Bancassurance and the Consumers’ Perspective on Bank Service Quality

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The 2nd ICVHE
The 2nd International Conference on Vocational Higher Education (ICVHE) 2017
“The Importance on Advancing Vocational Education to
Meet Contemporary Labor Demands”
Volume 2018
Conference Paper
Bancassurance and the Consumers’
Perspective on Bank Service Quality
Deni Danial Kesa
Finance and Banking Programme, Vocational Program of Universitas Indonesia, Depok,
Indonesia
Abstract
This article elaborates the perspective and quality of bank services between private
and state-owned bank companies in Indonesia. The empirical result shows that
consumers’ perspectives on service quality remain constant and has big influence on
the banks’ performances. There are no changes for knowledge aspect from consumer.
After product knowledge explanation to consumer, inconveniences of consumer
reduce significantly for positive perspective. In addition, tools of marketing effect
are documented, two factors have contributed to the process. Repeated information
and language simplicity shows negative relation with consumer perspective. These
results suggest that the bancassurance architectural structure for banks does offer
some benefits and thus may become more prominent in future years.
Keywords: bancassurance, service quality, consumer perspectives
1. Introduction
As a result, for the need for the organised protection of human lives and property
values, insurance had appeared very long time ago. From its origins, it was exposed
to many changes, either of revolutionary or Ease of Use evolutionary nature, which
led to significant milestones in the way insurance activities have been done. So as a
result of the first major disaster of modern times, the great fire of London in 1666,
the first insurance company was established. With the discovery of the law of large
numbers the foundations of the modern insurance have been laid and after the great
fire of the 1842 in Hamburg, where local insurance company Hamburg Fire Fund did
not have enough capital to cover the damages, the first reinsurance company, Cologne
Reinsurance Company, was established. In recent years, especially the last ten years,
when the development of world economy and human society has reached a speed not
recorded before in history, the changes that affect the insurance industry have become
even more important. Including all the changes that occur in the insurance market,
How to cite this article:Deni Danial Kesa, ‘2018), “Bancassurance and the Consumers’ Perspective on Bank Service Quality” in The 2nd International
Conference on Vocational Higher Education (ICVHE) 2017 “The Importance on Advancing Vocational Education to Meet Contemporary Labor Demands”,
KnE Social Sciences, pages 1142–1155. DOI 10.18502/kss.v3i10.2835
Page 1142
Corresponding Author:
Deni Danial Kesa
Denidanialkesa@gmail.com
Received: 8 June 2018
Accepted: 17 July 2018
Published: 8 August 2018
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given their numbers and complexity, is challenging and never entirely feasible. With
that in mind, only the identified most important changes and trends in the insurance
market will be analysed. They are: integration processes, which encompass globalisa-
tion, consolidation and convergence, ever more frequent and intensified catastrophic
events and the emergence of new risks, mainly caused by the emerging technologies.
2. Literature Review
2.1. Integration processes in insurance
Integration processes are ubiquitous in contemporary life and work, especially in econ-
omy sphere. Integration processes accomplished in order to achieve economic goals
more efficiently have been present in the original association of individuals in families
or tribes, and at the international level since the Roman Empire. Insurance is essentially
based on the pooling of individuals who are exposed to the same type of risk, and the
principles of reciprocity and solidarity. The development of insurance was encouraged
by the development of international trade and was directly caused by the processes of
connecting people in coastal areas of the Mediterranean. Following modern economic
trends of economic integrations, the insurance sector is characterized by processes of
globalisation, consolidation and convergence. All of them are essentially integration
processes as in their essence are direct or indirect integrations in the insurance industry
or insurance sector with other financial industries.
