Chapter 4 The Distribution Channels in China’s Life Insurance Market
4.3 The Development History of China’s Bancassurance Channel
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 insurer and insured. The insurer will provide payments for insured’s lifetime. The payments can be paid by monthly, quarterly, semi-annual, or annual.
Life’s 10-year term businesses had up from 33% of 2003 to 71% in 2005. And Taikang Life’s non-five-year term businesses had reached from 54% of 2004 to 75%
of 2005.
Table 4-6: The Products Overview in Bancassurance Market of the Largest Six Life Insurers
Source: Chen et al. (2007).
3. Some new type protection products appeared. Different from the slogan
“participating”, protection products adopted “fixed income” and “increase disease protection” to attract customers.
4. Banks began to participate in product development. In 2006, Industrial and Commercial Bank of China set up “Product Examination Committee” (
). The bank cooperated with some key partners to launch new type universal life, endowment, dread disease insurance, non-life-insurance investment-linked products.
They also tried to design specific products to adapt to a specific group of people; for example, the bank promoted cancer product to the customers whose age lay in between 18 to 45.
4.4 The Operation Model of China’s Bancassurance Channel
The characteristics of Bancassurance include simple process of insure, rapid process of underwriter, and competitive price. Moreover, combine with many kinds of financial products to provide one stop shopping and best-price-combination to customers. From Table 4-4, we can see how the model of distribution agreement undergoes between commercial banks and insurers.
Source: Hu (2006).
Figure 4-4: Model of Distribution Agreement
According to Figure 4-5, the Bancassurance model can take the following four various forms that allow banks and insurers to cooperate and achieve synergies (Swiss Re, 2006):
Distribution agreement: The integration between banks and insurers are low.
Banks are as agents to gain commission from selling insurance products. The two sides invest the lowest capital to reach the cooperation.
Strategic alliance: The two sides cooperate on product development and share customer information in some cases. It needs to invest capital to do the
Insurers Commercial Banks
Bancassurance Dept.
Other Business Dept.
Financial Dept.
Other Business Dept.
Agent
integration of IT system and training cost for sales force.
Joint venture: the two sides provide capital and together manage the businesses; therefore, they will have same customers and share data.
Full integration to be a financial services group: It is a total integration model, which can satisfy customers’ one stop shopping needs.
Source: Same as Figure 4-5.
Figure 4-5: Model of Strategic Alliance
In the present, distribution agreement is the main cooperation model in China, but in Taiwan, most of banks and insurers take first and second forms to achieve synergies. Distribution agreement is a kind of open cooperation model, which means one-to-many relationships, that is a bank cooperating with many insurers (Tsung, 2007).
The convergence of banks and insurers is to create a win-win operating strategy, but in Taiwan, there are a lot of discussions about this subject, and some insurance industries expressed different viewpoints to the convergence.
Commercial Banks Strategic Alliance Insurers
Supporting Department
Financial Department
Bancassurance Department
Other Business Department
Product Design
Exclusive
Financial Team
Data Sharing
Henri de Castries, the Chief Executive of the largest life insurance company in France, considered that due to bank and insurance was two very different industries, he doubted the convergence of the two could pass through the time test. He thought it was an enough relationship of strategic alliance between bank and insurer.12 Guo-duan Zhou ( ), the Chairman of Hontai Life Insurance Company, considered that the reason for the rising of Bancassurance was because banks preferred not to digest deposit and transferred the capital to insurance companies (Le, 2003).
In Taiwan, insurance industries thought that bank is a strong distribution channel with low sales cost, stable customers, and considerable sales volume. The channel is advantageous to insurers to build up itselves brand, and customers’ trust (Zhang, 2003). That is way many insurers develop Bancassurance channel.
4.4.1 Sales Channel on Bancassurance
Due to Bank is an open platform to provide diversified insurance products, and banks positively develop wealth management businesses, insurance product line is more and more complete, and customers buy insurance products in banks are more and more usual. Base on bank’s professional image, financial products packed with insurance model become popular in the market, such as investment-linked products.
The sales channels of Bancassurance include OTC, telemarketing, credit card, web bank, and insurance consultant, which will be discussed as below:
1. Over the Counter (OTC)
Bank employs and financial consultants are main force to sale standard savings products because the employs in banks are professional in wealth management field
12 See “Bancassurance – Back to Basics?” Economist, 12 Dec. 2002, http://www.economist.com/
finance/PrinterFriendly.cfm? Story_ID=1496613.
but not insurance field. It is the most direct way to reach customers. The characteristics of this model are “standard products”, “simple training”, “low cost”, and “bank conduct”.
