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Bancassurance:

The Lessons of Global


Experience in Banking
and Insurance
Collaboration

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

A word about Asia-Pacific...


We have used the term ‘Asia-Pacific’ to describe the countries in the Asian land mass as
well as other countries in the Pacific Ocean such as Australia, Korea and Japan. Our
sources, however, sometimes use the term ‘Asia’ to refer to what appears to be roughly
the same area, and when using their data we employ the same term. Our intent is to cast
our net as widely as possible in the region by using the term ‘Asia-Pacific’ without
attempting to make an academic distinction.

© 2007 VRL KnowledgeBank Ltd

No part of this report may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without the prior permission of the copyright holder.

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
with regard to any specific matter. In the event that consulting or other expert assistance is required with regard to any specific
matter, the services of qualified professionals should be sought.

Print production: Patersons (www.patersons.com)

Product code: 7RB

First published: London, June 2007

ISBN: 1-905457-63-4

II © 2007
Contents

The Author........................................................................................................................ii
Currency conversions ......................................................................................................ii
A word about Asia-Pacific... ............................................................................................ii

List of figures ..................................................................................................................vii

List of tables ....................................................................................................................ix

Executive summary ..........................................................................................................1

1. Introduction..................................................................................................................5

2. What drives bancassurance? ........................................................................................7

3. The alternative structural models..............................................................................11


Assurbanking: The insurers’ response ............................................................................16

4. The influence of regulation........................................................................................17


Permitted ownership and products ................................................................................17
Taxation............................................................................................................................18
Capital adequacy regulation............................................................................................18
Product sales regulation and customer protection ........................................................19

5. The bancassurance products......................................................................................21


Product categories............................................................................................................21
Key product trends ..........................................................................................................23
The trend toward simple products in many sectors ................................................23
Banks extend their insurance product range ..........................................................24
Merging of products into ones that favour banks ....................................................25
Banks appear to have a competitive advantage as product range evolves ..............25
Less progress in markets where advice is required ..................................................26
Innovation comes from incomer companies............................................................26

6. The bancassurance client – profile and trends..........................................................29


Client profile ....................................................................................................................29
Key trends in customer behaviour – and the response to these trends ........................32

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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

7. Competitive distribution channels............................................................................35


Profile of the alternative channels ..................................................................................35
Agency sales forces and insurance company employees ..........................................36
Brokers ........................................................................................................................36
Other non-bancassurance channels ..........................................................................37
Trends in distribution market shares..............................................................................40
Europe ........................................................................................................................40
Asia-Pacific ................................................................................................................44
The US ........................................................................................................................45
Multiple channel distribution and the insurers’ response to bank competition ..........46

8. The profit profile ........................................................................................................49


The relative cost of bank distribution ............................................................................49
Relative product and functional profitability ................................................................53
Bancassurance pricing ....................................................................................................55
Actual profitability data ..................................................................................................55

9. The key national markets ..........................................................................................57


Europe ..............................................................................................................................58
Market profile ............................................................................................................58
Concentration of bank and insurance ownership....................................................59
Relative integration of bancassurance manufacture and distribution ....................60
A simple, tax-favoured investment product ............................................................60
France..........................................................................................................................61
Italy ............................................................................................................................62
Spain ..........................................................................................................................64
Germany ....................................................................................................................65
The UK........................................................................................................................66
North America ................................................................................................................69
The US ........................................................................................................................69
Canada ........................................................................................................................71
Asia-Pacific ......................................................................................................................73
Market profile ............................................................................................................73
Japan ..........................................................................................................................74
China ..........................................................................................................................75
India ............................................................................................................................77
Malaysia ....................................................................................................................78

10. Case studies ..............................................................................................................79


Allianz ..............................................................................................................................80
Background ................................................................................................................80
Bancassurance strategy ..............................................................................................81
Evaluation of bancassurance strategy ......................................................................83
Aviva ................................................................................................................................83
Background ................................................................................................................83
Bancassurance strategy ..............................................................................................84
Evaluation of bancassurance strategy ......................................................................85

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

11. The lessons of global experience: Addressing the issues ......................................115


Ownership and control..................................................................................................115
Choice of national market ............................................................................................118
Channel strategy ............................................................................................................119
Product range and strategy............................................................................................120
Client segmentation and strategy ................................................................................121
Joint venture/alliance selection and management ......................................................122
Culture and people issues..............................................................................................124
Managing the sales process............................................................................................124
Performance metrics......................................................................................................125
The impact of regulation ..............................................................................................127

© 2007 V
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

12. Summary and outlook............................................................................................129


Geography ......................................................................................................................129
Product ..........................................................................................................................131
Channel ..........................................................................................................................132
Structure of joint ventures and alliances ......................................................................133
Profitability ....................................................................................................................134
Client ..............................................................................................................................135
Regulation ......................................................................................................................135

Appendix: List of interviewees ....................................................................................137

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 3.1: Four dimensions of the bancassurance model ............................................14


Figure 3.2: Advantages and disadvantages of alternative distribution structures ........15

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 7.1: Share of revenues by postal services associated with financial


services, 2006 (%) ......................................................................................................40
Figure 7.2: The declining role of insurance company employees and agents in
selected European life insurance markets, 1998-2004 (%) ......................................41
Figure 7.3: Number of tied agents in France, 1985-2003 ..............................................42
Figure 7.4: The evolution of the share of life insurance broking in selected
European markets, 1998-2004 (%) ............................................................................43
Figure 7.5: Distribution of life insurance in Europe, 1990-2000 (%) ..........................43
Figure 7.6: US life insurance distribution is dominated by agents, 2006 (%) ..............45
Figure 7.7: US variable annuity sales dominated by independent financial
planners, 2001-2005 (%) ............................................................................................46

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

Figure 10.1: Allianz’s cross-selling in Germany..............................................................81


Figure 10.2: Rapid progress in Allianz’s key Asia-Pacific businesses (€ m)..................82
Figure 10.3: Comparative CNP bancassurance margins for France, Italy and
Brazil, end-December 2005 and end-June 2006 (%) ................................................91
Figure 10.4: Bancassurance: A truly virtuous circle ......................................................99
Figure 10.5: ING is well positioned for growth markets..............................................101
Figure 10.6: Relative ING bancassurance growth in Asia-Pacific, 2002-2005 (%) ....102
Figure 10.7: Wells Fargo’s insurance network ..............................................................112

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

Table 9.1: Leading European bank-insurance mergers, 1980-2006 ..............................59


Table 9.2: Life insurance distribution channels in major European countries,
2004 (%)......................................................................................................................60
Table 9.3: Top ten French life insurers, 2005 (€ bn) ......................................................62
Table 9.4: Evolution of Italian life insurance distribution channels, 2000-2005
(%) ..............................................................................................................................63
Table 9.5: UK life and pensions market by distribution channel, 1999-2004 (%) ......67
Table 9.6: Premium income from bank insurance sales, 2000-2005 (US$ bn
and %) ........................................................................................................................70
Table 9.7: Comparison of European and Asia-Pacific bancassurance models..............74
Table 9.8: Major insurance players in Chinese market by premium, first five
months of 2005 (CNY bn and %)..............................................................................76

