Bancassurance and Assurancebank Strategies - Essay Example

Bancassurance’ and ‘Assurancebank’ strategies Table of Contents ‘Bancassurance’ and ‘Assurancebank’ strategies Table of Contents 2 Introduction 3 The HSBC Bank and the ‘bancassurance’ strategy 4 Assurancebanking in context of ING Group 7 Bancassurance vs. Assurancebanking 9 Anderson, K. & Kerr, C. (2001) Customer Relationship Management. USA: McGraw-Hill. 14 Business Wire (2007) ‘A.M. Best Affirms Ratings of HSBC Insurance (Asia) Limited’. [Online] Available at http://www.thefreelibrary.com/A.M.+Best+Affirms+Ratings+of+HSBC+Insurance+(Asia)+Limited.-a0163062806 (Accessed: 6 November, 2009). 14 Ennew, C. & Waite, N. (2007) Financial services marketing: an international guide to principles and practice. Oxford: Butterworth-Heinemann. 14 Friedman, J.P. & Harris, J.C. (2006) Keys to Mortgage Financing and Refinancing. New York: Barron. 14 HSBC Holdings plc Annual Reports and Accounts. (2008). ‘Strength, Diversity and Resilience’ [Online]. Available at http://www.asiaing.com/home/ebook/index.html (Accessed: November 14, 2009). 14 ING (n.d.) ‘ING Going Forward’. [Online] Available at http://www.ing.com/group/showdoc.jsp?docid=074177_EN&menopt=abo|his (Accessed: 6 November, 2009). 15 Kasuya, M. (2003) Coping with crisis: International financial institutions in the inter-war period. USA: Oxford university Press. 15 Rajola, F. (2003) Customer relationship management: organizational and technological perspectives. New York: Springer. 15 Tyson, E. (2008) Investing for Dummies (5th Edition). New Jersey: Wiley Publishing. 15 Introduction The tide of liberalisation and hence globalisation sweeping over every nook and corner of the world led to a renaissance in the global social structure. The main purpose behind the liberalisation move was not only to broaden the availability of goods and services and stretch the potential consumer basket, but also to instil greater competition in the national industrial structure and thus in a way compel the national producers to supply high quality products. Hence, an opening up of the markets eventually led the production houses to operate in an environment saturated with stringent competition. The companies worldwide have responded to this change by adapting themselves into newer strategies while designing their financial plans. Many firms have introduced added features in their operations so that they are able to meet more of the people’s demands and thus are able to capture a higher fraction of the market. Since it becomes easier for people to shop or transact under the same roof, this introduced feature is enough to lure them (Staikouras, 2009). One such move that was simultaneously embraced by the insurance as well as the banking sector was that of indulging themselves in each other’s activities. Hence, two new strategies of ‘bancassurance’ and ‘assurancebank’ were introduced in some of the units in the banking and the insurance sectors respectively (Nurullah & Staikouras, 2008). For instance, in Europe, there is the HSBC Bank which has adopted the strategy of ‘bankassurance’ while there is the ING Group which has embraced the other strategy. The HSBC Bank and the ‘bancassurance’ strategy The strategy of bancassurance implies an embedding of the insurance sector in the activities of the banking sector (Ennew & Waite, 2007). The advantage to the customers in case such a strategy is introduced are, firstly, they are able to transact under a single roof which is time as well as cost-saving, and secondly, the moment that a customer takes some loan, he automatically is entitled to the insurance benefit that accompanies it. Thus, if the loan is meant for some investment and it fails to reap the returns it is expected to yield after a specified time period, then an insurance coverage will help him to forgo the loan and thus the person’s tremor is reduced by a great extent. The HSBC Group adopted the ‘bancassurance’ strategy in as early as 1993. Like most other European banks who adopted the strategy, it built up a separate subsidiary named the HSBC Insurance, which henceforth became responsible for all the bank’s insurance dealings (Nurullah & Staikouras, 2008). Opportunities The bank already has an access to a large number of trustworthy potential customers through its already established business. Hence, it has to bear a lower cost of customer acquisition. The bank already has a good distribution channel and is spread over 86 countries throughout the world, so that most people can reach it in times of need. The HSBC Group is spread over a huge area and has numerable branches, spread not only over Europe, but throughout the world as well. The bank already has a reputed brand name and the customers’ decisions are often guided by the brand values. Since people have to frequent a bank due to a variety of reasons, so, in times when they need some advice on matters related to insurance, they can readily acquire it from the banks, sitting face-to-face with the manager or the officer-in-charge of the department handling insurance dealings. In fact, HSBC has a trend of updating the manageability of its sales and service staff, so that they can manage customer problems more efficiently. The banks might use the statistics of the current account balances of the individual for judging whether the person should be sold a particular insurance scheme or not. Hence, unlike the insurance companies that need to do a lot of research work which often seems more like harassment to the people, the banks seem to be much less troublesome. The bank enjoys the opportunity of quoting different prices for different product bundles so that even their customers have the privilege of enjoying a mixture of various products and services of the bank. There are also a wide range of insurance products and schemes of the bank, available to the consumers, so that they can select from a huge basket, and mix their products accordingly so as to get the maximum. (HSBC Holdings plc Annual Reports & Accounts, 2008) Challenges Customers often back-off when there is a tendency of excessive overzealous telephonic conversations on part of the bank officials. The customers either turn dubious of the bank’s intentions or simply get fed up of it. In fact, people who are interested only in opening up a bank account are forced into purchasing some insurance scheme, which the bank apparently assures would be of great help to the customers. However, this move on part of the bank often disturbs the customers and thus the banks lose their reputation of allowing the customers carry on with their activities peacefully. This is a severe problem in some branches of HSBC, especially because the agents responsible for selling the schemes are paid some incentives in lieu of it. The opportunity cost of the bank can get high in case a customer is very insistent about his choice of scheme which turns out to be rather low-priced. Although a reputed bank is not expected to indulge in such activities, but the agents whom the banks employ are subjected to an insurance-based salary structure and thus in many instances it is found that they subconsciously involve themselves in activities they are not supposed to (HSBC Holdings plc Annual Reports & Accounts, 2008). The challenges that the company faces seem mainly due to a lack of expertise of the bank-employees in handling such situations. Hence, there is need to impart them some training in the area. Moreover, the salary structure of the agents that the banks employ must also be changed, so that they can work in a less stringent environment. Despite the challenges that the bank had been subjected to, it had been doing a tremendous business over the years. The statistics for the year 2006 finds that the bank had been able to capture 5.8% of the non-life insurance market. Of all the non-life insurances which it sold, the strategy of ‘bancassurance’ is responsible for 50% of it. Another significant channel which the bank uses to sell its insurance products is that through brokerage (Business Wire, 2006). Assurancebanking in context of ING Group Assurancebanking implies the indulgence of banking services into the insurance sector, in the sense that the insurance companies provide customers the option to deposit their money and earn interest on them apart from other facilities like shopping against those deposits and paying via the company credit cards and so on. One such veteran insurance company that has involved itself in such activities is the ING Group. The ING Group started out its banking services in 1994, when it opened its first branch in Romania. However, later, the bank extended its services to other parts of the world through joint ventures with local banks, e.g., the group collaborated with Piraeus Bank in 2001 to enter the Greek market and extend its services over there (Nurullah & Staikouras, 2008). Yet, the group had always carried on its banking and insurance services hand-in-hand, rather than splitting up the services. Recently though, after the financial crisis gulped down many big names, the company has planned to divide its services between two separate units and launch the ‘Back to Basics’ strategy. The opportunities and challenges the group had to face through its journey are explained below (ING, “History of ING”, n.d.). Opportunities ING had been a big player in the insurance market since 1991, although its roots can be traced back to the late nineteenth century. Since