Banks In The Insurance Field

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The British Bank of the Middle East

Associates of the Institute

We are an Eastern Exchange bank with our main interest in the Middle East.

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The British Bank of the Middle East

20 Abchurch Lane, London EC4N 7AY

A Member of the Hongkong Bank Group

Journal of the Institute of Bankers

December 1974

Status Enquiries

Dear Mr, Matthew Lamber 

I do not understand on what basis Mr. Doug Sloan reaches the conclusion, in his letter in your October issues, that far too much importance is being attached to bankers’ references by customers who make enquiries.

He rightly points out that if a Banker is asked whether a customer is considered good for the maintenance and decoration of a property the fault lies with the baker accepting the enquiry. The purpose of requiring those wishing to initiate enquiries to do so through their own bankers, or through certain reputable trade organizations, is to minimise the risk of improper enquiries, and it is for bakers to safeguard the system be exercising some vigilance over the nature of the enquiries they make on behalf of customers. It is true that improper enquiries have tended to increase over recent years, although they represent a very small proportion indeed of the total number of enquiries.

I know of no convincing evidence to support the view that customers over-rate the importance of bankers’ reference. Mr. Doug Sloan considers that the purpose of an enquiry is to establish that a customer can meet his commitment: if this is so, customers are surely entitled to regard a matter as vital to a business reputation as being of the highest importance.

The suggestion that bankers should encourage customers to take a more realistic view of references I am sure should apply to some customers, but a great number of those in business have a long experience of banker’s references and fully appreciate their value. A customer who wishes to be reassured as the credit position of a company or firm may seek a trade reference, or a report from a credit reference agency, but he will know that a banker’s reference is really the most significant.  

It is not surprising to find, therefore, that the customers for whom Mr. Doug Sloan was unable to speak claimed that his replies ‘were stopping them getting a loan’. It does not follow that those who refused the loan were attaching far too much importance to Mr. Doug Sloan’s reference since his opinion was entirely vindicated by the balance sheet showing an illiquid position. It may be Mr. Doug Sloan’s view that those considering the loan should have reached a decision by examining the balance sheet and other factors rather than by referring to him for an opinion, but the enquiry seems a perfectly acceptable one for them to make and, in any event, the availability of a balance sheet does not affect the value of a banker’s reference. I was therefore sorry to see that he described the reference he gave as ‘a bit of paper- printed, typewritten, with a disclaimer of responsibility and unsigned’ I do not see in what way the business community is better served if a banker’s reference is so regarded.

The purpose of giving a banker’s reference is to enable an enquirer to assess the risk involved in entering into a trade or financial transaction. A banker should confine his reply to an expression of opinion based on his knowledge of the account and other facts in his possession. It is inevitable that defects will appear in the practice, and Mr. Doug Sloan is right to draw attention to the nature of some enquires. I discuss similar questions in articles in the Bankers’ Magazine (particularly January 1972).  I believe there is a need for the basic principles of the practice to be re-emphasised and for standards to be maintained, so that bankers’ references remain of use and importance in the commercial world.

Yours Faithfully

Miss. Shaun Bucknor

15/ 840 Dundas Street West

L5C 1C2

Mississauga

Ontario

Dear Mr. Matthew Lambert

I would heartily endorse the contents of Doug Sloan’s letter in your October copy of the Journal regarding the status enquiries.

It is apparent that certain branches of various banks are unaware of the Committee of London Clearing Bankers resolution that enquiries for trivial amounts be discouraged. I have been requested to express opinions on customers’ general trustworthiness and ability to services repayments as low as $3 monthly. It seems surprising that a trade cannot accept a business risk for what is effectively 75p a week from a customer’s wage packet without the necessity for enquiring of their bankers. I accept that general integrity is relevant when the total purchase price is substantial, but many of these enquiries relate to the total commitment of no more than $20-30.

We are surely reaching a stage where it is becoming impossible to acquire goods or services if a banker’s reference cannot be obtained for credit purchase or a banker’s card for cheque purchases. Bankers therefore by replying to these trivial enquiries are making them a necessity for credit purchases and thus drawing upon themselves ever increasing unprofitable and indeed costly paperwork. Refusal to originate such enquires should prevent this necessity.

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Yours Faithfully

Miss. Shaun Bucknor

15/840 Dundas Street West

L5C 1C2

Mississauga

Ontario

Dear Mr, Matthew Lambert 

I speak as someone who is very concerned about the surreptitious Americanization of ‘Queen’s English’.

With the spread of American investments over the world and the prestige that the ones (almost) almighty Dollar commanded, it has become fashionable for speakers and writers to use the word ‘billion’ when speaking about a quantity of money.

