Bancassurance, effectively a convergence of banking and insurance, is a global trend, with markets at different stages of development depending on their regulatory environments and financial industry sophistication. For more than a year banks and insurance companies in Korea have been making plans to capture the new revenue streams promised by bancassurance when deregulation takes effect from August 2003.
The sale of insurance is one of the first steps a bank can take towards leveraging its distribution channels to provide customers a full range of investment, banking and insurance products. Delivered alongside high value-add financial advice, this is true bancassurance, and soon Korean banks will have the opportunity to move closer to this advanced model. Early indications suggest, however, that flawed strategies and poor implementation are taking some banks in the wrong direction.
Although Korean banks have been able to distribute a range of insurance products at their branches for years, it is only now that there is significant market buzz about bancassurance. This is because for the first time bank employees will be able to sell insurance, whereas to date only insurance agents stationed in bank branches have been permitted to sell.
It was widely anticipated that bancassurance would be deregulated in Korea to allow exclusive joint ventures between a single insurer and single bank, and foreign investors signed a number of agreements in anticipation of this change. In February 2002 Allianz Group acquired 12.46% (W126.38 billion, or $106 million) of Hana Bank's shares, and in December 2002 it was announced that ING had agreed to invest up to $250 million in Kookmin Bank, increasing its stake from approximately 4% to about 6%.
But the new regulations announced by the Korean Ministry of Finance and Economy in January 2003 surprised many market players.
It was announced that from August 2003 banks would be able to distribute insurance products in their own branches without the need for an insurance agent, but that exclusive partnerships would not be allowed. The regulators placed a cap of 49% on the sales of the products of any one insurer (for both life and non-life), effectively dictating that banks must select a minimum of three life suppliers and three non-life suppliers, and that Korean financial institutions will not be able to enjoy the partnership benefits of exclusivity in their bancassurance operations.
The regulator's decision was based on a number of factors, including a desire to ease the impact of bancassurance on the dominant traditional agency force, and an attempt to avoid further market polarisation that may be caused by large banks and insurers joining to launch bancassurance ventures.
Following this announcement there was a flurry of activity as banks and insurers tailored their strategies to this new reality, and set about courting and signing multiple distribution agreements.
MoFE also outlined a schedule for product deregulation. Initially bank staff may sell four life products (individual annuity, variable annuity, endowment and credit life), and three non-life products (individual pension, house fire and long-term savings). By 2007 it is planned that a full range of products will be available in bank branches.
Management consultancy NMG Financial Services Consulting expects that many Korean banks will implement a minimalist bancassurance model, opting for a low-impact transitional model at the expense of longer-term value creation. This is a missed opportunity because even under the restricted regulatory environment it is still possible for a broad range of products to be delivered to bank customers, and for a degree of exclusivity between insurers and banks to be established.
For example, only the in-branch environment is restricted. Banks can form exclusive relationships with insurers to sell a full range of products via direct marketing or worksite marketing. Moreover, the sales cap only applies to deregulated products sold via bank employees, and in-branch insurance sales agents can be used to broaden the product offering.
Unfortunately, early signs suggest that the majority of Korean banks do not see the benefit in aligning closely with a single insurer, and are resistant to having in-branch sales representatives from insurance companies.
Banks therefore will forego possible benefits of alignment such as an exchange of intellectual property, more committed and customised training, products which are more specifically designed for the bank's customers, IT and administrative efficiencies and
favourable long-term commission arrangements.
The majority of banks will simply act as brokers to multiple insurers, and distribute the deregulated product set via their own staff from August. The majority will not fully exploit the full potential of the branch, direct marketing or worksite marketing channels. This distribution of a limited range of insurance products via bank branches is a long way from the successful bancassurance models of Europe, and some other Asian countries.
It seems that further deregulation, and a change in mindset from banks and insurers, is required before Korea will adopt a holistic financial services package, encompassing banking, insurance, lending and investment products, all provided within a financial advice framework by professionally trained staff. Expectations and profit projections should be aligned with this market reality.
Philip Gusterson ([email protected]) is a consultant with NMG Financial Services Consulting.