risk management and insurance

PROGRAME : RISK MANAGEMENT AND INSURANCE (PARA)
NAME :
STUDENT NUMBER : P0109064F
COURSE : INSURANCE BROKING AND CLIENTELE SERVICES
COURSE CODE : CIN4103
LECTURER : MRS SHONHIWA
DUE DATE : 21 OCTOBER 2013
QUESTION: Do a swot analysis of traditional insurance brokers versus bancassurance as intermediaries in transacting insurance business. (100 marks)

Introduction
Large-scale changes in the market point out the challenges the future will bring for brokers in the insurance industry. On the one hand, inefficiencies in insurance markets were partially defused by the global emergence of modern information and communication technology, which, at least theoretically, should have led to a smaller demand for intermediation. On the other hand, other contextual changes in the industry, such as the deregulation and liberalization of insurance markets, have resulted in greater product differentiation and correspondingly lower market transparency, which in turn increased demand for brokerage. Hence intermediaries still play a decisive role in facilitating the exchange between consumers and providers of financial services. However in the Zimbabwean market the largest challenge faced by traditional brokers is the emergency of Bancassurance.
Body
According to the News Day Zimbabwe, 14 February 2013, Bancassurance is a partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank’s sales channel to sell insurance products. The insurance company underwrites the transactions, meaning that it assumes the underlying risk. Bancassurance is when banking institutions and insurance companies enter into a contract whereby banks act as an intermediary for accepting insurable risk for insurance companies.

In this session I am going to employ SWOT analysis to carry out the competitiveness of the traditional Insurance brokers versus Bancassurance.SWOT Analysis is an extreamly usefull tool for understanding and decision making for all sorts of situations in business and organizations. It is an acronym of Streanght ,Weaknesses,Opportunities and Treats.The SWOT prowides a good freamwork for reawewing strategy, position and direction of a company or business proposition, or any other idea. SWOT is usually used for:-Business planning
-Strategic planning
-Competitive evaluation
-Marketing
-Business and production development.
For traditional insurance brokers and bancassurance, SWOT would be usefull for evaluating market competition. The broker would use SWOT analysis to look at his business and try to identify:
S – strengths that exist in comparison to bancassurance
W – weaknesses that exist in comparison to bancassurance
O – opportunities that exist in the identified market
T – threats that may arise to jeopardise the operation
The plan drawn up should aim at making the best of the opportunities that exist, given the strength that are there, while minimising the role of the weaknesses and seeking to counter or best avoid the threats.

Firstly a broker may start to look at their strength in the industry as detailed below:

Traditional Insurance Brokers (Strength)
Resources, Assets and People.
Traditional brokers have the competitive advantage that they have in place existing assets in form of buildings and office faniture designed spacifically for the broking function. The premises are used for the regulation purpose when it comes to the minimum capital requrement.Since a broker have only one business of only acting as an intermediary, there are less commitments and therefore the available resources are more likely to be adequate as compared to bancassurance which have banking as their core business and insurance as their secondary business.

Process, System, IT and communication.
Most insurance brokers have in place a systematic way of capturing information, storing it and retrieving it when needed. Most brokers have an information system department which is solely responsible for the maintenance and improvement of the information system. Because brokers are well established, they use economies of scale to have an upper hand over competitors when it comes to information systems.

A traditional function of insurance brokers is to provide their clients with information and advice regarding the clients’ insurance needs. Through economies of scale and scope, brokers can search the insurance market more efficiently than could individual buyers and can help their clients compare insurers’ skills, capacities, risk dispositions, financial strengths, and reputations
(Cummins and Doherty, 2005). Brokers also fulfill an informational function for insurers. During the matching process, insurance brokers can typically acquire or process more information about their clients’ level of risk than is possible for insurers (Sirri and Tufano, 1995).

Marketing
The intermediation process through which buyers are matched with insurers is complex and multidimensional. By fulfilling the information function discussed above, insurance brokers help customers to make intelligent insurance decisions. In this way, the brokers contribute to increased industry transparency and stimulate competition in the marketplace (Cummins and Doherty, 2005). Additionally, bancassurance may have significantly less bargaining power in negotiations with large insurance companies. By leveraging their business volume with individual insurance carriers, brokers are able to obtain better terms and conditions for this size of client, thus smoothing the problem of asymmetric bargaining power between buyers and sellers (Spulber, 1999).

Transformation function. Insurance brokers often deal with cases where the scale or complexity of risks is not practical for coverage by a single insurer. In these cases, the broker has a pooling or aggregation function (Merton and Bodie, 1995), identifying multiple insurers who are prepared to take on various shares of coverage. This usually leads to a complex negotiation process involving coverage design, pricing, and ultimate business placement. The broker always have an upper hand when it comes to complex risks because of economies of scale.