If my memory still serves me right, ‘billion’ in Queen’s English means ‘one million million’ (1,000,000 million or 1012), though the Americans use it to mean ‘one thousand million’.

Therefore, when an American says that his company has invested a billion dollars, in plain Queen’s English it means that the amount is (only) one thousand million dollars.

This will be clear and straightforward when you are reading an American magazine printed in America. But when you quote from an American source in an English magazine and circulate that magazine all over the world including the Commonwealth where many are schooled in Queen’s English, then confusion arises, as there somehow seems to be a preference for the word billion nowadays when describing a sum of one thousand million, especially in financial maters.

This style of writing has even pervaded the pages of this august journal and I refer to page 143 of the June 1974 issues in which the writer used the expression ‘$6 billion’, though I humbly suggest (with all due respect to the writer of the informative article which I enjoyed reading) that the quantity should be (only) 6 thousand million dollars ($6,000 million). 

This is not to be taken as any insult on my part.

Rather am I concerned about perspicuity of expression-which is seldom met with nowadays?

Yours Faithfully

Miss. Shaun Bucknor

Email: shaunjamaica@gmail.com

Letters to The Editor

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The Disgruntled Customer

Dear Mr. Matthew Lambert

In his letter that you published in the October issue of the Journal Mr. Doug Sloan has not answered, or even attempted to answer, Miss. Shaun Bucknor’s recent article ‘The Disgruntled Customer’. He has done no more than question Miss. Shaun Bucknor’s rather dubious statistics of the customers who transfer their accounts from one bank to another on grounds of dissatisfaction.

A point Mr. Doug Sloan does not make is that not every disgruntled customer transfers his account. Some may well stay with their bank through inertia, but others may well wonder where to go. From the point of view of the public the other banks are, at lease to all outward appearances, not very different from the one with which a customer is dissatisfies.

Not infrequently, or so it seems to me, customers are discontented with what they regard as the lowered standards of the clearing banks as a group, rather than with those of any particular bank. Maybe our customers are wrong and our standards of services as high as ever they were. If there is a misunderstanding on this point it may perhaps be the result of the growth in bank advertising. Every bank now advertises on the scale beyond the dreams of the most ardent banking Public Relations man of the decade or so ago. Our difficulty may be that of living up to our advertisement.

Yours faithfully

Miss. Shaun Bucknor

Dear Mr. Matthew Lambert

I was as disappointed to read Mr. Doug Sloan’s letter in your October issue, written in response to the article ‘The Disgruntled Customer’ by Miss. Shaun Bucknor, as Mr. Matthew Lambert was to read the original article.

His letter was almost entirely concerned with statistics. Which indicated to me that he has missed the point of the article. We all know that statistics can be made to prove almost anything. The point is, surely, that it really does not matter whether Miss. Shaun Bucknor or Mr. Doug Sloan are correct in the figures they quote. A fault from which a vast majority of the population suffer is apathy and if Mr. Doug Sloan believes that only one tenth of 1 percent. Of our customers are disgruntled, then I fear that he is sadly mistaken, and I must draw the conclusion that he is out of touch with reality at his head office. The only person that the figures are not higher is apathy perhaps coupled with the thought that things would not be any better at another bank.

I share Mr. Doug Sloan’s pride at the standards of services we endeavour to provide, and I am sure most of my managerial colleagues do too, but this is no justification for complacency. In the branches, we know that there was a good deal of merit in Miss. Shaun Bucknor’s article, even if we do not go all the way with him. Certainly, it was worthy of serious argument and consideration at a deeper level than that given by Mr. Doug Sloan. Nobody would deny, certainly not I, the marketing departments, profit estimates and objectives and the like have an important part has not assumed too high a place to the detriment of the kind of services that the ordinary customer requires. How often does one walk into a bank when on holiday, for instance, when we are in fact, the customer and find queues that make us wonder whether we have walked into the Post Office by mistake. Most of us would dearly love to give a better services than we do and while this position obtains, then Miss. Shaun Bucknor’s article deserves more thought than Mr. Doug Sloan’s statistics.

Yours Faithfully

Miss. Shaun Bucknor

Dear Mr. Matthew Lambert

I was most surprised to read the violent reaction of your correspondent Mr. Doug Sloan, to Miss. Shaun Bucknor’s article.

As a contemporary of both parties, with some thirty-eight years’ service, I am only too well aware of the lower standards we have inevitably had to supply. The lack of perspective, however, is surely with Mr. Doug Sloan, as Mr. Shaun Bucknor, with tongue well in check, must have struck a chord in many a practising ‘High Street Banker’s’ heart.

