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Steven I Davis
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
The Author
Steven I Davis has spent his career in the banking and financial services sector as a
senior executive, strategy consultant, author, analyst and teacher. He is a graduate
(magna cum laude) of Amherst College and of the Harvard Business School.
His 20-year career in international banking began at JPMorgan, where he managed a
Paris-based research and M&A unit. For Bankers Trust Company, he ran a venture
capital subsidiary in New York, and later the bank’s European businesses from a
London headquarters. Subsequently he set up and managed for six years the London-
based merchant banking subsidiary of First International Bancshares of Dallas, Texas.
Since establishing Davis International Banking Consultants (DIBC) in 1980, he has
managed several hundred strategy assignments for commercial and investment banks,
global fund managers, insurers and other financial institutions. In 1993, he headed a
DIBC team which advised the Norwegian Ministry of Finance on the restructuring of
the country’s banking sector during the Nordic banking crisis. In addition, he and his
colleagues have prepared over 60 research reports on the financial sector for
publication by investment banks and other clients.
Steven Davis is also the author of seven books on the banking sector (published by
Macmillan in London). They include Excellence in Banking, Managing Change in the
Excellent Banks, Leadership in Financial Services, Bank Mergers: Lessons for the Future,
Investment Banking: Addressing the Management Issues and, most recently, Excellence in
Banking – Revisited.
Currency conversions
This report contains a significant amount of historical financial information, and calcu-
lating currency conversions for every amount would make the publication unwieldy,
while to impose an ‘average’ conversion rate could convey an incorrect impression in
some cases. Historical conversions for all the currencies mentioned in this report can be
found by logging on to OANDA, The Currency Site: www.oanda.com/convert/fxhistory
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This report is designed to provide accurate information on the general subject matter covered. This report is provided with the
understanding that the author and publisher shall have no liability for any errors, inaccuracies or omissions of this report and, by
this report, the author and publisher are not engaged in rendering consulting advice or other professional services to the recipient
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matter, the services of qualified professionals should be sought.
ISBN: 1-905457-63-4
II © 2007
Contents
The Author........................................................................................................................ii
Currency conversions ......................................................................................................ii
A word about Asia-Pacific... ............................................................................................ii
1. Introduction..................................................................................................................5
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
The demand from the upscale customers for product choice in financial
solutions has become even clearer........................................................................32
Mis-selling issues........................................................................................................32
The concept of the ‘trusted adviser’ has gained traction..........................................32
Prioritising the upscale segments ..............................................................................33
IV © 2007
CONTENTS
Citigroup ..........................................................................................................................86
Background ................................................................................................................86
Bancassurance strategy ..............................................................................................87
Evaluation of bancassurance strategy ......................................................................88
CNP Assurances ..............................................................................................................89
Background ................................................................................................................89
Bancassurance strategy ..............................................................................................90
Evaluation of bancassurance strategy ......................................................................91
Fortis ................................................................................................................................92
Background ................................................................................................................92
Bancassurance strategy ..............................................................................................93
Evaluation of bancassurance strategy ......................................................................94
Hartford Financial Services Group ................................................................................95
Background ................................................................................................................95
Bancassurance strategy ..............................................................................................96
Evaluation of bancassurance strategy ......................................................................96
HBOS................................................................................................................................97
Background ................................................................................................................97
Bancassurance strategy ..............................................................................................98
Evaluation of bancassurance strategy ......................................................................99
ING Group ....................................................................................................................100
Background ..............................................................................................................100
Bancassurance strategy ............................................................................................101
Evaluation of bancassurance strategy ....................................................................103
KBC ................................................................................................................................103
Background ..............................................................................................................103
Bancassurance strategy ............................................................................................105
Evaluation of bancassurance strategy ....................................................................106
Maybank ........................................................................................................................106
Background ..............................................................................................................106
Bancassurance strategy ............................................................................................107
Evaluation of bancassurance strategy ....................................................................108
UniCredit........................................................................................................................109
Background ..............................................................................................................109
Bancassurance strategy ............................................................................................110
Evaluation of bancassurance strategy ....................................................................110
Wells Fargo ....................................................................................................................111
Background ..............................................................................................................111
Bancassurance strategy ............................................................................................112
Evaluation of bancassurance strategy ....................................................................113
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Bibliography ................................................................................................................139
VI © 2007
List of figures
Figure 2.1: The insurance industry has been growing faster than the world
economy for the last ten years (%) ..............................................................................7
Figure 5.1: Relationship between product complexity and distribution channel ........24
Figure 5.2: European banks’ share of non-life insurance, 1998-2004 (%)....................25
Figure 6.1: The role of insurance products in the overall client relationship ..............30
Figure 8.1: Banks have higher productivity than traditional agents ............................50
Figure 8.2: New distribution channels are much lower-cost ........................................51
Figure 8.3: Bancassurance in Italy has succeeded because of a cost advantage ............52
Figure 8.4: Relative profitability of selected products....................................................54
Figure 8.5: Relative share of production and distribution costs of life and non-
life products (%) ........................................................................................................54
Figure 9.1: Evolution of three major regional life markets, 1985-2004 (%) ................58
Figure 9.2: Sales of life insurance by channel in France, 1990-2005 (%)......................61
Figure 9.3: Bank penetration of individual life products in Italy, 1998-2001(%) ........64
Figure 9.4: Evolution of life insurance and other investment products in Spain,
1993-2002 (€ 000s) ....................................................................................................65
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Figure 9.5: Relative size and growth of Asian insurance markets, 2005 (US$ m
and %) ........................................................................................................................75
VIII © 2007
List of tables
Table 3.1: Benefits to banks and insurers of alternative bancassurance structures ......12
Table 7.1: Profits and product offerings for direct banks in Canada and the
UK, 2003 ....................................................................................................................38
Table 7.2: Life insurance premiums by distribution channels for individual
Asia-Pacific markets....................................................................................................44
Table 8.1: Recent bancassurance profitability comparisons – Fortis and Aviva (%)....56
© 2007 IX
Executive summary
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
growing use of direct channels, which undermines the traditional bank advan-
tage of physical proximity.
National markets differ not only in fiscal treatment of insurance but also in
structure, the role of banks, customer preference and a host of other variables.
The survey conducted for this report thus found a totally pragmatic approach
to product selection based on these variables. The core product grouping in
Europe has been the life and related long-term investment products, but banks
there have become increasingly aware of the high margins available on non-life
and other products sold in connection with a loan or even independently of the
lending function. At the same time, across the world, lower-cost and simpler
tax-advantaged investment products such as mutual funds, guaranteed bank
deposits and annuities are playing a dominant role in the product offering. Life
insurance is understandably a more expensive product because of the regulato-
ry and medical process involved, but it is also that much more difficult for a
bank platform’s staff to sell in competition with their other responsibilities.
In many markets, the natural trend has been from a basic non-life, term life or
investment product to a more advice-based, comprehensive approach to overall
financial needs. In many markets such as the US and UK, banks find it difficult
to compete with independent brokers and advisers who have the customer rela-
tionship, financial incentive and expertise to offer a range of long-term invest-
ment products.
In terms of client segmentation, bank distribution is a natural choice for mass-
market clients looking for simple, low-cost products made available from a
trusted financial intermediary. As the client becomes more demanding in terms
of product choice and experience-based advice, however, the broker or financial
adviser channel becomes increasingly competitive.
For an insurer without a related bank distribution network, the challenge is to
find a major bank prepared to offer access to its retail client base on acceptable
terms, and hopefully on an exclusive basis, which permits alignment at the mar-
keting level and in the back office. In Europe, insurers like Aviva and Fortis have
been able to knit mutually satisfactory, long-term alliances which have so far
stood the test of time. But this has been achieved only at the expense of allocat-
ing skilled specialist personnel, investing heavily in marketing and information
technology (IT) systems, and being flexible enough to adapt to changing cir-
cumstances.
Overshadowing even the most successful such joint ventures is the threat of
break-up, either because of external events such as a merger or at the behest of
the bank that wishes to provide its own products or change insurance provider.
This is a particular issue in markets like India and China, where banks have
been reluctant to offer exclusive access to their client bases and could take
advantage of the insurer’s reliance on their client base. In retrospect, given the
lack of durability of joint ventures in other businesses, the record of bancassur-
ance alliances has been exceptionally good to date, with few publicised breakups
of major alliances.
2 © 2007
EXECUTIVE SUMMARY
© 2007 3
Chapter 1
Introduction
In the consolidating world of financial services, with mergers across the sector
combining with a broadening of the product array, the concept of bancassur-
ance has assumed a central role in the strategy of a growing number of financial
institutions.
In this report, ‘bancassurance’ is defined, quite simply, as the marketing of retail
insurance products to a commercial bank’s client base. As is discussed in
Chapter 3, this may or may not involve equity ownership or control as part of
the business model. The related concept of ‘assurbank’ – the sale of retail bank-
ing products to an insurer’s clients – is summarised briefly in Chapter 2 as the
response by insurers to the banking challenge.
The fundamental objective of this report is to analyse the lessons of actual prac-
tice in the markets where bancassurance has become well developed as an oper-
ational concept. An earlier study by VRL KnowledgeBank, Bancassurance in the
21st century, provides considerable background on the structural environment
for the concept across the world. This study focuses on the major markets – the
EU, Asia-Pacific and North America – where bancassurance has achieved the
most significant development and therefore the basis for examining these les-
sons of experience. Quite simply, the goal has been to synthesise this experience
for the benefit of academics, consultants, students and, of course, for present
and future practitioners.
Given this approach, the methodology has been, first, to gather the relevant data
in the public domain: industry statistics, consultant studies and material in the
trade press. More importantly, the author has relied heavily on off-the-record,
in-depth conversations with leading practitioners in the financial services sec-
tor. This key input is reflected in the case studies incorporated in Chapter 10 as
well as the report’s findings and conclusions in the following chapters.
At this point, it is necessary to acknowledge that the publicly available database
for bancassurance, in particular the key metrics of margins and profitability, is
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
woefully weak, with the result that observations are often based on verbal indi-
cations from the author’s sources. In addition, data may be relatively stale. The
author has thus indicated such instances with the phrase ‘latest available data’.
Following these introductory comments, the body of this report begins with
Chapter 2 and an analysis of the key drivers of bancassurance. Chapter 3 then
describes the various possible structural models, ranging from an integrated
financial conglomerate to an arm’s length distribution joint venture without
any equity links. The critical role of regulation in its various forms is discussed
in Chapter 4 – specifically the key aspects of taxation, controls on product range
and diversification, efforts to control mis-selling and the use of capital.
Chapter 5 addresses the role of product range, specifically the distinction
between life/investment and protection products and how the banks’ product
ranges have evolved over time. Chapter 6 discusses the major client segments of
interest to bancassurers, specifically the mass-market and affluent segments,
and the various segmentation approaches used by the banks. Since the issue of
distribution is central to the rationale for bancassurance, Chapter 7 is devoted
to the role of alternative distribution channels, not only the traditional agency
and employee sales forces but also, in particular, the growing importance of
independent financial advisers (IFAs). The limited publicly available insights
into bancassurance profitability are summarised in Chapter 8.
In Chapter 9, the report examines in more detail how these key variables have
played out in a number of major bancassurance markets: the EU, where today’s
model evolved in the 1980s; North America, where a different model has devel-
oped in the US since the regulatory barriers were lifted in 1999; and Asia-
Pacific, where the concept is vigorously evolving on the back of traditional bank
distribution. As mentioned above, the earlier VRL KnowledgeBank study pro-
vides insights into a much wider range of national markets.
The analysis of the lessons of experience begins in Chapter 10 with the exami-
nation of 12 case studies which demonstrate the successful execution of bancas-
surance strategies under different circumstances. In each case, the report pro-
files the institution’s retail strategy, examines its bancassurance approach and
provides observations on its outlook for the future. Next, in Chapter 11 the
findings of these case studies and the author’s series of interviews are analysed
to examine how bancassurers have addressed issues of strategy, structure and
execution. The report focuses in particular on the problems of managing differ-
ent cultures and practices in the banking and insurance worlds. It also provides
some conclusions on the lessons of best practice based on the interviews and an
analysis of the database. Finally, a view of the future of bancassurance is sum-
marised in Chapter 12.
6 © 2007
Chapter 2
Figure 2.1: The insurance industry has been growing faster than the world
economy for the last ten years (%)
growth (%)
income growth
Life
Life premiums World
Worldnominal
nominalGDP
GDP
premium income
CAGR:
CAGR: +5.1% CAGR:
CAGR:+4.2%
+4,2%
Annualpremium
Annual
Non-life
Non-life
premiums
premiums
CAGR:
CAGR:+4.9%
+4.9%
1995
1995 1996
1996 1997
1997 1998
1998 1999
1999 2000
2000 2001
2001 2002
2002 2003
2003 2004
2004 2005
2005
© 2007 7
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
8 © 2007
WHAT DRIVES BANCASSURANCE?
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
10 © 2007
Chapter 3
© 2007 11
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Source: Swiss Re
A host of factors drives the choice of the appropriate structure. To start with,
each national market has its own profile – for example, the relative size and
structure of the banking and insurance sectors as well as different regulatory
and tax environments. Equally important is management’s strategy: is the ban-
cassurance unit an integral part of the retail strategy and the client relationship,
or is insurance just another product to be sold as part of the overall array?
The decision to invest equity in the business is a function of both strategy and
the relative returns from the bank and insurance businesses. In most markets,
the return on equity on the insurance business as calculated using bank
accounting practice (as opposed to embedded value) has been lower than that
of the banking business, which has driven many banks to focus on the distribu-
tion, rather than manufacturing margin.
Finally, different views can be taken at different points in time on the value of
operational integration. Thus, in the Benelux markets, several of today’s major
bancassurance players began life as pure financial conglomerates but later inte-
grated their operational units. Credit Suisse declined to integrate Winterthur
after acquiring the insurer, then integrated it, and finally sold it to AXA. In the
other direction, Allianz in Germany initially did not integrate its Dresdner Bank
12 © 2007
THE ALTERNATIVE STRUCTURAL MODELS
retail business, but, as part of its ‘3+One’ strategy, has aligned the Dresdner unit
as a major distribution element of its core insurance business.
Both internal and external factors drive such changes. Thus merger and acquisi-
tion (M&A) activity may jeopardise a joint venture or distribution agreement as
one partner is faced with an unacceptable new partner, or management may
decide to buy out the partner to capture its equity return.
The captive, or integrated approach, has been consistently adopted in markets
like France and Spain where a dominant bank manages its insurance business as
a fully integrated element of its retail distribution function. Thus, Banco Bilbao
Vizcaya Argentaria (BBVA Seguros), Santander Central Hispano (SCH), Société
Générale (Sogecap), Crédit Agricole (Predica) and others treat the insurance
function as a subset of the retail banking division.
In contrast, the joint venture approach has been widely adopted in Italy and
other markets. Thus 50-50 ownership characterises Ecureuil Vie (CNP
Assurances – CNP is an acronym for Caisse Nationale de Prévoyance – and
Caisse d’Épargne) in France, BNL Vita (the insurer Unipol and BNL – Banca
Nazionale del Lavoro – in Italy), CAIFOR (Caixa and Fortis) in Spain, and the
venture between Royal Bank of Scotland (RBS) and Aviva in the UK.
Finally, the pure partnership without any equity ownership is based entirely on
an exclusive or non-exclusive agreement to sell the insurer’s products. This cate-
gory includes the partnership between Legal & General and Barclays in the UK,
AMB (Aachener und Münchener Beteiligungs-Aktiengesellschaft) and Generali
in Germany, and CNP and La Poste in France. In markets like Asia-Pacific,
where foreign ownership in a local insurer is prohibited, a partnership may be
the only structural alternative.
Interestingly, a 1997 study by McKinsey & Co set out three likely bancassurance
partnership models as the most likely result of the forthcoming deregulation
which occurred in 1999 in the US. In reality, as discussed in Chapter 9, the
banks have almost exclusively simply acquired brokers, eschewing both product
manufacture as well as the joint venture approach.
What distinguishes many of these structures is how they vary over time as the
perceived needs of their owners and M&A in the sector evolve. Many bancas-
surers, for example, decide over time that their vocation lies in product distri-
bution rather than manufacture. This decision is perhaps also influenced by the
relative profitability of the manufacturing activity.
Thus, many Scandinavian banks, having acquired composite insurers during
the 1990s, retained the life business but sold the non-life activity and bought
back the non-life product from the buyer under a partnership arrangement. In
the US, the iconic Citibank/Travelers merger, which was viewed in 2000 as a
pathfinding venture in the recently deregulated US market, was undone when
Citibank management decided that ownership of neither the life nor non-life
business was critical to the group’s strategy. A case study in Chapter 10 explores
this evolution in more detail.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Product- Single
focused integrated
channel channel
Distribution
Life In-house
production
(Life, P&C)
The ‘right’
Product
bancassurance Production
range
model?
Life Sourced
and production
P&C Ownership (Life)
structure
Distribution M&A
agreement greenfield
Source: McKinsey & Co
14 © 2007
THE ALTERNATIVE STRUCTURAL MODELS
Degree of integration
Banks distribute life A higher degree of Clear mutual Operations and
insurance products integration in product ownership of systems can be fully
(standalone or development, service products and integrated
bundled with bank provisions and customers
products) in return for channel management A high capability to
fee income Sharing of customer leverage on banks’
Possible sharing of databases existing customers
No or little sharing of customer databases and other service
customer databases Requires strong and provisions
Requires investments long-term
Limited investments in IT and sales commitments from One-stop financial
personnel both sides services
Source: Swiss Re
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
On the other hand, in the US, the long-awaited passage of deregulatory legisla-
tion in 1999 has led essentially to bank acquisitions of insurance brokers rather
than the partnerships or financial conglomerates widely predicted. Banks have
thus preferred simply to buy in both the product and the sales force rather than
invest in the business itself.
Finally, in the key Asia-Pacific markets, regulation in the form of prohibition of
bank ownership of insurers, plus the dominance in many markets of family
owned insurers and the relative immaturity of the banks’ distribution and sell-
ing mechanism, has led to a number of alliances between local banks and expe-
rienced foreign insurance partners rather than extensive ownership ties.
16 © 2007
Chapter 4
© 2007 17
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
The global trend in permitted ownership and product profiles is in the direc-
tion of the European model, as banks in particular lobby for a greater presence
in the insurance sector, and liberalising governments lower traditional barriers
designed to protect existing franchises. In Sweden in the 1990s, for example, the
tax privileges on private pensions, hitherto the monopoly of the life insurers,
were extended to products sold by banks.
TAXATION
Different tax regimes have shaped the structure of bancassurance as well as
product profile across the markets under review. Given the social and economic
importance of encouraging long-term savings as discussed in Chapter 2, tax
regimes in many countries have traditionally favoured the life insurance prod-
uct over other forms of savings such as bank deposits or securities.
Such a tax preference usually takes place at one or more phases of the duration
of the life product: tax deductibility of the premiums paid, tax-free roll-up of
income received from the investment, and taxation on maturity or payout.
Whatever the format, the global trend has been toward levelling the taxation
playing field by providing the same or similar tax treatment to a number of
long-term investment products as well as life insurance. Thus, long-term bank
deposits, mutual funds, annuities and other long-term investments in many
countries now have the same tax status as life insurance.
Thus, in the 1980s, the French and other so-called bancassurance markets in
Europe were built around the similar tax treatment of life insurance and long-
term bank deposits. Most recently, for example, in 2005 the German insurance
market has been transformed by the withdrawal of tax benefits on the maturity
of an endowment policy.
18 © 2007
THE INFLUENCE OF REGULATION
The intent of the proposed Solvency II in the EU is to do the same for insurers,
thus effectively eliminating regulatory arbitrage.