2. Telemarketing
Insurers call out to customers whose contact information provided by banks to sell simple insurance products such as accident insurance, health insurance, and savings insurance. For increasing the successful rate, the products sold via this channel should be simple and easy to understand because customers usually do not have enough patience to understand complex products.
3. Credit card possessors
There are two ways to promote insurance products to credit card possessors.
One is to freely provide short-term accident insurance to those who buy air ticket or pay travelling expenditures. Another is to send direct mail to credit card possessors.
4. Web bank
Industrial and Commercial Bank of China started providing web insure.
Customers can buy accident policy and medical insurance via website. Product price is usually competitive to attract customers to insure on the website.
5. Insurance consultant
Interview with customers according to customer’s contact information provide by banks or through bank employ’s introduce to sell more complex protection insurance products and investment-linked products, and provide comprehensive wealth management service.
4.4.2 Win-Win Strategy for Banks and Insurers
Although Pang, Shen-Chang ( ), ING’s former President of Great China Region, considered that the contribution of profit from Bancassurance channel is
limited to insurance company, in present years, the prosperous development trend of Bancassurance has no change (Zeng, 2003). The cooperation should be built on a win-win basis; otherwise the convergence will not be longer. In this section, bank and insurer’s advantages and weakness will be discussed.
1. Advantages of banks
Image resource: Generally speaking, customers trust in banks usually more than insurance companies. Banks can utilize this advantage to help customers to do asset management with insurance products. Moreover, suggest insurance companies to develop specific products for different groups.
Customer resource: Banks hold most abundant customers’ data, which can help insurance companies to sell insurance products. Through cross-over analysis, either to find adaptable products to sell to specific group or send direct mail to attract people to buy insurance products.
Foothold resource: There were over 180,000 commercial banks distributed in China; each bank could roughly service 7,000 people. Due to the quantity advantage, customers can easily choose insurance products when they go to banks.
2. Advantages of insurance companies
Professional resource: Insurance is one of significant parts of the whole financial market, and also an indispensable tool for asset management. Insurers have to observe the public needs and design products to meet their need. Before an insurance product launched, it should experience a series of back and forth discussion on product features, and actuary; IT department also has to support and do the test. There are no sufficient human resources and knowledge in banks and that is insurer’s advantage.
Product innovation: Due to complex actuary and market analysis, insurers have
its own professional actuaries and marketing team to observe market trend and collect market information. Banks are also hard to invest in a lot of resources to build up a team.
The convergence benefits to each other:
1. Benefits for banks
Reduce employee management expenses
Increase income source: Commercial banks’ deposit profit is getting lower continuously. Banks have to find out other stable income sources to increase profits. The proportion of non-interest income had reached 35% in Hong Kong in 2003. Therefore, banks cooperate with insurers to increase its stable income.
Increase customers’ loyalty: Through providing more and more service items including completed product time to enhance customers’ loyalty, and also emphasis banks’ professional image. More service, lower lapse rate.
Reduce operation cost: Through selling diversified financial products, banks can full utilize its manpower, fix assets, facilities decrease average cost.
2. Benefits for insurance companies
Reduce employee management expenses: Insurers can reduce rely on traditional intermediaries with the aid of a lot of footholds of banks. No need to build up traditional agent network, insurance products can penetrate into the market too.
Stable operation: The operation of insurance company builds up on the law of large numbers. Expand its operation scale and scope is advantageous to disperse risks, and make the operation more stable. Insurance company can acquire new capital to increase its solvency through cooperating with banks.
Dig out customers: Insurance company can build up reliance relationship through the cooperation with banks. Meanwhile, it can also design insurance products according to customers’ needs in different life phase.
4.5 The Issues and Prospect of China’s Bancassurance Channel
The role of banks has changed. In the past, banks passively sold insurers’
products, but nowadays they structured life insurance subsidiaries; in the past, they were just a seller, but nowadays they were also producer, participating in product design.
4.5.1 Issues of China’s Bancassurance Development
After almost three decades development of Bancassurance, there are some problems appeared and scholars also raised a lot of methods to solve the problems (Chen et al., 2007).
