The operational approach for financial institutions has moved from segregation to integration due to the globalisation and liberalisation of financial markets. The regulations in many countries have been revised to allow the conglomeration of financial institutions, a trend that is driven by suppliers as well as consumers. The financial institutions hope to improve the efficiency of product distribution through cross-selling.
At the same time, the consumer’s wealth management requires integrated services for various financial products. One of the most important innovations in the financial liberalisation trend is bancassurance, which was developed in the European markets and extended quickly to other areas over the past decades.
Bancassurance can be reviewed from two aspects: Distribution channel and operation strategy. Some experts regard banks as having the primary role in bancassurance, while others see the insurer as the dominant player for selling insurance products through a bank. Some other studies consider bancassurance to be a cooperation or cross-selling between bank and insurer that provides insurance products to the bank’s customers.
Others suggest that bancassurance is a new way to provide various financial products for consumers in addition to insurance. That is, bancassurance can be interpreted as a business strategy to become more competitive in financial markets, improve service to consumers and increase the value of a financial institution.
The operation of bancassurance can be divided into four categories:
- pure distributor
- strategic alliance
- joint venture
- financial holding company
Each category presents different levels of sharing customer information, product design and investment capital. However, marketing is always one of the most important functions of bancassurance, regardless of the category. The evidence for the fast expansion of bancassurance implies that it has competitive advantages over other marketing channels.
Effectiveness of bancassurance
While bancassurance seems beneficial to both consumers and insurers on a conceptual level, empirical evidence proves inconclusive. Its market share differs significantly from country to country due to regulatory environment and business culture.
In Taiwan the distribution of life insurance products has traditionally relied on salespersons employed by the insurer or exclusive agents, but now bancassurance has become the dominant marketing channel with a market share of more than 50% after its introduction in 2002.
Bancassurance in Taiwan mainly plays the role of pure distributor because of its short history and regulatory constraints. Although bancassurance in Taiwan is not yet mature compared with European markets, it has contributed significantly to the growth of the life insurance business and has driven insurance penetration to the top ranking in the world since 2007, according to statistics by Swiss Re.
The ups and downs of bancassurance
Although the experience of selling insurance products through bancassurance covers only about 10 years in Taiwan, its growth has been fast and prominent. Theoretically, bancassurance has the advantages of customer expansion and cost efficiency due to cross-selling with the bank. However, previous literature also questions the service quality of providing insurance products, because bank tellers are less competent than salespersons employed by insurance companies. Therefore, this paper investigated the impact of bancassurance on insurance operations, including service quality, corporate reputation and profitability.
According to the empirical result, bancassurance does significantly influence insurance operations. The comparison between life insurers shows that insurers with more bancassurance have a higher complaint ratio and lower contract persistency, which implies that bancassurance may impair service quality and corporate reputation. On the other hand, bancassurance can reduce business expenses, resulting in better cost efficiency and higher profitability for insurers. In summary, the result indicates that bancassurance has an advantage in the financial construct but not in the underwriting construct of insurance operations.
Considering endogeneity between service quality, corporate reputation and profitability, the empirical result indicates that service quality is positively related to the salesperson but negatively related to bancassurance, which implies that the marketing channel is a relevant factor for service quality. Corporate reputation shows a significantly positive relation with service quality. Consequently, the insurer’s reputation declines with dependence on bancassurance. The empirical result also supports the advantage of bancassurance on expense saving and profitability.
Reputation and profitability
The empirical evidence indicates that corporate reputation is an important contributor to the insurer’s profitability. This paper finds that corporate reputation has a sustained effect that may keep the insurer in a favourable position in the market for the long term and thus increase the potential of future profitability.
As profits can contribute additional funds to improve service quality, these three elements form a virtuous circle. The organisational structure, in general, does not play an important role in enhancing the operation of bancassurance, even though the interaction of FHC and bancassurance shows a moderating effect on service quality.
The operation of bancassurance is expected to improve with market maturity, as seen by the experience of the European markets. The empirical analysis based on the sub-period data (before and after 2008) of bancassurance in Taiwan also confirms this expectation. And when bancassurance grows in market share and operational experience, the negative effect on service quality and corporate reputation declines, and the positive impact on profitability increases.
Bancassurance is an important innovation for financial service in the emerging markets as well as in developed markets. It has the advantage of cost efficiency and increases an insurer’s profitability, and is therefore expected to remain a favoured marketing approach in the future. However, insurers must improve the service quality of bancassurance to gain long-term competitive advantages in the market, because low service quality has a sustained effect on corporate reputation, which could lead to a deterioration in profitability.
There are certain limitations to this study. First, the operation of bancassurance in Taiwan is currently immature and focuses on distributing insurance products only, instead of integrated wealth management. In the future, insurers and banks should explore the ideal type of underwriting infrastructure for bancassurance in order to improve the service quality.
Second, the connection between business expense and service quality might be influenced by the market structure (e.g., competitive or not). As this study is based on the data in one market, which is competitive, it is probably not possible to generalise the results for other markets. Future studies may consider this issue through an international comparison of different markets.
Third, contract persistence, service quality and complaints might be associated with the underwriting experience of the staff, irrespective of the marketing channel. However, the available public data cannot distinguish the underlying reasons for complaints (e.g., product, distributors, or insurer). The results of this study must be interpreted in the light of this limitation.
The empirical result indicates that marketing through bancassurance reduces underwriting service quality and thus negatively affects the insurer’s reputation. On the other hand, bancassurance shows an advantage in that it cuts business expenses and consequently contributes to the insurer’s profitability.
This study also finds a positive and sustained relationship between corporate reputation and profitability. Furthermore, the impact of bancassurance on service quality, corporate reputation and profitability increases with market maturity. The overall result suggests that life insurers must pay attention to service quality when marketing through bancassurance, as service quality has a sustained effect on corporate reputation and therefore profitability. A
Ms Tsai-Jyh Chen is a professor of risk management and insurance at the National Chengchi University in Taiwan.