Product Types in Bancassurance Channel

Because of easily understandable insurance products and simple insure process for customers, this kind of sales model quickly accepted in the Europe. Nowadays in France, the total premium comes from Bancassurance channel reaches 65%, and

France has become the largest and most mature Bancassurance market in the world.² The product development in Bank could be divided into three phases (Figure 4-1).

1980 1990

extension of bank’s business savings product diversified products Source: Daniel (1995).

Figure 4-1: Three Phases of Product Types in Bancassurance Channel of France

Before 1980, selling insurance products was only an extension of banks’

businesses. Banks as an agent accessed into insurance field through collecting surcharge. In this period, banks sold credit-loan insurance to reduce itselves risks, and that was why Daniel considered that Bancassurance was an extension of banks’ businesses.

Starting in 1980, banks began to develop different types of financial products.

During this period, banks lunched endowment policy ( ),³ which included savings and protection concepts simultaneously.

After 1990, banks began to design products to meet customers’ needs, and in the Britain and Spain, banks began to provide life insurance products.

1990 was a breakthrough for Bancassurance development in Europe. Banks cooperated with and relied on insurance companies’ professional on complex

2 In most of the western countries, ex. Belgium, Italy, Norway, Netherlands, Germany, Britain, Switzerland, Finland, and Ireland, the proportion of Bancassurance in total premiums is about 20% to 35%, but in France, Spain, and Portugal, Sweden, and Austria, the proportion reaching as high as 60%.

3 The definition is from Wikipedia, http://en.wikipedia.org/wiki/Endowment_policy. An endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its ‘maturity’) or on earlier death. Endowment policy (http://endowmentpolicy.comuf.com/) typical maturities are ten, fiftenn, or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness. Policies are typically traditional with-profits or unit-linked (including those with unitised with-profits funds). Endowments can be cashed in early (or ‘surrendered’) and the holder then receives the surrender value which is determined by the insurance company depending on how long the policy has been running and how much has been paid in to it.

actuarial knowledge to develop other non-life insurance products such as equity-linked ( ) and investment-linked products (

), not just took eyes on a single product as before.⁴

4.2 The Historic Development of Taiwan’s Bancassurance Channel and the Implication to China

Taiwan’s developing insurance market is worth comparing to that of China, especially considering geographic location and past history. From Taiwan’s development in each field such as supervisory system, regulations, actuary, claim and underwriting, products, human resources, risk management, we expect to understand China’s insufficiencies.

Taiwan is the tenth largest life insurance market and its penetration rate ranked 1^st in the world in 2007.⁵ Based on the statistics, its insurance market continues to show the growth of premium, even though the growth line has tended to be flat. In recent years, Taiwan has become a mature insurance market.

Table 4-1 shows the ten-year changes of Taiwan’s insurance density, insurance penetration, and ratio of life insurance and annuity. According to the figures, in ten years, Taiwan’s insurance density increased 3.3 times to NTD 83,294; insurance penetration reached 15.52% which was 2.68 times that of 1999. The ratio of having insurance coverage in 2008 reaches 203.27% which means each person owns more than two insurance policies, and ratio of prevalence reaches 333.38% which means each person has more than 3 times protection comparing to one’s income. The figures show that Taiwanese people have a high insurance concept. Compared to China’s status, the potential of China’s insurance market is evidently.

4 Equity-linked products and investment-linked products were launched by insurance industries in the Britain in 1960.

5 See Life Insurance Association of the Republic of China, The Life Insurance Industry in Taiwan 2008.

Table 4-1: Taiwan’s Insurance Density, Insurance Penetration,

Notes: 1. Insurance Density: average insurance expenditure per capita.

2. Insurance Penetration: the ratio of insurance premium to GDP.

3. Ratio of having insurance coverage of life insurance and annuity: the ratio of life insurance and annuity policies in force to population.

4. Ratio of prevalence of life insurance and annuity: the ratio of life insurance and annuity policies in force to national income.

Source: Taiwan Insurance Institute ( ), Insurance Density, Insurance Penetration, and Ratio of Life Insurance and Annuity,

http://www.tii.org.tw/images_P2/3.xls.

Taiwan’s life insurance market consisted of 30 insurers at the end of June 2009, in which there were 21 insurers operating agency channels, 27 insurers operating Bancassurance channel, 16 insurers operating Telemarketing/Direct Marketing channel, 17 insurers operating Bancassurance channel and Telemarketing/Direct Marketing channel, and 12 insurers simultaneously operating three kinds of distribution channels. The insurance industry had reached an 18.6% proportion in the

finance industry in 2005; the percentage in Japan is 8.7% in 2005 (Hong, 2006). The percentage exposes that Taiwan’s insurance industry plays an important role of the whole finance industry.

