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.