a long-time, the company had been dealing with customers and eventually have also earned a customer loyalty. After globalisation, when it decided to indulge into the provision of banking services to its customers, this acted as a decisive factor behind the company’s adoption of the scheme. Secondly, ING being an insurance company suitable to accomplish sales based jobs efficiently, it had the ability to attract customers and lure them into profitable schemes. A bank is not so efficient in such tasks and that is where they lag behind the insurance companies. The expertise with which an insurance company can handle the advertisement of their products is almost absent in banks. Thirdly, it is their expertise in sales and marketing which gives the insurance sector an edge over the banks with respect to their interaction with the customers. Since the banks are relatively new in the aspect, they still have to invest some more time before they can know the exact way to arouse the demand in people. Many banks who are new in the field of bancassurance often involve themselves in overzealous attempts to attract customers. But the insurance firms like ING which had been there since a long time, knows the optimal level beyond which a person should not be convinced. Moreover, since the insurance companies are just commencing their operations in the field, they are more eager to attract customers and thus often offer high rates of interest on the bank deposits or advance loans at a lower rate of interest than that prevailing in the market (Kasuya, 2003). For instance, at present, ING is offering an annual interest rate of 6.25% on its term deposits, while it is just 5% in case of HSBC Banks. Challenges Despite the opportunities of the company, it has to face certain challenges as well that are inherent to the insurance companies dealing with banking services and products. One such challenge is a relatively fewer number of outlets of an insurance company that acts like a constraint for people who need to avail bank services frequently. For instance, ING has its outlets in about 50 nations all over the world, compared to HSBC that operates in 86 nations throughout the world. Secondly, although the company is a reputed brand name among people, yet, there often arises some suspicion in the minds of people about depositing their hard-earned money with the insurance companies. The main reason behind this being a belief among people that the insurance companies often invest in relatively riskier projects so as to yield a higher return in order to meet the sudden demands of the customers, since the accidents against which they are insured occur without notice (Tyson, 2008). However, the banks do not face such a typical challenge since their customers know that even if they are involved in such risky investments, they have ample funds from bank deposits that might provide for any sudden demand for funds arising from an accident. Bancassurance vs. Assurancebanking Apparently, although the two situations might seem to be similar, there exist some differences in them from certain aspects. In fact, the differences are optimistic for the banking sector but pessimistic for the insurance industry, indicating that the strategies of bancassurance that many banks have greater opportunities than that of the strategy of assurancebanking adopted by many insurance companies (Nurullah & Staikouras, 2008). The above statement can be supported by data from the annual reports of the two companies considered as examples – HSBC Financial Details 2008 (US$m) 2007 (US$m) 2006 (US$m) Net Insurance Premium 10850 9076 5,668 Net Interest Income 42563 37,795 34,486 Total Income 56745 61,751 54,793 Insurance/income 0.191206 0.146977 0.103444 Interest/Income 0.750075 0.612055 0.629387 ING Financial Details 2008(€m) 2007(€m) 2006(€m) Net Interest Income 11,042 8,976 9,192 Net Insurance Premium 43,812 46,818 46,835 Total Income 66,291 76,586 73,621 Insurance/income 0.660904 0.611313 0.636164 Interest/Income 0.166569 0.117202 0.124856 From the information gathered from the ratios, it is certain that HSBC is doing much better in with its bancassurance scheme than ING Group is faring with its assurance banking strategy. For banks who are indulged in bancassurance, though the challenges seem quite gripping, are much lower than that for assurancebanking strategy adopted by many insurance companies. The main problem lies in the role that the companies belonging to the two sectors had been traditionally playing in the life of man. The banks are institutions where people can deposit their money safely and withdraw them after some specified period of time. Their money earns a certain amount of interest meanwhile rather than simply