a partnership with one insurer and only sells their products

Alliance & Leicester

To explain why bancassurance in the UK has not lived up to expectations, it is useful to make some comparisons with those European countries where it has been very successful.

• In the UK, consumers are more suspicious, less trusting and less deferential to banks than are consumers in many other European countries. This attitude is not conducive to establishing a financial relationship.
• The UK has a strong independent distribution channel, as opposed to the case in France and Spain, for example; therefore, there is a real alternative to buying through a bancassurer. Interestingly, bancassurance in Germany, where there has traditionally been a strong tied distribution channel and, more recently, significant growth in independent distribution, has been less successful than the best examples in Europe, with penetration of 20-30%.
• Consumers’ buying patterns across European countries are quite varied. Money in Spain, for example, is more likely to be held with a bank on deposit or in a bond than is the case in many other countries. This access to customer money, and information on where it is held, provide greater marketing opportunities and ability to adopt a wealth manager position.
• Regulation is much more onerous in the UK than it is in many other European countries. Since 1997 there have been 18 regulatory or government interventions in the banking industry. In the UK - as in Germany - insurance products must be sold by a regulated sales person, rather than by counter staff. This requirement creates a disjunction in the sales process, increasing time and cost.
• Insurance is often viewed as non-core by UK bancassurers. Rarely is it well integrated in culture, training and compensation schemes.

Models for the future

So what is the future for bancassurance in the UK? Will new business models be adopted, and will the bancassurers learn from the success stories in other European countries?

The business model most likely to be adopted by UK bancassurers in the future is the post-depolarised multi-tied model. Companies such as Abbey National are already moving towards this model: its recent partnership with the Prudential adds to offerings from its in-house providers Scottish Provident and Scottish Mutual.

The FSA’s consultation paper CP121, ‘Reforming polarisation: making the market work for consumers’, is also likely to affect the operational side of bancassurance with the recommendation to introduce second-tier advice. This could have a positive effect on bancassurers by simplifying sales processes, allowing them to be smoother and unbroken and so leading to cost savings.

Another, longer-term, influence on the bancassurer business model is the change in global accounting techniques with the introduction of Fair Value Accounting (Phase One for insurance companies, planned for 2005) and the introduction of

Basle II capital adequacy requirements for banks. Both of these are expected to reduce the benefits to the capital base of banks from those currently arising with embedded values. One of the remaining benefits of having an in-house insurer - the provision of ‘tier one’ capital - is likely to be reduced.

Figure 1: New models for bancassurers

The future success of bancassurers in the UK lies essentially in their ability to correct the mistakes of the past and to exploit the opportunity presented by the new legislation.

In particular, the extent to which future opportunities are exploited depends on how two key choices are made. First, will the bancassurers adopt multi-ties to offer consumers a perception of provider choice whilst - most importantly - keeping the product range small and simple? The success stories in Europe were largely built with small - often proprietary - product ranges, and it is likely to be a mistake to use multi-ties as a means to offer wider product ranges.

Secondly, the advantages offered by second-tier advice - that is, more simple processes and reduced costs - can be exploited only if customers visit branches and if insurance is part of the core business of the branch. To date UK banks have often viewed branches as costs, not assets, and have actively pushed customers away from branches into electronic and telephonic relationships. And, as mentioned before, insurance is seldom seen as core.

If bancassurers do not learn from past mistakes, the new opportunities will be wasted and we are unlikely to repeat the successes experienced by some of our European neighbours. There is a much brighter alternative future.

December 2002