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Bancassurance is the term used to describe the relationship formed between a bank and an insurance company whereby the bank sells products of the insurance company to the public. This type of arrangement enables the staff of the banks to sell the insurance products in the numerous branches of the bank throughout the country, while the insurance company does not need to maintain such a large sales staff as before. The insurance company will support and give training and advice on insurance products to the staff of the bank who will be selling the insurance products over the counter. The commission relating to the sales is shared between the bank and the insurance company, while the insurance policies resulting from the transactions will be dealt with in the usual way by the administration of the insurance company.
This bancassurance model contrasts with the more traditional model of insurance sales which involves large sales teams within the insurance company who work through brokers and other agents to sell the insurance policies to the public. The bancassurance model gives the insurance company the chance to make use of the numerous outlets and wide customer base of the bank and therefore allows it to reduce its sales force and dispense with other outlets for insurance sales. It is possible for a hybrid model to be used whereby the insurance company sells its products through the banks and also retains a sizeable sales force so that sales can be made through other brokers and agents. The bancassurance model has developed as one consequence of the liberalization of financial markets in European countries, North America and elsewhere.
In addition to allowing insurance companies to have access to the numerous bank outlets and their staff for sales of their products, thereby reducing costs, the bancassurance model also enables banks to sell insurance products as a package at the same time as selling their own products. An example is the opportunity to sell life insurance at the same time as completing a mortgage deal with a customer. The supply of personal loans and credit cards to bank customers is also an opportunity to sell card protection insurance and similar insurance products at the same time.
The demutualisation of building societies and life insurers changed the dynamics of the market. The ex-building society banks and the old established banks acquired many of the former mutual life offices, so that quality customer relationships could benefit from cross-selling both ways. Banks and building societies expanded into the insurance market through acquisition, joint venture agreements or distribution agreements. All the main high street banks either acquired or established life companies for cross-selling of insurance products to their banking customers.
The smaller banks have not followed the same route although most if not all have an insurance connection. This is because they cannot see the advantage in committing capital to an insurance subsidiary when they can make risk-free profits from an agency or partnership arrangement with an established insurance company. Many financial institutions act simply as insurance agents selling “badged" products underwritten by one or more of the major composites.
Banks and insurance companies normally enter into three or five-year partnership agreements, with the banks being remunerated by commission and profit share. Insurers normally take the lead in suggesting marketing initiatives to the banks, which then conduct the necessary database mining amongst their customers. As well as selling through their branches, the banks also conduct extensive direct mailing.
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Retail Distribution Review
The Retail Distribution Review (RDR) of the Financial Services Authority (FSA) will require independent financial advisers to have suitably high qualifications if they are to operate as independent advisers. The current mix of advisers includes IFAs, whole of market advisers, multi-tied advisers and sales representatives of product providers (e.g. banks). Some advisers receive commission for their advice, some receive fees and some are paid both. Following the implementation of the RDR at the end of 2012, there will be two principal types of financial adviser. The independent financial adviser will continue to offer products from the whole market while the sales adviser will be engaged to sell products from one or a few advisers. It will not be possible for product providers to pay commission to financial advisers.
The intention of the changes is to ensure that people seeking financial advice are confident that they are given the best advice in their particular situation from an independent financial adviser. It is thought however that IFAs may target high net worth individuals and market their services only to these. Most people are likely to go to their local high street bank or to a building society for advice. Access to independent advice may become still more important at a time when younger people will need advice on building up a pension fund, given the undeniable fact that people are on average living longer, and will continue to need advice on life insurance and other insurance based products.
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Direct marketing is now often referred to as non-intermediated business. Sales reported as non-intermediated are those that are pure direct business, that is sold directly to the customer, with no intermediary intervention. The customer might have reached the insurer:
- entirely on his or her own initiative;
- through general advertising (such as by newspaper or television);
- through an advertisement mailed to a list bought from a third party;
- through the provider’s authorised introducer; or
- at an earlier date through an intermediary who is no longer involved in (or remunerated for) the current sale.
Term insurance, which has been identified by UK insurers as an excellent product to sell on the internet because it is simple and does not require specialist financial advice in order to be sold, is likely to account for a reasonable proportion of the market share of non-intermediated protection business.
Life insurance and pension products usually have to be “sold", but car and house insurances are “bought" as essential, if not legally required, items. The small direct market share can probably be attributed to informed purchasers who, having compared product features elsewhere, seek to buy at the best price. Thus Marks & Spencer, Tesco and others offer low cost methods of policy acquisition with the attraction of well-known brand names and therefore a measure of security.
Although telephone calls are recorded for compliance purposes, the fact that a caller can easily terminate an interview limits the effectiveness of telephone sales. Some investment advisers may send fact-finding questionnaires to interested prospects and negotiate completion of the sale over the telephone when the completed questionnaire is returned.
UK Life Insurance Distribution (Bancassurance, Direct Marketing)
This is "series linked article" introducing the reader to the complexities of the UK life insurance distribution market. The first four articles are published in February 2010 and the remaining articles on this subject will be published in March 2010.