Ensuring Competition: Bank Distribution of Insurance Products

Jane M. Wilson is a Toronto-based chartered financial analyst in the
investment business.

Proposed 1997 revision of the regulations preventing Canadian banks from
selling insurance products through their retail banking networks is a
casus belli for banks, insurance companies, and consumer groups. This
book’s thesis is that bank distribution of insurance products would be
more cost-efficient and that competition would ensure that at least some
of the economic gains would be passed to consumers.

The authors’ premise that the Canadian banking industry is
competitive rests uneasily on their assumption that the industry is
contestable (i.e., that it has ease of entry) and that the Schedule B
banks’ failure to break into the retail market is evidence of no
existing oligopoly. It also presupposes that clients can change banks as
easily as they change gas stations. While the book’s analysis of the
relationship between competition and product (and price) unbundling and
its discussion of cross-product cost sharing are essential to
understanding the economics of the subject, it is puzzling that the
authors see no long-term risk in the labile demarcation between the two.
What they laud as an example of productive cost sharing might be viewed
by consumers as an egregious case of tied selling and predatory pricing.
The book’s study of deregulated markets in the United Kingdom,
Australia, and New Zealand, as well as its examination of the
less-well-known marketing and distribution methods of insurance
companies, are equally useful. However, a parallel survey of bank
distribution methods might have refuted another of the work’s
assumptions, and opponents will find the reference to the banks’
methods as “technical innovation” somewhat invidious.

The authors dismiss the potential costs of unevenly distributed gains
as insufficient grounds for “blocking innovation” and have chosen
not to address the more emotive issues, such as possible inequities in
the status quo. That banks may have a cost advantage is one of the least
contentious issues. The book’s conclusion that this advantage applies
only to a bank’s existing customers merely discredits its case for
deregulation. Ensuring Competition is an informative but unconvincing
contribution to the debate.