Table 10.1: Bancassurance contribution to Aviva, 2006 (%) ........................................84


Table 10.2: US Bancassurance – top ten banks by insurance income, 2005
(US$ m and %) ..........................................................................................................88
Table 10.3: KBC market share by country and business, 2005 (%) ............................104

Table 11.1: Bancassurance divestitures by European banks and insurers,


1990-2006..................................................................................................................116
Table 11.2: Cultural differences between insurers and banks......................................117
Table 11.3: Three kinds of bancassurance sale ............................................................125

© 2007 IX
Executive summary

Bancassurance – the sale of retail insurance products to a commercial bank’s


client base – has evolved in different models since its origins in the European
Union (EU) in the mid-1980s. The classic European model is an integrated one
with common ownership or some form of exclusive commitment between the
insurance provider and bank distributor. In the US, the model involves virtually
total separation between bank distributor and insurance provider, while in
emerging markets like Asia-Pacific, where foreign insurers compete for shelf
space on domestic bank distribution platforms, yet a third structure is evolving.
The different models used drive profitability, product design and the opera-
tional challenge. While comparable profit data across a range of bancassurers
are fragmentary at best, it would appear that the integrated European model
not only combines both the substantial manufacturing and distribution margin
in insurance products but also offers significant operational economies in both
the back and front office. The available data thus indicate a relatively impressive
return on equity and client penetration for experienced, integrated European
bancassurers, like Fortis in its home markets and Aviva in markets where it has
integrated with a local bank distributor.
In the US, despite early indications that bancassurance might achieve market
penetration levels in life insurance comparable to the one-third it has in
Europe, US banks struggle to achieve a market share of 1-2% and essentially
offer a third-party insurance product to complete their financial product range.
In contrast, in the booming markets of Asia-Pacific, incremental market shares
for the bank channel are rapidly approaching European levels.
A common strategy of the leading bancassurers is to be present, as appropriate,
in all the major insurance distribution channels – company employee/agency,
bancassurance and independent brokers. It is widely assumed that, as insurance
markets evolve, there will be a natural trend from agents to banks to brokers as
the market becomes more sophisticated and willing to pay for advice and
choice. The challenge for the future of bancassurance in this regard is the

© 2007 1
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

Bancassurance also involves addressing the cultural divide between banks,


which take an institutional approach to selling, and insurance, where selling is
done by highly motivated individuals. Blending these cultures has been a chal-
lenge in all markets, whatever the ownership relationship. In addition, the rela-
tively lower returns on insurance underwriting has probably been a factor in the
US banks’ reluctance in invest large amounts of capital in manufacturing the
insurance product. In Europe, the wave of bancassurance deals before the stock
market peak of 2000 has left in its wake a number of transactions which have
since been undone or regretted.

© 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

© 2007 5
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

What drives bancassurance?

Bancassurance has evolved in different fashions at different historical points in


different national markets. As indicated by Figure 2.1, using data provided by
Swiss Re (Sigma) and AXA, life and non-life insurance have grown globally at
an annual rate of 5% over the past decade, against only 4% in global gross
domestic product (GDP).

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

Source: Datastream, Swiss Re, AXA

A number of key drivers have been underpinning this performance:


• The fusion of life insurance as one element of a booming global market
in long-term savings and investment products. The potential and actual
demand for investment in retirement products has preoccupied govern-
mental and private sector analysts as they attempt to quantify the need
for long-term savings of an ageing population for its retirement and the
corresponding inadequacy of most traditional pay-as-you-go or state

© 2007 7
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

pension arrangements. Life insurance has been a core instrument – if


not the only one – in many markets for the great bulk of the population.
In Sweden, for example, until the 1990s tax-favoured life insurance was
the long-term savings vehicle of choice for personal pensions, while in
Japan an understandable mistrust of alternative long-term investments
has ensured a similar role for life insurance.
At the same time, however, life insurance in recent years has become
only one of several alternative products to meet this demand. Term bank
deposits, variable and fixed annuities, personal pension funds, mutual
funds, direct equity investment and other tax-favoured vehicles have
emerged as viable alternatives. The explosion of personal pension fund
plans in markets like Australia, Chile, France and Italy provides yet
another alternative product. Interest in equity-linked products, in which
banks often have greater expertise than insurers, has further opened the
competitive gates.
This explosion in product alternatives has also corresponded with a lev-
elling of the tax treatment for all eligible long-term personal investments
rather than one which favours the traditional life product. This is dis-
cussed in more detail in Chapter 4 on regulation.
In many markets, life insurance has thus lost its unique status as the
vehicle of choice for long-term savings. As result of these forces, in most
European markets today the long-term saver is confronted with a wide
array of alternatives which vary in yield, risk, tax status and maturity. In
Spain, for example, banks define ‘customer funds’ as comprising three
elements: traditional bank deposits, pension funds and life insurance. In
France, life insurance, termed épargne assurance, has in effect become a
banking product.
For life insurers, therefore, recent history is a double-edged sword. The
good news is that their product is in even greater demand to meet the
structural need for greater long-term savings, but the bad news is that it
must confront an array of competitive propositions.
• The discovery of bank branches as an attractive alternative distribution
channel. While banks for decades sold life and non-life insurance as
agents in markets like the UK and France, the great bulk of life insurance
has historically been marketed by the traditional channels of company
salesmen, agents and brokers. The discovery in markets like France in
the 1980s that simple life products could be sold easily by generalist bank
branch sales staff was a revolutionary development which continues to
play out today in developing markets like Asia-Pacific. This transforma-
tion is discussed in greater detail in Chapters 9 and 11.
The advantages of banks as distributors are compelling: the visibility and
convenience of a large branch network, the trust most clients have in
their bank and its brand, and a more frequent interaction with the client
than is the case with traditional life channels. In addition, since banks
already held most of the funds used for purchase of life insurance in
their deposit and custody accounts in markets like France and Italy, only

8 © 2007
WHAT DRIVES BANCASSURANCE?

a simple internal recycling of the funds was necessary to create massive


apparent gains in market share. In Chapter 7, the report tracks the evo-
lution of these alternative distribution channels.
While banks spied these opportunities, insurers recognised the threat of
bank distribution. In Europe, where banks generally boasted a larger
market capitalisation and became the dominant partner in a consolida-
tion, insurers also reacted by buying or setting up their own bank.
• The structural convergence of banking and insurance in a consolidating
financial services sector. At both the structural and operational level,
banks and insurers have long eyed each others’ domain. Decades ago in
the US, institutions like American Express and Sears, Roebuck attempt-
ed, with limited success, to provide a supermarket of retail financial
services.
But today’s dominant model of bancassurance originated in Europe,
where a liberal regulatory structure placed no barriers on the sale of
banking and insurance products by the same institution, or of owner-
ship of both businesses by the same holding company.
At the same time, aggressive financial institutions realised that they
could grow their market capitalisation and – potentially – shareholder
value by merging across sectors. Thus in markets like Benelux, with a
limited number of potential partners in the financial sector, bank-insur-
ance mergers created today’s major conglomerates such as Fortis, KBC
and ING. As the 20th century drew to a close, a permissive capital mar-
ket environment actually advocated such ‘cross-pillar’ mergers. One of
the key arguments for such mergers was the perceived operational syner-
gy from cross-selling a broader range of financial products to an existing
client base as well as expanding the overall client base by acquisition. In
Chapter 3, the report examines in more detail the models used, while
Chapter 11 profiles the outcome of such consolidation.
• Potential cost savings from the perceived lower-cost bank branch chan-
nel. As bancassurance gained momentum in markets like Europe and
South Africa, both consultants and the banks themselves concluded that
an additional advantage of bank distribution is lower costs. Not having
to pay the significant sales commission to the traditional sales forces,
and perhaps not charging the full cost for use of the branch network,
gave banks a major cost advantage. At the same time, the productivity of
traditional sales forces was declining, whereas in contrast the ability of a
bank to produce ‘warm leads’ from existing clients gave it a considerable
advantage in sales productivity.
Actually measuring this cost advantage is a complex calculation, as is the
issue of whether banks actually reflected it in their insurance pricing or
simply absorbed it in their profit stream. Chapter 8 provides some esti-
mates from reliable sources. What is certain is that, combined with the
relationship and convenience advantages summarised above, any cost
advantage made it clear that bank distribution would make substantial
inroads into traditional alternatives.