The operation environment for Taiwan’s insurance industry is very rigid and challenging starting in 2000. Banks did not easy to gain from traditional business on deposit and grant loans due to the Central Bank decreased required reserve ratio more than 10 times during 2000 to 2005; deposit interest was continuously declining, so bank could only gain restricted spread from traditional business. In addition, credit card and money card were like disasters to bank’s operation; selling insurance products seems a good idea to gain stable, almost-zero risk income from insurance companies.

4.2.1 The Sales of Taiwan Bancassurance Channel

Taiwan’s Bancassurance started in 1996, rose up in 2000, and has developed vigorously in the last two years; in comparison with China, the two cross straits’

Bancassurance developments were starting almost simultaneously (Tsung, 2007).

From the table below, it shows that the proportion of traditional agents from life insurers and Bancassurance from Bankers almost become 1:1 ratio, which means the public are used to buying insurance products from bank. The traditional agents sales channel had a negative growth (-9.38%) while Bancassurance had a sharp growth (58.18%) in 2008. Therefore, more and more life insurers began building cooperative relationships with banks to develop products only for the Bancassurance channel.

Broker and Agents ( & ) still maintained a tiny proportion of distribution channels, which was decreased to 2.98% from 3.76%. The figures of 1Q 2009 show that Bancassurance channel will continue its keeping growth this year and in the future.

Table 4-2: Taiwan’s First Year Premium (FYP) Income by Distribution Channels

Source: Life Insurance Association (2008), The Life Insurance Industry in Taiwan 2008.

4.2.2 Life Insurance Products of Taiwan Bancassurance Channel

From the figures below we can find that the public are used to buying interest sensitive products in the Bancassurance channel while the main sales channel for traditional life insurance products and accident & health products is still life insurers.

Table 4-3: Taiwan’s First Year Premium Income

The images of banks are professional and trusted; insurance products can be one

of wealth management tools; interest sensitive products or investment-linked products are adaptable to be promoted in banks. Since bank has its own professional image, they promote many kinds of wealth management products such as Structure Notes, fund investment products. From Table 4-3, we can see that the acceptance rate of those wealth management products is high. People would like to rely on banks’

profession to increase wealth and also well distribute their assets.

4.2.3 Taiwan’s Bancassurance Business in China

Taiwan’s insurance companies entering into China’s market do not need to sign the Memorandum of Understanding as presupposition. There are now three life insurance companies and one property insurance company established in China.

Currently, there are also 14 insurance companies setting up 17 offices in China.⁶ From the Ttable 4-4, we can find that there were two periods (year 2004 and 2005) that the numbers of offices set up in PRC by local insurers had a sudden increase. Taiwan’s human resources began to migrate into the market and had a positive effect on China’s insurance development.

Cathay Life Insurance and Shin Kong Life Insurance use the same strategy which dispatched middle level or high level leadership to manage new subsidiaries.

Shin Kong Life Insurance dispatched 38 people including 20 middle and high level leadership.⁷

In recent years, local insurers sought out non-insurance partners to make inroads into China. For examples, Cathay Life cooperated with China Eastern Airlines to set up a subsidiary in Shanghai in January 2005, still named Cathay Life Insurance;⁸

6 See Economic Daily, A9, 5 May 2009.

7 See Finance.qq ( ), , 11 June 2009,

http://finance.qq.com/a/20090611/002045.htm.

8 Cathay Insurance and China Eastern Airlines signed joined venture contract in November 2003, and the subsidiary formally operated in January 2005. See

https://www.cathaylife.com.tw/bc/B2CProjectWeb/area02/cl-history.jsp.

Shin Kong Life Insurance joined with Hainan Airlines to establish a life insurance company based in Beijing, named Shin Kong & HNA Life Insurance, and will be starting business in July 2009;⁹ Taiwan Life Insurance cooperated with Xiamen D&D Inc. to set up a life insurance joint venture in southern China, named King Dragon Life Insurance ( ), and opened for business on 17 December 2008.¹⁰

Table 4-4: Number of Insurance Companies and Branches in Taiwan

Year

Note: 1. The numbers of insurance institutions are based on the business licenses issued.

2. Local insurance's offshore branch includes subsidiary, branch, representative office and liaison office.

3. The data of 2009 is only from January to September.

Source: Financial Supervisory Commission (FSC), Division Three, Insurance Bureau, http://www.tii.org.tw/images_P2/4_ver1.xls.

From the Table 4-5, the proportion of new-contract premium is more than 50%

of Shanghai Cathay Life Insurance, which began its businesses in China only 4 year.

