By Zhang Chenghui

Research Report No 143, 2006

I. The Present State and Problems of China’s Bank Insurance

Bankinsurance in general refers to the fact that the life insurance companies use the network and customer resources of the banks and other financial institutions to market insurance products. To the banks, actively developing bankinsurance can diversify their service contents, expand their banking business and reduce their dependence on spread revenue. In addition, the banks can take advantage of the customers of the insurance companies and tap the potential of the resources possessed by these insurance companies to realize resource sharing. To the insurance companies, utilizing the vast operating networks of the banks to sell insurance products can reduce their marketing cost and expand their market by taking advantage of the fine reputation and customer resources of these banks. It is precisely because the cooperation between banks and insurance companies can improve operating efficiency and produce "win-win" results through resource sharing, bankinsurance has maintained rapid development abroad. Relevant data indicate that insurance commissions in Europe accounted for as high as 10 percent of the gross profit of the banks in 2000 and this ratio will reach 15 percent by 2010. Nearly half of the 500 large banks now have subsidiaries specializing in insurance operations. In most European countries, the premium income from bankinsurance accounts for 20-35 percent of the life insurance market. In France, Spain and Portugal, this ratio is as high as 50-70 percent. In China’s Hong Kong, Singapore and other places, bankinsurance accounts for over 20 percent of the insurance revenue.

In China, bankinsurance has also developed rapidly and has become an important marketing channel for the life insurance companies since the country introduced the mode of bankinsurance from abroad in the mid-1990s. In 2003, the volume of bankinsurance business accounted for 26 percent of the life insurance premium income in the country. But bankinsurance operations began a downturn in the second half of 2004 and hit the bottom in the first 10 months of 2005. However, it recovered vigorously at the end of 2005, and the volume of business accounted for 33.9 percent of the total premium income of the life insurance companies in the first quarter of 2006. In particular, China Life Insurance Corporation saw its bankinsurance business rising by 121 percent year-on-year and accounting for 40 percent of the premium income from its new policies. This drastic fluctuation of bankinsurance operations indicates the immature nature of bankinsurance in China and the foundation for the cooperation between the banks and the insurance companies is not solid.

From the perspective of the insurance companies, the bank agency channel has become a scarce resource as more insurance companies emerge and their competition intensifies. As a result, the banks are in an advantageous position and ask for exorbitant commission from the cooperating insurance companies. Investigations reveal that the insurance companies have to pay bank commission at a rate of 3-3.5 percent in general and even as high as 4 percent in a few cases. In addition to commission charges, the insurance companies also have to pay incentive fees to the bankinsurance salespersons and many commercial banks can request their cooperating insurance companies to buy fund products.

From the perspective of the banks, the bank agency products of the insurance companies are seriously identical in nature and unitary in structure. The main products in general are the short-term, single-payment, participating products, which are similar to and competing with the savings products of the banks. Besides, the insurance companies are also suspected of abusing the reputation of the banks.

From the perspective of the consumers, the issue of bankinsurance in misleading marketing is quite tangible. The bankinsurance brochures often deliberately blur the difference between savings and insurance, and some salespersons exaggerate the yields of bankinsurance products and use erroneous yield calculation methods to mislead the customers of their participating products. Besides, the after-sale service of bankinsurance is also questionable. As most of the insurance agency operations done by the banking institutions are handled manually, the flow of insurance policies is slow and the customers generally have to wait for a week before their policies arrive. Meanwhile, the current cooperation between banks and insurance companiesmainly adopts the methods of over-the-counter marketing and covers virtually no other business areas. The service items of most insurance companies, such as inquiry, contract security, policy loan, policy amendment and claims settlement, still have to be handled by themselves. This is utterly inconvenient to the customers.

Furthermore, bankinsurance faces some in-depth difficulties for its development. The banks and the life insurance companies lack long-term interest-sharing mechanisms for their cooperation; the banks have not yet incorporated bankinsurance operations into their overall development strategies; the insurance companies merely take bankinsurance as a marketing mode, emphasize on the brand effect of the banks and neglect their own brand preservation and product innovation. Therefore, their cooperation can only take place at the low level of agency marketing. When the products of various insurance companies are not quite different from each other, the rivalry for the agency outlet resources of the banks becomes an important measure for the insurance companies to develop their bank agency service. And this rivalry is mainly manifested in the competition over agency commission. The rising marketing cost of bankinsurance products has squeezed the profit margin of the insurance companies and increased their operating risks.

II. The Impact of Integrated Operations on Bank Insurance Business

Integrated operations can save transaction cost, spread financial risks and achieve synergistic effect. In an environment where market competition becomes increasingly fierce and the financial institutions speed up transformation, integrated operations can increase the competitiveness of China’s banking industry if it is steadily introduced. This is already a consensus. In particular, with the deepening institutional restructuring of China’s state-owned commercial banks and the improvement of their internal governance, the commercial banks are remolding their mode of profitability and are shifting their business emphasis to financing and retail operations. Under such circumstances, there is a growing inherent need to develop integrated operations. With the support of the regulatory authorities, integrated operationshave become a conspicuous trend in the financial industry. Since the Pilot Administrative Measures on the Establishment of Fund Management Companies by Commercial Banks was promulgated in 2005, three funds have been launched in the banking sector. Other banks are also actively organizing their own fund management companies. The Sino-French Life Insurance Co. Ltd., which was the first insurance company in China’s banking sector, was officially launched not long ago. Some new financial holding companies in the insurance and securities sectors are also in the making. It is expected that as the reform and opening-up advance further, integrated operations will become a main trend in the development of the financial industry.

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