Until such arbitrage is eliminated, however, an integrated bancassurer may have
the opportunity of making a lower capital charge by utilising the more lenient
jurisdiction. The extent of this arbitrage cannot be quantified, but conversa-
tions with interviewees indicate that it has been widely used.
© 2007 19
Chapter 5
Bancassurance products – those sold to a bank retail client base – have evolved
over time as a response to local market conditions, global trends and the banks’
growing experience with insurance-related products. This chapter analyses the
different categories of these products and how they have evolved.
PRODUCT CATEGORIES
The core bancassurance product is life insurance: a composite product provid-
ing both protection in the event of death and some form of long-term invest-
ment return. Known in different markets as whole life or universal life, it has
traditionally been the core product of insurers across the globe in both mature
and emerging markets. As such a composite or complex product, it requires
advice (which implies the cost of a trained sales force) and often a regulatory
and underwriting process which adds to the cost.
In addition, because of the presence of multiple risks – of death as well as
investment return – it is arguably more expensive than individual products such
as term life or a pure investment instrument sold separately. In markets like the
US and Japan, the fixed or variable annuity, which pays out over a period of
time, is regarded as an insurance product because of the death benefit that is
usually included. Most observers, however, view it as an investment product as
it does not usually involve an intensive fact-find or medical examination.
The report discusses below how the life product in bancassurance markets like
France has been replaced by investment products with perhaps an insurance
wrapper, as well as term life as a standalone product. In more traditional mar-
kets like Germany, the life product has remained essentially unchanged until
quite recently, whereas in developing markets like Asia-Pacific, it remains the
core long-term investment product.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
While the life product is the benchmark for most statistical analysis of bancas-
surance, it represents only a fraction of the total tax-advantaged long-term
investments which are actively sold by banks. In Chapter 11, the actual evolu-
tion of the banks’ product mix is analysed.
The second category is comprised of those related to traditional banking prod-
ucts such as mortgages and personal loans. For decades, banks have profited
from these relationships to sell so-called credit or creditor life insurance –
essentially protecting the borrower (and the bank) against the inability to repay
a loan in the event of death or disability. In many markets, well over half of
these retail loans are sold by banks with such protection attached – a cause of
concern from regulators about tied sales. UK banks are estimated to provide
roughly one-third of the buildings and contents insurance on their home loans.
In recent years, PPI has become the focus of regulatory attention because of the
effective cost of the insurance compared to the possible benefits.
Finally, banks have successfully sold simple non-life products independent of
bank services, including buildings and contents, automobile, travel and pet
insurance. Often carrying substantial margins, these require little advice and
can be sold online, by direct mail or by generalist bank staff.
Life and other long-term investment products as well as those sold in connec-
tion with bank loans have understandably attracted most of the strategic atten-
tion of bank distributors. In contrast, pure protection products such as auto
and home loans have been seen by many banks as low priority: perhaps involv-
ing unacceptable underwriting risks, few synergies with other bank products,
being subject to regulated tariffs, and perhaps (most difficult of all) conflicting
with the bank’s brand. For years, for example, banks worried over the conflicts
which might occur in the event of a loss claim, when a valuable client would
leave the bank in anger over a disputed insurance claim.
The net result of these constraints is the modest market share of bancassurance
in non-life products. Despite the increasing contribution of credit life and other
products cross-sold against bank loans, non-life in Europe, for example, repre-
sents 10% or less of the major national markets.
In undeveloped insurance markets like Central and Eastern Europe (CEE) and
Asia-Pacific, non-life insurance is often the market entry offering of an insurer
like Allianz to establish the concept of insuring against risk. More profitable
investment products in line with the bancassurer’s strategy of meeting retire-
ment needs follow. But for many bancassurers, non-life remains simply another
financial product designed to increase share of wallet and customer loyalty.
A pathfinding strategy for non-life products was launched in 1990 by Crédit
Agricole, the largest French retail bank. As a decentralised co-operative with an
extremely loyal customer base, Crédit Agricole had pioneered, with Crédit
Mutuel, bancassurance in the life sector in the mid-1980s – through its sub-
sidiary Predica – to become the second-largest life provider in France today.
22 © 2007
THE BANCASSURANCE PRODUCTS
The launch of the group’s non-life subsidiary, Pacifica, in 1990 addressed the
issues of concern to bancassurers that hesitated to invest heavily in non-life
products. In particular, potential conflict with bank clients over insurance
claims was addressed by a totally separate online channel for such claims which
avoided any involvement with the client’s bank branch. Branch staff are moti-
vated by the payment of a substantial portion of the gross profits from the rele-
vant client policies. Management described the strategic concept as one com-
bining the advantages of RBS’s Direct Line service with the convenience of a
physical branch network.
Today Pacifica ranks among the top ten non-life companies in France, with the
goal of becoming one of the top five. The great bulk of sales are made to Crédit
Agricole banking clients via individual voluntary agreements with each of the
group’s 41 regional banks, representing a branch network of over 7,000 units. A
full range of individual non-life products is offered – auto, household, private
health care, legal protection, personal accident and a range of specialty vehicles.
By 2006, Pacifica had 5.3 million policies outstanding and dealt with 3 million
claims.
Perhaps most importantly, the company has been consistently profitable since
its start-up years, in contrast to the MSI (mutuels sans intermediaires) which
dominate the French non-life market.
In evaluating the attractiveness of all these products, the analyst is hampered by
the lack of transparency regarding production and distribution margins as well
as overall profitability. The report returns to this issue in Chapter 8 on the prof-
itability of bancassurance. In addition, there are indications that product prof-
itability varies widely from market to market. Thus, term insurance is seen as a
low-margin, commodity product in the US while, in Europe, banks often regard
it as one of their most attractive offerings.
© 2007 23
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
term life alternative, not only in France but also Italy, Spain and other EU mar-
kets. In France, for example, life insurance is seen as a ‘bank’ product, and term
insurance volume has shrunk to a few percentage points of the overall sector.
In other markets as well, the traditional insurance product has been simplified
by the regulatory authorities to encourage long-term savings. Thus in recent
years in Germany and the UK, where the traditional life product (in the form of
endowment insurance) remains the dominant offering, the authorities have
introduced low-cost, simple, tax-advantaged products such as the so-called
Sandler products in the UK and Riester products in Germany. These not only
offer much lower margins to the product manufacturer but, arguably, less need
for the advice which is the mainstay of the traditional life sales forces – both
negatives from the standpoint of the traditional insurers.
Figure 5.1, taken from Davis International Banking Consultants (DIBC)
research undertaken for Saloman Brothers, shows that banks are well placed to
win a share of these simpler products.
Increasing product
complexity and
Ordinary insurance products, eg Bank staff level of service
unit-linked products (with one to two weeks of training)
24 © 2007
THE BANCASSURANCE PRODUCTS
12% 11.0%
10.0% UK
10% 9.0% France
Portugal
8% 7.0% Belgium
5.7% 5.7% Austria
6%
4.8%
4.1%
4%
2.8%
2%
0%
1998 2004
* CEA data combines banks and post offices into a single category – ‘other networks’
© 2007 25
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
In addition, there is evidence that the traditional life sales forces have had diffi-
culty in mastering to these new products.
26 © 2007
THE BANCASSURANCE PRODUCTS
universally chosen the capital guaranteed product with an equity kicker, and the
banks have also ridden this lucrative wave by providing their guarantees along
with their perceived expertise. As emerging markets such as Asia-Pacific evolve,
the same product trends seem to be gathering pace.
© 2007 27
Chapter 6
At the centre of bancassurance, of course, is the retail client. This chapter exam-
ines, to the extent of the available data, his/her profile as well as the trends in
client demand over the past few decades.
CLIENT PROFILE
The starting point in the analysis of the client profile is segmentation: arraying
the client base according to agreed and relevant criteria such as wealth/income,
channel preference, stage in life-cycle, etc. This is particularly difficult for the
traditional insurance company, in large part because of the barrier often repre-
sented by an independent broker or agent that effectively owns the client rela-
tionship, but also because of the relative – to banks – infrequency of contact.
Banks all too often struggle to take a disciplined approach to priority segments,
despite their advantages of contact and visibility.
Figure 6.1 (on the following page) profiles the role of the client relationship in a
bancassurance context. Thus banks benefit from more day-to-day contact, but
the average product life span – and therefore ‘stickiness’ – may be longer for the
insurer. A 2006 report by Capgemini found that 71% of insurance customers
never or rarely (once a year) interact with their financial insurance distributor,
while consumers interact their banks more than 200 times annually.
© 2007 29
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Figure 6.1: The role of insurance products in the overall client relationship
20
Ɣ Life
Ɣ Accident
15
Average product life span
10
Ɣ DDA
Ɣ Savings plan
5
Ɣ Car insurance
0 5 10 15 20 25 30 35 40 45 50
Low High
Frequency of (personal) contacts per year
Source: Citibank, Salomon Brothers
While there are many approaches to the segmentation issue, most banks and
market observers break down retail clients by size of investible wealth. A com-
mon typology in the bancassurance world is the following:
• up to roughly €50,000-100,000: mass market. Such a client can con-
tribute to bank profits if provided with automated service and basic
products;
• €100,000-1 million: mass affluent and affluent, depending on the partic-
ular institution. These clients can be offered a higher level of service,
including access to a call centre for advice as well as basic investment
products; and
• over €1 million: high net worth. These desirable clients can be offered a
designated client adviser and an upscale service level.
In addition, many banks also segment their retail clients on the basis of com-
mon needs and interests – the so-called affinity segmentation. Thus, members
of a profession (such as doctors) or an interest group (such as a labour union)
can be offered a package of eight to ten products at an advantageous price and
tailored to their needs. A bancassurance offering might well be part of such a
package.
In the context of bancassurance, the mass-market or mass-affluent segments are
well suited to the typical bancassurance product: standard long-term invest-
ments such as life insurance and bank deposits, mortgage loans with protection
in the form of credit life, and standard non-life products. The typical branch
salesperson with perhaps several weeks of training, supported with product
30 © 2007
THE BANCASSURANCE CLIENT – PROFILE AND TRENDS
brochures, should be able to offer the necessary level of service and advice
regardless of the client’s level of wealth.
Problems arise, however, when a certain level of expert advice is required. The
typical branch salesperson has to be familiar with perhaps several hundred dif-
ferent products, and the bancassurance array must also compete with the inter-
ruptions and pressure of other daily priorities. The choice of alternative pen-
sion products, gathering data for regulatory purposes in a fact-find and an
understanding of the securities markets all call for both the time and expertise
away from the daily routine of the bank branch.
Most banks address this problem by using specialist bank staff, or experts from
a partner insurance company (who are assigned to provide support for insur-
ance and other investment products to a number of branches). The theory is
that a branch generalist, confronted by a problem requiring specialist advice,
makes an appointment with the relevant specialist. In practice, however, the
handover is often difficult to make, and the client goes elsewhere or does not
pursue the dialogue.
For the affluent or high net worth individual with access to advice from an
existing relationship, such as a private banking adviser or broker, the solution is
to call on that broker or financial adviser, who has the expertise, the time and,
possibly, the solution to the client’s problem. Thus in the UK and Germany,
these clients tend to rely for advice on IFAs or so-called structured sales forces,
rather than engage in a dialogue with bank branch personnel.
A particular problem is the possible mismatch between bank and insurance
clients. One of the major issues faced by US banks that have bought an inde-
pendent broker is that bancassurance cross-selling is constrained by the differ-
ence in wealth and sophistication between their clients and those of the
acquired broker.
Another approach to segmentation and cross-selling in bancassurance is to
measure product penetration for key client segments. In the case study on KBC
in Chapter 10, the report discusses this bancassurer’s segmentation on the basis
of the number of banking and insurance products sold to a given priority client.
Bancassurance leaders such as Fortis and Crédit Agricole achieve life insurance
client penetration rates of 25-35%, a target to which many others aspire. In the
realm of credit life sold in connection with a credit product, penetration rates
with retail borrowers can easily exceed 80%.
Limited data exist in the public domain on the relative size of bancassurance
client segments, but a consultant study provided by one of the interviewees in a
major EU market indicates that the mass market is only a fraction of the
absolute size of both affluent and high net worth markets. Thus, banks domi-
nate the mass market with 94% of its household financial assets, but have a
much smaller share of the other two markets.
© 2007 31
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
The demand from the upscale customers for product choice in financial
solutions has become even clearer
The swelling wave of demand for open architecture has swept over the bancas-
surance world as well as the fund management business. In their search for per-
formance, such clients demand a choice of bancassurance solutions as well as
straightforward investment alternatives.
Brokers in markets like the UK and Germany sustain their client relationships
through their perceived independence in an open architecture context – even
though they support themselves largely from the sale of products they recom-
mend. In the UK, the former polarisation has now been replaced by association
with a limited number of product providers – a happy solution for brokers pre-
viously either tied to one provider or obliged to understand the offerings of all
the providers in the market.
Mis-selling issues
The repeated examples of mis-selling – selling a product that is not appropriate
for the client or not sold in a transparent fashion – has led regulators in markets
like the US and UK to demand greater transparency and regulation of selling
practices. Bancassurance products – in particular endowment mortgages and
PPI – have figured prominently on the list of such problems. In the UK, the FSA
has given top priority to what it terms “treating customers fairly” by demanding
that UK-based financial institutions embed best practice in selling practices,
transparency and product selection.
32 © 2007
THE BANCASSURANCE CLIENT – PROFILE AND TRENDS
© 2007 33
Chapter 7
© 2007 35
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Brokers
Brokers – essentially firms or individuals selling a wide range of insurance
products – have experienced mixed results in the major markets in the face of
bancassurance.
Remunerated largely by commissions which appear to be little changed over the
years, brokers are highly motivated individuals who generally have earned the
trust of their clients and are widely perceived to ‘own’ the client relationship. In
contrast, insurance carriers have suffered from the lack of direct relationships
with their client base and the information that proceeds from this relationship.
Brokers understandably thus go to great lengths to protect their client relation-
ships.
As indicated above, they have benefited from the universal trend toward choice,
in particular when advice is needed because of product complexity or regulato-
ry requirements. In so-called ‘broker’ markets like the UK and the Netherlands,
36 © 2007
COMPETITIVE DISTRIBUTION CHANNELS
the perceived independence of the broker has been a major competitive advan-
tage – despite the fact that he is usually remunerated by the product provider.
In the US, access to these client relationships has been an important objective in
the hundreds of broker acquisitions by US banks. The Wells Fargo case study in
Chapter 10 highlights the value of broker relationships.
In several European markets, a number of large brokerage firms focusing on
investment products have won market share on the basis of their relationships
with upscale clients, perceived independence and the ability to provide financial
advice across a wide range of products. Life insurance is only one of the prod-
ucts offered, and the broker is perceived to be able to offer the most appropriate
long-term investment solution for his client.
Case studies of success in this segment are St. James’s Place Capital in the UK,
Acta in Norway, Deutsche Vermögensberatung (DVAG) and Allgemeiner
Wirtschaftsdienst (AWD) in Germany, and Fideuram in Italy.
The model for many of these brokerages involves extensive training, a focus on
selected client segments, significant upside earnings potential and a rigorous
selection of sales personnel. In markets like Germany, they are known as struc-
tured sales forces – a pyramidal organisation in which the superior levels of the
pyramid receive a share of the commission of the lower levels, thus providing
extra leverage and rewards to the upper echelons. In Italy, such sales forces are
known as promotori finanziarie. Usually owned by financial institutions, they
are also used to tap the more affluent client segments.
Such a model enables the brokerage to attract the most highly motivated and
well-connected sales personnel, often providing levels of commission earnings
which banks are unwilling or unable to offer within their pay scales. A major
challenge for the management of brokers is, on the one hand, to retain the bro-
kerage’s top talent in the face of competitive offers and provide new products
for them to sell, while on the other to manage the model in a disciplined fashion
to prevent mis-selling.
© 2007 37
Table 7.1: Profits and product offerings for direct banks in Canada and the UK, 2003
38
Direct Launched Profit/ Current Savings Loans Credit Mortgages Mutual Life Health P&C Pensions Brokerage
bank (loss)1 a/c a/c cards funds services
(£ m)
Note:
1. Pre-tax profit before exceptional items.
2. Specific figures not given.
© 2007
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
COMPETITIVE DISTRIBUTION CHANNELS
markets, of which six sell life, four health and nine P&C offerings in addition to
deposit and lending products.
A global study of the insurance sector by consultants Capgemini in 2006 con-
cluded that the internet is a major threat to other distribution channels such as
bancassurance. While overall only 20% of the customers surveyed cite the inter-
net as their primary channel for buying insurance, in the UK the preference in
the life sector is a remarkable 46% and for non-life 30%. In contrast, in the US
only 12-13% of those surveyed prefer this channel for life and non-life purchas-
es. While national preferences clearly differ, the trend towards direct selling
seems clear.
Post offices, which are often lumped together with bank branches for statistical
purposes, have been successful in several instances in marketing simple insur-
ance products despite the widespread view that the sector’s potential for cross-
selling has not been fully exploited. A particular case study of success is the
Italian Post Office which, under the leadership of the current CEO of Banca
Intesa, won a remarkable 10% of the Italian life sector in a few years. Other suc-
cess stories include La Poste in France, Deutsche Post and the Irish An Post. The
current privatisation of Japan Post, the country’s largest financial institution, is
thus of great strategic interest.
Figure 7.1 (on the following page) provides an indication of the role played by
financial services in a number of European markets. Italy leads the league with
an impressive 42% of total post office revenues. A number of vehicles are used
by post offices to leverage their vast distribution networks: directly owned
banks (Deutsche Postbank), joint ventures with banks (An Post in Ireland) and
white-labelling of third-party products (Poste Italiane). In 2006, Japan’s largest
bank was formed with the break-up of the country’s post office: Yucho Bank
will have 233 branches and operate through the nation’s 24,000 post offices.
© 2007 39
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
70%
58%
60%
50%
42%
40%
28%
30% 25% 23%
20%
20% 17%
9%
10%
0%
Italy Hungary Poland France Switzerland Germany Belgium
Supermarkets and other retailers offer the bancassurer the advantage of strong
brands and large customer bases. In the UK, Tesco and Sainsbury have been
successful in selling simple, low-cost auto and homeowners insurance via their
direct banking arms. Other success stories are the supermarket chain Pic ‘n Pay
(in South Africa) and Corte Ingles (in Spain), while Virgin has had success with
basic investment products.
Europe
While retail banks in many European markets had traditionally sold life and
non-life products as agents, today’s bancassurance model originated in Europe
in the mid-1980s in France. Bancassurance now accounts for an estimated one-
third of the overall European retail life insurance market and perhaps 5-10% of
the non-life sector. Europe is often characterised as having two distinct models
– the bank-dominated countries like France and Spain, where banks control at
least half of the life market, and the broker model, which dominates in the UK
and the Netherlands. The database on Germany is sparse, but it would appear
that all three channels – traditional agents and employees, brokers and banks –
have significant shares of the market.
40 © 2007
COMPETITIVE DISTRIBUTION CHANNELS
Until the early 1980s, agents and company employees accounted for roughly 60-
80% of the typical national market. Figure 7.2 depicts the decline of combined
agency and employee distribution in selected European markets since 1998, a
date when significant attrition had already taken place in these countries.
Figure 7.2: The declining role of insurance company employees and agents in
selected European life insurance markets, 1998-2004 (%)
50%
45% 44.0%
40%
35% 33.3%
Total new life sales (%)
31.2%
30% 27.0%
24.8% 1998
25% 23.0%
2004
20%
15%
10%
5%
0%
France Italy Austria
More specifically, there has been massive attrition of agents and company sales-
men in markets like France, which have been particularly impacted by bancas-
surance. Figure 7.3 plots the 42% fall in the number of tied agents in France
over the period from 1985 to 2003.