9 See , 20% , Apple Daily, 28 April

2009, http://tw.nextmedia.com/applenews/ article/art_id/31582929/IssueID/20090428.

10 See “Taiwan Insurers Want In On China Market”, China Post, 18 February 2008, http://www.chinapost.com.tw/print/143345.htm.

King Dragon Life Insurance began its businesses last year-end, but has already signed contracts with China Construction Bank, Bank of Communications, and other important banks in Xiamen. King Dragon Life Insurance Company’s new-contract premium has reached 30% to 40% of its total premium; it is a rapidly increase because King Dragon was just set up half-an-year.

Table 4-5: Three Giant Insurers’ Distribution Arrangements in China

Parent

Hainan Airlines Beijing Branch of Shanghai

Pudong Development Bank Initial stage

Sources: Commercial Times, A12, July 16^th, 2009.

According to the most updated information from Commercial Times, Taiwan’s giant insurance companies all represent how much they pay attention to Bancassurance channel by build up close relationship with banks.

Taiwan’s insurance industry has experiences in training and personal sales, which can further bring operating knowledge in these aspects of risk management, legal & compliance, products innovation, people cultivation, distribution channel development, actuary development, and investment portfolio management into China’s insurance industry. Therefore, we can expect that the two will be more and

more frequently working with one another, and Taiwan’s effect to China must be deep and continue. Following further open steps, Taiwan’s insurance companies will be more participating in China’s life insurance market by Bancassurance channel.

4.3 The Development History of China’s Bancassurance Channel

The real switching on (starting) of Bancassurance business was in 2000. The proportion of total life insurance premiums from Bancassurance channel sharply increased from 3.15% in 2001 to 20.57% in 2002. In 2004, Bancassurance channel produced RMB 79.48 billion in premiums, which was 24.85% of total life insurance premiums. In recent years, the Bancassurance penetration rate was stable maintaining at 25%. Compare to the proportion at 60% of some countries in the Europe or North America, the Bancassurance proportion of China has a large growth space (Tan, 2008).

China’s Bancassurance development history could be roughly divided into four phases:

initial stage from 1981 to 1992, exploring period from 1993 to 1999, development period from 2000 to 2003, and transformation period from 2004 to the present, which will be discussed in the following sections (Chen et al., 2007).

4.3.1 Initial Stage –––– 1981 1992

In this period, the government did not play a push role by policies; instead was the fundamental institutes to cooperate automatically. In early 1980s, when the People’s Insurance of China resumed its domestic insurance business, it had handled insurance businesses, but it was only a preparation for the recovery of insurance institutes. Following the establishment of insurance institutes, the tasks were handed over to insurance companies.

Some initial cooperative models appeared in this period which listed as below:

1. Bank of Communications began its insurance businesses in 1987 based on its

operation advantages. The State Council approved to restructure a stock-limited bank named Bank of Communications in July 1986, and set up its administrative office in Beijing, but later moved to Shanghai. According to the documents of the People’s Bank of China, the business scope of Bank of Communications included RMB-related businesses, foreign currency businesses, securities businesses, real estate services, trust consultation businesses, and insurance businesses. In 1987 Shanghai branch took the lead to set up an insurance business sector to develop insurance businesses.

Henceforth, other branches also set up insurance business sectors. According to a new requirement of management by different industries, in April 1991, the insurance business sector of Bank of Communications was asked to separate out, and later China Pacific Insurance Company established in Shanghai.

2. The branches of Industrial and Commercial Bank of China did some innovations on Bancassurance businesses. Its Hunan branch opened a new business called “enterprise loan guarantee insurance business”. Insurance companies entrusted banks to run its businesses, and they played the role of supervision.

4.3.2 Exploring Period –––– 1993 1999

In this period, the Central Government confirmed that “each enterprise can only operate its industry”, and “non-insurance companies could only be insurance companies’ agents to sell insurance products” became the main model of Bancassurance (Wang, 2006).

The Central Government recognized that the timing for allowing an enterprise running different industrial businesses during the process they trimmed financial market. Therefore, the Central Government raised the concept of “each enterprise can only operate its industry” on July 5^th, 1993. In the same year on December 25^th, the State Council implemented “The Determinations Regarding Financial Systems

Reform” , and in 1995 implemented “Law of the People’s Republic of China on Commercial Banks” , “Insurance Law of the PRC” to carry out the concept. In the end of 1997, the State Council further emphasized the principle of “each enterprise can only operate its industry” by enacting a series of financial regulations regarding the principle. Accordingly, bank industry, security industry, and insurance industry respectively had its supervisor – China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC), and China Insurance Regulatory Commission (CIRC).