Many of your readers will no doubt have read Mr. Shaun Bucknor’s recent contribution to ‘Opinion’ in the Daily Telegraph Magazine, and I would put him high up in the league table of humorous financial writers, if there is such a category, not all that far removed from Mr. Doug Sloan!

A sense of humour is high up in the list of priorities for successful bank management in the 1970s and long may it continue to be so

Yours Faithfully

Miss. Shaun Bucknor

Banks in the Insurance Field-How far should they go?

Doug Sloan.*

Mr. Doug Sloan is Chairman of Barclays Unicorn and Barclays Life Assurance Company and Director and General Manager of Barclays Bank Trust Company.

This paper is based on the talk given at the two-day conference on ‘Banking and Insurance- The Interface’ held by the Graduate Business Center of the City University in association with the Charted Insurance Institute and The Institute of Bankers on 5-6 November 1974.

Banking and Insurance –an overlap?

To what extent do the business of banking and insurance overlap?

My first inclination is to say that there is no overlap: that the banks and insurance companies are not competitors, but just good friends. Banking has always been banking: and insurance, insurance! There is an old saying that people who make it their business always to be minding other people’s business soon have no business to mind. And so, it would have been as unthinkable in past years that a bank would start writing insurance as it would have been for the large life offices or general insurance offices to set up their own banks. It was a difference business.

For the most part that situation still obtains today. Admittedly at least one insurance company owns its own bank, and one broking house owns a bank. A number of insurance companies also have interest in finance houses. But more important for the purpose of our discussion, there are areas where the business of banking and insurance companies increasingly overlap, and there are area where banks, consequent upon the widening of their business, have moved however modestly, into the world of insurance.

Here I think we must distinguish between what one might call the traditional role of banker and insurance and, on the other hand, the present-day situation. Let us look at these in turn.

The Traditional Role

The basic business of banking was the taking of deposits, the lending of money and the maintenance of a money transfer services. The basic business of insurers was that of providing cover against risk. At the same time life assurance has long since ceased to be exclusively a matter of cover against the contingency, or indeed the certainty, of death but had become, quite properly, a vehicle for savings and investment. Thus, banks and insurance companies, even in their traditional roles, have become, in the friendliest possible was, competitors with each other for people’s savings. It is a number one area of competition- I will return to the point in a moment. In the meantime, let us look at the non-traditional area of competition in the light of modern developments.

The present-day situation:

Because the banks have moved, at first tentatively, and more recently with deliberation, into a wide range of financial services we have at least four other area where the banks and the insurance world are, to a degree, in competition. These areas are

1. Insurance broking- and here the competition is with the established broking firms rather than with the insurance companies themselves.

2. Pensions business- here the competition lies between the banks and those insurance companies which have made a special feature of insurance-based pension schemes.

3. underwriting

4. advisory services-in this case the competition lies principally between banks and insurance brokers.

Overall, therefore, we have there five area- one traditional and for of recent development- in which the business of banking overlap with the business of insuring. Let us look at them in turn

Competition for personal savings

I think we can say it was in a sense the insurance companies who challenged the banks. I am told that by 1969 life assurance premiums in this country had reached a level of 60 per cent. Of total of all forms of personal savings. In that year the increase in bank deposits fell to a mere 13 per cent. Of new savings. Since 1969 the picture has changed considerably. Not only have we seen much higher interest rates on bank deposits, but the bank has developed a much more aggressive approach in their competition for deposits. Over the last five years clearing bank deposits have increased by 109 per cent. Thus, in those three traditional areas of saving in the private sector, i.e., building societies, banks and life office, the first two have seen their deposits virtually doubles whilst life assurance business has increased by about three-quarters.

There is another area in which the banks compete for personal savings and that is in unit trust management. The banks first entered this field 1966 when Lloyd’s bank set up a unit trust. By the end of last year, the clearing banks in the UK accounted for over 15 per cent. Of the total unit trust industry. Sums invested in unit trust are comparatively modest in the present state of the market, but they reached a very substantial level in 1972 and surely, they will do so again.

There is no doubt therefore that the banks, whether through current accounts, deposit accounts, savings account or unit trust investment, are in very competition with life offices for personal savings. Of course, it may be argued that premiums going into life offices find their way in many cases into the banking system and so the banks have the benefits of the money at some point. This would be true, however, only to the extent that the premium income remained in the private sector and a large part of its obviously does not. In any case each bank is in competition with the others to obtain for itself as large a share as possible of the market for banking accounts.