lying idle in the accounts. However, the banks maintain a certain amount of liquid money with them so as to meet any sudden demand arising from the customers. Yet, such demands are not expected to be so high so as to make the situation perilous for the banks. Hence, people feel safer on depositing their money with the banks. On the other hand, the insurance companies are more susceptible to risk because they are prone to invest their funds more in investments that generally bring a high return, like mutual funds which are a combination of all types of assets available in the market. However, it is a commonly known fact that the investments which yield a higher return are riskier than those generating low returns. Hence, the people can seldom remain at peace of mind when they deposit their money in accounts of insurance companies. In fact such companies in order to lure the customers often offer high rates of interest on such deposits and there are some risk-lovers who even prefer to take the plunge and deposit their money in such places, but the number of such people is so few that they are not able to bring a significant difference. Moreover, in case that the insurance companies lose their money when the project turns out to be a bad investment, the company goes bankrupt and so do the people who initially had trusted the company’s moves. On the other hand, banks are known to involve themselves less in such investments and earn revenues mainly by advancing loans to people. Again, when they advance loans, they seek some mortgage from the borrowers. The nature of the mortgage normally is found to be in proportion to the amount of loan being forwarded. Hence, people who take such high loans often have to reconsider their decision, since in case their loan turns out to be a bad asset for the banks they lose their mortgaged asset as well (Friedman & Harris, 2006). Due to the relative disadvantages of depositing their money in investment houses compared to the banking units, on account of the risk quotient, the strategy of ‘assurancebanking’ has not been able to leave behind a mark as impressive as the strategy of ‘bancassurance’ did. Moreover, since the banks have a larger number of outlets and distribution channels than insurance companies, they can reach out to a greater number of people. However, this obstruction can be rooted out by the insurance companies through building up more and more branches so that they too can enhance their circle like the banking units. Thus, the future scope of the assurancebanking strategy to equal that of the popularity of the bancassurance strategy cannot be ruled out. (Nurullah & Staikouras, 2008). But another inherent problem that can be solved only after considering the time-factor is that of the personal relation that the bank customers share with that of the bank employees. This personal interaction is not possible in case of companies in the insurance sector. This is because people do not frequent insurance offices as they do banks. However, this loophole can be enclosed with time so that the two sectors might be able to reach an equivalent level (Anderson & Kerr, 2001). Reference Anderson, K. & Kerr, C. (2001) Customer Relationship Management. USA: McGraw-Hill. Business Wire (2007) ‘A.M. Best Affirms Ratings of HSBC Insurance (Asia) Limited’. [Online] Available at http://www.thefreelibrary.com/A.M.+Best+Affirms+Ratings+of+HSBC+Insurance+(Asia)+Limited.-a0163062806 (Accessed: 6 November, 2009). Ennew, C. & Waite, N. (2007) Financial services marketing: an international guide to principles and practice. Oxford: Butterworth-Heinemann. Friedman, J.P. & Harris, J.C. (2006) Keys to Mortgage Financing and Refinancing. New York: Barron. HSBC Holdings plc Annual Reports and Accounts. (2008). ‘Strength, Diversity and Resilience’ [Online]. Available at http://www.asiaing.com/home/ebook/index.html (Accessed: November 14, 2009). ING (n.d.) ‘ING Going Forward’. [Online] Available at http://www.ing.com/group/showdoc.jsp?docid=074177_EN&menopt=abo|his (Accessed: 6 November, 2009). Kasuya, M. (2003) Coping with crisis: International financial institutions in the inter-war period. USA: Oxford university Press. Nurullah, M. & Staikouras, S. K. (2008). ‘The Separation of Banking from Insurance: Evidence from Europe’. Multinational Finance Journal, Vol., 12 (3/4): 157-158. Rajola, F. (2003) Customer relationship management: organizational and technological perspectives. New York: Springer. Staikouras, S. K. (2009). ‘An event study analysis of international ventures between banks and insurance firms’. International Financial Markets, Institutions and Money, Vol. 19: 675. Tyson, E. (2008) Investing for Dummies (5th Edition). New Jersey: Wiley Publishing. Read More