Comparing Alternative Structures of Financial Alliances
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Comparing Alternative Structures of Financial Alliances Raimo Voutilainen Helsinki School of Economics, Helsinki, Finland. E-mail: [email protected]
In this paper, we study alliances between banks and insurance companies. Our perspective is that of the top management of a financial enterprise, and we constrain ourselves to the retail market. We define six different structure models for financial alliances. The parameters of the models are the closeness of the alliance in terms of mutual ownership, and the question of whether alliance partners have overlapping service channels. Examples are given of the models in the Finnish banking and insurance market. We also characterize nine criteria according to which the previously defined models are to be compared to achieve the most attractive alliance model. Thus, we obtain a multi-criteria decisionmaking (MCDM) problem. In the design of the criteria, representatives of the top management of Finnish banks and insurance companies have been consulted. The Geneva Papers (2005) 30, 327–342. doi:10.1057/palgrave.gpp.2510026 Keywords: financial alliances; financial convergence; financial conglomerates; multi-criteria decision-making; strategic planning JEL classification: G21; G22; O21
Introduction Networking and alliance formation have been growing trends in the financial industry during the past decades. In many European countries, it became almost an industrial practice in the late 1980s to step over the borderline between banks and insurance companies. It was often banks that had calculated that it would produce good synergies to start up an insurance subsidiary, or perhaps both a life and a nonlife subsidiary, and then sell their products via the banks’ own distribution network. In the 1990s, big financial conglomerates, which included both banks and insurance companies, emerged both in the U.S.A. and Europe. The launching of financial conglomerates was generally based on the same hypothesis as intra-sector mergers: centralized ownership helps to achieve and utilize the critical mass and, thus, increase efficiency. It was also believed that different business lines could diversify the business portfolio and reduce the cyclicality of corporate performance. There are many firm supporters of financial conglomerates but as we entered the new millennium we also heard their opponents’ statements. The diversification potential has been questioned both in theory and practice. The different attitude to risk in the banking and the insurance industries has worried some observers, especially in the insurance sector. On the other hand, because of the obvious benefits of cross-selling, some kind of alliance between banks and insurance companies
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is desirable. Therefore, one might ask what the most appropriate depth of an alliance is, given the financial institution’s business objectives. The term ‘financial alliance’ occurs seldom in the literature – when authors refer to groupings that are looser than conglomer
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