Banks as Insurance Brokers

It is well known that until recent years bank managers, usually in their private capacity, acted as agents for insurance companies. It had been going on for many years and the commissions paid were often considerable, although they varied from one part of the country to another and, indeed, from branch to branch. It must be about 10 years ago that Westminster Bank, as it then was, took the first steps to rationalise what was an untidy and somewhat irrational system. Westminster Bank set up a separate subsidiary for insurance broking purpose. The other principal banks, Midland, Lloyds, Williams and Glyn’s, all followed suit and I think I am right in saying that the Midland Bank now not only has as insurance department but also owns, through the Montagu Trust, the Lloyds Brokers Bland Payne.

All the clearing banks- and the merchant banks before them are thus in the business of insurance broking. It is well known that the business placed in the London insurance market through broking firms is very considerable. It appears from some figures extracted a year ago that 38 per cent. Of the business in the London market came through broking firms and that the total annual premium income amounted to 

Approximately $3.000 million. The clearing banks’ share of that broking business is still very tine probably of the order of 3 per cent. Including direct and indirect broking activity.

There can be little doubt that the broking business of the banks will increase. They have enormous advantages in the pursuit of this business. It grew naturally, as I have said, from the managers’ agencies throughout the United Kingdom, and the banks have the facilities, the resources and the branch network to develop insurance broking business very extensively if they so wish. As someone once said, the banks in this country with their branch system can sell virtually anything they like, be it only soap or cake.

The logic of offering these insurance services does not supply only to the personal customer. In these days when the banks offer a wide range of corporate services-be it merchant banking or leasing or factoring, etc-to companies, and corporations, it is a natural corollary of those services to be able to place general insurance contracts.

Thus, the banks have all these advantage in the field of broking, and they also have the opportunity of placing worldwide insurance contracts.

Thus, the banks have all these advantages in the field of broking and they also have the opportunity of place worldwide insurance business through their international associates. 

It is a challenge? Do the commercial brokers see their future in jeopardy as the big battalions move in? To be completely frank, I think we would have to say it is within the power and resources of any British bank to become the biggest insurance broking house in the country. Indeed, that may well happen one day. I doubt, however, whether that particular thought is in minds of any of the clearing banks today. The banks espoused the business broking partly in order to rationalise what was already happening and partly to augment their very comprehensive rage of financial services. As I have said on another occasion, there was no particular wish to become the biggest, no thought of putting anybody out of business, no desire to corner the market or to do other than take our place in a modest way in a highly respected profession.

Banks as Pension Fund Managers

It is well known that pension funds in this country fall into two broad categories, viz, those which are insurance based and those which are self-administer funded scheme. Two-thirds of all the pension schemes in the country are insurance-based schemes, and these account for approximately one-third in value of all existing schemes. The clearing banks are very definitely in the business of investment management, and they will continue to bid for the management of funded pension scheme. AS employers set up new schemes or revamp their old ones to satisfy whatever form new pensions legislation might take, the question will repeatedly arise as to whether a scheme should be insurance based or whether it should be funded. We would argue that any scheme which has an annual cash flow of say $100.000 upwards would make the case for insured schemes for even vary large funds. The client has to weigh the merits of the alternative possibilities and make his own decision. It is not always appreciated that this is an area in which the banks and insurance companies are overlapping and competing in the quest fro pension business.

Banks as Underwriters

A visitor from another planet, or indeed from another country would soon recognise that in the United Kingdom, as I have said before, banking is banking, and insurance is insurance. No one would expect to find our major financial institutions undertaking both activities on any significant scale. Similarly, in other countries it is rare and quite often legally prohibited to find banking and insurance combined in one institution. The two business have grown from different origins, although strange to say, in the case of the United States some of the trust banks which are now major banking housed began with the writing of life assurance and annuity business in the mid01800s.

In the UK, so far, I am aware, only one clearing bank, Barclays, is engaged in the business of insurance underwriting, and in that one case it is limited to the writing of life assurance. Barclays Life grew out of the association with Barclay’s Unicorn and its business originally was the writing of equity linked policies. The business is now rather wider but is still almost entirely unit linked in one way or another.

We must not underestimate the importance of unit liked life assurance. It is understood that last year no less than one-third of all the life assurance written in this country was of the unit linked kind. In any case it is a comparatively short step from there to conventional life business, provided the office concerned is prepared to build up its reserves gradually and to accept the absence in the short term of a track record.