2.2. Globalisation processes
Processes of liberalisation and deregulation, are the most notable example of inte-
gration processes in the modern economy, including the insurance industry. These
processes occur primarily in reinsurance, which is essentially an international busi-
ness because it allows cross-border dispersion of risk. The need for the dispersion of
risk has always been in the basic of the need for integration processes in the insur-
ance industry. Insurance companies provide cross-border services by providing direct
insurance in other countries from the home country or by establishing subsidiaries in
other countries. The establishment of representative offices or acquisitions in other
countries is much more common form of cross-border business of global insurers.
In addition, globalisation of insurance and reinsurance is encouraged by the need to
monitor foreign country operations of existing customers as well as the need for profit
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enhancement, which achievement is limited in saturated home markets in developed
countries. The connection between the globalisation of business and improvement
of insurers’ business performance has been proven in numerous studies, for exam-
ple, Capar and Kotabe (2003). However, globalisation has its limits in the form of
expensive entry in some markets, business complication and the need of increased
product customisation. Besides for global companies, the globalisation of insurance
offers many advantages for markets in developing countries. These benefits include
the development of new types of insurance, the application of best practices and
experiences and the inflow of fresh capital. Certainly limits of the presence of major
global insurance companies in regard to their local insurance companies, tow-away
premiums and/or profits abroad and reduction of the total availability of capital and
strategic economic and political influences must be taken into account. However, based
on the more powerful positive impact, many countries are moving away from protec-
tionist policies and state control toward more market access, that is they stimulate
the arrival of foreign insurers. States seek to deregulate insurance so as to ensure a
stable, properly managed and successful industry, carry out the privatisation of state-
owned companies and open their markets to integrated with insurance. The increased
presence of insurance companies tied with bank in Indonesia illustrates Table 1.
T 1: Bancassurance in Indonesian banks.
No. Type of banks Dec 2012 Dec 2013 Dec 2014 March 2015 % change
between
2016 and
2017
1 State-owned banks:
a. Government of Republic of
Indonesia
5 5 4 4 –25.0
b. Local (provincial)
governments
26 26 26 26 0.0
2 Private domestic-owned banks 78 55 56 56 –39.33
3 Foreign-owned banks
a. Subsidiary ( Joint Venture) 29 29 13 13 –123.1
b. Branch office 10 11 10 10 0.0
4 Sharia banks 3 4 11 11 72.7
Total 151 130 120 120 –25.8
Note: This table shows the number of banks based on different types of banks operating in Indonesia
from December 2012 to March 2016 (various years).
Source: Indonesian Banking Statistics. Bank Indonesia
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Most countries of the region there was a larger share of insurers, except for non-life
insurance market in Indonesia, where the presence of foreign insurers was recorded
higher in 2016 than in subsequent years. The majority capital participation in insur-
ance companies in all banks has been noticed more in life insurance than in general
insurance, with the exception of the insurance market in Private Bank.
The process of globalisation of insurance and reinsurance combined with ever
tougher competition in the insurance market is causing an increasing enlargement
of insurers [3]. Consolidation is the integration of insurers through mergers and
acquisitions. The process of consolidation is driven by the desire to achieve greater
market power, reduce operating and fixed costs and achieve economies of scale.
Also, the causes of consolidation in the insurance sector may include the need to
enter national markets of developing countries that are otherwise completely closed
to foreign companies. The introduction of third generation of directives that make
Solvency I framework for solvency regulation of insurers in the Indonesian banks
has further encouraged the consolidation of activities. In the period from 2012 to 2016,
around 114 mergers and acquisitions involving insurance to bank companies from have
happened.
Regulatory changes, changes in accounting standards, changes in business practices
and economic factors, such as economic growth, low interest rates, financial capital
surplus, represents factors of consolidation in the insurance industry [4]. New regula-
tory frameworks in the U.S. (Sarbanes-Oxley) and the EU (Solvency II) will give further
impetus to the consolidation in the insurance industry since it will give better treatment
to bigger insurers. Consolidation allows the provision of adequate management skills
for achievement of success in various types of insurance and improvement of market
concentration and thus market power in existing markets. Of course, it is necessary to
bear in mind that a higher concentration in the market caused by the decrease in bar-
gaining power of clients, both individual and corporate insureds, essentially represents
a socially unproductive trend. For that reason, there are regulations which aim to frame
consolidation transactions with the aim of protecting public interest, and they include
[4]: (1) capital requirements, (2) supervision institutions, and (3) maintaining market
discipline. Also, the key problems for companies appear to be too high price that they
pay in conducting acquisitions, false assumptions about the strategic compliance of
transactions and inefficient process of consolidation itself [5].