© 2007 9
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

• Regulation both assists and hinders bancassurance. Each national mar-


ket has its own framework which regulates what products can be sold,
who can sell these products, the relative taxation on each and the rules
governing ownership of banks and insurers. Chapter 9 analyses in more
detail how today’s bancassurance has evolved across the world’s major
markets.
To summarise briefly, bancassurance has flowered in European markets like
France and Italy in large part because of liberal regulations on ownership, prod-
uct range and mis-selling, along with a level taxation playing field which gave
banks the ability to leverage their distribution strengths. In contrast, in a hand-
ful of markets like Canada, banks have been effectively prevented from owning
an insurer or marketing their products. In between are markets like the US,
where a level competitive playing field was only introduced in 1999, and the
UK, where strict regulations against mis-selling on long-term products work to
the advantage of brokers that can provide the necessary advice.

10 © 2007
Chapter 3

The alternative structural models

Bancassurance relationships between a bank and insurer can assume a wide


variety of structures. This chapter examines the choices available, the advan-
tages and disadvantages of each, and the critical factors which usually drive the
decision. In addition to bancassurance structures in which banks sell insurance
products to their retail clients, the report discusses briefly the assurbank alter-
native, in which an insurer establishes or acquires a bank to offer banking prod-
ucts to its insurance clients.
The two critical variables in selecting a bancassurance structure are the extent of
financial control and the degree of operational integration. Financial ownership
can range from zero to 100%, while the insurance business can be totally inde-
pendent from the banking unit or managed as an integrated retail entity. Thus
the possibilities include:
• a financial conglomerate with little or no effort to integrate the banking
and insurance operations. Such a structure provides earnings diversifica-
tion and a larger capital base but not the operational synergies from, for
example, cross-selling;
• a captive insurance company which is fully integrated with the bank at
the operational level and sells its products largely to group customers;
• a joint venture between a bank and insurer which involves a capital
commitment from each, as well as a strategy based on cross-selling to the
partner’s client base; and
• a distribution agreement without an equity interest but an exclusive or
non-exclusive agreement to sell the insurer’s products to the bank’s
client base.
Table 3.1, taken from a Sigma study, provides a summary of the benefits of three
of these options to the bank and insurance partners.

© 2007 11
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

Table 3.1: Benefits to banks and insurers of alternative bancassurance structures

Benefits to banks Distribution Joint Integrated


agreements ventures operations

Secure an additional and more stable stream ✔ ✔ ✔


of income through diversification into insurance
and reduce their reliance on interest spreads as
the major source of income
Leverage on their extensive customer bases ✔ ✔ ✔
and increase customer retention
Sell a whole range of financial services to clients ✔ ✔
Reduce risk-based capital requirement for the ✔
same level of revenue
Work towards the provision of integrated financial ✔ ✔
services tailored to the life-cycle of customers
Access funds that are otherwise kept with life ✔ ✔
insurers who sometimes benefit from tax advantages

Benefits to insurers Distribution Joint Integrated


agreements ventures operations

Tap into the huge customer base of banks ✔ ✔ ✔


Reduce their reliance on traditional agents by ✔ ✔ ✔
making use of various channels owned by banks
Share services with banks ✔ ✔
Develop new financial products more efficiently in ✔ ✔
collaboration with their bank partners
Establish market presence rapidly without the ✔ ✔ ✔
need to build up a network of agents
Obtain additional capital from banks to improve ✔ ✔
their solvency and expand business

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.

© 2007 13
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

Finally, in the UK many banks adopted the integrated approach to ownership


and management as they entered the bancassurance market in the 1990s, but
most eventually collapsed these de novo ventures in favour of joint ventures or
partnerships.
A survey by Finaccord in 2003 found that the exclusive distribution agreement
was by far the most common structural model, followed by wholly owned cap-
tives.
A 2002 study by McKinsey & Co of possible models focuses on four critical
dimensions: the product choice (life or life and non-life), number of channels
(a single integrated one or multiple product-focused channels), product source
(in-house or outsourced) and ownership (greenfield or acquisition as opposed
to simple distribution agreement).
Figure 3.1 sets out these options together with the choices made by a number of
EU bancassurers in the early years of the 21st century.

Figure 3.1: Four dimensions of the bancassurance model

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

Chapter 11 provides the report’s findings and conclusions on the choice of


structure. At this point, it is clear that there is no ideal structure either in terms
of ownership or operational integration.
A host of variables in each market must be evaluated, including:
• the relative profitability of manufacturing the insurance product. As
mentioned above, many banks feel that the equity returns from owner-
ship are unattractive in comparison with investment in the banking
business;

14 © 2007
THE ALTERNATIVE STRUCTURAL MODELS

• the relative profitability of the distribution margin. In Italy, for exam-


ple, splitting the overall sales margin with the product provider seems to
produce an acceptable return for the bank partner;
• the difficulty in managing an integrated banking and insurance busi-
ness. In Chapter 11, the report discusses in detail the problems of inte-
grating such critical dimensions as management culture, compensation
and different distribution channels; and
• management strategy and culture. Many banks insist on wholly owned
or captive operations, while few others are comfortable with a number
of alliances or joint ventures.
In summary, Figure 3.2 (from a Sigma study) presents the advantages and dis-
advantages of four alternative structures: the integrated financial services
group, joint venture, strategic alliance and distribution agreement.

Figure 3.2: Advantages and disadvantages of alternative distribution structures

Distribution Strategic Joint Financial


agreement alliances ventures services
groups

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

Potential for fully


integrated products

Source: Swiss Re

As will be discussed in more detail in Chapter 9, the bancassurance model has


taken different shape in the major markets reviewed in this study. In Europe,
arguably the home of the concept, the financial services landscape was trans-
formed in the late 1990s by about 20 mergers of banks and insurers to create a
bancassurance conglomerate. Usually led by an acquiring bank, these transac-
tions were driven by a combination of desire to broaden the product base,
achieve a larger market capitalisation for both defensive and offensive reasons,
and increase the customer base.

© 2007 15
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.