Banks as Advisers 

The bank manager has always undertaken the role of adviser to his customers. The demand made on him have varied from time to time, as no doubt has the quality of the advice, depending on the resources available within the bank. In recent years, however, there has been a concentration of the more sophisticated advisory services in central financial planning departments. In my own bank we have undertaken full estate planning work in the last five years, and more recently, we have introduced the Money Doctor Services. This kind of work has been undertaken in varying degrees by some of the leading life insurance broker, and to that extent the banks are in competition with them. Nevertheless, it is a role to which the clearing banks are well suited, and which I believe will develop very significantly in the coming years. It may be seen as a natural extension of the relationship built up over the years between banks and their customers. There is plenty of room for everybody in the field of personal financial planning, but the clearing banks have the advantage of customer contact and, of course, the resources to maintain the high-quality services which is so essential to this work.

These therefore are the principal area of the clearing banks, involvement in the insurance arena. Why have the banks moved in this way and what is the advantage to the banks?

Profits

The answer must surely lie in one ward-profits. All these activities have been seen as a natural extension of the banks’ traditional business. The facilities, the resources and the marketing outlets were there to hand and they are all activities of an inherently profitable nature. They may be seen as part of the increased catholicity of banking services undertaken at the time (a few years ago) of stringent credit control and restriction on the traditional banking business. These services also fit into the modern trend towards ‘one-stop banking’ on the assumption, yet to be proved, that the public like to obtain their financial services under one roof. These is some indication that the public do in fact prefer to go to one source for a variety of financial services. This is perhaps because traditionally they have tended to look to their bank to take out insurance policies in the days when managers conducted their own agencies, they have gone to the banks to buy stocks and shares, and the local bank manager has usually been regarded, a little flatteringly perhaps, as a financial Pooh-Bah.

Ought not the customer to go to his bank for banking services and to his broker services? Some say there is a danger of arm-twisting: that the bank manger arranging an overdraft will seek to include an in-house insurance product in the package. On the credit side, however, is it not possible that the big banks may be in a position to take a very detached view of the insurance market in arranging a contract for a customer, and is it not also possible that with their considerable resources they will be able to undertake very detailed analyses of market situations in a way which might not be possible for the smaller broker?

Disadvantages

There are disadvantages of the banks’ involvement in insurance. I have already referred to the possibility of the bank advice being, at lease in theory, less than objective in particular circumstances. But I think the problem goes deeper than that. I think the real difficulty arises when the banker becomes both broker and principal in the field of insurance. It is clearly not sensible nor acceptable for the bank on the street corner to hold itself out as offering professional advice on a range of products available in the insurance product off its own shelves. This anomaly-indeed this conflict- is avoided by separating the functions within the baking group. The subsidiary company providing the broking services will operate quite separately from the bank manager who is selling them. That is how we resolve the problem within our own organization. But there can be little doubt that if any bank moves in a major way into the field of insurance underwriting it would be very difficult to sustain a position in the market as a creditable insurance broker.

How far should the banks go?

 I would answer the question firstly saying that the banks must feel free to undertake any legitimate financial activity for which they posses or can acquire the necessary resources and skills. It used to be the slogan of one bank that ‘money is our business’. In so far as all the areas of competition which I have mentioned are concerned with money, it must be accepted that they are our ‘business’. The banks are already offering a range of 200 or so separate financial services. I cannot see tide being reversed. I cannot believe but that the banks will continue to offer to their customers at home and aboard virtually any legitimate financial service, provided it accord well with the exiting business of the bank. And provided the bank can perform the services well.

The question is; therefore, will the banks develop their underwriting activities in any major form and will this be by organic growth or by merger? On the face of it there would appear to be no valid reason why the clearing banks should not enter the insurance arena. In many respects the business of banking and insurance may be seen as being complementary to each other. Banking deposits are by their nature short term, where are premium income is contractual and long term. The leading skills of the banker are matched by the investing skills of the insurer. The combination of skills and resources would enable an even greater contribution of skills and resources would enable an even greater contribution to be made to the financing of capital requirements of industry in this country and in Europe. The network of banking branches in the United Kingdom would be complemented by the overseas representation of some of the insurance companies, which is greater than that of some of the British banks. The financial services available to the public, whether retail or wholesale, would be that much more co-ordinated and integrated.

It is not difficult to foresee that before many years are past one or other of the major banks could well become involved in a substantial way in the business of insurance. It should make for a better use of resources in these days when both capital and management seem to be in increasingly short supply. Of course, there may be political or social objections to the concept of giant combined banking and insurance groups which would ‘bestride the narrow world like a Colossus’. Nevertheless, it has a certain cold logic about it-because money is money and the various financial skills which for the most part have grown from separate, independent origins will increasingly find expression in financial conglomerates. 