© 2007 41
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
22,600
20,000
16,280
15,050
No. of tied agents
13,590 13,200
15,000 16,780
15,700
14,450
13,540
10,000
5,000
0
1985 1996 1997 1998 1999 2000 2001 2002 2003
Source: DIBC – latest available data
One question remains: what has been the fate of the thousands of company
employees and agents displaced by bancassurance? This report was unable to
find any reliable data, but interviewees believe that many, if not most, of them
converted to brokerage status by broadening their range of carriers or joined
bancassurers as specialist salesmen.
Overall, the brokerage community has sustained, if not increased, its life insur-
ance share in many European markets where data are available. Figure 7.4
shows how this share has increased in markets like the UK, France and Austria
since 1998, while declining in Belgium.
42 © 2007
COMPETITIVE DISTRIBUTION CHANNELS
Figure 7.4: The evolution of the share of life insurance broking in selected
European markets, 1998-2004 (%)
70% 66.2%
63.1%
60%
Total life insurance sold by channel (%)
50%
40%
35.4% 1998
2004
30% 27.2%
20% 17.2%
15.6%
10.0%
10% 8.0%
0%
France UK Austria Belgium
70%
61%
60%
Distribution of life insurance sold (%)
50%
39%
40%
1990
31% 30% 2000
29%
30%
20%
10%
10%
0%
Tied Agents IFAs Banks
© 2007 43
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
In broad terms, the European distribution model has moved from proprietary
distribution, with an exclusive link between insurer and policyholder, to a sec-
ond stage of tied distribution, and now to a third-party model with multiple,
independent relationships between the customer, provider and distributor.
In contrast to the US and Asia-Pacific model, most bancassurance relationships
are exclusive – either between a captive insurer and the stockholding bank, or a
joint venture between independent provider and distributor with some degree
of exclusivity for the relevant market. Subsequent chapters of this report will
explore the pros and cons of exclusivity and distributor by multiple bank chan-
nels.
Asia-Pacific
The rapidly evolving Asia-Pacific region has recently witnessed significant ban-
cassurance inroads into the traditional employee/agency domination of many
national markets.
A study by Swiss Re in 2002, summarised in Table 7.2 (below), confirms that
such channels were the main sales conduit with at least 75% of life sales at the
end of the last century. Yet the bancassurance channel was not allowed then in
key markets like South Korea and the Philippines, and in recent years it has
probably increased from a low base in Japan, India and other countries. The
more than 20% penetration at that time in major Chinese cities, as well as
15-20% in the more mature Hong Kong and Singapore markets, is some indica-
tion of the potential as bank distribution takes hold.
Table 7.2: Life insurance premiums by distribution channels for individual Asia-
Pacific markets
Source: Swiss Re
44 © 2007
COMPETITIVE DISTRIBUTION CHANNELS
The US
Insurance distribution in the US is widely regarded as dominated by agents –
both independent and tied to an insurance provider. Figure 7.6 (below) pro-
vides the market share data for 2006, when independent agents captured 54% of
the life market against 35% for tied agents. Banks for that period accounted for
only 2% of the total.
Others
9%
Banks
2%
Tied agent
35%
Independent agent
54%
Traditionally, individual buyers of insurance have relied on their local agent for
their insurance needs. This close personal relationship has survived the arrival
of banks as distributors; it would appear that bank ownership of insurance bro-
kers has not altered that relationship.
In the important variable annuity sector, however, banks have won a 17% mar-
ket share. For this key investment product, their principal competitor is the
independent financial planner, whose market share has increased to 41% in
2005 against only 28% in 2001. Figure 7.7 profiles this evolution.
© 2007 45
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
80%
38%
70%
39% 41% +10.1%
60%
28% 29% Planners
50% Banks
17%
Brokers
40%
12% 13% 17% 17% +10.0%
30%
20% 39%
30% 30% 27% 27% (3.2%)
10%
0%
2001 2002 2003 2004 2005
46 © 2007
COMPETITIVE DISTRIBUTION CHANNELS
The ideal strategic solution for multiple channel bancassurers is to match prod-
ucts and clients with channels. Thus, low-cost, simple products like auto and
homeowners in non-life, and simple investment products in the life arena,
could be sold most efficiently via direct channels. At the other end of the prod-
uct spectrum, complex products requiring advice are usually the province of
brokers or specialists operating in the bank branch network. This
product/channel interface is overlaid with the client dimension: upscale clients
should be offered a higher service level across the relationship.
In the developed bancassurance model in Europe, banks with multiple channels
have generally managed the bank and other channels separately in each nation-
al market. Different compensation structures, cultures and channel economics
lie behind the separation. Yet banks like KBC, as described in the case study in
Chapter 10, have made significant efforts to bring the two sales forces together
both in physical and organisational terms.
Another solution is to reorganise the two channels on the basis of strategic pri-
ority. Thus when two Swedish banks acquired major life and pension providers,
each transferred sales staff from the acquired insurer to bolster their retail
branch network’s marketing capability.
In addition, most major European bancassurers have taken a pragmatic
approach to channel selection in different markets. Thus, global competitors
like ING Group use brokers in the home market, bank distribution in Asia-
Pacific and its own force of agents in CEE.
For insurers confronted with bank competition and determined to remain
independent, the response has been almost universal: employ all possible chan-
nels to meet the challenge. Chapter 3 summarised how some banks have set up
or acquired small banks so as to be able to offer standard banking products to
their insurance clients.
For those insurers not prepared to invest in the banking business, alliances with
existing retail banking networks as well as the usual array of employee, agency
and broker channels are exploited. The case studies in Chapter 10 examine how
bancassurers like Aviva, CNP and Fortis have successfully built profitable bank
distribution in a variety of markets.
© 2007 47
Chapter 8
Having examined the key dimensions of bancassurance, the report turns now to
the database on bancassurance profitability to address a number of issues. Is
bancassurance a cheaper channel than the alternatives? How does its profitabil-
ity compare with the pure banking and insurance retail businesses? Which ban-
cassurance products are more profitable than others? And finally, if bancassur-
ance is as relatively inexpensive as most observers believe, is this profitability
reflected in pricing to benefit the client or, on the contrary, simply absorbed
into the bancassurer’s profits?
Sadly, the database provides relatively few answers to these fundamental ques-
tions. While the profitability of banking products and institutions is relatively
transparent, comparable numbers in the insurance sector are rarely available,
and the bancassurance sector seems to follow the example set by the insurers.
The database in this chapter thus consists largely of consultant studies, presum-
ably based on the consultants’ research, and the data published by a handful of
trade associations and leading bancassurers. Comparability is made even more
difficult by the use of embedded value accounting in Europe and other markets,
with comparable data on a bank accounting basis rarely available.
This chapter first examines the key issue of the relative cost of the bancassur-
ance channel. The available data on relative product and functional profitability
are summarised next, followed by insights into bancassurance pricing. Finally,
the report provides some indications of overall profitability. Most of this data
are based on experience in the relatively mature European market, whose data-
base is relatively well established, as opposed to the US and Asia-Pacific sectors.
© 2007 49
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
10
No. of cases
10
3
No. of appointments
5
1
No. of closes
2.5
Salaried agents with warm leads from bank branches Traditional insurance agent
Conversion rate
Traditional insurance agent: 10%
Salaried agent with warm leads from bank branches: 25%
Source: McKinsey & Co (Submissions to the Canadian government task force, 2003 – latest available data)
A 2002 Sigma study for Asia suggests that the lower cost of bancassurance, esti-
mated at 33% of annual premium equivalent (APE) against 42% for independ-
ent agents and 78% for a direct sales force, has been a major driver for the bank
channel in that market. Another consultant study by McKinsey & Co, shown in
50 © 2007
THE PROFIT PROFILE
Figure 8.2 (below), fixes the cost of bank distribution at 60% of the first year
premium against 152% for career agents, and is undercut only by direct selling.
Career 152%
Worksite 65%
Bank* 60%
Direct** 20%
Online 10%
Source: McKinsey & Co (Submissions to the Canadian government task force, 2003 – latest available data)
Italian data from 1995, shown in Figure 8.3, track not only the lower cost of
bank distribution but also show how it probably contributed to the explosion of
Italian bancassurance from 4% in 1990 to 37% of the total in 1995.
© 2007 51
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
19.9
14.5
5.4
3.0 8.8
14.5 3.0
11.5
5.8
4.1
17.7
52.9
76.2 10.4
35.7
1990 1995
* First-year premiums + increases of single premiums for banks; first-year premiums + 1/10 of single premium for
other channels.
Source: Associazione nazional fra le imprese assicuratrici (ANIA), Isvap, Il Giornale delle Assicurazioni, McKinsey & Co –
no subsequent data available
More recently, research in the UK in 2002 by the consulting firm Mercer Oliver
Wyman for ABI (the Association of British Insurers) found that bancassurance
was the lowest cost of the principal delivery channels for regulated, long-term
investment products of any of the major channels. Thus, taking into considera-
tion the time per sale, including time for unsuccessful leads, a bancassurance
sale required only 6.8 hours against 13 hours for an independent adviser and 11
hours for a direct sales force.
52 © 2007
THE PROFIT PROFILE
In summary, it would appear from the evidence of these studies and the inter-
views conducted for this report that banks may benefit from an overall potential
cost advantage of perhaps 5-10% of premium income against the agency sales
force.
While there is thus significant evidence of the cost advantages of bancassurance,
the author’s insurance sources raise a number of questions regarding the validi-
ty of the data provided above. They acknowledge the advantages of a loyal client
base that is open to offers from its bank, but these sources point out that much
depends on the product chosen and the bank’s accounting policies. Much more
effort is required to sell a product requiring advice, such as a personal pension,
which happens to be the mainstay of the broker and agency channels. In con-
trast, ‘tick-the-box’ cross-sales of credit life or a pure investment product, which
are the province of the banks, require much less time and skill. And while the
marginal cost of a bank branch sale may be nominal, if the training, systems
and other overhead costs of bancassurance are fully charged, any cost advantage
may disappear.
© 2007 53
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Wholelife 50-60
Universal life 25
Variable life 20
Term 5
Source: McKinsey & Co (Submissions to the Canadian government task force, 2003 – latest available data)
As indicated above, the relative ease with which a bank sales force can cross-sell
an insurance product can be a major competitive advantage. Thus, term life
may, in some markets, be a low-margin product, but a bank providing creditor
life in connection with a new consumer loan may actually have a zero incre-
mental selling cost.
As Figure 8.5 indicates, the distribution margin on both life and non-life insur-
ance can be substantial. Thus a bancassurer with an efficient sales and service
process can achieve substantial margins on products which are associated with a
loan or other banking service. The discussion of mis-selling in Chapter 4 point-
ed out that combined bank selling and profit margins on PPI could exceed 50%
in the UK.
Figure 8.5: Relative share of production and distribution costs of life and non-life
products (%)
Life insurance P&C insurance
Life insurance P&C insurance
Distribution Distribution
35% 48%
65%
52%
Production Production
Source: McKinsey & Co (presentation to EBR Forum, 2002 – no subsequent data available from this source)
54 © 2007
THE PROFIT PROFILE
BANCASSURANCE PRICING
Whatever cost advantages bancassurers may have, there is little evidence today
of their products selling at a discount to that of their traditional insurance
peers.
A survey in 2005 by DIBC in Europe found that several pioneers in the late
1980s and early 1990s did indeed offer a price advantage under the insurers’ life
offerings. In Germany, for example, Deutsche Bank’s new captive life company,
Deutsche Leben, amortised the commission element of the policy over the life
of the policy, thus both increasing the funds available for investment and lower-
ing the cost to the client in the early years.
In Sweden, PK Banken’s (now Nordea) pioneering captive Livea did not charge
the traditional 3% sales load on its flexible, low-cost pension product designed
for the mass market. And in France, Crédit Agricole’s life captive Predica initial-
ly charged a sales fee of only 3% for its single premium life product against one
of 18-22% for its life rivals.
In the current European market, however, this research uncovered no signifi-
cant difference in pricing between bancassurers and traditional life carriers.
There is in effect a market price for each national market and product regard-
less of provider. Whether this reflects the traditional insurers lowering their
prices to meet bancassurance competition, or the latter raising theirs under the
former’s price umbrella, is impossible to determine.
What is clear, however, is that bancassurers in Europe are expanding their prod-
uct array with an emphasis on the higher-margin life and non-life products. In
addition, banks in markets like Spain are selling such products to third-party,
non-bank clients based on their lower manufacturing costs and strong brand
name. At the same time, margins on the traditional tax-advantaged pure invest-
ment products are being eroded by competition. Protection products, especially
those sold in connection with a bank loan, have a high strategic priority for
most European banks.
© 2007 55
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
channel for both groups. More importantly, the internal rate of return (IRR) for
Fortis’ bancassurance channel in Belgium, at 20%, is roughly double that of
broker distribution.
Table 8.1: Recent bancassurance profitability comparisons – Fortis and Aviva (%)
* value added by new business divided by present value of new business premiums.
56 © 2007
Chapter 9
© 2007 57
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Figure 9.1: Evolution of three major regional life markets, 1985-2004 (%)
1985 2004
North America,
Asia-Pacific, 19.6%
50.3% Asia-Pacific, 22.7%
Over this 20-year period since the effective birth of the bancassurance phenom-
enon, both Europe and Asia-Pacific have won share of the life market at the
expense of the US, which has fallen from 50% to 36% of the total. As discussed
below, bancassurance has taken different forms in each of these three markets,
and the report will focus on the lessons of this development for the future.
In terms of bancassurance penetration, however, the profile is a different one.
Bancassurance is estimated by various sources to account for perhaps 35% of
the European market, 12% of Asia-Pacific, and only 1-2% of US life insurance
sales.
The preference of this report has thus been to provide an in-depth analysis of
what it regards as significant national markets rather than attempt to cover all.
For readers interested in such broader coverage, VRL KnowledgeBank’s earlier
study, Bancassurance in the 21st century, should be useful.
The report begins with Europe, where bancassurance first evolved.
EUROPE
Market profile
The European bancassurance model is characterised by relative concentration
of bank and insurance ownership, integration of product manufacture and dis-
tribution, and a bancassurance product that is a tax-favoured, simple invest-
ment product which is increasingly sold via bank branches.
58 © 2007
THE KEY NATIONAL MARKETS
Source: DIBC
© 2007 59
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Table 9.2: Life insurance distribution channels in major European countries, 2004
(%)
Thus, roughly two-thirds of retail life distribution in Spain, France and Italy is
accounted for by bank distribution. While the banks’ share is less than 25% in
the UK and Germany, recent developments, which will be discussed below, indi-
cate the likelihood of future market share gains in these two markets.
60 © 2007
THE KEY NATIONAL MARKETS
France
The spiritual home of bancassurance, France is the largest bancassurance mar-
ket in Europe and the second most important life insurance sector in the EU.
In the early 1980s, two French mutual banks – Crédit Mutuel and Crédit
Agricole – realised that their tax-favoured term bank deposit was an attractive
alternative to the traditional high-cost whole life policy. Thus began a major
shift – often involving a transfer from custody accounts already held in the
banks – to what is known today as épargne assurance, which is the dominant life
product today in France. Essentially a bank deposit with a modest life wrapper,
this permitted banks to market a wider range of equity-linked term insurance
products also benefiting from a tax preference. At the same time, the traditional
whole life product has been marginalised to a few percent of total life sales.
The result has been an increase in life market share for bank distribution from
39% in 1990 to the current level of about 62%. As indicated by Figure 9.2, this
latter share has remained roughly unchanged since 1999, an indication of the
success of other channels in preventing further attrition.
80%
7 7 8 9 9 9 9
70% 7
11 10 10 9 8 8 8
11 12
60%
50% 18
40%
30% 59 61 59 60 61 60 61 62
56
20% 39
10%
0%
1990 1995 1996 1997 1998 1999 2000 2001 2002 2005*
Banks Agents Brokers Insurance company employees Direct channels All others
The league table of French life companies provided in Table 9.3 reflects this
transformation. Of the top six life insurers, three are banks (Crédit Agricole,
BNP Paribas and Société Générale) and the largest (CNP) is heavily dependent
on bank distribution.
© 2007 61
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Insurer Premium
income (€ bn)
Source: FFSA
The substantial benefit of deductibility from income tax of premiums paid was
removed in the 1990s in favour of exemption from inheritance tax. On the
other hand, newer products such as the plan d'épargne retraite populaire (PERP)
have the reverse benefit: premium deductibility but taxation on maturity. In the
late 1990s, the banks moved aggressively into selling protection or credit life
products as part of retail lending packages.
Thus between 1998 and 2002, the banks increased their share of the term life
market from 4.5% to 5.1% at the expense of the traditional insurers. An over-
whelming 93% of life premium income for the banks in 2002 was derived from
pure savings/investment products.
France’s largest life insurer, CNP, markets life insurance largely through savings
bank and postal offices, while the sales of the three major banks are made pri-
marily through their own branch networks.
In recent years, both banks and insurers have targeted upscale clients with dedi-
cated teams of financial advisers. In addition, a recent trend has been the
appearance of independent financial adviser networks along the lines of the
IFAs in the UK. These networks emphasise their independence by offering mul-
tiple brands and a wide range of investment and protection products.
Italy
Having imported the French model, often through distribution agreements
with French bancassurers, banks began to sell life insurance only in 1990. As
Table 9.4 (on the following page) shows, since then the share of banks has
increased steadily to roughly 59-60% in recent years.
62 © 2007
THE KEY NATIONAL MARKETS
Table 9.4: Evolution of Italian life insurance distribution channels, 2000-2005 (%)
Source: ANIA
Unlike the case in France where the banks have manufactured their own invest-
ment products, the Italian pattern is one of joint ventures with domestic or for-
eign insurers with whom the roughly 7% sales load is split. The core life, or
investment, product, was originally tax-favoured, but this relative advantage has
been continually reduced in recent years as Italy moves towards tax-favoured
personal pensions.
The banks profited from the equity boom of the 1990s to leverage their equity
expertise through the unit-linked product. Since the equity market peaked in
2000, they have been able to sell alternative investment products, in particular
the guaranteed capital note with an option on equity indices, which provides a
most attractive margin to the banks. The result is that the life product is widely
regarded as only one of a number of such long-term investment vehicles whose
appeal depends on current tax or other advantages.
Figure 9.3 (on the following page) provides one of the rare data sources in
Europe on distribution channels by individual product. It shows how banks
have dominated the unit-linked and capitalisation sectors during a recent peri-
od with their similarity to bank products, in contrast to the much smaller share
of the health care and individual pension product sectors, which are dominated
by agents.
© 2007 63
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Figure 9.3: Bank penetration of individual life products in Italy, 1998-2001 (%)
90%
80%
70%
Penteration (%)
60%
50%
40%
30%
20%
10%
0%
Whole life Unit-linked Long-term Capitalisation Pension Individual
health care funds pensions
Spain
The Spanish banking sector, led by the two dominant players BBVA and SCH,
has won a roughly 60% share of the life market, a proportion which has
remained roughly constant since the mid-1990s. Banks have benefited in Spain
from particularly high levels of client trust, with only marginal penetration by
the brokerage community. Of the top four life insurance providers, three (the
Caixa savings bank group, BBVA and SCH) are banks, and the fourth, Mapfre,
has a joint distribution venture with the Caja Madrid.
Insurance agents are primarily active in the non-life sector, where they hold a
roughly 50% market share against perhaps 22% in life products.
Since the initial entry via the tax-advantaged single premium life product in the
early 1990s, the life product has been grouped by the banks along with mutual
funds and personal pensions as one part of the generic category of ‘customer
funds’. Individual segments of this category are a function of tax and other fea-
tures. Thus, one major bank, whose core expertise is in mutual funds, only pro-
motes life insurance if it can offer clear advantages over that equivalent mutual
fund product.