ASSURBANKING: THE INSURERS’ RESPONSE


Rather than merge or operate a joint venture with a bank, many insurers have
replied to the banking challenge by offering their own banking services through
a subsidiary vehicle. Known as assurbanking, this strategy is underpinned by
the desire to retain insurance clients by offering basic loan and deposit services,
such as the ability to retain in-house the proceeds of insurance payouts. Thus in
the Netherlands, where all of its major peers bought or allied with a banking
partner, Aegon went it alone by setting up a wholly owned bank.
A recent study on the French market by the rating agency Fitch confirms that
the results of assurbanking have generally been fairly modest. The principal
barrier has been to persuade clients – perhaps a targeted 10% of the insurer’s
base – to switch the bulk of their banking business to an insurer’s bank. In addi-
tion, agents have not shown much enthusiasm for selling the relatively low-
margin banking products, and loan losses have been fairly high. The largest
French assurbank, AXA Bank, has won perhaps 500,000 clients but has only
recently reached breakeven after years of operations.

16 © 2007
Chapter 4

The influence of regulation

Financial services is a closely regulated sector, and regulation is a critical driver


of the profile and outcome of bancassurance in markets across the world.
Regulation in its various forms impacts bancassurance in several principal
dimensions.

PERMITTED OWNERSHIP AND PRODUCTS


The ownership of insurance companies, as well as that between banks and
insurers, has shaped bancassurance in the key markets under review. At one
extreme is the European Union, whose liberal financial services directives place
no barriers on ownership links between banks and insurers, nor prohibitions in
principle of foreign vs. domestic ownership.
Until 1999 and the passage of the Gramm-Leach-Bliley legislation, banks in the
US were largely unable to acquire insurers. The result of this deregulation has
been a wave of bank acquisitions of insurance brokers, in contrast to Europe
where banks have largely acquired insurance underwriters. Chapter 9 analyses
these developments in more detail.
At the other extreme are many Asia-Pacific and other markets, where regula-
tions prohibit or seriously limit the ownership of domestic insurers by banks.
Others limit foreign ownership of an insurer or bank, and several countries
place major barriers to the sale of insurance products by banks. Thus, in South
Korea, insurers have resisted the entry of bancassurance proposed for 2007. In
many markets, the politically sensitive price of auto insurance is controlled. In
Japan, South Korea and the Philippines, there are severe restrictions on the
insurance products banks can sell. Canada prohibits banks from selling most
insurance products to their retail clients.
Chapter 9 of this report discusses in more detail the bancassurance profile cre-
ated by these regulations in the markets under review.

© 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.

CAPITAL ADEQUACY REGULATION


One of the unique features of most national financial services sectors is the sep-
arate regulation of banks and insurers. The Financial Services Authority (FSA)
in the UK, for example, is a rare example of one regulator setting rules which
apply consistently to both banks and insurers. As political barriers to the merg-
er of different regulatory agencies are removed, however, other jurisdictions
have adopted the FSA’s structure.
One consequence of these differential regulatory regimes has been the opportu-
nity of a bank or insurer to avoid the full capital weighting of a given risk by
placing it in the more lenient jurisdiction. As a recent study by Standard &
Poor’s points out, “insurance capital needs are not represented in regulatory
capital”. For banks, this possibility has been effectively eliminated by Basel I and
the proposed Basel II, which oblige banks to take the full capital weighting in
their insurance operations.

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.

PRODUCT SALES REGULATION AND CUSTOMER PROTECTION


The economic and social importance of insurance products has understandably
surrounded them with a network of regulations designed at least in part to pro-
tect the insured. In several markets, price controls on certain insurance prod-
ucts still exist.
In recent years, however, it has become clear that many clients do not fully
understand the risks and rewards of the life or protection product they are buy-
ing. At the same time, the relatively high selling commissions paid to salesmen
and the pressure on these sales forces to meet sales targets can result in mis-sell-
ing – essentially selling a product which is not appropriate for the client.
Such mis-selling is a regulatory target in markets like the UK and US, with
strong consumer lobbies and regulatory agencies. Chapter 9 discusses in more
detail the action taken by the UK’s FSA to implement its priority strategy of
‘Treating Customers Fairly’, as well as the fines incurred and substantial pay-
ments to customers made by several UK financial institutions. The issue is a
particularly significant one for bancassurers in view of the relatively high sales
and manufacturing margins involved in such products as credit life, payment
protection insurance (PPI) and health insurance.

© 2007 19
Chapter 5

The bancassurance products

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.

© 2007 21
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.

KEY PRODUCT TRENDS


Over the past few decades as bancassurance has developed, a number of trends
stand out.

The trend toward simple products in many sectors


Bancassurance today, both in name and heritage, reflects the discovery by banks
in France in the 1980s that their simple, long-term, tax-favoured bank deposit
was an attractive alternative to the traditional, more complex life insurance
offering of the insurance sector. As will be discussed in more detail in Chapter 8,
this simple, low-cost (because it is sold by semi-trained bank staff and not bur-
dened by the margin on death benefits) investment appealed to savers looking
for a long-term, low-cost, tax-favoured investment for their retirement. The
result has been a marginalisation of the traditional life product as well as the

© 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.

Figure 5.1: Relationship between product complexity and distribution channel

Complex products, eg group


Specialist
life/pension plans, estate planning
advisors

Demanding products or Mobile


demanding customers sales force

Increasing product
complexity and
Ordinary insurance products, eg Bank staff level of service
unit-linked products (with one to two weeks of training)

Simple products, eg credit Bank staff/tellers


insurance, term insurance (with minimal training)

Source: DIBC, Saloman Brothers

Banks extend their insurance product range


In bancassurance countries like France, banks have moved from selling the
long-term life product (essentially a term deposit with a life wrapper) to mar-
keting simple term life and non-life products. The universal discovery of the
banking community has been that simple retail products not requiring special-
ist advice can be sold effectively to a bank client base via direct mail, the internet
and the branch system. In markets like Spain, the banks now sell life and non-
life products outside their branch system to non-bank clients.
Figure 5.2 demonstrates how European banks have gained share in many non-
life markets since 1998. Having won a dominant share of the life business in
markets like France and Portugal, banks have begun to build share – admittedly
from a low base – in the non-life sector with auto, health care, travel, and build-
ings and contents insurance.

24 © 2007
THE BANCASSURANCE PRODUCTS

Figure 5.2: European banks’ share of non-life insurance*, 1998-2004 (%)


16% 15.0%

Share of non-life insurance (%) 14%

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’

Source: CEA – latest available data

Merging of products into ones that favour banks


The traditional life insurance product has effectively merged into a broader cat-
egory of tax-favoured, long-term investment products in which banks often
have a competitive advantage. This has been driven in large part by a levelling of
the tax playing field as governments remove the historical bias in favour of life
insurance. In Sweden, for example, the tax-favoured pension product, which is
the solution of choice for investors in this high-tax country, was effectively in
the hands of the insurance sector. In 1994, however, banks were permitted to
offer the same product advantages.
Thus in markets like Europe and the US, the client can now choose among a
range of tax-favoured personal pensions, traditional life insurance, equity-relat-
ed variable annuities, mutual funds and bank deposits. In this more complex
world in which the individual can select his own preferred investment vehicle
and still retain tax benefits, the traditional life insurance general pooled fund
may have less appeal.