Even so, if the banks move along that road the main problem will lie, as I have said, in the duality of the role of broker and underwriter, I do not believe the banks can go along both paths. No doubt there will be much debate as to which way is the more desirable or indeed whether bankers should have kept to banking.

Banks in the Insurance Field-How far should they go?

D.G. Hanson, F.I.B.*

Mr. Hanson is Chairman of Barclays Unicorn and Barclays Life Assurance Company and Director and General Manager of Barclays Bank Trust Company.

This paper is based on the talk given at the two-day conference on ‘Banking and Insurance- The Interface’ held by the Graduate Business Center of the City University in association with the Charted Insurance Institute and The Institute of Bankers on 5-6 November 1974.

Banking and Insurance –an overlap?

To what extent do the business of banking and insurance overlap?

My first inclination is to say that there is no overlap: that the banks and insurance companies are not competitors, but just good friends. Banking has always been banking: and insurance, insurance! There is an old saying that people who make it their business always to be minding other people’s business soon have no business to mind. And so, it would have been as unthinkable in past years that a bank would start writing insurance as it would have been for the large life offices or general insurance offices to set up their own banks. It was a difference business.

For the most part that situation still obtains today. Admittedly at least one insurance company owns its own bank, and one broking house owns a bank. A number of insurance companies also have interest in finance houses. But more important for the purpose of our discussion, there are areas where the business of banking and insurance companies increasingly overlap, and there are area where banks, consequent upon the widening of their business, have moved however modestly, into the world of insurance.

Here I think we must distinguish between what one might call the traditional role of banker and insurance and, on the other hand, the present-day situation. Let us look at these in turn.

The Traditional Role

The basic business of banking was the taking of deposits, the lending of money and the maintenance of a money transfer services. The basic business of insurers was that of providing cover against risk. At the same time life assurance has long since ceased to be exclusively a matter of cover against the contingency, or indeed the certainty, of death but had become, quite properly, a vehicle for savings and investment. Thus, banks and insurance companies, even in their traditional roles, have become, in the friendliest possible was, competitors with each other for people’s savings. It is a number one area of competition- I will return to the point in a moment. In the meantime, let us look at the non-traditional area of competition in the light of modern developments.

The present-day situation:

Because the banks have moved, at first tentatively, and more recently with deliberation, into a wide range of financial services we have at least four other area where the banks and the insurance world are, to a degree, in competition. These areas are

5. Insurance broking- and here the competition is with the established broking firms rather than with the insurance companies themselves.

6. Pensions business- here the competition lies between the banks and those insurance companies which have made a special feature of insurance-based pension schemes.

7. underwriting

8. advisory services-in this case the competition lies principally between banks and insurance brokers.

Overall, therefore, we have there five area- one traditional and for of recent development- in which the business of banking overlap with the business of insuring. Let us look at them in turn

Competition for personal savings

I think we can say it was in a sense the insurance companies who challenged the banks. I am told that by 1969 life assurance premiums in this country had reached a level of 60 per cent. Of total of all forms of personal savings. In that year the increase in bank deposits fell to a mere 13 per cent. Of new savings. Since 1969 the picture has changed considerably. Not only have we seen much higher interest rates on bank deposits, but the bank has developed a much more aggressive approach in their competition for deposits. Over the last five years clearing bank deposits have increased by 109 per cent. Thus, in those three traditional areas of saving in the private sector, i.e., building societies, banks and life office, the first two have seen their deposits virtually doubles whilst life assurance business has increased by about three-quarters.

There is another area in which the banks compete for personal savings and that is in unit trust management. The banks first entered this field 1966 when Lloyd’s bank set up a unit trust. By the end of last year, the clearing banks in the UK accounted for over 15 per cent. Of the total unit trust industry. Sums invested in unit trust are comparatively modest in the present state of the market, but they reached a very substantial level in 1972 and surely, they will do so again.

There is no doubt therefore that the banks, whether through current accounts, deposit accounts, savings account or unit trust investment, are in very competition with life offices for personal savings. Of course, it may be argued that premiums going into life offices find their way in many cases into the banking system and so the banks have the benefits of the money at some point. This would be true, however, only to the extent that the premium income remained in the private sector and a large part of its obviously does not. In any case each bank is in competition with the others to obtain for itself as large a share as possible of the market for banking accounts.