Reduction of participation costs. Allen and Santomero (1998) suggest that participation costs are very important in understanding modern intermediaries and their new roles. According to these authors, participation costs include much more than simply the time involved in making financial decisions, but are also understood to include acquiring and using expertise (Allen and Santomero, 2001). This is relevant cost consideration for firms—especially those operating internationally—as the level of sophistication and specialization required to execute complex risk trading and risk management operations is very high. For small- and medium-sized companies with little or no expertise in the field of risk and insurance, the broker function of “reducing participation costs” can be especially significant.

Service function
Closely connected with the reduction of participation costs are other service functions brokers provide their clients in helping them deal efficiently with the increasingly complex variety of financial instruments and markets. For example, “risk management” services can be especially valuable in the financial intermediation process (Merton and Body, 1995; Allen and Santomero, 1998; Scholtens and van Wensveen, 2000). Other services, such as claim settlement, captive management, risk modeling, and risk trading, have also been found to make the existence of insurance intermediaries salient in today’s challenging climate.

After identifying their strength a broker will then try to identify the strength for Bancassurance as detailed below:

Bancassuranc (Strength)
One Stop Shop
The bank becomes a sort of “supermarket”, a “one-stop shop” for financial services, where all customers’ needs –whether financial or insurance-related – can be met. The broadening of its product range makes the bank more attractive and can reinforce customer satisfaction and therefore customer loyalty.

Reduced cost of operation.
The distribution costs can be seen as marginal since, in most cases, it is the bank’s existing employees who sell the insurance products. Amongst other things, the one-stop shop model optimizes the use of the network and increases the profitability of the existing branch network. However employing the existing employees may cause incompetence since the workers are overloaded. Costs may also be increased through training and development of the employees into the insurance field.

Premium payment.
Since the distribution costs are lower than in a traditional distribution network, the consumer can usually get cheaper insurance products than through traditional channels. In addition, premium payment methods are simplified, since premiums are collected directly from bank accounts.

From the above comparison of the strength between traditional insurance brokers and Bancassuranc, a broker can come to a conclusion that brokers have more strength competitively. A broker then will try to make the best out of the available opportunities. An analysis of the opportunities is illustrated below.

Opportunities (brokers)
Demand trends
The demand for insurance have been on the rise since the introduction of the dollarization. The ability to cross sell financial services is barely being tapped.
Technology is improving to the point that paperless transactions are available.
The client’s increasing need for an “insurance consultant” can open new ways to service the client and generate income.
Opportunities (Bancassurance)
The legal framework for bancassurance and the authorities’ attitude to its development are clearly essential and have a real influence on the model’s conditions for success in a given country. Tax advantages can provide a strong incentive for consumers to invest in one life insurance or pension product rather than another. Changes in the law providing such incentives can have a positive, or negative, influence on the sales of a product.

Threats (Bancassurance)
Consumer behavior
One interesting factor that has been highlighted suggests a connection between consumer habits in a country and the success of bancassurance on that market: the more a population is familiar in the use of new technologies, particularly the Internet, the smaller the role of bancassurance.

That it is extremely dependent on the country’s culture and consumer habits. Certain populations prefer to go to their bank and discussing their financial needs face-to- face with their account manager. In other countries, consumers prefer to take the time and resources to compare products, for example on the Web; their consumer choices are entirely dictated by their research, which is completely anonymous. This pattern of consumption runs entirely counter to the market development of bancassurance.

Regulation.
Government regulations on issues like health care, mold and terrorism can quickly change the direction of insurance. Increasing expenses and lower profit margins will hit hard on the smaller banks.

Weaknesses (Brokers)
Insurance brokers are often slow to respond to changing needs. There is an increasing trend of financial weakness among the companies.
There are more competitors for agencies to compete with banks and Internet players.

Weaknesses (Bancassurance)
The middle class population of Zimbabwe that are today overburdened, first by inflationary pressures on their pockets and then by the tax net. Most Zimbabweans have no disposable income.
Another drawback is the inflexibility of the products i.e. it can not be tailor made to the requirements of the customer. For a Bancassurace venture to succeed it is extremely essential to have in-built flexibility so as to make the product attractive to the customer.

Conclusion
The creation of Bancassurance operations has a material impact on the financial services industry at large. Insurance brokers are feeling direct competition from Banks. Banks insurance companies and traditional fund management houses are converging towards a model of global retail financial institution offering a wide array of products. It leads to the creation of 'one-stop shop' where a customer can apply for mortgages, pensions, savings and insurance products.

The plan drawn up should aim at making the best of the opportunities that exist, given the strength that are there, while minimising the role of the weaknesses and seeking to counter or best avoid the threats. The marketing plan should be refined and brought down to numbers (sales targets and expenses) so that they can be fed into the company financial model. .