Banks appear to have a competitive advantage as product range evolves


Equity and derivative-related products have won market share in the long-term
savings sector in recent decades, and banks would appear to have led this prod-
uct innovation. For example, historically the core life insurance product was
based on an insurer guaranteeing a fixed income return based on its pooled
investment fund. In contrast, today’s most popular long-term retail investment
product is a bank-guaranteed deposit or annuity with an option on the equity
markets.

© 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.

Less progress in markets where advice is required


On the other hand, banks have made less progress in insurance markets where
expert advice is required to sell complex products. Thus in highly regulated
Germany and the UK, where the traditional mixed protection/investment prod-
uct still dominates, banks find it difficult to compete with independent finan-
cial advisers. Numerous forecasts have been made of the market share gains that
banks should, in theory, win, but the results have often been disappointing.
Many banks have increasingly espoused the view that they are distributors of
mass-market financial products, including life and non-life.
Having bought insurance companies in the 1990s to augment their product
range, US and European banks like Citigroup and the Scandinavian banks have
subsequently sold the insurance manufacturer and bought back the product in
their role as distributor. Thus, Wells Fargo (see the case study in Chapter 10) has
led the US banking fraternity in acquiring insurance brokers while eschewing
the manufacture of the product. In cases where the manufacturing margin is
attractive and the risk controllable, however, large banks like Crédit Agricole
have not hesitated to run an integrated insurance business.
In contrast, as discussed in Chapter 3, insurers have had less success in selling
banking products. Margins of less than a fraction of 1% on traditional banking
products such as deposits and retail loans are not particularly attractive to an
insurance sales force accustomed to perhaps 3-4% on a life or mutual fund
product, while the banks have successfully resisted the inroads of insurers on
their core client population.

Innovation comes from incomer companies


In emerging insurance markets such as Asia-Pacific, innovation has been pro-
vided largely by foreign insurers and banks that can adapt their home country
products to a less sophisticated environment. Thus, foreign insurers like Aviva,
Hartford and AIG have been able to win market share in partnership with local
banks and insurers. The case study in Chapter 10 profiles how Hartford has
built the Japanese variable annuity market and retained its leadership position.
In summary, the product profile has evolved separately in each national market,
driven by factors such as tax, regulation, client demand and the relative strength
of alternative distribution channels. In the stock market euphoria of the late
1990s, equity-related investments were the universal choice of retail clients, and
the banks benefited from their perceived expertise in the equity markets as well
as distribution strength. Since that time, cautious retail investors have almost

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

The bancassurance client – profile and


trends

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

Ɣ Personal liability Ɣ Savings


household account

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

KEY TRENDS IN CUSTOMER BEHAVIOUR – AND THE RESPONSE TO


THESE TRENDS
On the basis of the limited statistical evidence on bancassurance customer
behaviour, the following trends – and responses to the trends – stand out.

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.

The concept of the ‘trusted adviser’ has gained traction


Financial institutions increasingly measure customer satisfaction as a key ele-
ment of both individual and unit performance. The response to the question
“Would you recommend this bank to your friends and family?” is a key metric
for such surveys, as well as an element in the banker’s balanced score card.
Reconciling this metric with that demanding superior sales performance is a
real challenge for sales staff.

32 © 2007
THE BANCASSURANCE CLIENT – PROFILE AND TRENDS

Prioritising the upscale segments


Both banks and insurers have responded to competition for the mass market
and the commoditisation of traditional products by prioritising the upscale
segments. Margins on simple investment products like term deposits and loans
have been slashed by price competition. Banks in particular are moving towards
rewarding client loyalty by price concessions in the form of gold, silver and
bronze classifications. In the bancassurance world, this means a focus on private
banking units and offering a higher level of service to clients who can afford it.
As indicated above, the overall wealth of the upscale segments can dwarf that of
the mass market.

© 2007 33
Chapter 7

Competitive distribution channels

Bancassurance distribution cannot be evaluated in a vacuum. This chapter first


examines the alternative channels with which bancassurance competes to deter-
mine the relative advantages and disadvantages of each major channel. The
report then reviews how bancassurance has fared against these channels in the
three major regional markets in the report survey. Finally, it reviews the issues
involved in multichannel distribution and the competitive response by insurers
to bank distribution
In practice, the choice of channels in a given market is driven by the complex
interaction of a number of variables: regulation and taxation, product profile
and complexity, the brand strength of major providers and the local culture. As
discussed below, both banks and insurers make use of multiple channels in a
given market as well as use different channels for different markets.
One of the key issues for bancassurers is the relative importance of the distribu-
tion function versus product manufacture. As their business model evolves, the
relative priority of the two functions often changes, and bancassurers often
term themselves ‘product providers’ or ‘distributors’. Relative product profitabil-
ity, capital requirements, client needs, the strength of the distribution network
and the availability of alternative providers are variables in this strategic choice.
Chapter 11 of this report discusses the decision of banks in the US and Europe
to divest themselves of both life and non-life manufacture in favour of buying
back the product.

PROFILE OF THE ALTERNATIVE CHANNELS


This chapter begins with a summary of the competitive strengths and weak-
nesses of the principal alternative channels.

© 2007 35
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

Agency sales forces and insurance company employees


The starting point for retail insurance distribution is the classical combination
of company salesmen and agency channel: a sales force committed to a single or
limited number of insurers’ brands and product lines.
The great strengths of such a force are its commitment to the carrier as well as
its personal relationships with the insured. On the other hand, in a world where
relatively sophisticated clients are increasingly demanding choice, the competi-
tive positioning of channels such as brokers offering a choice of many providers
is improving.
Another disadvantage of this channel is its relative cost. While an agent presum-
ably is paid on the basis of results, the level of commissions paid to company
salesmen and agents is substantially higher than the case of bank distribution.
Little reliable data on exact commission numbers are available, but the wide-
spread assumption is that agency/salesman distribution is relatively expensive.
Thus, a LIMRA International (LIMRA is an acronym for the Life Insurance and
Market Research Association) survey in 2000 in Asia found that 79% of the
insurers believed that bancassurance was more cost-effective than career agents.
This issue of relative cost is discussed in more detail in Chapter 8.
Finally, there is evidence that such a channel has some difficulty in adapting to
new products such as equity-linked and derivative-based offerings, as well as
aggressively seeking out new clients. In Europe, for example, traditional insurers
such as AXA and Aegon have had to restructure their agency sales forces exten-
sively to focus on selected agents and employees who can be trained and moti-
vated to sell the broader range of products demanded by clients. In similar vein,
Allianz in Germany has more recently reshaped its traditional sales force along
these lines.

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.