On August 8^th, 1993, China Ping An Insurance Company and China Agricultural Bank signed agent contract in Shenzhen. During 1997, China Life Insurance Company and Industrial and Commercial Bank of China signed agent contract. China Pacific Insurance Company, Bank of Communications, Bank of China, and China Agricultural Bank signed agent contract. In this period, the four professional banks’

main recognition was to “strive for more deposit”, thus insurance companies could not find a breakthrough of Bancassurance business.

4.3.3 Development Period –––– 2000 2003

The turning point for rapidly development of Bancassurance businesses was product innovation. In August 2000, China Ping An Life Insurance Company took lead to launch A, B, C in total three types of “Qian Xi Hong” ( ) products only for Bancassurance channel, which was a beginning of rapidly development of China’s Bancassurance businesses. During the period from 2001 to 2004, almost all life insurers launched participating policy with single pay and 3 to 5 years term in Bancassurance channel. After 2004, some insurers began to adjust product feature of Bancassurance, but before 2004, most of the insurance products sold through Bancassurance channel were designed to be very similar, and the sales results proved

that the similar products were acceptable by customers (Saunders, 2004).

After the fourth quarter in 2001, the business development of Bancassurance sharply increased; the premium scale reached RMB 38.8 billion, which equaled 17%

of total premiums of life insurance. Moreover, started from the third quarter of 2002, the scale of Bancassurance business was over group direct sale. In 2003, the premium income of Bancassurance reached RMB 76.5 billion, which equaled 26% of the total premiums of life insurance. The speed of proportion increase of the total premiums of life insurance was the first in all the distribution channels. Thus, traditional agency channel, Bancassurance channel, and direct marketing channel became three pillars of life insurance distribution channels.

4.3.4 Transformation Period –––– from 2004 to the present

In 2005, the increase speed was obviously slowed down. The premium income of Bancassurance channel only increased RMB 3 billion, and the increase rate that compared to the prior year was only up 4%, but in August 2005, the businesses of Bancassurance stared to recover. In the end of 2005, the premium income had reached RMB 90.5 billion, which represented 24% of the total life insurance premium. From the figure below, it was obvious that during 2003 to 2004, the premium increase of Bancassurance channel was gentle (Figure 4-2).

China’s total premium of Bancassurance increased from only RMB 5 billion in 2000 to RMB 169.8 billion in 2007 and RMB 359 billion in 2008 (Postdoctoral Scientific Research Work Station of China Insurance Regulatory Commission, 2009).

The figure below showed how fast the Bancassurance business grew in 2008. The proportion of total premiums reached 48.92% on Bancassurance, even surpassed the proportion of the total premiums of traditional agency channel. Similar with Taiwan’s situation, Bancassurance channel, and traditional agency channel almost occupied the

4.5 Bancassurance channel was 47.84%, and on traditional agency channel was 49.18%

(Figure 4-3).

Source: China Insurance Regulatory Commission (2009), China Insurance Market Development Report 2009.

Figure 4-2: Premium Income of Life Insurance and Bancassurance in China –––– 2001 2005

In 2008, the three pillar of distribution channel were confirmed. Bancassurance businesses of emerging insurance companies has become main sales channel, the proportion rate reaches 60% and above; in the three largest insurance companies, China Life, Ping An, Pacific Life, the proportion rate is in average at 24% (Mo, 2007).

We can see a great potential of Bancassurance channel in the future.

From the Table 4-6, it is easy to find that all the largest six life insurers launched participating policy and annuity in Bancassurance channel. Therefore, it meant that

Traditional Agent

participating policy and annuity product were easy to be understood and accepted by customers.¹¹

Source: Same as Figure 4-2.

Figure 4-3: Proportion of Total Premiums of Distribution Channels in China ––– 2008

During this period, some significant developments were detailed below:

1. After 2004, the product type began to be diversified. Although participating policy was still the mainstream on Bancassurance channel, the proportion had reduced from 90% to 84%. Universal life products developed rapidly. In 2005, the proportion of Ping An Life Insurance Company on Bancassurance channel reached 80%, and in American International Assurance (AIA), the proportion even reached 97%.

2. Insurers began to pay attention to “term” products. Some insurance companies reduced five-year term with single pay products, and vigorously developed 10-year term with single pay businesses. For example, the proportion of New China

11 The aim of participating policy is to provide stable medium to long-term returns through the combination of guaranteed benefits and non-guaranteed bonuses. Extract from “Your Guide to Participating Policies,” Life Insurance Association of Singapore, 2008, p. 4,

http://www.aviva-singapore.com.sg/pdf/YGTPP-ENG-FA.pdf. Life annuity is a contract between the

http://www.aviva-singapore.com.sg/pdf/YGTPP-ENG-FA.pdf. Life annuity is a contract between the