Strategic alliances in bancassurance

A new trend in the local financial services sector has caught on.

In September last year, the Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, approved the proposed merger between the Bank of the Philippine Islands (BPI) and Ayala Insurance Holdings Corp. (AIHC), thus breaking the ground for the rise of an institution that integrates banking and insurance services.

The event scarcely rated media space, but those who made it possible knew it could trigger similar mergers among banks and insurance companies in the country, with profound effects in both industries and, by extension, in the entire financial system.

In financial circles, the institution, thus, created is known as bancassurance. It is the final, logical result of the process of convergence in bank and insurance services that has been going on for several decades now.

Look closely. People take out insurance policies with other financial products traditionally offered by banks, such as auto loans and mortgages. It thus makes a lot of sense to integrate insurance and banking services under one company. That way, the company can lower distribution cost, increase profit, and enhance overall competitiveness.

Actually, bancassurance is not a new concept. It is a new development in the Philippines, but not in Europe, where it has originated.

Some of these more prominent and successful bancassurance organizations in that continent include ING (with ING Life), Credit Suisse (with Winterthur), Barclays (with Barclays Life), and Lloyds (with TSB Life and Lloyds Abbey Life).

These organizations have shown that integration of banking and insurance services as opposed to simple marketing tie-ups or strategic alliances results in a more unified vision and goals.

In the local scene, tie-ups and strategic alliances, the second best thing to full integration, are common.

Following deregulation of the insurance industry in 1995, a number of foreign insurance firms quickly established their presence here mainly through joint ventures and marketing alliances with local banks.

As a result, the country is host to Solidbank and John Hancock working together, PCIBank and Cigna, Equitable Bank and Berkley International, Metrobank and AXA, RCBC and Nippon Life, Security Bank and Standard Insurance, and Asian Bank and Mapfre.

It is BPI and AIHC, however, which created the first-ever bancassurance, that is, strictly speaking, the full integration of a bank and an insurance company or group of insurance companies.

Under a tie-up or marketing alliance or whatever one wishes to call it, the bank and an insurance company give each other access to their respective customer bases and distribution channels.

They derive their income by splitting the financial services fees resulting from the arrangement.

In a bancassurance operation, where full integration of banking and insurance services truly exists, the company gets to identify and develop financial instruments and reconcile them for the benefit of the growing market. It can thus adopt a more competitive pricing scheme and offer more accessibility and convenience to the customer.

As in all other mergers and acquisitions, the surviving entity can expect considerable savings from a unified operation. Although banking and insurance transactions are conducted separately as they were before, both share the same company headquarters and branches, the same information technology infrastructure, the same back office support.

The bancassurance company, with its wide range of products, can thus take advantage of the so-called economies of scale.

It is not all to the advantage of the bank or the insurance company, either. Indeed, business evolves as a direct response to customer requirements and demands.

The convergence of banking and insurance services means the customer has to deal with only one service provider for his diverse financial needs.

Apart from the usual deposit accounts, loans and credit cards, foreign exchange, and other services traditionally provided by a banking institution, the bancassurance company also provides insurance coverage -- life, fire, vehicle, and casualty insurance -- as well as health care and pension plans for the customer.

In other words, the bancassurance company takes care of practically all financial requirements of its customers.

One who looks closely at things will realize that banks and insurance companies pursue the same customers: Those who have extra income to save or invest, in a bank or in an insurance company.

From that premise it is easy to see that bancassurance is here to stay.