A study by Morgan Consulting profiles the evolution of these three core invest-
ment products over the years between 1993 and 2002. Thus, life insurance has
shown a steady increase, while the much larger mutual fund sector peaked in
1999. Figure 9.4 plots this evolution.
64 © 2007
THE KEY NATIONAL MARKETS
Figure 9.4: Evolution of life insurance and other investment products in Spain,
1993-2002 (€ 000s)
250,000
200,000
Product sales (€ 000s)
150,000
100,000
50,000
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
As in Italy, the recent boom in the Spanish mortgage sector has focused atten-
tion on the high margins in credit life. For example, BBVA has long sold pure
protection in the form of term life as a standalone product as well as to brokers
as an element in the pension packages they market to group policies. Another
bank, which only sells 5% of the credit life policies to its mortgage clients, plans
to increase this ratio to 80%. Interviews conducted for this report indicate that
margins on credit life in Spain exceed 50% after commissions.
On the other hand, the tax advantages once associated with the single premium
life policies have been removed, and the pure life product is seen as a commis-
sion generator with perhaps a 1% annual yield.
Germany
Of all the major EU insurance markets, Germany has seen the least change in
product and distribution channels over the past few decades. While no official
figures on product breakdown or distribution channel are available, the core
endowment product still represents an estimated half to two-thirds of the total.
The figure of 25% from bank distribution shown in Table 9.2 compares with
one of 19% in 2002, albeit from a different source.
Until a change in tax regulation that became effective in January, 2005, this
combined protection and investment product offered substantial tax benefits
(to those holding the product for a minimum of 12 years) in the form of limit-
ed premium deductibility, tax-free roll-up and tax-free distribution. Under
© 2007 65
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
pressure from the banking sector as well as other factors, the remaining tax-
deductibility benefits have been removed, while the critical tax-free status of
payouts has been substantially reduced in an effort to create a more level tax
playing field for long-term investments.
The primary product innovation in recent years has been the introduction of
the so-called Riester private pension. Designed as a tax-advantaged (in the form
of premium deductibility) pure investment vehicle for a mass market, in the
early years it failed to meet its volume targets. In 2005, however, volume reached
an impressive 1.1 million policies as problems such as limited payout options,
the small size of permitted funds and extremely complex paperwork were suc-
cessfully addressed.
On the distribution front, all of these products are marketed by the major banks
as well as the traditional tied agents and so-called structured sales forces (broker
networks). Among the banks, by far most impressive performance has been
shown by the retail unit of Citigroup. As the leading bank provider of credit life
products, Citi has achieved productivity levels estimated at eight times those of
its peers by marketing a line of simple products sold by bank staff with training
and support supplied by an alliance with HDI, a domestic insurer.
The domestic banks have struggled since the early 1990s with problems of
union restrictions on incentive compensation, a lack of selling culture, the
problems of selling a different brand and a lack of co-ordination with the insur-
ance partners that provide the product. Most recently, the market leader
Allianz, with a 20% market share in life, has invested heavily in its subsidiary
Dresdner Bank’s insurance capabilities by assigning an Allianz specialist to each
bank branch to provide support in selling complex products. These efforts are
profiled in the case study on Allianz in the next chapter.
The combination of success in marketing the simple Riester products and the
loss of tax privileges on the traditional whole life product have offered interest-
ing selling opportunities for bank distribution, and analysts note with interest
the decline in sales of traditional life insurers in 2005.
The UK
British banks have adopted a variety of business models over the past few
decades to address the issue of life and non-life distribution. Two of the top ten
UK life carriers are integrated bancassurers – HBOS and Lloyds TSB – while
others (such as RBS) have followed the joint venture or distribution alliance
route.
In recent years, bancassurance has won market share. Table 9.5 indicates that its
share over the 1999-2004 period has risen steadily from 9.1% of the life and
pension market to 17.5%.
66 © 2007
THE KEY NATIONAL MARKETS
Table 9.5: UK life and pensions market by distribution channel, 1999-2004 (%)
Independent IFA brokers remain the dominant channel, however, with over
60% of the life/pension market.
The major factor in limiting bank penetration of the UK life market has been
product complexity and the associated need for regulatory oversight. Protection
and investment have been combined in most products traditionally sold by the
life sector, such as whole life, endowment and unit-linked. A complex regulato-
ry mechanism designed to protect the client has not only polarised – until
recently – the distribution function (between own-brand and multiple offer-
ings) but also required extensive fact-finds for so-called regulated products
(usually with a protection as well as an investment element).
Banks selling such products may thus be obliged to manage two separate sales
forces operating from the branch network: one selling unregulated products –
essentially bank-like liquidity and medium-term savings products – and the
other offering regulated products like personal pensions, unit-linked and
endowments. Banks understandably find it a challenge to manage these two
sales forces with different compensation and other variables, while still offering
the client a seamless service and a comprehensive range of long-term invest-
ment products.
On the other hand, as in France and other bancassurance markets, the banks
have been quite successful in selling simple, tax-advantaged investment prod-
ucts like individual savings accounts (ISAs). According to trade association
data, they are the largest single distribution channel of ISAs with 32% of the
market.
The advent of ‘A Day’ in April 2006 may, however, be a landmark in the context
of the battle for market share. Until then, with up to eight different tax regimes
applied to the personal pension product, extensive advice – usually provided by
IFAs – has usually been required to make the sale. Henceforward, however, there
will be only one tax and regulatory regime, and many observers predict market
share loss for the IFAs and gains for the banks.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Such product complexity has been a key selling point for the banks’ major com-
petitors. These IFAs also benefit from the perception of offering ‘independent’
advice, although they rely primarily on commissions paid by the product
provider. While little data on customer profiles are publicly available, it is wide-
ly assumed that the typical IFA client is wealthier – and thus willing to pay com-
missions – than the banks’ perceived mass-market client base.
The significant compensation available from providing advice-based products
has enabled IFAs to attract some of the most effective and highly motivated
marketing talent in the retail financial sector, in contrast to the banks, who are
often restrained in their compensation and other structures by bank-wide poli-
cies. Having recently convinced the FSA that they should be able to retain the
title ‘independent’ while offering products from only a limited array of suppli-
ers, IFAs may face a challenge to their dominance under the new unified pen-
sion regulations.
A major regulatory issue in the UK is that of mis-selling, or “treating customers
fairly” in the terminology of the FSA. The FSA has undertaken a broad study of
retail insurance distribution in view of the high level of product churn (cancel-
lation before maturity), evidence that the client does not have an adequate
understanding of the risks involved in some policies and the constraints on
marketing relatively low-cost investment products to fill the retirement savings
gap.
In a seminal presentation in 2006 to a gathering of senior executives in the UK
life and pension sector, Callum McCarthy, chairman of the FSA, concluded that
the UK has a “system which serves neither the producer of the services nor the
consumer of the services. It is doubtful whether it serves the intermediary
either.” He criticised the focus on business volume rather than quality, pointing
to a “merry-go-round”, or churn, with a substantial volume of ‘new’ business
being in effect transferred from other providers. Behind this concern lies evi-
dence that, despite commission levels and costs which have been criticised by
regulators, individual IFA firms as well as life companies are under profit pres-
sure, while clients continue to display dissatisfaction over the value of products.
A subsequent report in late 2006 by the consultant Capgemini on global insur-
ance focuses on the churn rate – the measure of customer attrition – in particu-
lar in non-life. Capgemini found that nearly 40% of non-life customers have
switched providers in the last five years, with the UK figure rising to 63%. The
churn in life is lower at 10%, if only because the process of cancelling a life pol-
icy is more onerous than a non-life one.
The interview with the FSA indicated that the authority bases much of its analy-
sis on the data received on customer complaints. Some indication of the cost of
mis-selling to providers is given by the FSA’s estimate at year-end 2006 that the
total compensation bill for mortgage endowment mis-selling alone is approach-
ing £3 billion. A review of compensation procedures at 52 firms responsible for
more than 90% of this key bancassurance product uncovered evidence of poor
complaints procedures at 22 of them. In addition, the regulatory spotlight has
68 © 2007
THE KEY NATIONAL MARKETS
focused on so-called precipice bonds (in which the principal repayment can fall
sharply with market declines) and PPI insurance. The latter, which is seen to
offer the banks high margins in comparison with the benefits available, will be
the subject of a regulatory report during 2007.
This level of regulatory concern, which could seriously impact the profitability
of some popular and high-margin bancassurance products, must be viewed in
the context of perceived low profitability of both insurance providers and the
IFA firms that sell the bulk of them. While the UK is thus the focus of regulato-
ry attention on bancassurance, it is quite possible that this attention will spread
to other markets.
NORTH AMERICA
This report first examines the key US market, followed by a profile of the
unique Canadian bancassurance structure.
The US
The success of bancassurance in Europe gave added impetus to the long-await-
ed deregulation of the US financial structure in 1999 through the passage of the
Gramm-Leach-Bliley (GLB) legislation. Until then, the Glass-Steagall Act had
blocked ownership ties between banks, insurers and securities firms, as well as
the sale of most insurance products through most bank channels. During the
1990s, however, banks had gradually won the right first to sell, and later to man-
ufacture, annuities and life insurance. On the other hand, the banks’ strategic
focus has traditionally been on selling investment products such as mutual
funds.
The passage of the GLB landmark legislation, in the view of many analysts, was
predicted to transform the banking and insurance sectors. Consultant studies
opined on the right combination of mergers and alliances along the lines estab-
lished in Europe. And the passage of the GLB legislation coincided with the
merger between two leaders in their respective sectors – Citigroup and Travelers
– with the CEO being Sandy Weill, who had a track record of success in both the
insurance and banking businesses. The case study on Citigroup in Chapter 10
discusses the outcome of this merger.
Bancassurance was widely viewed as a ‘win-win’ prospect. Banks would earn
valuable fee income and broaden the base of their client relationships, while
insurers would gain an attractive distribution channel.
Seven years later, however, the view on bancassurance is a muted one.
On the one hand, M&A activity has been significant – but not in the form pre-
dicted by consultants. Banks have essentially bought insurance brokers rather
than product providers. Thus by the end of 2003, banks owned 25% of the top
© 2007 69
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
40 insurance brokers, with BB&T (as Branch Banking and Trust has been
known since 1913) in North Carolina alone having acquired 56 of them
between 1995 and 2006. A total of 1,395 bank holding companies, including
some of the industry leaders like Citigroup and Wells Fargo, sell insurance.
Eleven of the top 100 US banks now earn more than 10% of their non-interest
income from insurance sales.
A few insurers such as Met Life and State Farm have acquired small banks as the
basis for assurbank activity – selling banking products to an insurance client
base. Impressive growth figures for incremental insurance sales are reported by
the American Bankers Insurance Association (ABIA), with US$80 billion in
bancassurance revenues indicated for 2005. Major insurers such as Nationwide,
MetLife and Hartford are the major product suppliers to the banks.
On the other hand, as indicated above, the banks’ estimated current life insur-
ance market share is a modest 2%, in contrast to the 10-20% predicted in fore-
casts by leading consulting firms. Insurance contributes only 6.6% of the non-
interest income of US banks that sell insurance. And growth is tapering off, as
indicated by Table 9.6. Whereas annual bancassurance premium growth in the
2000-2002 period exceeded 20%, it dropped to 2.6% in 2005. Cross-sell rev-
enues represent only 5-8% of the bank-owned brokers’ revenue streams, while
less than 1% of the retail clients of these banks had acquired insurance from
their bank. The average income from life and health insurance marketing in
2004 was a modest US$2.33 per bank customer household.
Finally, the pathfinding Citigroup/Travelers merger has been undone with the
sale of both the life and non-life businesses.
Table 9.6: Premium income from bank insurance sales, 2000-2005 (US$ bn
and %)
Note:
1. 2005 estimated. No data available for 2004.
2. Includes commercial property/casualty and group benefits premium.
3. Excludes accidental death and dismemberment. No adjustment is made for non-recurring premiums.
70 © 2007
THE KEY NATIONAL MARKETS
product sold successfully in France and other markets, and therefore well suited
to marketing by a generalist bank sales force. Another 24% is represented by the
rapidly growing figure of commercial lines, sold essentially to the banks’ small
and medium-sized enterprise (SME) commercial clients. In 2005, only 4% con-
stituted individual life and health products.
In retrospect, it has become clear that banks have been unwilling to invest sig-
nificant amounts of capital in the insurance sector. Both the perceived volatility
of insurance risk and lower return on equity for underwriters have been cited.
Instead, banks have preferred to buy distribution in the form of the insurance
agencies whose client relationships dominate the US retail brokerage scene.
Bancassurance in the US is thus essentially a distribution business, with banks
manufacturing none of the fixed annuities and life insurance they sell, and play-
ing only a minor role in the manufacture of their mutual funds and variable
annuities. Their providers are the insurers themselves as well as third-party
marketers (TPMs), independent firms that now sell a range of insurance and
investment products, mostly to community banks.
Within the bank branch networks, the key marketing role is played by platform
reps – essentially generalist salespeople who are licensed to sell annuities and
life products. They are supported by financial consultants or in-house stockbro-
kers who sell a wider range of mutual funds, annuities, securities and life insur-
ance. In addition, referrals can be made to the agents of third-party providers as
well as in-house wholesalers/coaches.
Chapter 11 discusses the findings from the author’s interview series on the
obstacles to bancassurance growth in the US and its likely evolution.
Canada
While the tide of deregulation has swept over virtually the entire bancassurance
world, Canada remains the only major developed national market in which
banks are legally unable to sell most life and non-life products to their retail
clients. This has provoked a major debate between the leading banks, which are
anxious to leverage their retail client base, and insurers, which have to date been
able to defend against changes in these regulation. Yet the Royal Bank of
Canada, the country’s leading financial institution and one of the top ten banks
in North America, has persisted in a unique and successful bancassurance strat-
egy within the guidelines established by Canada’s Banking Act.
Since 1992, banks in Canada have been able to enter the life insurance business
as well as acquire life companies legally. Yet the country’s Banking Act, which
was last reviewed in 2006, prohibits banks from selling life, home and motor
insurance to the clients of their retail network. Banks are also prohibited from
using their client lists to target market these insurance products.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Over this period, the debate has raged between the two protagonists. The insur-
ance sector argues that banks have priority access to credit and other
information on their retail clients, on the basis of which they would unfairly
cherry-pick the best insurance prospects. Pointing to the depredations in tradi-
tional agency distribution which occurred in the EU bancassurance countries,
insurers claim that such erosion of its sales force would weaken an otherwise
healthy insurance sector. More importantly, it is suggested that the potential for
tied insurance sales from deregulation could lead to the kind of mis-selling
which has occurred in the US and the UK.
The banks counter these arguments with those used by bancassurers across the
world. As relatively low-cost insurance providers, banks could offer their clients
lower prices. With their massive nationwide retail networks, banks can tap
client segments – especially the less well-off or those in rural areas, which are
not well serviced by insurance agents and brokers. And finally bancassurers, as
in the US, would offer a choice of insurance products to their clients.
Determined to become the undisputed leader in Canadian financial services
despite this prohibition against insurance cross-selling, Royal Bank of Canada
(RBC) has used other channels to become one of the top ten life insurers in the
country. Utilising primarily the brokerage channel, RBC sells through 17,000
independent life and health insurance brokers in Canada and a direct sales force
of roughly 650 salesmen, as well as the online channel.
Its insurance subsidiary, RBC Insurance, is the leader in credit life in Canada
with 28% of the market as well as being the number one in travel and living
benefits insurance. It has become the leader in new individual life policies and
was the first insurer to sell auto insurance online. In the non-life arena, the
company sells a comprehensive range of personal home, travel and auto insur-
ance
Rather than buy a domestic insurer as the country’s insurance sector has con-
solidated, RBC has acquired the Canadian subsidiaries of several US life compa-
nies, including Unum and Mutual of Omaha. Canada’s largest bank-owned
insurer, RBC Insurance now sells to around 5 million insurance clients, which
compares with the group’s banking client base of some 13 million.
In financial terms, RBC Insurance stands out as a growth element in the group;
in 2005 it generated revenues of C$ 3.3 billion, 15% higher than the 2004 figure.
Outside Canada, insurance products are sold in the US by a broker force as well
as the sales force of its US regional commercial bank, Centura.
Most recently, the group has launched a pilot policy of opening insurance
branches next to existing units of its vast Canadian network of over 1,100
branches.
The outcome of the long-running debate over removing the prohibition of
cross-selling to bank clients is uncertain. Ranged against the banks are not only
insurers but also insurance agents who are concerned about their future. Most
recently, a survey undertaken in 2006 on behalf of the Financial Advisors
72 © 2007
THE KEY NATIONAL MARKETS
Association of Canada (Advocis), found that most Canadians are wary of the
removal of these restrictions. A total of 78% of those surveyed said they do not
support expanding banks’ powers. Also, 91% of those interviewed feel that the
banks have enough, or more than enough, information about them. And on the
question of product choice, the survey concluded that “more than six out of ten
Canadians believe that removing protections will lead to less choice”.
ASIA-PACIFIC
Market profile
The bancassurance model in the emerging markets of Asia-Pacific, such as
China, Japan, India and Malaysia, can be summarised as follows:
• Agency distribution is the starting point for life and non-life distribu-
tion, but bancassurance is rapidly winning market share. Brokers are
not yet a major influence. As late as 2001, Sigma estimated the share of
agency distribution at an overwhelming 96% of the total, with bancas-
surance a miniscule 2%. Across Asia-Pacific, it was estimated then that
only 5-10% buy insurance from their bank. By 2004, however, a more
recent Sigma report on China and India noted that over 20% of new
premiums in these markets were generated by the bank channel. For
domestic and foreign insurers aiming to build market share, the bank
channel is both cheaper and quicker than building an agency sales force.
• The bank channel benefits from mass-market, unsophisticated clients
prepared to buy a range of financial products from their local bank.
Partnerships with these local banks are thus at a premium, with foreign
and domestic insurers competing to obtain multiple distribution arrange-
ments. Sales are made by agents of the bank or insurer based in individual
branches. Most products in growing markets like India and China are
essentially simple deposit-like instruments easily sold by bank branch
staff.
• Foreign insurance partners introduce new products and marketing tech-
nology. With both local banks and insurers using traditional, simple prod-
ucts and relatively primitive banking networks, foreign banks and insurers
can make a major strategic contribution to bancassurance alliances. On
the other hand, such banks – like their peers in the developed markets –
are finding it difficult to sell more complex protection products.
• Markets are progressively deregulating in terms of bank/insurance own-
ership, possible products offered, and product pricing. A few banks like
Southern Bank and Maybank in Malaysia and OCBC in Singapore have
acquired insurers. Local regulators have used barriers to entry to regulate
the flow of new competitors. Foreign bank entry to retail markets has been
strictly limited, so that foreign insurers are leading the bancassurance
movement.
© 2007 73
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Table 9.7 from the Sigma study offers a useful detailed comparison of the Asia-
Pacific and European bancassurance models.
Europe Asia
Source: Swiss Re
Japan
As shown in Figure 9.5, Japan is not only Asia-Pacific’s dominant insurance
market but also the largest in the world, with an impressive 30% of household
financial assets and over US$16 billion in premium income. It is also the world’s
most saturated market, with an estimated 90% of Japanese households holding
a life policy.
This remarkable result is the product of the meagre gains from bank deposits in
a zero rate environment, disillusionment with stock market performance, sim-
ple life products and a distribution structure based on thousands of part-time
housewives selling door-to-door.