Other non-bancassurance channels


The internet and other direct channels have become an attractive channel for
the sale of simple non-life products such as auto and home insurance. The role
model for such direct marketing is Direct Line, now owned by RBS, which in
the 1990s won a dominant market share in the UK auto insurance sector by
offering superior service as well as competitive pricing.
On the other hand, life insurance has not been a particularly successful product
for this channel due to the perceived need for advice and an offline medical
examination.
Direct banks have become a significant provider of life, health and property and
casualty (P&C) products. Table 7.1 lists 15 direct banks in the Canadian and UK

© 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)

Tesco Personal 1997 173.0 ✔ ✔ ✔ ✔ ✔ ✔


Finance
First Direct 1989 49.9 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔
Scottish Widows 1995 16.5 ✔ ✔ ✔ ✔
Bank
The One Account 1997 23.0 ✔ ✔ ✔ ✔ ✔
Sainsbury’s Bank 1997 22.0 ✔ ✔ ✔ ✔ ✔ ✔ ✔
Standard Life 1998 4.6 ✔ ✔ ✔
Direct Line Rescue 1998 31.0 ✔
ING Direct Canada 1997 profit2 ✔ ✔ ✔ ✔ ✔
Cahoot 2000 (15.0) ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔
Goldfish 1996 (30.0) ✔ ✔ ✔ ✔ ✔
Egg 1998 (34.0) ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔
Intelligent Finance 2000 (53.0) ✔ ✔ ✔ ✔ ✔ ✔ ✔
Financial
President’s Choice 1998 (104.0) ✔ ✔ ✔ ✔ ✔ ✔ ✔
ING Direct UK 2003 loss2 ✔
Citizens Bank of 1997 loss2 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔
Canada

Note:
1. Pre-tax profit before exceptional items.
2. Specific figures not given.

Source: Financial Services Distribution

© 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

Figure 7.1: Share of revenues by postal services associated with financial


services, 2006 (%)
100%
91%
90%
83%
80%
80% 75% 77%
72%
Share of revenues (%)

70%
58%
60%

50%
42%
40%
28%
30% 25% 23%
20%
20% 17%
9%
10%

0%
Italy Hungary Poland France Switzerland Germany Belgium

Financial services Mail and other services

Source: Financial Services Distribution, La Poste

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.

TRENDS IN DISTRIBUTION MARKET SHARES


The report here analyses how the advent of bancassurance has impacted the
market share of the major channels in Europe, the US and Asia-Pacific.

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

Source: CEA – latest available data

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

Figure 7.3: Number of tied agents in France, 1985-2003


25,000

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

Source: CEA – latest available data

In summary, a Euronet survey for the European market as a whole indicates


that the share of brokerage distribution in the life sector has increased margin-
ally over the years between 1990 and 2000. In contrast, bank distribution has
soared from roughly 10% to 30% of the total retail market. Figure 7.5 depicts
this erosion of traditional life distribution channels.

Figure 7.5: Distribution of life insurance in Europe, 1990-2000 (%)

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

Source: Euronet – latest available data

© 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

Year Career agency Brokers Direct Bancassurance Others


and direct marketing
sales force

China - main channel insignificant insignificant > 20% in -


major cities
Hong Kong - main channel insignificant < 1% 15.1% -
India - main channel effectively insignificant < 5% -
prohibited
Indonesia 2000 main channel about 1% insignificant negligible -
Japan - main channel insignificant < 1% < 1% -
Malaysia 1998 86% 0.6% 2% 6% 4%
Philippines 1998 75% 1.8% 1% not allowed 3%
Singapore 1998 77% insignificant < 0.5% 26% 1%
South Korea - main channel < 1% insignificant not allowed -
Taiwan 1998 93% 4.4% 1% 1% 2%
Thailand 1998 97% < 0.5% insignificant 2% -
Vietnam - main channel small 0% < 1% -

Source: Swiss Re

44 © 2007
COMPETITIVE DISTRIBUTION CHANNELS

In Asia-Pacific, as indicated in Table 7.2, the brokerage sector to date has


remained a marginal player in the face of the traditional company and agency
sales forces and the growing strength of the bancassurance competitors.
For domestic and foreign newcomers to the Asia-Pacific insurance market, bank
distribution is a much cheaper and faster means of building market share than
recruiting, training and positioning an agency sales force. On the other hand,
given the difficulty in obtaining exclusive sales arrangements with local banks,
some newcomers have established their own greenfield sales forces.

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.

Figure 7.6: US life insurance distribution is dominated by agents, 2006 (%)

Others
9%
Banks
2%

Tied agent
35%

Independent agent
54%

Source: LIMRA International

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

Figure 7.7: US variable annuity sales dominated by independent financial


planners, 2001-2005 (%)
100% CAGR
2001-2005
90%
Share of variable annuity market (%)

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

Source: VARDS, AXA – latest available data

MULTIPLE CHANNEL DISTRIBUTION AND THE INSURERS’ RESPONSE


TO BANK COMPETITION
The business model for many bancassurers, as well as the insurers themselves, is
a multiple channel strategy. In many cases, such a strategy is the product of an
insurance acquisition designed to build a larger overall client base and obtain
insurance expertise as well as develop an additional, non-bank sales channel.
Thus leading European bancassurers like Lloyds TSB, Svenska Handelsbanken,
DnB NOR, KBC and Fortis have retained the traditional company
employee/agency and broker channels they acquired in the 1990s.
Managing this multichannel structure is a complex challenge. Channel conflict
– the issue of similar products being sold through different channels – has been
a major problem for bancassurers, particularly in markets where brokers are
well entrenched or geographic monopolies had been granted to specific agents
or employees.
Thus in the early days of bancassurance, French carriers like the former UAP, as
well as Italian insurers, were obliged to pay off agents to permit their bancassur-
ance arms to compete in those regions. A classic confrontation took place in the
Netherlands, a brokerage stronghold, when the insurer Nationale-Nederlanden
(NN) in 1991 announced the acquisition of NMB Bank along with its direct
banking affiliate Postbank. A boycott of NN by the brokerage community was
settled only by a compromise which is believed to have involved product pricing
and channel usage.

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

The profit profile

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.

THE RELATIVE COST OF BANK DISTRIBUTION


It is widely assumed that bank distribution is cheaper than the traditional
agency and broker channels. A number of reliable consultant studies, some of

© 2007 49
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

which are incorporated below, quantify this differential. It should be pointed


out, however, that actual operating data from individual bancassurers are rarely
made available to support these conclusions.
Underpinning this cost advantage is bancassurance’s higher productivity. Since
the origins of bancassurance in the mid-1980s in Europe and South Africa, it
has been assumed that a bank employee working off the so-called warm client
base provided by the branch network can generate a multiple of the revenue of
an agent or broker who must do his own prospecting.
A typical productivity study based on US data is provided in Figure 8.1 (below)
for the bank and agency channels. Given the same number of client cases, the
bank channel is deemed able to convert 25% into actual business against only
10% for the agent. Similarly, a study by the consulting firm Tillinghast estimates
the bank productivity advantage at four times that of the agent. A study by
Accenture indicates that the bancassurers’ cost advantage translates into an
internal rate of return of 8.3% over the cost of funds against 7.0% for tradition-
al insurers.

Figure 8.1: Banks have higher productivity than traditional agents

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.

Figure 8.2: New distribution channels are much lower-cost

Percentage of first-year premiums (%)

Career 152%

Independent brokers 116%

Worksite 65%

Bank* 60%

Direct** 20%

Online 10%

* Ordinary life acquisition cost


** UK experience

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

Figure 8.3: Bancassurance in Italy has succeeded because of a cost advantage


Cost ratio by channel (C$ bn)

19.9

14.5
5.4

3.0 8.8

14.5 3.0
11.5

5.8

Agents Financial services Banks

Commissions General expenses

New life business* (C$ bn and %)

100% = C$1.3bn 100% = C$2.8bn

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.

