Bancassurance, the force behind the growing domination of banks in the European insurance market, is emerging in America.

Insurers and independent agents in Europe have seen the power of this phenomenon and recognize the threat it represents. In this country, however, the current disarray in the banking industry gives insurers a chance to gain the upper hand in the bancassurance game, if they act quickly.

The banking industry is probably more fragmented in the United States than in any other major industrialized nation. However, bancassurance - the European term for the sale of insurance by banks and, to a lesser extent, the sale of bank services by insurers - is likely to pose less of a problem for insurers here than it has in Europe.

The biggest danger in bancassurance arises when a large bank with national distribution outlets enters the market, thus potentially crowding out smaller insurers. But in a market like that in the United States - dominated by smaller banks that generally do not come close having full market coverage - insurers can forge links with a larger number of low-cost distributors.

Deposits vs. Premiums

By forging a network of distribution links with these banks now, before the banking industry becomes more concentrated, U.S. insurers have a special opportunity to become the dominant players in bancassurance. However, this opportunity probably is limited to insurers with captive agency forces - the only way to ensure that the insurance premiums generated by the partnership do not end up in the coffers of an unrelated entity. The bank in the partnership willingly accepts the loss of bank deposits, but only because it knows it will get insurance premiums in return.

Bancassurance already has made inroads in the United States. For many years, banks have sold credit insurance, and some own their own credit life insurance companies. Recently, the emphasis has been on the sale of single-premium deferred annuities through bank branches. The bank's customer is persuaded to take such an annuity, with its inherent tax advantages, instead of a standard bank deposit instrument - and the bank receives a generous commission on the transaction.

Apparently, many banks also feel that getting the deposit liability off their books is an advantage, given stricter capitalization requirements and the trouble they are having earning a secure spread. It is ironic that while European banks are entering the insurance business to protect their deposit bases, U.S. banks are using insurance as a deliberate disintermediation tactic.

By forging distribution links with banks now, U.S. insurers can capitalize on the disarray in the banking industry and position themselves for financial services deregulation.

Why It's Coming

Although financial services deregulation is not happening in this country at the same pace as it is in Europe, it is inevitable. The emergence of a global economy is relentlessly eroding the artificial regulatory barriers that interfere with the free play of market forces. In such an economy, it is difficult to maintain barriers that are not in step with what's going on in the rest of the world.

Other factors that have fostered bancassurance in Europe have parallels here. The North America population, like the Europe, U.S. tax laws offer consumers tax breaks on retirement-type insurance products - tax breaks not available through any comparable bank deposit instrument. This creates the potential for a shift from short-term deposits to longer-term savings plans.

The tax concessions for savings-type insurance products are not as great here as they are in many European countries, but they do exist. So the significant growth in annuity sales through U.S. banks is likely to continue, soon to be followed by a regulatory environment that permits the cross-selling of other insurance products.

A Dangerous Tactic

Right now, U.S. banks do not seem to be worried about the disintermediation that occurs when their deposit instruments are converted to insurance instruments. But sooner or later, as sales of single-premium deferred annuities increase at the expense of bank deposits, bankers will wake up to the dangers of disintermediation.

When that happens, bankers are likely to react in one of two ways. Either they will want to own the insurers whose products they sell, just as insurers dependent on bank distribution will want to own banks to protect their distribution channels; or they will start to lobby aggressively for bank retirement savings instruments that provide the same tax advantages as insurance savings instruments. This is already the case in Canada, where banks sell registered retirement savings plans that allow individuals to set aside up to $11,500 per year toward their retirement. Contributions made to these plans are deductible from earned income, and funds accumulate tax free.

Canada Takes the Plunge

Under recent deregulation legislation, Canadian banks are allowed to own insurance companies. The catch - a big one - is that they are not permitted to do any of the things that would make them want to own an insurer. Banks also are prohibited from selling most insurance products - including those of any insurance company they own - through their own branches.

They are allowed to sell insurance to their customer base (using direct mail techniques or possibly by sending an agent to call on the customer), but they cannot use segmentation techniques that take advantage of their customer information files. Since Canadian insurance companies are now able to own banks and trust companies, and are not subject to any networking restrictions, similar restrictions on banks are also likely to disappear within the next decade.

Price Squeezing in Europe

In the European insurance market, bancassurance has resulted in price squeezing and marketplace crowding. The new insurers started by banks are pursuing a low-cost, price competition strategy. In many cases, market thrusts are confined to products that do not compete directly with those sold by agents. However, the impact of price competition has been felt.

Marketplace crowding occurs even when banks form alliances with or buy existing insurers since the insurers that get access to bank distribution are able to pick up market share at the expense of other insurers. This is happening at a time when European insurers must cope with expected large-scale consolidation, stemming from the emergence of a single-market economy.

So far, bancassurance, as practiced in Europe, primarily has involved the sale of life insurance, but banks can be expected to move into the property and casualty business in the not too distant future. Both banks and consumers view retail property and casualty insurance as a commodity product. This makes it an ideal candidate for a low-cost distribution strategy. Moreover, some property and casualty products are a natural extension of major bank services and thus lend themselves to "bundling" with the mainline banking product. For example, homeowners insurance can be linked with mortgage lending and auto insurance with car loans.

A surprising number of European insurers have reacted to bancassurance by ignoring the problem and hoping it will go away. It hasn't, and it won't. The insurers that have recognized the problem have responded by consolidating their life and nonlife operations to become more competitive; by using technology more effectively to improve service and cross-marketing; and by experimenting with alternative distribution methods, including direct mail, direct response advertising, and automated sales.

The Shape of Things to Come

As bancassurance evolves in the United States, we can expect to see significant cross-ownership between banks and insurance companies, if permitted by the regulators. The dominant alliances will be between banks and insurance companies with tied agency forces.

There will also be a general preference for the so-called Allfinanz model, in which the insurance offered in banks is sold mainly by dedicated specialist agents employed by insurance companies that own, or are owned by, the bank.

We may see some growth in over-the-counter sales of insurance by bank staff, but this will be limited. Experienced, qualified agents can do a much more effective - albeit more expensive - job of selling complex insurance products than branch personnel.

Even in these instances, though, properly exploited branch distribution has proven to be a powerful, cost-effective way to generate qualified leads for insurance agents. And insurers selling through Bancassurance have been able to realize an 80% reduction in commission rates because their agents are selling seven times as much business.

Mutual Commitment Crucial

Insurers that set out to forge alliances with banks should choose their partners carefully, making certain that the bank is committed to making the arrangement work. Without a true commitment from both parties, the venture will be doomed. Insurers also need to clarify the ownership of the book of business built up through branch distribution, and consider the bank's ability to remain a source of warm leads as branch banking becomes less important.

If the partner is a small bank, the insurer must take care to protect the distribution agreements it develops - in order to prevent the dissolution of these agreements in the event that the partner becomes absorbed into a larger group. If the partner is a large bank, the big question to resolve is whether the bank plans to form its own insurer.

Finally, and perhaps most important, an insurer must decide whether its agents can live with the arrangement. The biggest hurdle may be convincing agents that the increased volume of sales will make up for the decrease in commission rates.

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