Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

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.

Such Longing
Asian banks' loan margins are under pressure because of low global interest rates
Source: Bloomberg
*As percentage of average risk-weighted assets. Data is for 52 lenders with market capitalization of more than $5 billion.

In Europe, about 55 percent of insurance is sold through banks, according to Bernstein. Bancassurance has a similar market share in Hong Kong, the logic being that tying up with a lender gives scale that would otherwise take years to build. And in Asia, insurance penetration is so low that having access to a bank's ready customer base is a double plus.

Life Savings
Premium growth has been robust in many Asian countries including Indonesia
Sources: Bernstein-compiled data

The quality of growth, though, can be suspect.

In China, bancassurance accounts for about 30 percent of all new policies sold, according to Bloomberg Intelligence's Steven Lam, but instead of offering longer-term, protection-focused plans that have higher margins, banks are typically selling low-cost, savings-type policies. Products sold through lenders in the nation represented just 10 percent of insurers' new business by value last year, an indication of future profits.

It's curious, then, that bancassurance, which never took off in the U.S., is so popular in Asia. Siam Commercial Bank is looking to offload a stake in its life-insurance unit -- and might throw in rights to sell products via its bank branches -- in a deal Bloomberg News said could value the business at $3 billion. Reuters has reported that both AIA and Prudential may be interested. That amount is equivalent to 4.5 times book value, according to Bernstein, hefty even for Thailand where the growth potential is large.

But like Einstein's lunatic, bancassurance has always had irrationality stamped all over it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net