Bancassurance

Bancassurance is a business relationship between a bank and an insurance company in which the insurance company allows the bank to sell its products. In most forms of bancassurance, the bank essentially functions as a mediator that helps the insurance company reach its targeted customers. This arrangement can be advantageous for both parties in that it provides banks with an additional revenue stream and offers insurance companies the opportunity to recruit new customers without hiring more salespeople or paying commissions to agents or brokers. Bancassurance can also be beneficial for customers, who can have all their banking and insurance needs easily met under one roof. While it remains relatively uncommon in the United States, bancassurance is popular in various countries across Europe, Asia, and Latin America, as well as in Australia. Moreover, the global market for bancassurance is rapidly growing—a trend that is expected to continue as time goes on.

Background

Bancassurance brings together the worlds of banking and insurance to better connect customers with the financial services they need in a way that is advantageous for both banks and insurance companies. To understand how bancassurance works and benefits all parties involved in the process, it is first necessary to have a basic understanding of banking and insurance.

At its core, banking is the business of finance. Banks oversee all sorts of financial transactions and provide their customers with a wide array of valuable financial services. Through savings and checking accounts, banks offer people a safe and secure place to store their money. In addition, banks use the funds generated by customers’ deposits to provide loans to those in need of immediate financing. Most banks offer a variety of useful loans, including home mortgages, car loans, and business loans. Such loans allow borrowers to acquire the funds they need to make large purchases as a way of investing in their future. Individuals and families often rely on loans to purchase homes or pay college tuition. Businesses may take loans to finance the hiring of new employees or other improvements that will help them expand and grow in the future. In short, banking is an important part of everyday life and a vital part of the economy.

Insurance is a form of protection from financial loss. Insurance companies sell contracts called insurance policies that offer customers some sort of financial protection against losses. Different types of insurance policies offer protection against various kinds of potential financial losses that may result from injury, damage, or legal liability. Some of the most common forms of insurance include property, auto, health, and life insurance. While auto insurance is required by law, most people have some or all of these types of insurance. Many businesses also purchase certain types of insurance that protect them against specific loss risks. All insurance policies have three main components: the premium, policy limit, and deductible. The premium is the price of a policy that the insured usually pays in monthly installments. The policy limit is the maximum amount a policy will pay to cover a loss. The deductible is the amount the insured must pay out-of-pocket before the insurance company pays a claim.

Overview

At the most basic level, bancassurance is simply defined as the sale of insurance products through banking institutions. This means that a bank and an insurance company form a partnership in which the bank allows the insurance company to sell its products to the bank’s customers. This arrangement makes bancassurance beneficial for all parties involved.

While it surged in popularity in the twenty-first century, bancassurance has a long history. Bancassurance first arose in 1860 when a savings bank in Belgium began selling mortgage-related insurance policies. The term “bancassurance” was coined in France in the 1980s. The modern version of bancassurance later appeared for the first time in Germany and quickly spread to other European countries. It also eventually came to be practiced in Asia and other countries worldwide. In the United States, bancassurance was effectively prohibited by the Glass-Steagall Act of 1933, which made it illegal for banks to form partnerships with companies that offered other types of financial services. Although much of the Glass-Steagall Act was repealed in 1999, bancassurance was not as widely adopted by American banks or insurance companies compared to the European market.

There are several distinct models of bancassurance, including pure distributor, strategic alliance, joint venture, and financial service group bancassurance. In pure distributor bancassurance, a bank exclusively sells the products of one insurance provider on a standalone basis or as part of a bundle with some of its own services. With strategic alliance bancassurance, the bank takes a more direct role in the development, service terms, and management of the insurance products it sells for the insurance company. In joint venture bancassurance, the bank and insurance company create a new corporation for the sale of insurance products in which both parties hold shares. In the financial service group model of bancassurance, a bank may choose to start or purchase an insurance company, or an insurance company may choose to start or purchase a bank. This form of bancassurance can also arise when a large conglomerate creates both a bank and an insurance company and uses business relationships between both to sell various financial services.

Bancassurance can be beneficial in many ways. For insurance companies, bancassurance offers an easy pathway to a larger client base. With direct access to a larger client base through bancassurance, insurance companies can boost profits without having to hire more salespeople or pay broker commissions. For banks, bancassurance opens up a new revenue stream in the form of insurance product sales and generally improves customer satisfaction. For customers, bancassurance means that they can get all the financial services they need under one roof and with the help of trained experts capable of advising them on all sorts of financial matters. Bancassurance also typically makes it as easy as possible for customers to complete transactions, renew policies, and whatever else they might have to do to maintain their financial security.

While bancassurance has many advantages, it can also have some potential disadvantages. Because banks are responsible for such a wide array of financial services, the insurance products they sell through bancassurance may not always get as much attention as they should. Bancassurance can also lead to culture clashes between banks and insurance companies, which sometimes follow very different organizational models. Finally, bancassurance can be inconvenient for customers when integration between banks and insurance companies is limited.

The most commonly purchased bancassurance product globally is life insurance. As the American population aged in the twenty-first century, the popularity of bancassurance increased, and the demand rose for life and health insurance as well as retirement plans. The digitization of bancassurance also contributed to its increased use in the United States.

Bibliography

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