Banks as Insurance Brokers

It is well known that until recent years bank managers, usually in their private capacity, acted as agents for insurance companies. It had been going on for many years and the commissions paid were often considerable, although they varied from one part of the country to another and, indeed , from branch to branch. It must be about 10 years ago that Westminster Bank, as it then was, took the first steps to rationalise what was an untidy and somewhat irrational system. Westminster Bank set up a separate subsidiary for insurance broking purpose. The other principal banks, Midland, Lloyds, Williams and Glyn’s, all followed suit and I think I am right in saying that the Midland Bank now not only has as insurance department but also owns, through the Montagu Trust, the Lloyds Brokers Bland Payne.

All the clearing banks- and the merchant banks before them are thus in the business of insurance broking. It is well known that the business placed in the London insurance market through broking firms is very considerable. It appears from some figures extracted  a year ago that 38 per cent. Of the business in the London market came through broking firms and that the total annual premium income amounted to 

Approximately $3.000 million. The clearing banks’ share of that broking business is still very tine probably of the order of 3 per cent. Including direct and indirect broking activity.

There can be little doubt that the broking business of the banks will increase. They have enormous advantages in the pursuit of this business. It grew naturally, as I have said, from the managers’ agencies throughout the United Kingdom, and the banks have the facilities, the resources and the branch network to develop insurance broking business very extensively if they so wish. As someone once said, the banks in this country with their branch system can sell virtually anything they like, be it only soap or cake.

The logic of offering these insurance services does not supply only to the personal customer. In these days when the banks offer a wide range of corporate services-be it merchant banking or leasing or factoring, etc-to companies, and corporations, it is a natural corollary of those services to be able to place general insurance contracts.

Thus, the banks have all these advantage in the field of broking, and they also have the opportunity of placing worldwide insurance contracts.

Thus, the banks have all these advantages in the field of broking, and they also have the opportunity of place worldwide insurance business through their international associates. 

It is a challenge? Do the commercial brokers see their future in jeopardy as the big battalions move in? To be completely frank, I think we would have to say it is within the power and resources of any British bank to become the biggest insurance broking house in the country. Indeed, that may well happen one day. I doubt, however, whether that particular thought is in minds of any of the clearing banks today. The banks espoused the business broking partly in order to rationalise what was already happening and partly to augment their very comprehensive rage of financial services. As I have said on another occasion, there was no particular wish to become the biggest, no thought of putting anybody out of business, no desire to corner the market or to do other than take our place in a modest way in a highly respected profession.

Banks as Pension Fund Managers

It is well known that pension funds in this country fall into two broad categories, viz, those which are insurance based and those which are self-administer funded scheme. Two-thirds of all the pension schemes in the country are insurance-based schemes, and these account for approximately one-third in value of all existing schemes. The clearing banks are very definitely in the business of investment management, and they will continue to bid for the management of funded pension scheme. AS employers set up new schemes or revamp their old ones to satisfy whatever form new pensions legislation might take, the question will repeatedly arise as to whether a scheme should be insurance based or whether it should be funded. We would argue that any scheme which has an annual cash flow of say $100.000 upwards would make the case for insured schemes for even vary large funds. The client has to weigh the merits of the alternative possibilities and make his own decision. It is not always appreciated that this is an area in which the banks and insurance companies are overlapping and competing in the quest fro pension business.

Banks as Underwriters

A visitor from another planet, or indeed from another country would soon recognise that in the United Kingdom, as I have said before, banking is banking, and insurance is insurance. No one would expect to find our major financial institutions undertaking both activities on any significant scale. Similarly, in other countries it is rare and quite often legally prohibited to find banking and insurance combined in one institution. The two business have grown from different origins, although strange to say, in the case of the United States some of the trust banks which are now major banking housed began with the writing of life assurance and annuity business in the mid01800s.

In the UK, so far, I am aware, only one clearing bank, Barclays, is engaged in the business of insurance underwriting, and in that one case it is limited to the writing of life assurance. Barclays Life grew out of the association with Barclay’s Unicorn and its business originally was the writing of equity linked policies. The business is now rather wider but is still almost entirely unit linked in one way or another.

We must not underestimate the importance of unit liked life assurance. It is understood that last year no less than one-third of all the life assurance written in this country was of the unit linked kind. In any case it is a comparatively short step from there to conventional life business, provided the office concerned is prepared to build up its reserves gradually and to accept the absence in the short term of a track record.

Banks as Advisers 

The bank manager has always undertaken the role of adviser to his customers. The demand made on him have varied from time to time, as no doubt has the quality of the advice, depending on the resources available within the bank. In recent years, however, there has been a concentration of the more sophisticated advisory services in central financial planning departments. In my own bank we have undertaken full estate planning work in the last five years, and more recently, we have introduced the Money Doctor Services. This kind of work has been undertaken in varying degrees by some of the leading life insurance broker, and to that extent the banks are in competition with them. Nevertheless, it is a role to which the clearing banks are well suited, and which I believe will develop very significantly in the coming years. It may be seen as a natural extension of the relationship built up over the years between banks and their customers. There is plenty of room fro everybody in the field of personal financial planning, but the clearing banks have the advantage of customer contact and, of course, the resources to maintain the high-quality services which is so essential to this work.