RELATIVE PRODUCT AND FUNCTIONAL PROFITABILITY


One of the clear findings of this research is the wide differential in product
profitability, not only across products, but also across national markets.
In terms of national markets, a basic product such as term life can be a low-
value, commoditised one (as in the US) or a relatively high-margin and attrac-
tive one in markets such as the Netherlands, Italy and Spain. Thus banks in
Europe, having been introduced to bancassurance by the ease with which they
can sell tax-advantaged investment products, have found that they are also well
equipped to offer relatively high-margin term life as a standalone product. One
Dutch bancassurer thus calculates that term life offers the highest return on
bancassurance capital at 15-20%, much higher than the fees earned now on sell-
ing the original investment product.
Sadly, it was impossible to locate publicly available and reliable data across
national markets on relative profitability even for such standard products. The
excuse given invariably is that such comparisons cannot be made because of
local conditions and other special factors.
Figure 8.4, based on US data, does provide a rough indication of relative prod-
uct profitability in terms of number of basis points. Fixed annuities and whole
life lead the list with spreads of at least 50 basis points, while term insurance, as
indicated above, produces only five basis points.

© 2007 53
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

Figure 8.4: Relative profitability of selected products


Spreads (basis points)

Fixed annuities 75-100

Wholelife 50-60

Variable annuities 30-50

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.

ACTUAL PROFITABILITY DATA


As indicated above, even in the mature European market the database on actual
bancassurance profitability – as opposed to consultants’ estimates – is quite
meagre. On the other hand, several leading bancassurers – not surprisingly, per-
haps, those with a good story to tell! – have not only revealed current key profit
numbers in their investor reporting but also compared them with distribution
alternatives.
Table 8.1 (on the following page) provides data from two such bancassurance
leaders which are profiled in Chapter 10 – Fortis (in its Belgian home market)
and Aviva (for its global business) – during the period 2005-2006. Margins (on
an embedded value basis) are substantially higher for the bancassurance

© 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 (%)

Fortis Belgium (2005 data)


Bancassurance Broker channel
(formerly Fortis (formerly Fortis AG)
Bank Insurance)

Margin (VANB/PVNBP*) 4.16% 1.82%


IRR 20.20% 9.80%

Aviva (2006 data)


Bancassurance Non-bancassurance

Margin 2.70% 1.50%

* value added by new business divided by present value of new business premiums.

Source: company data

As other bancassurers in these and other markets feel comfortable in publishing


their results by distribution channel, analysts will study them with interest to
determine whether bancassurance is truly a more profitable distribution chan-
nel.
The bancassurance profit record is thus an impressive one. Equally impressive,
however, are the steps insurers in European have taken to improve their own
profit performance – and thus enable them to meet the competitive challenge of
the banks.
Insurers like Aegon, Aviva, AXA and others have transformed their business
model since the 1990s. The productivity of the sales force has been improved by
the culling of agents who did not meet productivity standards. Multichannel
distribution has become the standard. Their product and operational experi-
ence has been successfully exported across Europe and into more dynamic mar-
kets such as Asia-Pacific. Product ranges have been modernised to meet their
clients’ demand for choice. Client segmentation has been improved, and priori-
ty given to the more affluent segments seeking advice. One wonders whether
this transformation would have taken place without the stimulus of bancassur-
ance!
Finally, the interviewees noted the wide range of performance data for individ-
ual bancassurers. As in any business, execution and management skill are key
variables whatever the inherent cost and other advantages of bancassurance.
Chapter 11 explores the drivers for these results and the lessons of several
decades of experience.

56 © 2007
Chapter 9

The key national markets

Having explored the key dimensions of bancassurance – product, client, distri-


bution alternatives and profitability – across the sector, the report now exam-
ines in more detail the profile of major geographic markets. The objective is to
determine how these elements fit together to drive relative bancassurance suc-
cess or failure, as well as lay the foundation for the final chapters which examine
case studies of success, the issues encountered and resolved, and the outlook for
the future.
In selecting national markets, the focus has been on those which meet some or
all of the following criteria:
• relative success of bancassurance;
• size of the market;
• growth potential of the market; and
• innovative solutions and lessons.
At the same time, a geographic balance has been established between the three
regions which dominate the overall bancassurance universe: North America,
Asia-Pacific and Europe. A typical segmentation of the global life insurance
market, the dominant bancassurance product, is provided by the Comité
Européen des Assurances (CEA) in Europe. The evolution of these three life
markets between 1985 and 2004 is provided in Figure 9.1 (on the following
page).

© 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

Others, 4.1% Europe, 25.9% Others, 4.4%

North America, Europe, 36.9%


36.0%

North America,
Asia-Pacific, 19.6%
50.3% Asia-Pacific, 22.7%

Note: Europe includes CEE.


Data may not sum due to rounding

Source: Swiss Re – latest available data

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

Concentration of bank and insurance ownership


Over the past decade, the European financial services sector has experienced
massive consolidation which has not only reduced the number of competitors
but also merged major banks and insurers. Table 9.1 lists the major bank/insur-
ance mergers in recent years across Western Europe as banks in particular
sought to expand their market capitalisation, client base and product offerings.

Table 9.1: Leading European bank-insurance mergers,1980-2006

Dominant banks Insurance partners Country

KBC (Kredietbank & CERA) ABB Belgium


Dexia DVV Insurance Belgium
Rabobank Interpolis Netherlands
SNS Reaal Netherlands
SEB Trygg-Hansa Sweden
Handelsbanken SPP Sweden
Danske Bank Danica Denmark
Nordea (Unidanmark) Tryg Baltica Denmark
Nordea (CBK) Vesta Norway
Sparebanken NOR Gjensidige Norway
DnB Vital Norway
Credit Suisse Winterthur Switzerland
Deutsche Bank Deutscher Herold Germany
Lloyds Bank Abbey Life UK
Lloyds TSB Scottish Widows UK
Abbey National Scottish Mutual UK
Scottish Provident UK
Halifax Clerical Medical UK

Dominant insurers Bank partners Country

Fortis (Groupe AG) ASLK-CGER Belgium


Generale Bank Belgium
Fortis (Amev) VSB Netherlands
ING (Nationale-Nederlanden) NMB Postbank Netherlands
Sampo Leonia Finland
Swiss Life Banca del Gottardo Switzerland
Allianz Dresdner Bank Germany
AMB BfG Germany
GAN CIC France
AXA (UAP) Banque Worms France
AXA Banque Directe France
Irish Life Irish Permanent Ireland

Source: DIBC

As a result, as indicated below in the discussion of individual markets, in a typi-


cal developed European market a significant number of leaders in the life sector
are bancassurers – groups with both a banking and insurance activity.

