Bancassurance

Banking markets have experienced a general trend towards conglomeration in recent years, which has been facilitated by the deregulation of banks’ activities in most Western countries. A particular feature of financial conglomeration has been the diversification of banks into insurance activities, and especially life assurance. This has been labelled ‘bancassurance’, using a term pioneered in France where this strategy has been particularly significant. Although many European banks have become actively engaged in the bancassurance strategy through acquisitions, joint ventures and de novo entries, there has been little empirical evidence on the performance of this strategy. The need for further research has been emphasised by a member of the executive board of the ING Group:

Banks and insurers have in common that financial intermediation is at the heart of their production process. (…) What happens if these processes are brought together in one financial services group? (…) What is the resulting risk profile of a merged financial services group? We have made this choice and we are convinced that we now have better possibilities to spread risks and to control them. But we would welcome contributions in this field from the research side.

(Holsboer, 1993, p. 397)

The ‘bancassurance’ catchword has been a topic of interest for analysts of the financial services industry in recent years. It has become so prominent in financial markets that Elkington (1993) suggests that this French expression will soon take its place in the Oxford Dictionary. In this chapter, we undertake a comprehensive analysis of what is bancassurance and the factors that have prompted the development of this strategy.

This chapter provides a review of the development of bancassurance in the United Kingdom which is recent and has considerably evolved over the last decade. In the first section of this chapter, we review the major regulatory changes that have had an impact on the bancassurance trend. This includes the Financial Services Act (1986), which reshaped the regulation of investments products and has led to new regulatory requirements for the distribution of insurance. The section then examines the impact of the Building Societies Act (1986) on the development of bancassurance. In Section 3.2, we review the emergence and strategy of UK bancassurers. We start by analysing the two earliest bancassurance operations in the United Kingdom, those of TSB and Barclays, who set up life assurance operations in the 1960s. Then, we examine the wave of new bancassurance operations established in the 1980s. Finally, we examine the bancassurance operations, established in 1993 to 1995.

This chapter examines the development of bancassurance in various European countries, including France, Germany, Italy, the Netherlands and Spain. It also examines the major bancassurers in each country and aims to identify the factors that led to the development of this strategy. The analysis serves as a basis for our cross-country comparison in the latter part of the chapter. We compare the bancassurance strategies in different countries according to three dimensions: the importance of country-specific factors in promoting the bancassurance phenomenon, the entry structures dominating in different countries, and the level of bancassurance integration.

This chapter reviews the theory of corporate diversification to provide an insight into why banks should seek to diversify into insurance and other areas. The literature on corporate diversification has been the focus of interest of researchers in both the management and finance fields. Interest was raised, in particular, by the creation of an organised corporate mergers and acquisitions (M&A) market in the United States during the 1960s when many financial and non-financial firms embarked on diversification strategies. An important question, in both the management and finance fields, has been to understand why corporations engage in such strategies and whether these diversification moves have been successful.

This chapter examines the literature on bank diversification and risk, that is, the risks inherent in the diversification of banks into non-bank activities. In particular, this mainly US literature considers the expansion of bank holding companies into non-bank activities. The main objective of these US studies was to predict the potential impact of more liberal laws governing bank holding companies’ (BHCs) permissible activities. Most studies have concentrated on the asset risk of BHCs and, using portfolio theory, attempted to estimate potential risk-reducing effects. The first section of this chapter briefly discusses the application of portfolio theory to corporate diversification.

This chapter outlines the methodology taken to investigate the potential risk effects of UK banking institutions’ involvement in life insurance. The previous chapter identified two main approaches in the US literature on bank diversification and risk: portfolio and merger simulations. The approach taken in this chapter adopts a merger simulation framework. The first part of the chapter describes the steps followed in order to undertake merger simulations and the second part outlines our main findings.

This chapter outlines the regulatory environment that has evolved with the growth of bancassurance and also considers recent issues concerning the regulation of financial conglomerates. The first part of the chapter examines trends in the regulation of the financial services industry in recent years and then goes on to review the regulations pertaining to bancassurance in various European and non-European countries. The remainder of the chapter examines the scrutiny under which bancassurance has been placed in recent years and the issues relating to the supervision of financial conglomerates. We outline the main features of the new types of regulations that are likely to be introduced to handle the increased mingling of banking and insurance businesses.

Many European banks have adopted a bancassurance strategy in recent years, but there has been little empirical evidence, if any, of the consequences of this strategy on bank performance. This book aimed at providing some empirical evidence on the risk/return effects of bank diversification into life assurance.