These therefore are the principal area of the clearing banks, involvement in the insurance arena. Why have the banks moved in this way and what is the advantage to the banks?

Profits

The answer must surely lie in one ward-profits. All these activities have been seen as a natural extension of the banks’ traditional business. The facilities, the resources and the marketing outlets were there to hand and they are all activities of an inherently profitable nature. They may be seen as part of the increased catholicity of banking services undertaken at the time (a few years ago) of stringent credit control and restriction on the traditional banking business. These services also fit into the modern trend towards ‘one-stop banking’ on the assumption, yet to be proved, that the public like to obtain their financial services under one roof. These is some indication that the public do in fact prefer to go to one source for a variety of financial services. This is perhaps because traditionally they have tended to look to their bank to take out insurance policies in the days when managers conducted their own agencies, they have gone to the banks to buy stocks and shares, and the local bank manager has usually been regarded, a little flatteringly perhaps, as a financial Pooh-Bah.

Ought not the customer to go to his bank for banking services and to his broker services? Some say there is a danger of arm-twisting: that the bank manger arranging an overdraft will seek to include an in-house insurance product in the package. On the credit side, however, is it not possible that the big banks may be in a position to take a very detached view of the insurance market in arranging a contract for a customer, and is it not also possible that with their considerable resources they will be able to undertake very detailed analyses of market situations in a way which might not be possible for the smaller broker?

Disadvantages

There are disadvantages of the banks’ involvement in insurance. I have already referred to the possibility of the bank advice being, at lease in theory, less than objective in particular circumstances. But I think the problem goes deeper than that. I think the real difficulty arises when the banker becomes both broker and principal in the field of insurance. It is clearly not sensible nor acceptable for the bank on the street corner to hold itself out as offering professional advice on a range of products available in the insurance product off its own shelves. This anomaly-indeed this conflict- is avoided by separating the functions within the baking group. The subsidiary company providing the broking services will operate quite separately from the bank manager who is selling them. That is how we resolve the problem within our own organization. But there can be little doubt that if any bank moves in a major way into the field of insurance underwriting it would be very difficult to sustain a position in the market as a creditable insurance broker.

How far should the banks go?

 I would answer the question firstly saying that the banks must feel free to undertake any legitimate financial activity for which they posses or can acquire the necessary resources and skills. It used to be the slogan of one bank that ‘money is our business’. In so far as all the areas of competition which I have mentioned are concerned with money, it must be accepted that they are our ‘business’. The banks are already offering a range of 200 or so separate financial services. I cannot see tide being reversed. I cannot believe but that the banks will continue to offer to their customers at home and aboard virtually any legitimate financial service, provided it accord well with the exiting business of the bank. And provided the bank can perform the services well.

The question is, therefore, will the banks develop their underwriting activities in any major form and will this be by organic growth or by merger? On the face of it there would appear to be no valid reason why the clearing banks should not enter the insurance arena. In many respects the business of banking and insurance may be seen as being complementary to each other. Banking deposits are by their nature short term, where are premium income is contractual and long term. The leading skills of the banker are matched by the investing skills of the insurer. The combination of skills and resources would enable an even greater contribution of skills and resources would enable an even greater contribution to be made to the financing of capital requirements of industry in this country and in Europe. The network of banking branches in the United Kingdom would be complemented by the overseas representation of some of the insurance companies, which is greater than that of some of the British banks. The financial services available to the public, whether retail or wholesale, would be that much more co-ordinated and integrated.

It is not difficult to foresee that before many years are past one or other of the major banks could well become involved in a substantial way in the business of insurance. It should make for a better use of resources in these days when both capital and management seem to be in increasingly short supply. Of course, there may be political or social objections to the concept of giant combined banking and insurance groups which would ‘bestride the narrow world like a Colossus’. Nevertheless, it has a certain cold logic about it-because money is money and the various financial skills which for the most part have grown from separate, independent origins will increasingly find expression in financial conglomerates. 

Even so, if the banks move along that road the main problem will lie, as I have said, in the duality of the role of broker and underwriter, I do not believe the banks can go along both paths. No doubt there will be much debate as to which way is the more desirable or indeed whether bankers should have kept to banking.