1. Operation problems of Bancassurance are listed below (Tuo and Chu, 2006):
No regulations for the payment measures of commission Employee’s quality
Low profit for insurers
Vicious competition on commission:
Insurers’ profit space become smaller and smaller. Due to the product design for Bancassurance was low protection-oriented, the profit source came from interest gain and loading surplus. The assumed interest rate had been set at the beginning of product design; therefore, it was impossible to adjust it randomly.
When the commission becomes higher, the profit space will be compressed.
Although the commission rates had written down in the contract, part of insurers not only pays commissions but also additional incentives for business promotion activities. Business bribery might happen during the vicious competition on Bancassurance channel.
High homogeneity of products, low protection
The proportion of premium income of savings products in Bancassurance
channel reached 99% in the top 5 domestic insurance companies in 2005. The proportion was obviously too high, and consequently it would make insurers’
requirement of yield rate, but it needed a sound investment environment and enough investment tools; otherwise, it would be a significant payment risk for insurers when the term at maturity.
There were not enough protection products which adaptable to be sold in Bancassurance channel. According to statistics, 98% products were participating policies, and only 2% products were universal life, annuity, and accident products. Insurers and banks should cooperate to develop health insurance, annuity, and life insurance products to meet customer’s demand.
Insurers disregarded other channel’s potential:
Due to the life insurers thought it would cost too much to develop new distribution channel, most of them only focused on the resources of branches and counters. Consequently, they disregarded the potential of internet market and telemarketing. There were no insurance products which were adaptable to be sold on non-Bancassurance channel. The life insurers ignored that different products should be promoted by different channels.
2. Regulation environment:
Most of laws in Europe countries clarified and stipulate the detailed of mix-industries-operation ( ), but in China, the Central Government stipulated that an industry can only operate its own industry. But the fact is in 2000, the supervision allowed and encouraged commercial banks, securities companies, and insurance companies to cooperate under the original structure of single-industry-operation.
In the aspect of tax policy, many countries have reduce tax or tax-free preferential when residents buy insurance products, but in China, there is no tax
preference policy for insurance yet.
4.5.2 Prospect of China’s Bancassurance Development
Although have to provide higher than banks’ savings return, lower mortality savings and interest gains, because of relatively inexpensive cost, policy maintain cost, and customer service cost, insurers can rely on expenses loading ( ) to earn profit at present year. Moreover, large quantity sales can bring in considerable cash flow and customer resources. Some China’s domestic insurers won market share and operation capital by expanding Bancassurance businesses (Deng, 2006).
A number of emerging insurance companies knew that Bancassurance could build up sales number quickly, so they entered in this battle. Some insurers were interested in acquiring ownership in domestic banks to further develop their Bancassurance businesses. For example, Pin An Life insurance company, the pioneer and leader of Bancassurance in China, bid for a 60% stake in Shenzhen Commercial Bank.13 Fortis Bank, one of the leaders in Bancassurance in the Benelux countries and Spain, was interested in acquiring ownership in domestic insurers as well. I acquired 25% of Taiping Life Insurance Company in 2001. In addition to the above cross companies’ investments, China Construction Bank and the Bank of China had submitted applications for a license to operate their own life insurance companies (Daniel, 2006).
The key point of the success of Bancassurance is not only on the choice of operation model, but also internal integration within the operation model, such as organization structure, information convection, training courses for sales people, incentives system, etc.
Sales channel and product diversified on Bancassurance channel will be the
13 See Benfield Limited, China Insurance Market Review, September 2006.
development trend. Bancassurance market participants have to do innovation unceasingly to satisfy customers’ financial service demand. Nowadays the foreign insurers had brought in many new ideas for diversified marketing, which will generally affect China’s insurance market.
Nowadays, it is not easy to collect the detailed data of Bancassurance channel’s cost and profit if compared to other distribution channels in China, but the successful experiences in France and Italy, Bancassurance channel is more advantageous than tradition agent and broker channel.
Bancassurance is not only providing a new profit source for the gradually saturated banking market, but also opening a new opportunity for competitive insurance industries (Tan, 2008). I believe an even higher proportion of premium will be sold through Bancassurance channel in the future.
4.6 Summary
The development of Bancassurance channel is the major topic of this chapter.
The operation model of Bancassurance, the historical development of Bancassurance, and the comparison of Taiwan and China’s Bancassurance operation status are
The operation model of Bancassurance, the historical development of Bancassurance, and the comparison of Taiwan and China’s Bancassurance operation status are