74 © 2007
THE KEY NATIONAL MARKETS
Figure 9.5: Relative size and growth of Asian insurance markets, 2005 (US$ m
and %)
18,000 25
16,000
20
New business premiums (US$ m)
14,000
12,000
15
Growth (%)
10,000
8,000
10
6,000
4,000
5
2,000
0 0
a
an
m
n
ia
na
nd
e
a
ng
s
ne
re
pa
si
or
si
d
na
w
hi
la
Ko
ay
ne
In
Ko
ap
pi
Ja
ai
et
Ta
al
do
ilip
ng
g
Th
Vi
M
on
In
Ph
Si
H
Into this unsophisticated market over the past decade have burst product inno-
vation, foreign suppliers, and the bancassurance channel. Bank sales, which in
2000 were estimated by Sigma to represent less than 1% of total distribution,
are now believed to have achieved 25% penetration. US insurers such as AFLAC
and AIG have won an estimated 15% of the life market. AIG now distributes
through 95% of the country’s banks, while AFLAC derives 75% of its earnings
from the Japanese market. The case study in Chapter 10 on Hartford describes
how a US insurer has pioneered the variable annuity sector in Japan.
Deregulation is proceeding, with full deregulation of prices and products
planned for 2007. In 2005, insurers were permitted to sell single premium life
and endowment policies. An estimated 3,000 bank branches now sell the popu-
lar variable annuity product, which moves with the ebb and flow of stock mar-
ket performance.
Bancassurance has already taken its toll of the agency and employee sales force.
The number of agency employees has fallen from 440,000 in 1990 to 260,000 in
2004.
China
Dominated by three state-owned insurers with an estimated 90% of the life
market, China is another giant moving into bancassurance from the dominant
agency model. China Life alone, with its 11,000 branches and 1.8 million
employees, accounts for an estimated 49% of the total life market, while its joint
venture with Generali of Italy also dominates the segment of foreign life insur-
ers in the country.
© 2007 75
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
For foreign banks and insurers anxious to penetrate the Chinese bancassurance
sector, a joint venture or alliance with a Chinese bank or insurer is effectively
the sole means of entry. Only 233 foreign bank branches existed in the country
at the beginning of 2006, representing perhaps 2% of total banking assets.
Government regulations strictly limit the entry of new players, the ownership
share held by foreign institutions (currently 25%), and the number, as well as
the location, of their branches.
With only an estimated 4% of its 1.3 billion inhabitants holding an insurance
policy, and projections indicating that the country will move from 11th to
fourth place in relative ranking in the insurance world, China is a natural target
for foreign banks and insurers hoping to build bank distribution and introduce
new products. The Chinese middle class – defined as those with an annual
income equivalent to US$7,400 – is expected to increase from 50 million cur-
rently to 600 million by 2010.
An estimated 25-33% of current life premiums are now generated by bank
branches, against only 1% at the turn of the century. Of particular interest to
bancassurers, however, is the roughly 25% share of major urban markets in
China estimated by that time by Sigma.
Table 9.8, taken from a recent report by KPMG, profiles the market shares of
domestic insurers and joint ventures with foreign insurance partners. The latter
had an estimated combined market share of 8.4% at the beginning of 2006.
Table 9.8: Major insurance players in Chinese market by premium, first five
months of 2005 (CNY bn and %)
76 © 2007
THE KEY NATIONAL MARKETS
In recent years, the four leading state banks, as well as major insurers, have
established joint ventures with foreign minority partners, one of whose strate-
gic goals is often to tap the bancassurance market. These state banks are also
taking stakes in domestic insurers, thereby creating a complex web of interests.
Thus, Allianz at the beginning of 2006 established a bancassurance joint venture
with Industrial and Commercial Bank of China (ICBC), one of the four major
state-owned banks, in which it has taken a 2.5% equity stake. Allianz’ global
bancassurance strategy is described in the case study in Chapter 10. Through its
20% investment in Ping An, the country’s second-largest insurer, HSBC has
been opening offices in markets like Shanghai. Fortis, with a 25% holding in
Taiping, sells roughly half of its policies through ICBC. AIG is the only foreign
insurer with a licence permitting it to own 100% of a Chinese carrier.
Investment in the Chinese market by foreign banks and insurers is widely
assumed to have a very long-term payoff. Dozens of new licenses have been
issued by the authorities to domestic and foreign players, and the major con-
straints placed on equity ownership and the ability to open new offices will
severely limit their profit potential.
The major local banks with their thousands of branches clearly have a domi-
nant role in these joint ventures, and the investment needed for the foreign
partners’ systems, marketing, product development and staff training. is sub-
stantial. And looming in the background is the Postal Savings and Remittance
Bureau of China Post, the fifth-largest financial institution in the country with
the largest network of all – 36,000 branches – and anxious to develop its finan-
cial services business.
India
Since 1999, with the end of the monopoly of life insurance sales by the former
state-owned banks, the private-sector banks have led the bancassurance revolu-
tion in India. Deregulation also permitted the entry of foreign banks and insur-
ers into the retail life market as well as authorised foreign minority investments
in domestic institutions.
The result is an increase in life insurance penetration to 2.4%, as India’s middle-
income households start to buy life insurance. Premium income soared 41% in
fiscal 2006, and market sources predict that the overall insurance market will
increase five-fold to US$60 billion equivalent by 2010. Deregulation is proceed-
ing, with price controls being removed on life insurance.
As in other emerging markets, banks are a relatively inexpensive channel which
benefits from the confidence of retail savers in their local bank and the resulting
willingness to buy more financial products from that provider. The standard
formula is an alliance with a foreign bank or insurer such as Allianz, AIG, Sun
Life AMP or Standard Life. Virtually all domestic insurers now have at least one
foreign partner. Aviva alone, as is discussed in a case study in this report, has
© 2007 77
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Malaysia
A mid-sized insurance market by global standards, Malaysia is one of the few
booming Asia-Pacific markets which have permitted foreign banks to build
their retail business and therefore enter the bancassurance market with inte-
grated operations. Thus, three of the top ten banks in Malaysia are foreign:
Citigroup, HSBC and Standard Chartered.
While new branch openings are severely limited, such banks (known as LIFBs,
or locally incorporated foreign banks) at least have the ability to operate with-
out the constraints of a joint venture or alliance. And banking is a profitable
business in Malaysia: the return on equity (ROE) for the LIFBs in 2005 was in
the range of 18-25%.
With a savings rate of 43% and 7% GDP growth, Malaysia is an attractive ban-
cassurance market. Insurance penetration has risen from 31% in 2000 to 39%
in 2005, compared to 80% in neighbouring Singapore. Bancassurance in 2003
represented 38% of new premium income for the sector, rising to over 50% in
2004. Agency sales are still the leading distribution channel with an estimated
56% of the total.
The case study of Maybank, the country’s leading bank, profiles its success in
bancassurance in company with its joint venture partner, Fortis. Maybank and
Fortis have recently acquired control of MNI, a local insurer.
78 © 2007
Chapter 10
Case studies
The 12 case studies in this chapter have been selected on the basis of the overall
interview series to provide a profile of best practice in bancassurance across the
major world markets. Peer recommendations thus played a major role in this
selection process, although every effort was made to include those banks and
insurers whose statistical performance indicated a successful strategy. In fact,
one of the case study institutions had actually carried out its own survey of best
practice in bancassurance, and by luck or judgment in almost all the institu-
tions on its list are included in this chapter!
In addition, a reasonable geographic balance was sought across the three major
bancassurance regions: the US, Europe and Asia-Pacific. In many cases, such as
ING, Fortis and Allianz, major EU financial institutions have led the assault on
the fast-growing Asia-Pacific region. A balance was also achieved between pure
insurers like Hartford, CNP Assurances and Aviva, which have successfully
leveraged bank distribution at home and abroad; highly integrated EU groups
like KBC; and commercial banks like Wells Fargo, Citigroup, Unicredit and
HBOS, which are pioneering insurance distribution in their home markets.
Outside the home market of Europe (where bancassurance originated), in Asia-
Pacific, Maybank – the leading domestic bancassurer in Malaysia – was selected.
In the US, where the bancassurance model differs sharply from that in other
regions, the choice was Wells Fargo (which is using brokerage acquisitions to
build its bancassurance strategy), Citigroup (as the largest bancassurer )and the
insurer Hartford (as a major product provider to banks).
In no way should this selection of case studies be regarded as a league table of
success in bancassurance. It does, however, illustrate a range of successful strate-
gic approaches to the common challenge of maximising the insurance penetra-
tion of a bank client base. And it includes most of the candidates mentioned as
success stories by interviewees.
© 2007 79
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
ALLIANZ
Background
Germany’s dominant insurer with roughly 20% of the national market, Allianz
is midway through a comprehensive change programme called ‘3+One’, which
is designed to protect and enhance its capital base, improve profitability and
reduce complexity.
More specifically, it aims to convert its subsidiary Dresdner Bank, the fourth-
largest German bank with 5% of the German retail market, into a profitable
bancassurer as well as reduce costs, revise inefficient and complex capital struc-
tures, divest itself of non-strategic investments, build its life insurance business
in growth markets and improve cross-selling across the group.
Good progress has been made in turning around the former loss-making
Dresdner Bank, which has achieved a reasonable ROE of 12% in 2006.
On a broader scale, since the first half of 2003, the group’s shareholders’ equity
has risen 53%, operating profits have soared 154% to €5.5 billion, and risk cap-
ital has been reduced by 6%.
The product and geographic profile of the group, however, has not changed
fundamentally in the past few years. A total of 91% of revenues are still derived
from insurance, with life/pensions accounting for somewhat over half of this,
and the balance is comprised of revenues from asset management and banking.
The German home market accounts for 32% of revenues, with another 41%
derived from Europe (excluding the CEE) and 20% from North America.
Allianz’ two major growth markets, Asia-Pacific and ‘New Europe’ (the CEE),
generate only 3% and 4%, respectively, of the total.
In this context, the group’s bancassurance strategy is critical to its overall
growth programme.
Allianz enjoyed a record year in 2006 based on preliminary figures as operating
profit jumped 30% to €10.4 billion, net income soared 60%, and earnings per
share (EPS) rose 52% to €17.1 billion. Return on risk-adjusted capital
(RORAC) for the group reached 21.3% with the key life/health segment pro-
ducing RORAC of 19.9%.
Allianz’ largest operating unit, life/health, boosted operating income by 22% to
€2.6 billion against a target of €2.1 billion. RORAC in the German life/health
market reached a remarkable 37%, while banking income doubled as Dresdner
Bank continued its recovery.
The small but strategically important New Europe region achieved a satisfacto-
ry 22% RORAC.
80 © 2007
CASE STUDIES
Bancassurance strategy
Allianz’ overall bancassurance strategy is built around two core challenges: in
the home market, to convert Dresdner Bank into an efficient vehicle for selling
insurance products to Dresdner Bank retail clients; and outside Germany, to
exploit growth markets like the CEE and Asia-Pacific.
In the German market, it would appear that the group’s assurbank strategy of
selling banking products to insurance clients has been quite successful. In 2005,
Allianz’ tied agents exceeded their target of 300,000 new clients by 20%, with
revenue of €100 per client. In bancassurance, where Dresdner Bank had been
selling Allianz products for decades prior to the assumption of control, new
business growth has been impressive since 2001, albeit from a low base. Thus,
Dresdner branches in 2005 accounted for 4.6% of Allianz’ new P&C business
and 12.3% of its new life business in Germany. Figure 10.1 profiles this German
cross-selling achievement.
Note: P&C: new and incremental premiums. L&H: value of new business; Mutual funds: net inflows.
High volatility dependent on bank production. Share in 2004 was 29.7%.
Source: Allianz
In CEE, which Allianz has identified as a top strategic priority, by 2004 the
group had 15,000 agents and sold through 650 bank branches. Strategically,
Allianz prefers to open in the CEE with non-life and then develop a life/pension
capability. Tied agents are a critical dimension of the strategy. In Hungary,
where Allianz has sold insurance for 20 years, the group has recently opened a
retail banking subsidiary.
Having moved into the key Russian market in 1990, which Allianz brackets in
strategic importance with India and China, Allianz teamed up with the Sistema
group to create Rosno Life. In Hungary, the company has the second-largest
branch network in the financial sector.
Another key ingredient of the CEE strategy is the alliance with UniCredit, the
Italian banking group, which seems to have survived UniCredit’s acquisition of
© 2007 81
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
494
22 304
220
185
134
43 96
1. Joint ventures with Bajaj. Allianz stake in both joint ventures currently 26%.
Source: Allianz
Allianz measures performance on three bases: absolute volumes sold, the net
profitability to Allianz of the unit/vehicle, and relative performance in terms of
market penetration compared with the vehicle’s overall market share. Thus for
the latter metric, Dresdner Bank has only 4% of the German retail banking
market but an impressive 13% of Allianz’ German sales.
The choice of entry into a new market is a function of the availability of strong
distribution partners with a major market position. Thus in Italy and several
CEE countries, the tie-up with a strong banking partner like UniCredit is criti-
cal. In other markets, like India and China, a more opportunistic solution is
called for – hence the large number of different banking partners in India, none
of which has a major market share.
On balance, Allianz has been most successful in agency markets like Germany
and greenfield ones such as the CEE, where it can build an agency capability. In
the US, a broker market where it has no major distribution partner, Allianz has
achieved relatively low market penetration.
In most of its bancassurance ventures, Allianz trains the bank selling staff and
provides sales support. Actually placing Allianz agents in the bank branches is
not appropriate because of the possible conflict between independent agents
and bank staff in competing for the client relationship. In the case of Dresdner,
82 © 2007
CASE STUDIES
where it can steer the selling function as 100% owner, Allianz has committed –
and paid for – several hundred of its specialists to train and support Dresdner
selling staff.
AVIVA
Background
Formed from the merger of Commercial Union and Norwich Union and now
the largest UK insurer, Aviva has transformed itself in a few years from a UK
composite insurer into a highly profitable, global, multichannel distributor of
life and non-life products. Low-margin or unprofitable business lines or coun-
try operations have been exited, while heavy investment has been made in the
life sector.
The result has been a 13% ROE in 2006, which compares favourably with its
insurance peers. The UK, where Aviva has an 11% life market share, now repre-
sents only 44% of the total new life and pensions business contribution, with
Continental Europe 49% and the rest of the world 7%. International earnings
now exceed domestic profits on an EEV (European embedded value) basis.
Aviva’s restructured US operation is now a leader in the rapidly growing equity
index sector, while heavy investment is being made in the booming Asia-Pacific
market.
One of the defining elements of Aviva’s global strategy is its multichannel distri-
bution approach across the network. Bancassurance, which is discussed below,
© 2007 83
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
accounted in the first half of 2006 for 26% of the group’s long-term insurance
sales, but a distribution balance has been achieved with financial advisers at
44%, direct sales for 26% and partnerships the remaining 4%. New business
margins (after capital, tax and minority interest) on bancassurance were 2.7%
in 2006, easily exceeding the 1.4% for other distribution channels.
Table 10.1 summarises the importance of bancassurance to Aviva.
2006
Note:
New business contribution is ratio of new business contribution to present value of new business premiums.
New business margin is ratio of new business contribution to present value of new business premiums, expressed as
a percentage.
Bancassurance strategy
Aviva’s bancassurance strategy is marked by its high margins, successful pene-
tration of growth markets, balanced distribution channels and partnerships
with banks in virtually all of its national markets.
84 © 2007
CASE STUDIES
The group as a whole has over 50 bancassurance partners and bank distribution
agreements, which range from exclusive relationships with major banks to
nonexclusive distribution deals with much smaller entities. Major bank part-
ners include RBS in the home UK market, Crédit du Nord in France, UniCredit
and several regional and co-operative banks in Italy, Allied Irish Banks in
Ireland, ABN Amro in the Netherlands, and five regional savings banks in
Spain. In many cases, Aviva has invested capital in the partnership to ensure its
success. In addition, Aviva has wholly owned life companies abroad, such as
Delta Lloyd in the Netherlands.
Its multichannel distribution strategy has propelled Aviva into the top tier of
major continental European life markets. In Spain it is the bancassurance mar-
ket leader with about 10% of the market, while Aviva is Italy’s seventh-largest
life insurer with a new business market share of 7.4%. Spain (with 23%) and
Italy (with 34%) together contributed over half of the value of new bancassur-
ance business in 2006 , followed by the UK (with 13%) and France (11%).
Management attributes its success in bank partnerships to a focus on local
client needs and alignment of interests with its partner. Possible issues such as
channel conflict are addressed up front, with the result that few, if any, partner-
ships have had to be undone.
Perhaps more remarkable are the bancassurance margins achieved outside the
UK. The overall new business margin for that channel in 2006 of 4.8% com-
pares with only 3.8% in the UK against an outstanding 9.8% in Spain and 4.3%
in France.
In the dynamic but fiercely competitive Asia-Pacific market, Aviva operates with
its multichannel strategy in the mature Singapore and Hong Kong markets in
partnership with DBS Bank. In the growth market of China, where it is target-
ing a 10% market share by 2010 in its market area, Aviva is the fifth-largest joint
venture operation with offices in 15 major cities, while in India it has over 30
bank alliances in a market which used to be dominated by agencies. The compa-
ny plans to have ten licences in Asia-Pacific markets by 2010.
One key objective, especially in the mature markets of Singapore and Hong
Kong, is to provide unique product offerings both to the IFA and bank chan-
nels.
© 2007 85
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
CITIGROUP
Background
The world’s largest banking institution, Citigroup played a seminal role in the
liberalisation of the US bancassurance market with its decision to acquire the
Travelers Group prior to the passage of the GBL legislation in 1999. Market
observers assumed that, once legislation permitting bank ownership of insurers
(and vice versa) had passed, Citi would replicate the integrated European ban-
cassurance model by selling Travelers’ life and non-life products through its US
branch network as well as its brokerage and other retail networks. The presence
of Sandy Weill, former head of Travelers, as CEO of Citi, reinforced this
assumption.
86 © 2007
CASE STUDIES
These expectations were destroyed when Citi sold first Travelers’ P&C business
(to St. Paul Insurance) in 2002, and its life business (to Metropolitan Life) in
2005.
While no official rationale for this apparent reversal of strategy has been given,
interviews conducted for this report identified a number of possible justifica-
tions. Given the lower ROEs achieved in similar insurance businesses compared
to Citigroup’s demanding ROE targets, it is quite possible that lower insurance
returns helped drive the decision. Another argument could well be the regulato-
ry pressure against tie-in sales, which proved a costly problem for Citi’s acquisi-
tion of Associates First Capital Corporation in the early 2000s. A related issue is
the widespread focus of US banks as distributor of retail financial products as
opposed to a manufacturer. Thus, in addition to bancassurance, Citi sold its
fund management businesses in the early 2000s to the broker Legg Mason, in
exchange for bolstering its brokerage distribution capacity.
In 2006, Citi reported an increase of only 1% in pre-tax income on the back of a
7% rise in operating income from continuing operations, while ROE fell to
18.8% from 22.3% in 2005. EPS from continuing operations increased 11% to
US$4.21 per share.
Citigroup’s core US consumer business provided revenue growth of only 2% in
contrast to the double-digit results from corporate/international and wealth
management. The US consumer business now represents only 35% of total con-
sumer revenues, as priority is being placed on international growth (despite a
management priority being given to the US consumer in 2007).
Priority is also being given to introducing Smith Barney brokers into Citi
branches in the US to boost sales of life and other investment products.
Bancassurance strategy
Whatever the rationale, in its home US market Citi’s bancassurance strategy is a
relatively small part of its overall retail distribution group, which accounts for
32% of the revenues of Citi’s consumer banking function. Its core products are
term and whole life insurance, and it offers a range of third-party products,
including those of MetLife under a ten-year contract agreed as part of the pur-
chase of the Travelers life business.
As is shown in Table 10.2 (on the following page), Citi leads its US banking
peers with an impressive 7% of the total life products sold by banks.