Observed in the short term, further realisation of mergers and acquisitions transac-
tions is almost certain, given that both life and non-life insurance and the reinsurance
industry exhibit similar tendencies in terms of relatively low valuation of companies
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T 2: Demographic information.
Variable Category Percentage
Gender Male 41.38%
Female 58.62%
Age Less than 22 1.12%
23–27 4.00%
28–33 0.25%
Over 34 94.63%
Bank type Public 25%
Private 75%
Total (N) 240
Sources: Author data collection, 2016.
shares, compared with the period before the financial crisis, low premiums in the non-
life insurance due to the absence of significant catastrophic losses, poor reputation of
some companies and some high-capitalization companies. Life insurers can expect
a similar trend given that organic growth in the previous year did not give signif-
icant results and that sales volume declined because of the crisis are not yet fully
restored to levels before the crisis. In addition to insurance companies, financial needs
of individuals and businesses have traditionally been fulfilled by banks, investment and
pension funds and investment companies. In the late eighties and especially during the
nineties, the concept of convergence has been created and developed. Convergence
occurs at three levels, the level of supply of financial services, and the level of the
services and at the level of financial advisory.
T 3: Average age of respondents.
Banks Company Mean (in years) N Std. Deviation
State-owned 39.62 8 7.836
Private 31.99 232 11.134
Total 35.9 240 9.691
Sources: Author Data Collection, 2016.
Historically the first form of cross-industry integration occurs at the level of supply
or sale of insurance services and is realised on the basis of linking banks and insurance
companies. These forms of integration are known as bancassurance. The highest level
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of integration in the sphere of financial services deals is the formation of financial
conglomerates, which typically combine provision of insurance and banking services
and intermediation in financial markets.
Application of these forms of integrations is motivated by the reduction of costs
of sales of insurance services, achieving inter-industry competitive advantages and
opportunities to achieve additional returns. The negative aspects can be expressed in
terms of financial contagion, the fact that was demonstrated by the global financial
crisis.
The convergence of various services within the financial sector is historically the
longest, with the exception of bancassurance, exercised at the level of consultation and
advisory services within the services such as accountants, lawyers, and consultants for
risk management, financial planners, insurance agents and the like. This convergence
of perspectives has advantages in terms of securing economies of
scale and thereby costs reduction, especially considering the package of financial
services to corporate clients. The disadvantage is the fact that advisors base their
work on conditional fees and could deliberately give wrong advices to customers.
The trend of convergence of insurance and other financial services is also present at
the product level. The emergence of alternative risk transfer mechanisms is primarily
caused by limited capacity of insurance and reinsurance markets that are caused by
increasing probability and intensity of adverse events [Njegomir, 2011]. In addition to
adverse events for the development of alternative risk transfer insurance mechanisms
the increase of capital requirements by rating agencies was especially important. On
the other hand, the growing investor interest in investing in instruments linked to
insurance risk is
noticeable. The increased interests by investors have appeared as these instru-
ments provide relatively high yields that are uncorrelated with other instruments in
the portfolio [6]. Also, the development of these forms of risk transfer is facilitated by
the new solvency regulation [7]. Namely, by equal recognition and treatment of risk
transfer mechanisms – reinsurance, hedging and securitization, requiring only proof of
insurance companies on their real contribution to risk reduction, Solvency II will give
insurers incentives to optimize assets and risk reduction incentive to the development
of alternative risk transfer mechanisms, such as the securitisation. Application of alter-
native risk transfer mechanisms until now has showed no significant shortcomings
except relatively high structuring costs and the existence of basis risk [8].
