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June 20, 2016 at 01:56 PM
(Bloomberg) — Among all financial products, bancassurance perhaps comes closest to fitting Einstein’s theory of insanity: Insurers have been conducting the same sorry experiment again and again, expecting different results.
Right now, it’s Asia’s turn to be gripped by madness as firms scramble to tie up multiyear contracts worth billions of dollars with the region’s big banks. The lenders, as is only to be expected, are charging high fees for distributing insurance products, and pocketing huge upfront payments for exclusive arrangements.
But who exactly benefits? Bancassurance isn’t a big source of “value creation” for insurers themselves because, as McKinsey director Vivek Agrawal notes, apart from selling lower-margin products through this channel, “the banks own the customer relationship and claim a big share of economic rent.”
That rent is often large enough to make paying insurance agents’ commissions a cheaper proposition. Besides, banks take a hit in the long run when they’re unable to resolve the conflict between a long-term business like insurance and the here-and-now focus of lending and deposit taking. The cautionary tale of ING, which was forced to split the two businesses in Europe in exchange for a 2009 taxpayer-funded bailout, should have damped enthusiasm.
There aren’t any banking-plus-insurance empires of similar heft in Asia, but the partnership obsession hasn’t moderated.
If anything, the craze for deals is starting to resemble a frenzy. Earlier this month, Japanese insurer Sompo agreed to sell its non-life products in Southeast Asia via Malaysia’s CIMB Group, and Canada’s Fairfax Financial Holdings is close to buying control of PT Paninvest’s non-life unit. Standard Chartered is also said to be planning a second insurance tie-up in addition to its agreement with Prudential.
These transactions don’t come cheap. Manulife’s 15-year contract struck with DBS in April last year cost $1.2 billion, while Prudential is paying Standard Chartered $1.25 billion to distribute its insurance offering.
As to why banks in Asia are salivating over extra income, look no further than the steady erosion in their net margins from core lending. The longer global interest rates stay low, the more other sources of revenue, like bancassurance, look increasingly attractive.