© 2007 87
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Note:
1. Out of 2,257 top-tier bank holding companies.
2. Total incomes: US$44.1 billion.
88 © 2007
CASE STUDIES
CNP ASSURANCES
Background
France’s leading insurer with 18% of the domestic life market and 2005 global
premium income of €26.5 billion and 22 million customers worldwide, CNP
Assurances has successfully exported its model of strategic bancassurance
alliances to supplement its own direct international operations. Currently 14%
of revenues and over 10% of CNP’s profits are derived outside France.
In its home market, CNP distributes through three key channels with over
20,000 points of sale: the postal system (La Banque Postale), the savings bank
network (caisses d’épargne) and the CNP Tresor financial adviser network,
which it has acquired from the French government. A total of 74% of CNP’s
equity is owned by these French distribution partners, with the balance held by
investors. Long-term distribution contracts set out the financial relationships
between CNP and the respective distribution partner.
Outside the bancassurance channel, CNP sells through independent financial
advisers and asset managers; in 2005 it acquired from Dexia a vehicle accessing
this segment.
Products for the retail market include the usual array of insurance savings
(épargne assurance) with a high component of unit-linked sales and pensions, as
well as protection/credit life products. During the first half of 2006, the postal
network accounted for 43% of total French premium income, with the savings
banks contributing 53%. The key unit-linked product accounted for 27% of
total group savings and pension premiums during that period. Over 90% of
sales in Italy and Brazil were unit-linked as opposed to 17% in France. In
France, CNP holds a leading 37% share of the loan insurance (credit life) mar-
ket.
Preliminary figures for 2006 indicate another successful year for CNP with a
19.5% pro-forma increase in global life premium income. Adjusted for income
© 2007 89
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
transfers under the Fourgous amendment, CNP increased its market share in
France.
More specifically, after this adjustment CNP’s new premium income in the
home market in the key savings/investment product rose 8.2%. In CNP’s spe-
cialty of credit life, premium income rose 14% globally, with an impressive 30%
growth outside France.
Outside France, on a like-for-like basis, premium income increased 12.5%. In
the key Italian market, where the Capitalia acquisition made a major contribu-
tion, pro-forma earnings (including Capitalia for both 2005 and 2006) rose
10% against an actual decline for the overall Italian market.
Bancassurance strategy
Both at home and abroad, CNP’s bancassurance strategy is keyed to joint deci-
sions on products, reliance on the banking partner to manage the distribution
process with support from CNP, and with administration largely handled by
CNP. The overseas network consists of bancassurance alliances in Brazil and
Italy plus wholly owned operations in Portugal, Spain, Argentina and a newly
formed Chinese unit, which was opened in 2006 with the Chinese Post Office.
In 2005, CNP acquired 58% of Capitalia’s Fineco insurance subsidiary, which
markets to the clients of Italy’s fourth-largest bank with 5 million clients. Also
in Italy, CNP’s branch offers protection products to the San Paulo/IMI banking
group. In Brazil, CNP owns 52% of a joint venture with the second-largest
Brazilian bank, Caixa Economica Federal, and holds 8% of the market. CNP’s
Portuguese subsidiary ranks ninth in non-life and 19th in life.
The attractiveness of non-French sales is shown by Figure 10.3 (on the follow-
ing page), which plots the higher margins available in Brazil and Italy. During
the first half of 2006, these higher margins actually increased as opposed to the
modest decline in France, where the distribution partners were give a higher
share of revenues.
90 © 2007
CASE STUDIES
Figure 10.3: Comparative CNP bancassurance margins for France, Italy and Brazil,
end-December 2005 and end-June 2006 (%)
Margin rate: NB/APE
20% 20.1%
12.6%
9.8% 10.5% 11%
9.7% 8.3%
© 2007 91
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Portugal, P&C will be the dominant offering, while both savings and P&C will
be in demand in Brazil. Offering health support faculties in France is also a
growth market, while home insurance may also be a growth area.
Management is prepared to expand beyond its traditional bancassurance chan-
nel depending on market conditions. Having bought a broker network channel
in France, for example, CNP sees this relatively new channel continue to
expand. In Italy, bancassurance is supplemented by sales through Capitalia’s
professional adviser force.
While CNP has achieved significant market generation in only a limited num-
ber of markets outside its home market, it seems to have developed a durable
joint venture strategy. China would appear to be a difficult market for CNP
given its scale, the different operating model in that market, and the investment
needed to change behaviours as well as build an infrastructure. On balance,
CNP is well positioned across distribution channels as well as product ranges.
FORTIS
Background
Formed in the 1990s from banking and insurance mergers in Belgium and the
Netherlands, Fortis derives roughly 80% of its profits from the relatively mature
Benelux region, with a growing share from bancassurance investments in Asia-
Pacific and elsewhere in Europe. It is the dominant insurer in Belgium with
22% of the life and 14% of the non-life markets, as well as the market leader in
banking with 31% of the savings deposit market. In the Netherlands, Fortis is
the fourth-largest bank, with 5% of the market, and the third-largest insurer
with 13% of the life sector.
The group is managed under six divisions, three in the banking sector (retail,
commercial and private/merchant banking) and three in insurance (Belgium
Insurance, Netherlands Insurance and International Insurance). During the
first half of 2006, banking profits represented a dominant 75% of the total net
profits. Management has recently taken measures to increase integration of the
banking and insurance elements of its predecessor institutions.
Under a new CEO, Jean-Paul Votron, management has targeted an increase in
non-Benelux earnings to 30% of the total as well as double-digit annual organ-
ic earnings growth.
Fortis has exited the highly competitive US market with the recent sale of its
affiliate Assurant.
Fortis is relying on its non-Benelux bancassurance strategy to meet a major
portion of its commitment to double-digit annual earnings growth. This busi-
ness is the major component of the business line of ‘International Insurance’,
92 © 2007
CASE STUDIES
Bancassurance strategy
Building on its core integrated bancassurance model developed in Belgium,
Fortis has embarked on a global strategy based on multiple distribution chan-
nels and the goal of operational control, if not actual integration. Each new
market – from the CEE to the Iberian peninsula to emerging Asia-Pacific – is
different, and the group has adapted its model to the local environment.
While Fortis sells through all the major distribution channels in its home
Benelux market, abroad it has relied primarily on joint ventures/equity interests
with leading banks in Portugal (Millenniumbcp), Spain (La Caixa), Malaysia
(Maybank), Thailand (Kasikorn Bank) and China (with its Thai joint venture).
Fortis’ bancassurance vehicles are thus one of the largest life insurers in Portugal
with 19% of the market, the largest bancassurer in Spain (Vida Caixa), and the
leader for new life business in Malaysia (see case study on Maybank). In China
and Thailand, it ranks sixth in life insurance. Typically, Fortis holds a large stake
in these affiliates, ranging up to 51% in Portugal and 60% in Spain. The Iberian
model could well be a useful template for expansion in the CEE.
Driving this bancassurance strategy is the group’s heritage in integrating bank-
ing and insurance, but more specifically its origins in the former ASLK-CGER
(Algemene Spaar- en Lijfrentekas-Caisse Générale d’Épargne et de Retraite), a
Belgian savings bank which has become a global role model of successful ban-
cassurance by fully integrating the front and back offices in operational terms.
In Belgium, Fortis’ penetration of its active bank client base in life insurance has
reached a remarkable 34%, a level which has almost been achieved in Spain.
In product terms, priority is given to life insurance, with non-life sold on a
selected basis. In its home market of Belgium, the retail client base of 3.5 million
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94 © 2007
CASE STUDIES
Background
One of the largest multiline insurers in the US with shareholders’ equity at end-
2005 of US$15 billion, Hartford is active in both the life and non-life sectors. Its
product specialty is the variable annuity, where it is one of the market leaders in
the US as well as the largest provider in Japan. In property and casualty insur-
ance, the group ranks 11th in the US.
Variable annuities represented roughly two-thirds of the US$191 billion in
assets under management at year-end 2005, followed by mutual funds with
US$30 billion. After an extended period of leadership in the key US variable
annuity market, in 2005 Hartford was pushed into second position by MetLife.
Its massive volume in the product enables the group to produce variable annu-
ities at roughly half the cost of the market average.
In financial terms, core earnings have grown at a 13% compound annual rate
over the period 2001-2005. Hartford targets a return on equity in the range of
13-15% as well as a double-digit annual increase in book value per share.
In 2000, Hartford pioneered the development of the variable annuity sector in
Japan, a market which is particularly attractive given the ageing Japanese popu-
lation and its propensity to hold liquid assets rather than term investments.
Over half of the US$12 trillion in Japanese personal assets are held by individu-
als aged over 60 years old, in the form of cash and bank deposits. In Japan,
Hartford currently has the leading market share in that product of 29% and
US$30 billion equivalent in managed assets. Over the period 2002-2006,
Hartford’s annual compound growth in that key product was an impressive
170%.
In 2005, Hartford entered the UK market with its variable annuity product,
thus positioning itself in three of the major retirement services markets – the
US, Japan and Europe. International now represents 12% of the group’s life
insurance income.
The year 2006 was a highly successful one for Hartford in financial terms. Core
EPS rose 24% to US$9.07, while core earnings in the key segment of life insur-
ance soared 34% to US$1.6 billion. ROE remained steady at 16.1% – somewhat
above the 15% long-term target. Hartford’s mutual fund assets under manage-
ment soared an impressive 33% during the year.
In Hartford’s specialty business of variable annuities, the company is making
major efforts to regain its number one position in the US, where total industry
variable annuity sales increased 18% as the number of individuals reaching
retirement age continues to mount.
In Japan, increased competition in the core variable annuity product has
depressed Hartford’s sales and funds under management. As of September 2006,
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
the company remained the leading variable annuity provider in the country, but
major marketing and product development efforts have been required to sustain
its position.
In the UK, efforts to build variable annuity distribution through IFA networks
continued.
Bancassurance strategy
As a major provider of life products, Hartford espouses a multichannel distri-
bution strategy through banks, broker dealers, financial planners, life profes-
sional sales outlets, other insurers’ agents and the affiliated property and casual-
ty agent channel. Hartford also owns Planco, a wholesaler of retail investment
products sold through broker-dealers and banks by some 200 agents.
In this context, banks play a major role as variable annuities are the principal
insurance product bought by their retail clients. In the US, the group is the
largest supplier of the product to banks. In Japan, for example, in the first quar-
ter of 2006 Hartford was the leading issuer of variable annuities, with 24% of
sales by the top ten issuers.
Building the bancassurance channel in the US and Japan was a pioneering effort
involving extensive product design, marketing what was an innovative concept
to banks in both countries, and negotiating the necessary changes in regulation
in Japan to permit banks to offer what was then a product which had not been
authorised for bank sale. In both markets, Hartford management convinced
banks that disintermediation – losing a deposit but gaining a revenue stream
from the annuity – was a constructive idea with a positive impact on capital
requirements and earnings.
The result has been a distribution channel which, it is understood, now
accounts for about 40% of Hartford’s retail insurance sales in the US. It has
involved building a distribution sales force uniquely serving the banking sector.
In terms of economics, the interviews conducted for this report indicate that
revenues to Hartford are comprised of a share of the fees on the mutual fund
which underpins the variable annuity product, as well as about a 1% per annum
charge for the mortality risk and operating expenses which, as indicated above,
are significantly lower than those of many peers because of Hartford’s massive
volume. The full distribution fee of perhaps 5-7% is earned by the bank distrib-
utor, as Hartford is purely a product provider.
96 © 2007
CASE STUDIES
This effort has understandably sparked competitive efforts by its peers in both
markets. As indicated above, in 2005 Met Life displaced Hartford at the top of
the life distribution league tables, and in Japan the group has lost market share
in variable annuities to competitors. In both markets, it would appear that the
typical bank now offers a number of competing products.
It is difficult to evaluate the likely success of Hartford in its latest effort to build
variable annuity distribution in a new market. In the UK, where the company
has commenced its efforts to build distribution through banks and brokers,
Hartford faces a highly sophisticated market with a variety of competitors for
the annuity product. Analysts will watch its progress with great interest.
HBOS
Background
Formed from the merger in 2001 of the leading UK retail mortgage provider
Halifax and successful SME/corporate bank Bank of Scotland, HBOS has large-
ly outperformed its UK peers in most measures of growth and market penetra-
tion. Its ROE of 20% in 2006, as well as 81% earnings growth over the 2002-
2005 period, reflects its success in the twin strategic goals of maximising rev-
enue growth and steadily reducing the cost base.
HBOS’s unique business model incorporates multiple brands across its business
lines as well as a multiple channel approach in the key business line of
Insurance and Investment products, in which its bancassurance business is
incorporated. In the retail sector, for example, HBOS makes use not only of the
Halifax brand but also that of Clerical Medical, esure and its wealth manage-
ment arm, St. James’s Place Capital. Building on its UK retail client base of 22
million, a leading 21% market share in the core retail mortgage product and
16% of UK savings deposits, HBOS has been a price leader while at the same
time achieving its ROE target of 20%.
Abroad, overseas earnings from retail and other businesses in Australia and
Ireland account for 14% of the total.
In 2006, HBOS’s underlying pre-tax earnings rose 14% to £5.7 billion to boost
per share results by 16% above the 2005 level. ROE increased slightly to 20.8%.
UK earnings benefited from 10% loan growth, a stable net interest margin and a
declining cost:income ratio.
In the key investment sector, HBOS became the largest UK provider of new
investment products as pre-tax income in the sector rose 18%. The new busi-
ness margin on an APE basis increased to 27% against 24% in the previous year.
Sales of insurance via the bank channel increased 12% against over 40% via
IFAs.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Bancassurance strategy
HBOS is the UK leader in bancassurance, well ahead of Lloyds TSB with its
Scottish Widows subsidiary, with a 29% annual compound growth in premium
income over the 2001-2005 period. At the same time, sales productivity has
increased at a 23% annual clip. Bancassurance margins (new business contribu-
tion as a percentage of annual premium equivalent) of 26% in the first half of
2006 were double that of sales through IFAs.
The generic business line Insurance and Investment includes a full range of life
and non-life products as well as other long-term investments such as pensions,
mutual funds and investment bonds. In 2004, HBOS was the largest UK player
in the field of investment products with a 12% market share, and it is the indus-
try leader in the core tax-advantaged ISA savings product.
Insurance products are sold through the Halifax branch network with over
1,000 advisers as well as through IFAs via its Clerical Medical brand. Its market
share in the highly profitable credit life product (sold in conjunction with retail
mortgages) is an impressive 20%. Overall sales of insurance products have
increased at a compound annual rate of growth of 17% during the past five
years. HBOS has a reputation in the UK market of being highly successful par-
ticularly in marketing simple insurance products to a mass-market client base.
Figure 10.4 (on the following page) portrays the virtuous circle of success in
both revenue generation and cost reduction.
98 © 2007
CASE STUDIES
Source: HBOS
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
ING GROUP
Background
The leading financial institution in the relatively mature Benelux market, ING
Group has built its overall growth strategy around three key businesses: direct
banking globally (with ING Direct), life insurance and retirement services in
the US, and life insurance in emerging markets, in particular Asia-Pacific. Its
core product groups are banking, life insurance and asset management, with
major geographic units in Europe, the US and Asia-Pacific.
One of the first major bank-insurance mergers, ING was formed in 1991 from
the merger of the leading Dutch insurer, Nationale-Nederlanden, and NMB
Postbank Group. It is now one of the top ten European financial institutions by
market capitalisation. In 2005, its operating ROE was 26.6%. Operating profit
in that year was split 55-45 between banking and insurance.
From its origins, the group has adopted a multichannel distribution strategy. In
the developed markets such as the US, Canada and Western Europe outside the
Benelux area, its key channel is ING Direct plus its retirement savings network
in the US. In CEE, the group has generally entered the market with a greenfield
operation and built distribution through its own sales force of tied agents, with
other channels such as bancassurance developing later. In Asia-Pacific, as dis-
cussed below, a combination of greenfield insurance, joint ventures and
alliances is the chosen distribution strategy.
The Insurance Europe division represents 22% of group pre-tax profits, largely
in the mature Dutch market, where it sells through the ING bank branch net-
work, the Postbank direct channel and the RVS broker network. In the US,
which represents 17% of 2005 group earnings, ING figures among the top five
providers of life insurance and retirement services.
100 © 2007
CASE STUDIES
ING’s EPS in 2006 increased 6.7% to €3.57 per share with ROE at 23.5%, as
banking profit rose marginally against a pre-tax increase in insurance earnings
of 24%. Growth slowed in ING Direct as management built the mortgage book
but attempted to balance growth with profitability.
A major growth engine was a 14% increase in new sales of life insurance in the
developing markets, which generated a rise of 32% in pre-tax underlying profits
for that sector. Outstanding results were achieved, particularly in Asia-Pacific,
where underlying pre-tax income from insurance soared 39% despite a decline
in Japan due to competitive pressures. Overall, the underlying profit from both
life and non-life grew 23% over the 2005 level.
Bancassurance strategy
Given the relatively limited growth prospects of the Dutch financial services
market, ING has focused its bancassurance strategy around selling life insur-
ance in the developing markets in the CEE and Asia-Pacific. The IRR of this
business line reached 19% for the first nine months of 2006. While pre-tax
income in the second quarter of 2006 from the Insurance Asia-Pacific group
was only 6% of group pre-tax income, the value of new business was an impres-
sive 48% of the group’s life insurance total.
In Asia-Pacific, ING is the second-largest foreign life insurer; while in Asia
(excluding Japan) it is also the third-largest foreign retail asset manager. The
group regards itself as being well positioned for the massive growth expected in
emerging Asia-Pacific. Figure 10.5 (below), based on Sigma data, reflects, the
split between ING’s mature current markets and those rapidly growing ones
with outstanding growth potential.
0%
0% 2% 4% 6% 8% 10% 12%
Inforce Premium as % of GDP
= Insurance Density is the average per capita spend for Life Insurance premiums, base = Euro 1,000
© 2007 101
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
In these targeted markets, ING has relied on a mix of bank acquisitions and
alliances as well as greenfield operations based on building an agency network.
Thus in Poland, the acquisition of Bank Slaski was complemented by a green-
field agency network, whereas in Australia ING has become the fourth-largest
life and asset management provider by its acquisition of a 51% share in ANZ
Bank’s fund management and life business. ING also owns 19.9% of Bank of
Beijing in China. Other alliances include joint ventures with Kookmin Bank in
Korea, where it is the fourth-largest provider of life and savings products, China
Merchants Securities Ltd in China, and Rajan Raheja Group in India.
Over the period 2002-2005, the value of new business rose at a compound
annual rate of 14% in the Asia-Pacific region, with underlying profit increasing
17% per annum.
Growth in Asia-Pacific bancassurance has been particularly impressive: in 2005,
sales (APE) soared 106% against those of tied agents (37%) and independent
agents (65%). As indicated by Figure 10.6, the share of ING’s bancassurance has
risen in all markets except Malaysia and Hong Kong over the period 2002-2005.
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102 © 2007
CASE STUDIES
KBC
Background
Formed from a three-way merger between two Belgian banks (Kredietbank and
CERA) and an insurer, ABB, in 1998, KBC is one of the three leading banking
groups in the country with roughly 20% of the major retail deposit and lending
products. Outside Belgium, KBC’s second ‘home’ market is CEE, where it is
active in five countries which together generate 25-30% of group profits and a
major portion of future growth.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Table 10.3: KBC market share by country and business, 2005 (%)
Belgium 22 22 9
Hungary 11 4 4
Poland 4 2 11
Czech Republic 21 9 4
Slovakia 7 4 4
Slovenia 42 8 N/A
In the CEE, the group’s strategy has been to make early acquisitions of both
major banking and insurance groups in the larger accession countries. Thus, in
the Czech Republic, its CSOB subsidiary is the second-largest hank with 21% of
the market; in Hungary K & H Bank has become the second bank with 11%,
and in the much larger Polish market Kredyt Bank is now the eighth-largest
banking institution. Unfortunately, in Slovenia its affiliate, Nova Ljubljanska
Banka with a dominant 42% market share, is no longer a strategic holding
because of a disagreement with the majority interest owned by the government.