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3. Discussion
3.1. Opportunity of bancassurance
Catastrophic damage was not characterized by simultaneous realisation of one or more
catastrophic hazards With the aim of providing a quantitative definition of the term
catastrophic losses, Property Claims Services, an integral part of Insurance Services
Office in the United States, catastrophic loss is any adverse event with an insured
property value lost equal to or greater than $ 25 million and that negatively affect a
significant number of policyholders and insurers [Insurance Services Office, 2011].
Thanks to economic development, technical and technological progress, the devel-
opment of medicine, the globalisation of business, increasing population and economic
values, individuals, companies and society as a whole today are exposed to more risk
than ever before. For example, the development of medicine has enabled a longer life
span, but the longer life expectancy led to the creation of new risks and the need to
cope with uncertainty regarding the provision of funds for old age. In a world charac-
terized by a trend of increasing interdependence between countries and businesses,
achievement of a catastrophic event, which is likely together with consequences con-
stantly grows up, the existence of national borders is less and less recognisable, which
clearly demonstrate the newly created phenomenon of global terrorism. Apart from
the increased probability of adverse events, the other determinant that influence risk,
the intensity of the consequences of adverse events, also increases. Concentration
of people, buildings, factories and infrastructure per unit of land nowadays means
that loss events with the same intensity could threaten more people and cause more
damage to property than before [11]. For example, according to OECD estimates [12],
repeating earthquake in Tokyo from 1923 would cause damage equal to approximately
75% of Japan’s gross domestic product. Apart from the increased probability of adverse
events, the other determinant that influence risk, the intensity of the consequences of
adverse events, also increases. Concentration of people, buildings, factories and infras-
tructure per unit of land nowadays means that loss events with the same intensity
could threaten more people and cause more damage to property than before [11]. For
example, according to OECD estimates [12], repeating earthquake in Tokyo from 1923
would cause damage equal to approximately 75% of Japan’s gross domestic product.
Figure 1 illustrates the increased economic and impact of information to bancassurance
in banking industry.
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No idea
13%
Opport un it y
58%
Ambi guous
16%
Threat
0%
Chall enge
13%
No idea
Opport un it y
Ambi guous
Threat
Chall enge
Figure 1: The perception of bancassurance opportunity. Source: Author data collection.
As can be seen from the graph, there is an increase trend in value of losses from the
realisation of catastrophic events, especially at the beginning of the new millennium
and during the nineties of the twentieth century. While insurance covered catastrophic
losses in the period between the 1970 and 1989 cost insurance market on average
$8.3 billion dollars a year, during the period between the 1990 and 2007they cost
on average $32 billion a year. Events such as hurricanes (especially the hurricane
season of 2005 in the U.S. when catastrophe losses cost insurance industry more than
$90 billion, with most devastating Hurricane Katrina whose sole cost to the insurance
industry was $68.5 billion), floods (for example, in the UK floods in 2007 have caused
unprecedented damage in 60 years), earthquakes (Northridge earthquake in 1994.
year, an earthquake in Kobe, Japan in 1995. and the earthquake in Sichuan Province,
China from 2008) tsunamis (e.g., tsunamis that hit Thailand in 2004 and Myanmar in
2008), terrorist attacks (e.g., an attack on the World Trade Center on 11 September
2001 cost insurance industry about $ 22 billion, in 2007 dollars) and others, produce a
growing adverse consequences for both the insurance industry and the global econ-
omy. Particularly strong impact catastrophic events have made to reinsurers. Figure 2
illustrates the negative impact that the realisation of catastrophic events had on the
reinsurance market.
3.2. Risk implication on bancassurance
Specifically, insurers, even in conditions of high exposure to certain catastrophic risks,
such as for example the risk of hurricanes in Florida, can achieve the minimisation
of risks by allocating the available capacity on the risks that are not correlated with
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each other, in this case that are not correlated with the risk of hurricanes in Florida.
