What it means
The underlying idea is that a bank already knows a great deal about its customers and already speaks to them at moments when insurance is relevant. Somebody taking out a mortgage plainly needs building cover, and somebody opening a business account may need liability cover, so the conversation is natural rather than cold.
For the bank, the attraction is fee income that does not consume capital. Lending ties up regulatory capital and carries credit risk, whereas commission on an insurance policy is a fee for introducing a customer, which flatters return on equity.
For the insurer, the attraction is distribution cost. Building a branch network or an agent force is enormously expensive, so paying a bank a share of premium is often far cheaper than acquiring the same customers directly.
Arrangements come in several shapes. Some are simple distribution agreements, some involve the bank taking an equity stake in the insurer, and some are full joint ventures where profits and losses are shared, with each structure sitting at a different point on the risk and reward line.
The model attracts regulatory attention because of the obvious conflict when staff with sales targets advise customers on protection products. Supervisors in many markets require clear disclosure of commission, careful separation of advice from selling, and evidence that products are suitable for the customers being offered them.
In practice
Real-world examples.
Example
A high street bank offers mortgage applicants a buildings and contents policy from a partner insurer during the application process. Take-up is high because the cover is a condition of the loan and the paperwork is already open on the adviser's screen.
Example
A business bank bundles a basic cyber liability policy into its premium current account for small firms. The account fee rises modestly, the insurer gains thousands of small policies cheaply, and the bank differentiates a product that is otherwise hard to distinguish.
Example
A savings bank distributes single premium life products through its private client team. When a regulator later questions whether these were suitable for elderly savers, the bank has to review several years of sales and pay redress on a portion of them.
Formula
Calculation
Bancassurance commission income = policies sold x average annual premium x commission rate
An illustrative retail bank sells 2,400 household insurance policies through its branch network in a year, with an average annual premium of $900 and a commission rate of 15% of premium.
Total premium generated = 2,400 x $900 = $2,160,000
Commission income = $2,160,000 x 15% = $324,000
The bank incurs costs of $90,000 for staff training, compliance monitoring and sales incentives connected to the arrangement.
Net contribution to the bank = $324,000 - $90,000 = $234,000
Because the bank carries none of the underwriting risk, this $234,000 arrives without tying up regulatory capital in the way a loan book would. If renewal rates run at 80%, roughly 1,920 of those policies renew the following year, generating 1,920 x $900 x 15% = $259,200 in commission before any new sales at all.Case study
Seen in the real world.
Pennhurst Regional Bank is a fictional lender used here as an illustrative example. It signed a ten-year exclusive bancassurance agreement with an invented insurer, receiving an upfront payment of $30,000,000 plus ongoing commission of 12% of premiums written through its 180 branches.
The upfront payment was recognised over the life of the deal rather than all at once, which meant it added a steady, unspectacular amount to income each year instead of one dramatic profit. Branch staff received a modest incentive per policy sold, capped deliberately low so that advisers would not push cover on customers who did not need it.
The illustrative point is that the agreement worked commercially because the bank designed the incentives with the eventual conduct review in mind. Partnerships of this kind fail far more often on mis-selling remediation than on the economics of the commission itself.
Watch out
Common mistakes.
- Assuming the bank underwrites the policy, when in most arrangements the partner insurer carries all of the claims risk.
- Treating bancassurance commission as low quality income, when renewal commission on a large book can be remarkably steady.
- Setting aggressive sales incentives for branch staff, which is the single most common cause of later mis-selling claims.
Questions
People also ask.
Is bancassurance the same as a bank owning an insurer?
No, though some groups do both, the term specifically describes distributing insurance through banking channels rather than owning the underwriting entity.
Why do insurers accept the commission cost?
Because acquiring customers through a bank's existing relationships is usually far cheaper than building an equivalent sales force from scratch.
Do customers get a worse deal through bancassurance?
Not necessarily, but convenience discourages shopping around, so it is always worth comparing the bank's offer with a direct quote.
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