Overall, however, the group has some 10 million CEE clients and 1,200 bank
branches.
KBC reported steady earnings progress in 2006 with underlying net income ris-
ing 11% to €2.5 billion and underlying ROE of 18% despite pressure on retail
lending margins in the home market. Net interest margins fell slightly, but 13-
14% increases were reported for the key metrics of loans, assets under manage-
ment and life volumes.
104 © 2007
CASE STUDIES
Bancassurance strategy
KBC’s bancassurance strategy is built around an integrated approach with a sin-
gle retail function marketing both banking and insurance products. This has
generated some of the highest cross-sell ratios in European banking; a study in
2002 by Citigroup placed KBC at the top of 34 major European banks in the
number of products per retail client – an impressive 3.6. Unlike some of its
peers who retain an organisational split between banking and insurance, KBC
has made major efforts to ensure collaboration among its marketing channels
with extensive measurement of client/product penetration and financial incen-
tives to cross-sell banking and insurance products.
Thus, 40% of the bank’s Belgian customer base buys at least one banking and
one insurance product, while 16% of the total are viewed as ‘stable’ bancassur-
ance clients with at least three banking and three insurance products. Cross-sell
ratios of mortgage loans, home insurance and death cover insurance in Belgium
approximate 80%.
As indicated by Table 10.3, the group’s strategic challenge is to export its ban-
cassurance concept to the CEE. The target market share of 10% overall implies a
major boost in insurance penetration.
Another strategic objective is to boost KBC’s share of non-life insurance across
the group. In 2006, management expects to achieve a 10% share of non-life in
the home market. With sustained pressure on margins in the core home mort-
gage product, the contribution made by related insurance offerings like credit
life is critical.
Product priorities in Belgium are driven largely by tax regulations. Thus the
choice of life or mutual fund is a function of which can best incorporate fiscal
advantages.
In terms of client priorities, KBC segmentation is underpinned by a distinction
between ‘stable’ and ‘unstable’ clients, which are further broken down into bank,
insurance and bancassurance clients. As indicated above, the key segment of
stable bancassurance clients is an impressive 16% of the total retail base.
An important dimension of the bancassurance strategy is the distribution lead-
ership centre, which brings together product specialists, the distribution chan-
nels, and marketing experts to propagate best distribution practices across the
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
group. One such Belgian best practice is the creation of three ‘needs platforms’ –
savings and investments, SME, and payments/consumer finance/retail insur-
ance – to break down the traditional product silos of a banking/insurance struc-
ture.
A particular issue has been to encourage the group’s roughly 600 independent
exclusive insurance agents to co-operate with the branch-based bankers. In
organisational terms, the problem has been to resolve the classic issue of ‘who
owns the client?’ and to motivate both bankers and insurance agents to sell to
the same client.
Management’s response has been to assign the particular client as a ‘stable’ one
to the intermediary who first sells three distinct non-life insurance products to
the client; he then receives all recurring credits for that client, while new sales
credits go to the salesman who made them.
MAYBANK
Background
Malaysia’s dominant financial institution with interests in banking, insurance
and fund management, Maybank has a one-third share of the country’s retail
savings as well as a physical network of 420 outlets to service its retail client base
of over 6 million clients.
106 © 2007
CASE STUDIES
The bank has faced strong competition from the three major foreign-owned
banks in the country – Citi, HSBC and Standard Chartered. In response, man-
agement has transformed its branch network, culture and systems to achieve a
single view of its clients. As will be discussed below, in 1994 Maybank pioneered
the concept of bancassurance in Malaysia. It was also a leader in establishing a
dedicated sales/service force for wealth management, selling a range of in-house
products including life insurance. Maybank has also played a leadership role in
Malaysia’s burgeoning takaful, or Islamic banking market, which is growing at
an annual rate of 15-20%.
The results have been excellent. One of the few Asia-Pacific banks to publish its
cross-selling performance, in 2004 Maybank achieved an impressive 4.83 prod-
ucts per client in its upscale client segment and 3.61 in the middle category –
results which compare favourably with the cross-sell leaders in the US and
Europe. Overall, profits have increased steadily in recent years and provided a
highly competitive 17% ROE in fiscal 2006.
Net earnings for the six months ended December 2006 increased slightly by
4.4% over the prior year period as a result of higher margins, an increased con-
tribution from international operations and the initial contribution from the
acquisition of Malaysia National Insurance (MNI). ROE increased slightly to
16.8%.
Results from the insurance and takaful unit more than doubled over the prior
year level in the first half of the current year.
Management reiterated its strategic focus on increasing international earnings,
the contribution from non-banking businesses, and non-interest income.
Bancassurance strategy
Challenging the Malaysian life insurance sector with its reliance on agency dis-
tribution, since 1994 Maybank has pioneered the bancassurance concept in its
home market. Malaysia’s high life penetration ratio of 37%, combined with the
absence of government pension provision for the private sector, make the life
market a particularly attractive one. While relatively small in the group’s overall
profits with 6% of total pre-tax earnings for insurance and takaful, the contri-
bution of this combined category soared over 80% in absolute terms in fiscal
2006.
In 2001, Maybank allied itself with Fortis, the Belgo-Dutch bancassurer, as part
of Fortis’ bid to win market share in Asia-Pacific. Fortis has a 30% share in the
bancassurance joint venture. In 2005, both partners combined to take a control-
ling 74% stake in the Malaysian insurer MNI Holdings to gain access to MNI’s
distribution capability with thousands of agents in the agency, corporate and
government channels.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
The arrival of Fortis in 2001 was a seminal event in Maybank’s retail evolution
as seconded Fortis professionals addressed both the bank’s overall retail strate-
gy, as well as bancassurance in particular. Essentially, Maybank’s bancassurance
model is based on the original Fortis structure used in Belgium – effectively
total integration of the insurance activity with the retail business in both the
front (client-facing) and back offices.
Maybank’s aggressive bancassurance strategy won it the second position in the
sales of new life policies in Malaysia in 2005, while in non-life it boasts the high-
est margins.
Bancassurance performance is measured by total volume of products sold (both
life and non-life) as well as customer penetration. Currently roughly 14% of
banking clients have an insurance policy, a figure which is projected to increase
to perhaps 20% by 2009.
The core life product is a simple single premium policy with an investment
linkage. The bank’s strategy is to move clients from such products to the generic
category of long-term investment and advice with mutual funds, guaranteed
investments and similar products. The client base is segmented into the core
categories of mass market, mass affluent, affluent and high net worth. Typically
mass-market clients start with non-life products, with wealthier clients offered
a financial planning package.
The major issues encountered in building the bancassurance business have been
development of the product range and improving the competence of the sales
professionals. Significant effort has also been made to incentivise this sales
force, with the introduction of a bonus plan which enables salesmen to earn up
to twice their salary.
108 © 2007
CASE STUDIES
UNICREDIT
Background
Formed in 1998 from the merger of a number of Italian commercial and sav-
ings banks, UniCredit’s cross-border acquisition of Germany’s HVB created one
of Europe’s top ten banks by market capitalisation, with strength in one of
Europe’s wealthiest regions as well as the rapidly growing CEE.
More specifically, the merged bank is Italy’s second-largest with 11% of the
lending market, Germany’s second-largest with 5% of the lending market, and
Austria’s largest with 19% of loans. In the CEE, the group is one of the largest
banking entities. In all, the group has some 7,000 branches in 21 countries
across Europe.
Having created one of Italy’s most profitable banks, UniCredit’s highly regarded
management team has been making a major effort since 2005 to turn around
loss-making retail entities in Germany and Austria. This has been done by
applying UniCredit’s management disciplines of a focus on customer satisfac-
tion; the use of financial incentives to cross-sell in the branch network; strict
customer segmentation between mass market, affluent and other groups; cen-
tralising service functions; and a focus on attractive customer segments.
The group has also applied its strict functional approach to the organisation of
the merged entity. All retail businesses report to the head of retail, Roberto
Nicastro, with geographic retail units using the same management guidelines.
The insurance function, UniCredit Assicura, is one of three specialist retail net-
works.
UniCredit’s retail strategy is built around a combination of hard and soft
dimensions. The former include market share targets for important products,
which are measured against national benchmarks as well as specific client seg-
ments. The soft dimension includes a focus on customer satisfaction, which is
regularly measured by external surveys, and assumes that there is a causal rela-
tionship between staff satisfaction, client satisfaction, and market share results.
In 2006, the group reported outstanding results across the board, reflecting
organic growth as well as some of the results from reshaping the HVB acquisi-
tions. EPS soared 60% to €53 on the back of an increase in operating results on
a like-for-like basis of 24.5%. ROE jumped to 16.7% against only 10.7 for 2005.
All divisions reported excellent growth, with retail earnings jumping 33.5% and
the contribution from CEE rising 30.7%.
Impressively, the cost-income ratio fell to 56.5% against 61.7% as productivity
improvements were made in Germany and Austria.
Of particular interest for this case study, the amount of fees for placing insur-
ance rose an impressive 27%.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Bancassurance strategy
The group’s bancassurance strategy is based on distribution through its branch
network, alliances with insurance providers and a product range driven by local
– essentially fiscal – factors.
In Italy, separate alliances with Aviva and Allianz dominate the distribution
strategy, as UniCredit has traditionally looked to partners for product manufac-
ture. A typical Italian branch will sell only products from one partner. Such
alliances generally are based on a split of the selling commission of perhaps 7%,
with the distributor receiving 70% of the sales margin. The insurance product
line is driven by relative fiscal advantage: currently the absence of such advan-
tage in Italy leads to focus on the unit-linked product. Significant growth, how-
ever, is taking place in credit life insurance, with a cross-sell ratio against con-
sumer loans well above the group’s overall relatively modest insurance penetra-
tion rate. Company data indicate such a penetration rate in the mass-market
segment in Italy for the key life product of about 5%, which compares with
mortgages of 12% and asset management of 16%.
In the German market, client penetration of HVB’s 2.4 million mass-market
client base is even lower at 3% for recurring premium life insurance. A key
offering is the low-cost Riester product under the post-2005 fiscal regime.
In the strategic growth target of the CEE, the Polish bancassurance sector stands
out as UniCredit’s major bancassurance market. No major insurance partner-
ships exist there, in contrast to the two in Italy. Credit life offers significant
growth potential in the CEE.
110 © 2007
CASE STUDIES
WELLS FARGO
Background
The product of a merger of equals in 1998 between San Francisco-based Wells
Fargo and Norwest Corporation in Minneapolis, Wells Fargo has grown organi-
cally and by the acquisition of smaller banks to become the fourth-largest US
bank with retail distribution strength in the West as well as several nationwide
businesses.
Management is committed to a broadly based financial services strategy and
compound annual growth targets exceeding 10% in sales and EPS. Over the five
year period ending in 2005, revenues have grown at a rate of 13%, while earn-
ings have increased at 14% annually. ROE in recent years has approximated to
19-20%.
Wells has become a global role model of a sales and service culture-driven bank
which has sustained above average results. More specifically, the bank is a global
icon of successful cross-selling of retail products, while maintaining high cus-
tomer and staff satisfaction ratings. Its well-advertised metric of sales per retail
client has increased steadily in recent years to the impressive figure of five prod-
ucts, with a long-term goal of achieving eight per client.
Its retail unit, the Community Bank, has over 3,000 ‘stores’, or bank branches,
plus an equivalent number of specialist mortgage, consumer finance and insur-
ance outlets across the 50 US states. The group ranks among the top three in 16
of the 23 Western states constituting its core market area. In addition, Wells is
the largest home mortgage originator and second in mortgage servicing in the
US.
In 2006, Wells continued on track for its strategic goals of double-digit revenue
and earnings growth, with a 12% EPS increase in the fourth quarter and five-
year annual compound EPS increase of 21%. Average core deposits and product
sales rose by 11% and 19%, respectively.
Equally important was progress in broadening the business base and improving
cross-sell and productivity ratios. The benchmark figure of core sales per
banker edged up from 4.9 to 5.0. In the small business sector, Wells is now the
largest competitor in the US, with loans to SMEs growing by 18%. In the pri-
vate-banking business, which is a high priority for Wells, earnings rose 14%.
The number of households buying at least eight products rose from 17% to
20% of the total, while the proportion of wholesale clients buying more than six
Wells products also set a record.
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Bancassurance strategy
Wells’ bancassurance strategy is driven by its management’s view that the bank
should be present for its priority client segments for all five major financial
needs: transaction services, savings, short term and long-term credit, and pro-
tection. Bancassurance thus targets protection services, essentially non-life
products, although investment needs are met by the sale of annuity products.
Roughly US$1 billion in brokerage revenues is currently earned from insurance
products, including annuities.
To deliver this strategy, Wells sees itself as a product provider rather than a man-
ufacturer, and in this context is committed to offering choice to its priority seg-
ments such as SME and mid-scale corporates, professionals and real estate
developers. It has thus built by acquisition an impressive network of insurance
brokers across the US. Under the Wells Fargo Insurance Services (formerly
Acordia) brand, this network now constitutes the largest bank-owned network
and the fifth-largest overall in the US.
Figure 10.7 profiles this national network of over 150 offices and 4,500 insur-
ance agents. During the first half of 2006,Wells ranked second in the US only to
Citigroup in the sales of insurance products to its banking clients, with a 15%
share of insurance revenues earned by bancassurers.
As an icon of cross-selling success in the US, Wells’ strategy for the insurance
sector is based on cross-selling of insurance products through referrals from the
bank branch channel to the Wells Fargo Insurance Services brokerage network.
Bank platform staff thus receive credit for referring possible insurance business
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Chapter 11
This chapter summarises insights from the more than 20 in-depth interviews
and case studies, examined in the light of the evidence from Chapters 1-9. They
are addressed in terms of the ten key issues which underpin bancassurer strate-
gies:
• ownership and control;
• choice of national market;
• channel strategy;
• product range and strategy;
• client segmentation and strategy;
• joint venture/alliance selection and management;
• culture and people issues;
• managing the sales process;
• performance metrics; and
• the impact of regulation.
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First, the projected cost and revenue synergies rarely exceeded 5% per annum,
even by the merging entities’ own calculations before the transaction. Such syn-
ergies, if achieved, must be set against the human and financial cost of such
major corporate actions.
Second, perhaps one-third of the transactions cited above in Table 9.1 were sub-
sequently reversed at least in part. Banks sold off the acquired non-life opera-
tions and/or exited the manufacture of life products, while insurers divested
themselves of problem banks. Most recently, the insurer Sampo sold off its
banking interests (which had only been acquired a few years earlier) to Danske
Bank, while Credit Suisse finally disposed of Winterthur to AXA – having previ-
ously reversed, in 1997, a decision to “buy the milk, not the cow”, in the words of
Lukas Mühlemann, the former CEO of the bank.
Third, many of these decisions to exit the insurance business were made as a
result of the subsequent collapse of the equity markets in 2001-2003, which
severely undermined the capital base of insurers in markets like Switzerland, the
UK and Germany and obliged new bank stockholders like Lloyds TSB and
Credit Suisse to make substantial provisions for capital impairment.
The net result is summarised in Table 11.1, which lists total or partial divesti-
tures of insurers by 11 banks during the past decade as well as five sales of banks
by insurers.
Source: DIBC
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THE LESSONS OF GLOBAL EXPERIENCE: ADDRESSING THE ISSUES
salaried employees. Table 11.2, taken from a Deutsche Bank report in the early
1990s, neatly summarises these cultural differences.
Banks Insurers
This report discusses below how these cultural differences are still present in
bancassurance mergers of a decade ago as well as a major factor in the success
or failure of recent joint ventures and alliances.
Thus the wave of optimism which created the integrated bancassurer in the late
1990s has receded and even been reversed in many cases. Whatever the argu-
ment against financial integration – the perceived equity risk, possible lower
ROEs in the insurance sector or cultural differences which hamper the smooth
running of the enterprise – many banks prefer a retail strategy of product dis-
tributor rather than manufacturer.
In the US, for example, banks have uniformly determined not to become insur-
ance underwriters, and a leader like Wells Fargo advertises its strategy of offer-
ing insurance choice to its banking clients. In the EU, the financially integrated
Spanish and French bancassurers contrast sharply with the current preference
in the UK for alliances with insurers like Aviva.
On the other hand, as discussed below, operational integration is cited as a crit-
ical success factor by most of this report’s case studies of bancassurance leaders.
Whether created by actual merger or a joint venture/alliance with an independ-
ent product provider, the ability to control execution of a bancassurance strate-
gy is a vital factor. This is a major issue for foreign partners in markets like India
and China where the leading banks have flexed their muscles by insisting on
non-exclusive distribution clauses.
Perhaps the most interesting case study of this issue is Allianz’ success in turn-
ing its subsidiary Dresdner Bank into a more effective bancassurer. Throughout
the 1990s, Dresdner as an independent entity was unable to ‘punch its weight’ –
achieve insurance penetration consonant with its share of the retail market –
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even though it sold excellent brands, such as that of Allianz. Whatever the costs
of acquiring and turning around the bank in recent years, Allianz now can
effectively direct bancassurance execution in Dresdner via its total financial
control.
On the basis of the interview series, it is clear those acquisitions of a bank (by an
insurer) and an insurer (by a bank) have failed for a variety of reasons.
A key issue is channel conflict. The culture, economics and client base of a
mass-market bank are significantly different from those of an insurance under-
writing or brokerage business. Some bancassurers like KBC and Fortis have
been relatively successful in managing this conflict, but others, like many EU
bank acquirers and Citigroup, have decided to divest the manufacture of the
insurance product and buy it in from third parties to broaden their product
range. In theory, adding a new distribution channel and client base are attrac-
tive to a bank, but in practice they must often be managed separately.
As many US banks have probably found in acquiring insurance brokers, bank-
ing products do not offer the absolute and relative commissions demanded by
brokers, while the brokers’ advice is difficult to provide to a mass-market bank
clientele.
Conversely, insurers attracted to assurbanking by extending their product range
to basic banking services have found it difficult to win the core banking busi-
ness of their insurance clients. Even attracting several hundred thousand bank-
ing clients has not provided the ROE needed to justify the investment.
Anther factor limiting the attractiveness of buying an insurer has been the rela-
tively low and volatile returns of insurance underwriting compared to the dou-
ble-digit and consistent ROEs of most successful banks. As discussed above, the
global equity crash of 2001 following a string of insurance acquisitions may
have been pure coincidence, but it has soured the appetite of bank investors and
management alike.
However, operational integration, as discussed below, can be essential to the
success of a bancassurance business – whether achieved by ownership or arm’s
length agreement though a joint venture.
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In contrast, the US with its split between product manufacture and distribution
has not been an attractive bancassurance market even for veteran bancassurers
like Fortis.
Interviews revealed that a major driver of market choice is the availability of the
ideal banking partner for those insurers seeking to enter a new market. Such a
partner would have a large retail market share and good brand, as well as the
willingness to commit to an exclusive alliance in which management is essen-
tially shared between the bank and insurer. Thus Allianz not only has such an
alliance in Italy with UniCredit but has also benefited in the CEE from
UniCredit’s penetration of that market.
In contrast, interviewees indicted that, failing such an ideal partner, a more
‘opportunistic’ or risky approach would be to joint venture with a smaller bank
or one not prepared to integrate on an exclusive basis. In the booming Chinese
and Indian markets, a host of foreign insurers have thus accepted such a strate-
gy as the best possible in an otherwise attractive market.
CHANNEL STRATEGY
The virtues of the bank channel are well known: access to the mass of retail
clients, low-cost distribution of simple products and strong client loyalty in
many markets. Yet successful bancassurers as different as Hartford, ING,
Maybank and CNP Assurances all are committed to a comprehensive approach
to channel management. Thus in Asia-Pacific, Malaysia’s leading bancassurer
has acquired a traditional agency-based insurer, while in France CNP
Assurances has entered (by acquisition) the servicing of the growing independ-
ent broker sector.