Unlike insurance companies that are directly informed about the risks in the portfo-
lios, reinsurers obtain information indirectly, through insurers. That is the reason why
reinsurers’ ability to identify catastrophic risk exposures is reduced.
The realisation of ever more frequent catastrophic events with ever more intensive
consequences led to problems of managing a large number of damage claims, but
primarily to the problem of limited capacity of traditional reinsurance and retrocession
market. One of the consequences of limited capacity and very high insurance pre-
miums is the emergence of the previously described alternative risk transfer mech-
anisms that enable risk transfer to the capital markets. It also created new forms of
cooperation between public and private sector, where the state instead of directly
recovering the costs of adverse events seeks to encourage private initiative by forming
insurance pools where only the highest levels of adverse events are borne by the state.
The realisation of catastrophic losses is also present in Indonesia. However, the main
problem in the region is a small insurance penetration and density and almost exclusive
reliance on public funds in financing catastrophic consequences. With that in mind, the
World Bank in 2006 initiated the development of an insurance pool for catastrophic
risk coverage for private and state owned Bank in order to stimulate households and
businesses to sign contracts of insurance against catastrophic risks. It is expected that
the project will start with the start of the reinsurance facility called economy stimulus
in January 2015.
70%
80%
20%
10%
10%
10%
0%
0%
0% 20% 40% 60% 80% 100%
Very much
Much
So-so
Low
Very low
Private
State-owned
Figure 2: The importance of e-banking implementation. Source: Author data collection, 2016.
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Insurance is a conservative business based on the application of mathematics and
statistics and careful investment of collected premiums in order to comply with the
obligations of both insureds and all others. However, insurance companies do not
operate in isolation and the world around them is characterized by constant change.
Constantly changing environment generates new risks. For example, the process of
globalisation has caused the emergence of risks that were previously assumed to
be not significant or that does not exist. The realisation of the global financial crisis
is one example of the manifestation of systemic risk, which likelihood is increased by
globalisation. Also, the realisation of political risks in the countries of North Africa that
were considered [AON, 2011] relatively stable, is an example of a sudden manifestation
of risks with significant economic consequences. The importance of timely identifica-
tion of the impact of new risks is evidenced by asbestos contamination. Although the
risks of diseases caused by asbestos, primarily cancer, have not been anticipated in the
seventies, they have realised. Over the past two decades, insurance companies have
continuously been faced with new claims. Thus, asbestos have caused tens of billions
of dollars costs to the insurance industry. A similar situation is possible with new
technologies, especially nanotechnology, biotechnology and information technology.
In the case of information technology, the greatest risk that has manifested so far
has been the cyber risk. This risk did not exist before 1995. The cyber risk occurs and
changes continuously with the development of the Internet and constant increase in
the number of private and business Internet users. All individuals and companies that
achieve presence on the Internet in any form are exposed to cyber risks. The best
known examples of cyber risk exposures, with regard to the financial impact and media
attention, are confidential information theft. According to the Federal Trade Commis-
sion’s estimates these thefts adversely affects about 10 million people and cause
unwanted costs of approximately $50 billion a year. Also, there are many case studies
that indicate that the risks associated with implementing information technology can
affect many other types of insurance coverage. For example, a hacker attack on a
computerized control system for irrigation in Australia caused flooding of parks and
rivers and pollution of water [13]. Endangering public services by hackers’ attacks could
cause significant damage on the basis of various types of insurance policies. Insurance
companies must take into account the above scenarios in risk management and rating.
In addition to the risks and benefits of the direct use of information technologies they
provide development opportunities for insurers. Insurance products related to infor-
mation technologies, which are present in our region, are insurance coverage for com-
puter hardware. However, the functioning of information systems interruptions caused
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by software errors, viruses or other conditions are usually excluded. Recently, with
the aim of exploiting opportunities for business development, insurance companies
have begun to offer policies that cover risks associated with information technology.
