Bancassurance Model is Business as Usual in European Countries

The passage of the Gramm-Leach-Bliley Act marked a watershed in U.S. financial regulation, opening up the banking, insurance and securities sectors to cross-holdings and business combinations after almost 70 years of separation. Most segments of the insurance industry praised the accord, but there are implications that trouble may lie ahead for agents and brokers.

The “European Bancassurance Model” provides one possible scenario. Continental Europe never had a Glass-Steagall Act, and therefore retail banks, investment banks and insurance companies have operated in tandem for as far back as anyone can remember. Numerous cross-holdings exist between them. Retail banks own insurance subsidiaries or have business arrangements with insurers, and their local branches actively promote the sale of insurance products.

The model is so strong in Europe that individual insureds, homeowners, automobile owners, even numerous small businesses, routinely use their local banks, rather than agents and brokers, for their insurance requirements.

A visitor to a typical local branch of the Societe Generale, France’s third largest bank, finds a well-stocked shelf of literature offering a good deal more than classic banking services. An eight-page brochure details the various life insurance and annuity products available. Similar pamphlets explain the automobile, homeowners’ and related services policies offered by the bank.

The relationship goes deeper, however. For example: if you purchase a home or apartment in France, and, as most people do, borrow money from a commercial lender to pay for it, the lender requires that you insure the property against loss. The standard homeowner’s policy in France, as in the U.S., covers natural disasters (fires, floods, etc.) and third-party claims (including water damages caused by plumbing leaks-which is especially important in the larger cities, like Paris, where almost all dwellings are apartments and burst pipes occur frequently).

The lender-also requires the equivalent of mortgage insurance, which covers payment of the debt in the event of the borrower’s death or incapacity. All of these insurance services are provided by the bank, which lends the money. No insurance broker or agent enters the picture.

The same is largely true for automobile insurance, small business loans, and the various types of coverage offered to credit card holders through the issuing bank. Agents and brokers exist in France, but their services are limited mainly to the commercial sector, life insurance, and big brokers like Marsh and Aon serving big clients.

Smaller agents for the most part represent a large insurance company, such as AXA, AGF, CGU, Mutuelle du Mans, etc. While it would be theoretically possible to go to an independent broker to obtain coverage, it simply isn’t done in practice. The banks handle it as part of a unitary transaction. The insurance is placed either with their wholly owned subsidiaries, or with one of the big carriers they work with.

One finds the same scenario in other European countries. Germany, the Benelux countries, Switzerland, Italy and Spain all have similar arrangements to the French with varying local differences. Agents and brokers are much less important in Europe than in the U.S.

The United Kingdom, which maintains a tradition of independent brokers and agents, and seems to have a public that is more keenly aware of the differences in premium rates and the opportunities which competing companies offer, remains an exception to the Continental model.

Chartered accountant and financial consultant Howard Cammel noted that, “The rates differ widely in England, and the public is generally aware of this. The Sunday papers, for example, contain pages of personal financial advice and analysis and are widely read. I think the British public is therefore better informed of the opportunities available than is the case in Europe.”

The U.K. in fact falls somewhere between the European and the U.S. model. Following the example of its most successful retail bank, Lloyds TSB, many British banks are now abandoning investment banking strategies and increasingly adopting Continental bancassurance models.

Cammell opined that Lloyd’s was now the most popular model for the future. “They bought Cheltenham and Gloucester, which offers mortgage lending, and immediately used the data base to offer mortgage and homeowners insurance. They recently bought Scottish Widows, a life and annuity company, and are doing the same thing. They’ve been very successful, with a higher return on capital than other British banks, by following the Continental model.”

U.K. agents and brokers are also under pressure from e-commerce competition like Direct Line. Originally set up by Royal Bank of Scotland, the company now sells
15 percent of all U.K. auto insurance. Numerous U.K. banks and insurers have recently established partnerships and working arrangements offering all kinds of insurance products directly to their customers.

So far, however, bancassurance doesn’t dominate the U.K. insurance market. One reason is the government’s position, largely supported by public opinion, that tying insurance to lending decisions and financial transactions amounts to unfair competition. Public safeguards assure that customers are given choices in the purchase of insurance, and this, coupled with the more competitive nature of the market in the U.K., means that independent agents and brokers still have a place there.

If the U.S. follows this example, agents and brokers should take steps to assure that the same safeguards are maintained along with the implementation of financial reforms.

Topics USA Agencies Europe Homeowners Uk