Interviewees pointed to the wide national differences in the value of a bank dis-
tribution channel. In markets like Spain, where bank networks are dense and
client loyalty strong, a bank channel can add more value than a market like the
UK, where it is less dense and clients go elsewhere for important financial prod-
ucts and advice.
While a commitment to multichannel distribution can be an expensive one, the
need to anticipate future changes in channel usage is clearly on the minds of
bancassurer management. Thus the potential growth of internet, or direct,
banking is a significant threat to the sale of insurance products through the
bank branch network.
Research has highlighted the enduring differences of each channel. Thus, bro-
kers thrive when complex products with correspondingly high commissions are
sold, usually to a relatively affluent client base. Banks are successful in selling
simple offerings to a mass-market client base, which either resemble banking
products or are sold in connection with them. Shifts between channels occur
when, as recently in the case of the UK and Germany, a formerly complex prod-
uct is simplified, or tax/regulatory changes permit the banks to sell a product
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which has the same advantages as its insurance equivalent. Conversely, brokers
benefit when a more demanding client base insists on choice and independent
advice. When a product such as auto insurance or term life is commoditised,
direct channels, such as the internet or supermarkets, win market share.
As discussed above, many US banks made heavy investments in the brokerage
sector which may have proved disappointing because of these enduring differ-
ences in channel character.
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THE LESSONS OF GLOBAL EXPERIENCE: ADDRESSING THE ISSUES
interviewees is the classic explanation: life insurance has to be sold, with the
implication that bank platform and support staff cannot do the job as effective-
ly as agents or brokers. By its nature, the individual life product is an expensive
one, and clients have shown their preference for a lower-cost, simpler solution.
The US experience reinforces the lessons of product simplification learned in
the 1990s in Europe. Products designed by insurers there for their client base for
years failed to sell well to a bank client base. The answer was the integrated ban-
cassurer like Crédit Agricole or Fortis, where insurance products were designed
by bankers with their clients in mind. Simple products may not have the ‘bells
and whistles’ designed by insurers – as well as the margins that go with a com-
plex product – but they can be sold by a generalist sales force. Simplicity may
mean front-office and back-office integration, such as common sales processes
and IT systems which use existing client data and move money from a current
account to pay a premium. In the US environment, where banks are essentially
processing a third-party product, this is not a simple task.
The dominant product theme from interviews with successful bancassurers has
been ‘make the product easy to sell’. Thus straightforward investment products
such as the variable annuity, usually tied to an equity index, have been the stan-
dard-bearer for most bancassurers as opposed to the traditional life product
which combines protection and investment, often with a complex array of vari-
ations to attract a particular client segment.
More recently, banks have discovered the attractions of selling life and non-life
products in connection with a bank loan. The combination of generous selling
commissions plus, in many cases, all or a major portion of the manufacturing
margin provides a substantial share of the revenues of many retail banks in the
EU.
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Given the growth and profit potential of an increasingly wealthy and ageing
population, selling wealth management and retirement products to upscale seg-
ments is a strategic target of many bancassurers. Here they must confront the
traditional competition of agents and brokers with the financial incentives and
time to build relationships of trust with the client. In the US, a traditional ‘bro-
ker’ market, persuading the client to buy these products from a bank is an uphill
struggle.
In Europe, where the client may place more trust in his bank for such products,
banks have the added advantage of association with teams of IFAs (in the UK)
or financial advisers (in Italy). Yet the interview conducted with HBOS, which
owns one of the best known of such IFA firms – St. James’s Place Capital – con-
firms that there is little cross-selling or referral within the group. One can only
assume that client ownership is a major obstacle to such cross-selling even with-
in the same group.
A major segmentation issue for bancassurers is to identify and service effective-
ly the segment of its retail population which desires a relationship and is pre-
pared to pay for it. For the typical bank platform salesman, taking the time to
build such a relationship means less effort in selling easier-to-sell products as
well as the proliferation of administrative tasks typical in a large bank. Many of
the complaints by insurers about bankers who are not willing or able to sell
stem from this dilemma.
The data from Mercer Oliver Wyman’s research into the cost of selling a regulat-
ed investment product in a market like the UK, as well as the wide variance in
sales productivity across European banks, highlight the need to segment the
client base and focus sales efforts on clients likely to buy the product.
As a bank’s mass-market client base grows in wealth and sophistication, the
long-term challenge will be to move upmarket to meet the need for advice and
choice. The research mentioned in Chapter 6 shows how the affluent segment
represents a multiple of the wealth of the mass market in a typical developed
country.
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than others, there have been few recorded instances of a break-up of a major
bancassurance venture in which both parties have invested. In the following
chapter, the outlook for such ventures is examined.
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THE LESSONS OF GLOBAL EXPERIENCE: ADDRESSING THE ISSUES
Customer proposition “You will need one of “This is good product ”Let us look after you.”
these as well.” for you.”
Typical products • Creditor insurance • Tax-advantaged • Retirement plannings
• Home insurance mutual funds • Risk protection
• Mortgage life • Savings plans • Inheritance planning
protection • Standalone motor
insurance
Transaction volume Medium Large Small
Premium size Small Premium Large
Margin High Small Medium
(price insensitivity) (commoditisation) (service premium)
Marginal sales cost Low Medium High
Mercer’s research attributes the wide range of bancassurance sales per salesman
in Europe to inefficiencies in systems integration and sales training. Thus in the
highly profitable credit life product, mortgage penetration rates range from 50-
60% for successful banks to 20-30% for laggards. In the UK, HBOS is a leader in
selling annex products, making use of single application forms and using a sin-
gle database. In its research in Germany, Mercer found that best-performing
bancassurers sold more than 60 policies per bank clerk annually, while the
majority sold fewer than 20.
As indicated above, banks have struggled to get the model right for relationship
sales, often spending considerable amounts of time building relationships with
the wrong customers or employing the wrong model for the right ones.
A separate issue in the sales process is mis-selling in markets like the UK and US
with strong consumer protection cultures. After focusing on endowment insur-
ance and precipice bonds, the UK’s FSA will be emphasising PPI in its enforce-
ment programme.
PERFORMANCE METRICS
The limitations of insurance disclosure sadly extend to the bancassurance
domain. As indicated by the case study material, the available data usually
focuses on growth indicators such as premium volumes and market share.
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THE LESSONS OF GLOBAL EXPERIENCE: ADDRESSING THE ISSUES
One of the most obvious – but difficult to quantify – differentiators is the prof-
itability of integrated bancassurers against those essentially earning the distri-
bution margin. As indicated in Chapter 8, the manufacturing and selling mar-
gins for life insurance are not dissimilar. Thus a successful integrated bancassur-
er like Fortis in its home market captures both margins as well, presumably, as
benefiting from integrating both the sales and processing functions.
In contrast, a US bank essentially selling third-party insurance products earns
only a selling margin and does not capture the advantages of integration. The
outside analyst cannot quantify this differential, yet it must account for much of
the reluctance of US banks to commit resources to bancassurance.
On balance, the outside analyst must rely on aggregate numbers for the bancas-
surance and/or international function. To date, for the leaders described in
Chapter 10, these numbers have largely been impressive in terms of relative
growth and profitability.
With specific reference to profits in the bancassurance realm reported for 2006,
the twin segments of bank distribution and international expansion are signifi-
cant growth engines for most of the sample of 12 case studies.
Thus the bank distribution channel in general is providing good growth for
HBOS, while bancassurance outside the home market is a dynamic profit gen-
erator for Aviva, Hartford, CNP, Allianz, ING and KBC.
Another feature of many of the case studies is the outstanding profit growth in
2006 for several insurers like Allianz, Fortis, CNP and Hartford as they success-
fully address major strategic issues. In contrast, more modest earnings growth
in the region of 10% continues for institutions like Wells Fargo, KBC and
Maybank.
Interestingly, only the two US-based banks – Citi and Wells Fargo – do not fea-
ture bancassurance in their initial 2006 analyst briefings.
Finally, there is increasing mention of competition in the bancassurance world.
More specifically, both ING and Hartford speak of margin pressure in the
important Japanese market. On a broader scale, Citi’s core US consumer busi-
ness overall is clearly passing through a difficult period.
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including life insurance, pension funds, mutual funds, variable annuities and
long-term bank deposits.
As the highly regulated emerging markets in Asia-Pacific and the CEE evolve,
the same liberalising trends are visible: a broader product range is allowed, new
distribution channels are permitted, and entry to the long-term savings market
is broadened.
Most of these deregulatory measures benefit newcomers to the insurance mar-
ket: foreign banks and insurers, new product innovations, and liberalised own-
ership rules. The case studies of US and European bancassurers reflect a long-
term commitment to these markets which could not be justified without the
assumption of further deregulation.
Regulation also plays a large part in the design of insurance products. Thus in a
market like Belgium, every effort is made to design a product – whether desig-
nated ‘insurance’ or not – to benefit from favourable tax treatment.
On the other hand, in the US and UK regulatory agencies have raised serious
issues of transparency and the fair treatment of insurance buyers. In markets
like the UK, it is clear that the level of understanding of financial products in
general, and complex insurance products in particular, is low. Combined with
the banks’ ability in practice to tie the sale of life and non-life to core banking
products such as retail loans, and the high overall margins often available on
these products, there is a high level of regulatory concern over such cross-selling
efforts. The interviews indicate that management is well aware of these con-
cerns, and their enthusiasm for the bancassurance business is somewhat attenu-
ated because of the negative publicity attached to possible regulatory action.
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Chapter 12
GEOGRAPHY
In broad terms, bancassurance in the three key geographies – the US, Europe
and Asia-Pacific – is likely to continue along the same lines developed in the
past few years.
In the developed markets of Europe, bancassurance will continue to gain
ground, particularly in the UK and Germany where it will benefit from product
simplification. Providing a tax incentive along with simple products like ISAs
and personal pensions in the UK and Riester-type products in Germany should
enable banks to approach bancassurance’s one-third market share of the overall
EU life market. Elsewhere in Europe, gains will be driven by a broader bancas-
surance product range, more efficient processes and the increasing bargaining
power of the bank distribution system.
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130 © 2007
SUMMARY AND OUTLOOK
PRODUCT
As in recent years, the principal drivers of future product growth will be
swelling personal wealth and an ageing population, which will be felt largely in
higher sales of life and other investment products. While traditional life insur-
ance will remain a significant factor in many countries, its dominance will be
threatened by cheaper, simpler investment products such as annuities, mutual
funds, guaranteed bank deposits and alternative investments. On the other
hand, banks’ efforts to simplify the life product may bear fruit in markets like
the UK and US.
Over time, the life product will increasingly be subsumed in the generic catego-
ry of ‘long-term investment’ product as it has in Europe. The composite invest-
ment and protection product such as whole life and endowment will lose mar-
ket share to pure tax-advantaged investment products, while those seeking
protection will tend to buy term life.
Credit and non-life products such as auto, PPI, health and homeowners will
benefit from the banks’ increasing recognition of the attractive margins avail-
able as well as their brand value. European banks have been prepared to manu-
facture some of these products to win the manufacturing margin, and perhaps
over time US banks will overcome their reluctance to underwrite. On the other
hand, regulatory concern over mis-selling may limit the penetration of some of
these products in consumer-conscious markets like the US and UK.
Overall, banks outside the US will continue to expand their insurance product
range as they become more comfortable with the risks, as well as benefit from
customer good will. The losers in this competitive dynamic will be the tradi-
tional insurance suppliers who may be obliged to give up more of their margin
or lose the business.
In summary, in most bancassurance markets the European trend of separating
investment from protection products will continue. The traditional life product
blending a significant death benefit/protection with an investment feature is a
mature one in markets like the US and EU, with likely annual volume growth in
the single figures. Equally important will be the trend for clients to buy their
life/investment and protection products separately. Certainly in the bancassur-
ance channel, the trend is clear. In markets like Japan, the US and EU, the stan-
dard life/investment product for bancassurers is not the complex traditional life
policy but something akin to the tax-advantaged variable annuity as it is known
in the US and Japan, usually based on a mutual fund. Such a product, which
does not require a medical examination or a complex sale process with exten-
sive regulation, can easily be sold by bank branch staff.
The interviews revealed a widespread commitment by bancassurance leaders to
increase sales of traditional life products as they attempt to win share of the
wallets of their increasingly affluent clients. Absent a major simplification of the
life product, however, it is difficult to see banks overcoming the traditional bar-
riers of product complexity and regulatory process. As will be discussed below,
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however, recent product simplification measures in life markets like the UK and
Germany may assist the banks in their efforts.
CHANNEL
The next few years will see a continuation of the correlation between channel
dominance and growing wealth and client sophistication. Thus the independent
agent channel is gathering pace in the booming Asia-Pacific markets like China
to satisfy the growing desire for product choice and service, while in Old Europe
brokers in bancassurance markets like France are winning business.
On the other hand, the traditional agency/employee channel will be under pres-
sure to adapt to the bancassurance and brokerage threat. Successful insurers will
respond by weeding out unproductive salesmen, focusing on upscale clients,
cutting costs and offering other long-term investment products such as mutual
funds and alternative investments.
As described in the previous chapter, the leading bancassurers with their com-
mitment to multichannel distribution are well positioned to meet any shift in
channel preference. On the other hand, this will involve more investment in
new channels, as well as the problems of multichannel management.
One of the major unknowns in the minds of the interviewees is the outlook for
customer channel preference and the possible undermining of the traditional
bank distribution system. Banks in many markets such as Scandinavia are
already concerned about the difficulty of sustaining client relationships in a
world where the customer simply does not visit the branch.
As discussed above, internet and other direct channels are already active in mar-
keting simple life and non-life products. As more products like auto and build-
ings/contents insurance become easier to buy online, all three major channels
could well lose market share.
The issue of channel mismatch – not matching the client base with the appro-
priate products and skills – is particularly relevant in the case of the US market.
The widespread and costly acquisition of broker networks there does not
appear to have significantly boosted the banks’ efforts to cross-sell retail insur-
ance to their existing client base or add new banking clients on the back of their
brokers’ relationships. The US thus remains the classical broker market where
the vast majority of bank clients look to their local insurance broker or agent
for insurance solutions. It is difficult to envisage a significant improvement in
the bancassurance market share for core insurance products, although banks
should continue to be a major provider of essentially investment products such
as annuities.
A similar mismatch seems to have taken place in markets like Europe where
banks have actively promoted assurbanking – offering insurance clients bank-
ing services via an acquisition or de novo bank. The great majority of insurance
132 © 2007
SUMMARY AND OUTLOOK
clients prefer to retain their current bank relationship for the core bank prod-
ucts of deposits and loans.
One of the interesting challenges for the bancassurance channel will be whether
bank-owned brokerage affiliates, as exist in Italy or HBOS in the UK, can suc-
cessfully market to a retail bank client base. To date, the evidence is not particu-
larly positive, but arguably a determined management can apply the necessary
incentives to sell across the organisation.
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PROFITABILITY
Divergent trends in bancassurance profitability make profit forecasting particu-
larly difficult – in part at least because of the paucity of published data.
On the one hand, the underlying volume trends are positive, with bancassurers
continuing to win market share in markets like Asia-Pacific and Europe on the
back of further life penetration, the broadening of the product line and possible
integration measures. In the US, however, additional penetration of the life
market is unlikely, and the volatility of the core annuity product plus reliance
on a pure distribution profit will limit profit gains.
Profit margins will be driven by increased competition, the addition of higher
margin products like credit life, and economies of integration. In this respect,
the evolution of the European market might be instructive for less mature mar-
kets like CEE and Asia-Pacific. Bank distributors in Europe have pressured their
insurance partners for a higher share of the distribution margin, while in-
sourcing of products by banks has also increased the profit pressure on insurers.
On balance, the profit winners have been the bank distributors.
Should regulation in markets such as the UK and US succeed in limiting the
sales of high-margin tied products like PPI, the impact on bancassurance
providers will be substantial.
In Asia-Pacific, the predominance in several markets of multiple distribution
alliances is likely to lead to a shake-out in which either a single provider is
selected by major banks or the bank itself takes the manufacturing margin in-
house. In addition, price competition in key markets like China, plus the need
to invest heavily in infrastructure, recruiting and training staff and compliance,
will continue to place heavy pressure on profit margins. Finally, profitability in
these booming markets is unlikely to reach European levels due to the lack of
integration economies and synergies.
The fully integrated model – incorporating both the manufacturing and distri-
bution margin, as well as front- and back-office synergies – will thus offer the
greatest profit potential. Profitability will also be driven by product pricing,
which can differ substantially from market to market. Yet the classical life prod-
uct, incorporating a sales charge of at least 3% in most markets, is one of the
most profitable and thus the strategic target of many bancassurers. Another key
profit driver will be scale – driving down unit costs by volume increases.
The European experience shows how product pricing can deteriorate with
greater competition and product commoditisation. Thus, pricing of the core
‘life/investment’ product in markets like Italy, Spain and France has been driven
to a profit margin of 1% or less, in contrast to more generous margins on life
and non-life products sold in conjunction with loans.
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SUMMARY AND OUTLOOK
CLIENT
A major issue for the future of bancassurance is the extent to which banks can
market insurance and other products requiring advice, such as life insurance
and other long-term investments, to their affluent and other upscale client seg-
ments. To date, they have been most effective in their core mass-market client
segment, but the attractions of the much larger aggregate wealth of the more
affluent segments are compelling.
The answer to this question in turn poses another: that of brand strength. In
brief, would a bank client – in particular a relatively sophisticated one who
demands choice and performance – go to his bank for advice? Banks across the
globe have invested heavily in building their brand, yet placing a value on that
brand is an imperfect science.
In a recent report on cross-selling (Cross-selling in retail banking: Meeting the
revenue growth challenge, VRL KnowledgeBank, December 2006), the author
found some evidence of brand strength, in particular the generic category of
‘savings, investment and protection’ used in an intensive survey for Citigroup
covering some 30,000 customers of 34 major EU banks in life insurance. This
validates the conventional wisdom that customer loyalty – and therefore cross-
selling – is stronger in markets like Scandinavia, France and the Benelux coun-
tries, and weaker in the UK and Germany.
The interviews conducted for this report would support this evidence. Thus a
typical UK or German retail client would tend to go to his broker or IFA for
advice on long-term investments such as life insurance, whereas in France or
Sweden his bank is the likely port of call.
Certainly in the US, the evidence from the interviews is that the US market is
similar to the UK in the sense that a stockbroker, financial adviser or insurance
agent is viewed as a more likely source of good financial advice than a commer-
cial bank.
In the emerging markets of Asia-Pacific and the CEE, it would appear from the
interviews that the banks’ brand strength generally compares favourably with
that of an insurance agent. The challenge for the future, in these dynamic mar-
kets as well as more developed ones, is for banks to retain or improve this repu-
tation for financial advice.
REGULATION
The deregulation process in the highly protected emerging markets of Asia-
Pacific is continuing as local regulators strike a balance between permitting
local financial institutions to build their competitive strength and the desire to
introduce new products and service standards from Western banks and insur-
ers. Unlike the case with the CEE markets, where foreign ownership now char-
acterises the banking sector, it would appear that locally owned Asia-Pacific
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Appendix: List of interviewees
BANCASSURERS
Allianz/Dresdner
Aviva
AXA
Banco Bilbao Vizcaya Argentaria (BBVA)
Bank of China
Citibank
CNP Assurances
Fortis
Hartford Financial Services Group
HBOS
ING Group
KBC
Maybank
Nordea
Santander Central Hispano (SCH)
Svenska Handelsbanken
UniCredit
Wells Fargo
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Bibliography
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BIBLIOGRAPHY
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