Although security conditions vary, this type of insurance can provide coverage for
direct and for damage caused to third parties, coverage that was not existent before.
Nanotechnologies are technologies that are based on the application of components
whose size is measured in nanometers. A nanometer is a billionth of a meter, or the
picturesque, the diameter of human hair is about 80,000 nanometers. Application
of nanotechnology potentially offers unimagined possibilities in many areas such as
data transfer speed, improved methods of treatment and prevention of various dis-
eases, including currently incurable, the production of quality products at lower prices,
reducing pollution, rational use of limited resources and so on. However, scientists
point out that the application of nanotechnology could lead to the realisation of risk,
although these are not currently possible to identify. Possible risks might lie in the
domain of influence on human cells and biological processes, the possibility of their
biodegradability and the elimination from land, water or air, the ownership of property
of inventions related to nanotechnology, as well as in terms of the potential cata-
clysmic effects of these technologies in the case of self-reproduction. Careful testing
and monitoring of negative manifestations of nanotechnology applications are neces-
sary for the insurance industry in order to eliminate possibility of repetition of negative
experiences in the past, as was the case with asbestos pollution.
An organization that represents biotechnology sector in the U.S. (BIO) defines
biotechnology as the use of cellular and biomolecular processes in solving problems or
making useful products. The simplest, biotechnology involves the use of living organ-
isms in creation of useful products. Modern biotechnology offers many advantages
by creation of new industries and products. Biotechnology has enabled developments
in pharmacy, medicine, manufacturing of mechanical organs, agriculture and various
other industries. In addition to creation of new opportunities, biotechnology has led
to the creation of new risks, related primarily to legal, ethical and moral issues. These
problems are particularly relevant to potential users of genetic information, such as
employers, pension funds or insurance companies. An example of the complexity of
the legal, ethical and moral aspects of application of biotechnology and especially
genetic information is the issue of acceptability of the use of genetic information
to refuse, limit or cancel insurance coverage. These aspects are expressed mostly
in the form of fears that biotechnology and its application may cause unknown
hazards to human health, environment, biodiversity and excessive political influence
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of multinational corporations. In the very beginning of the industrial development of
biotechnology or genetic engineering, for example, these risks were included within
general liability insurance. With the increasing public debate, insurance companies
excluded or limited insurance coverage for liability risk for these companies. Bearing
in mind that liability insurance is particularly vulnerable type of insurance coverage,
it can be expected that the supply of this type of insurance coverage in the future
would be based on the principles by which insurance coverage for similar risks is now
offered to pharmaceutical companies.
4. Conclusion
The insurance sector is inherently characterised by the integration processes. The glob-
alisation of business, capital consolidation and convergence of insurance with other
financial services offers many opportunities and dangers that insurance companies
must be aware of when deciding to participate or not in the integration processes.
Increasingly, the realisation of ever more damaging catastrophic events is one of
the most pronounced trends that characterise the modern insurance industry. This
realisation of catastrophic losses undermines the foundations on which the insurance
is based. By limiting insurance industry’s capacity such trends leads to high insurance
premiums that threaten vital economic and social role of insurance – the protection
of policyholders. Given the trends demonstrated so far it is almost certain that these
trends will affect the insurance business in the future. As a result, insurance companies
must adapt by developing innovative solutions. The anticipation and adaptation is not
only in their own interest but also in public interest. The emergence of new risks associ-
ated with information technologies, bio technologies and Nano technologies is evident.
The ability to identify, measure and treat new risks will contribute to technological
advances in the future. Technological advances will in turn create unimagined possi-
bilities or improvement of human life and work and thus development opportunities
for insurers. However, insurers must be aware of new risks that new technologies
might carry with them and must be able to identify, assess and determine their own
abilities for the acceptance or rejection of these risks.
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