Is merging banking and insurance an unsung risk management strategy?
I’m off to open a bank account with my insurers
Out of the turmoil from which finance is emerging ten years after the crash, a question emerges: is seeking the synergies uniting banking and insurance through bancassurance a better idea than the conventional wisdom portrays it?
Banking and insurance within one institution are prospering in many parts of the world. However, the repeal of the Glass-Steagall Act in the US in 1999, that permitted bancassurance for the first time, has not seized the imagination of financial innovators there. They may be missing a trick.
Advocates of bancassurance sing its praises from the rooftops: it achieves “synergies”, cost savings, customer retention, revenue diversification, better utilisation of resources, building brand equity and more.
One of the great attractions was said to be the cross-selling opportunities. After all bank customers needed insurance and insurance customers needed banking. It all looked great on a spreadsheet. What could possibly go wrong?
Clash of cultures
Even in mergers in the same sector doing the same sort of job often flounder. Like the failure of marriages, there can be multiple causes. But the most likely cause of mergers coming unstuck is ephemeral and amorphous. It is not to be found anywhere in a spreadsheet: it is the clash of cultures.
It was said of bancassurance that banks’ requirements were quicker than insurance; banks run on a five-year cycle compared to insurance's fifty-year cycle. Then there was the question of margins with the insurers raising eyebrows at the margins expected by the bankers. But most of all the merged entities were said to be just too big to manage.
While some European bancassurance attempts have been less than successful there are many bancassurances in Europe and the rest of the world that are thriving.
Banking is simply intermediation between lenders and borrowers with the bank taking a margin for bringing the parties together. Insurance is one the one hand risk management, taking a turn on the bet that something is less likely to happen than to happen.
On the other hand, the life insurance and pension-dimensions of insurance companies provide a platform for the inevitable – death or retirement – and structuring investments to ensure long-term liabilities are met.
Shared risk management
While on the surface they seem disparate businesses what banking and insurance have in common is risk management; risk management through the structuring of financial products and outcomes.
The use in banking of structured finance vehicles and the securitisation of debt instruments to create flows of income is pure risk management. These instruments and vehicles, in theory at least, facilitated the transfer of risk and liberated liquidity.
But wasn't it just such instruments that were the downfall of banking in the 2008 financial crash? Sadly the financial innovation inherent in the alphabet soup of CDOs and ABSs and CLNs (collateralised debt obligations, asset-backed securities and credit-linked notes) ironically underwritten by CDS (credit default swaps) proved unsustainable.
But many lessons in risk management have been learned and the number-crunching technology of risk measurement has improved dramatically.
It may be too late to ask if an injection of insurance expertise would not have helped avert the disaster that befell banking. However, the freedom bankers now have to call on the insurance sector’s long-term risk management skills is open to US banks. The surprise is bankers seem unaware of the advantages or are they too proud to ask for such help.