© 2007 59
BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

Relative integration of bancassurance manufacture and distribution


All structural models are present in Europe – captives, capitalised joint ventures
and simple distribution agreements – but the captive model is particularly
widespread. Thus, major banks in Spain, France, Benelux and Italy have fully
integrated their insurance units. Unlike the case in the US and Asia-Pacific, dis-
tribution agreements tend to be exclusive, which offers greater opportunities for
front- and back-office integration. The increased interest by banks in product
manufacture has also driven further integration.

A simple, tax-favoured investment product


The bancassurance model in Europe has evolved away from the complex whole,
or universal, life product offering both death benefits and investment returns, in
favour of a simple, tax-favoured, lower-cost investment product. In markets like
France and Spain, this traditional life product has virtually disappeared, as cus-
tomers appear to prefer to buy their investment and protection separately. The
bank distribution network has been the major beneficiary of this trend.
Table 9.2 profiles the distinction between bancassurance markets in developed
Europe and those dominated by brokers and agents.

Table 9.2: Life insurance distribution channels in major European countries, 2004
(%)

Country Banks* Agents (tied/ Brokers/ Insurance Other


multi-tied) IFAs company
employees

Spain 69% 15% 6% - 9%


France 62% 8% 10% 15% 5%
UK 18% 4% 61% 9% 8%
Germany 25% 34% 32% N/A N/A
Italy 68% 19% 1% 13% -
Netherlands 19% 55% - 26% -
Sweden 45% - 19% 28% 8%

Note: * Including other networks such as post offices


Figures may not sum due to rounding

Source: CEA, Bankhall, Tillinghast, DIBC – latest available data

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.

Figure 9.2: Sales of life insurance by channel in France, 1990-2005 (%)


100% 4 6 6 6 6 5 6 6 6
90%
19 17 16 17 17 16 17 16
28 38
Sales of retail life insurance (%)

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

* Change in data presentation as all non-bank channels are combined

Source: Fédération Française des Sociétés d'Assurances (FFSA)

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

Table 9.3: Top ten French life insurers, 2005 (€ bn)

Insurer Premium
income (€ bn)

CNP Assurances 21.4


Crédit Agricole 18.8
AXA 13.2
Generali France 9.6
BNP Paribas 9.0
Société Générale 7.7
AGF 6.2
ACM 5.9
Groupama 5.8
Aviva France 5.2

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 (%)

Channels Market share (%)


2000 2001 2002 2003 2004 2005

Banks 54.1 61.2 56.3 58.9 58.6 60.7


Agents 27.0 17.9 19.6 18.3 18.6 18.2
Direct sales 8.6 8.8 8.9 10.9 12.6 12.4
Financial advisers 9.4 11.2 14.3 11.2 9.5 7.6
Brokers 0.9 0.9 0.9 0.7 0.7 1.1

Note: Figures may not sum due to rounding.

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.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

Figure 9.3: Bank penetration of individual life products in Italy, 1998-2001 (%)

€19.4m €23.6m €0.01m €3.2m €0.1m N/A


100%

90%

80%

70%
Penteration (%)

60%

50%

40%

30%

20%

10%

0%
Whole life Unit-linked Long-term Capitalisation Pension Individual
health care funds pensions

Banks Agents Other

Source: ANIA – no comparable subsequent data available

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

Mutual funds Life insurance Pension funds

Source: Morgan Consulting

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

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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 (%)

1999 2000 2001 2002 2003 2004 Change


1999-2004

Financial adviser 54.1 58.9 64.2 63.3 64.1 61.4 10.1


Direct salesforce 28.8 21.5 13.0 11.4 9.7 8.7 (19.1)
Bancassurance 9.1 10.0 12.1 13.4 12.8 17.5 3.7
Tied agent 4.9 4.6 4.8 4.5 4.3 4.1 (0.6)
Direct 2.5 3.3 3.5 4.0 5.3 4.6 2.8
Others 0.7 1.8 2.3 3.3 3.8 3.8 3.1
Total 100.0 100.0 100.0 100.0 100.0 100.0 0.1

Note: Splits based on annual premium equivalent figures.


Figures may not sum due to rounding.

Source: Bankhall – latest available data

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

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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 %)

2000 2001 2002 2003 20051

Annuities 31.0 37.1 47.7 51.6 41.9


Commercial lines2 5.4 8.9 11.5 14.2 24.3
Personal property/casualty 3.7 4.1 5.0 6.3 7.7
Credit insurance 2.7 2.8 2.5 2.4 2.1
Individual life/health3 2.1 2.3 2.8 3.6 4.1
Total 44.9 55.2 69.5 78.1 80.1
Annual growth 23.4% 22.9% 25.9% 12.4% 2.6%

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.

Source: American Bankers Insurance Association

As indicated by Table 9.6, the dominant product sold by US bancassurers is the


annuity offering, with 42% of the total in 2005. In the US, this is a tax-advan-
taged investment instrument that is not dissimilar to the classic European

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.

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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.

Table 9.7: Comparison of European and Asia-Pacific bancassurance models

Europe Asia

Regulation Liberalised Ranging to liberalised to forbidden


Market growth Mature markets but pension reforms High growth potential
could spur growth in the life insurance
sector
Bancassurance Highly integrated models Mostly distribution alliances and joint
model ventures
Tax drivers • Tax concessions for life insurance • Squeeze on bank margins
premiums paid • Insurers' growing cost pressure and
• Squeeze on bank margins desire to expand distribution capability
• Financial deregulation
• Foreign companies use bancassurance
to enter Asian market
Products Mainly life insurance products to Mainly life insurance products linked to
maximise tax benefits bank services and, increasingly, products
geared towards managed savings
Distribution Mixed channels Mainly bank branches
Major players Domestic banks and insurers Foreign companies are playing an
important role

Source: Swiss Re

The Asia-Pacific region includes a number of national markets, such as


Australia, with a mature bancassurance structure, as well as relatively developed
ones such as Hong Kong and Singapore where bancassurance has already won
shares of 25% or more. Of interest in this study are the rapidly growing markets
like Japan, China, India and Malaysia, in which foreign insurers have been so
successful and which appear to offer the prospect of further significant gains to
domestic and foreign players.
The four markets are examined in greater detail below.

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

Source: Prudential, Life Insurance International

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.

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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 %)

Premium (CNY bn) Market share (%)

National insurance players


China Life Insurance 79.1 48.7
Ping An Life Insurance 24.4 15.0
Pacific Insurance 17.2 10.6
New China Life Insurance 7.5 4.6
Taikang Life Insurance 6.1 3.8
Taiping Life Insurance 2.3 1.4
Shengming Life Insurance 1.2 0.7
Others 0.2 0.1
National total 138.0 84.9

Foreign capital and Sino joint ventures


General China Life 20.2 12.4
AIA (American International Assurance) 2.4 1.5
Aviva-Cofco Life 0.4 0.2
CITIC-Prudential Life 0.3 0.2
Pacific-Aetna Life 0.3 0.2
Manulife-Sinochem Life 0.3 0.2
Others 0.6 0.4
Overall total 162.5 100.0

Source: KPMG, Reuters and Life Insurance International

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

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

over 30 such partnerships with Indian banks. Typically a bancassurance agent is


placed in the relevant bank branch. The largest joint venture insurer, Bajaj
Allianz, thus has alliances with seven major rural banks.
The proportion of new sales of life insurance through banks has thus soared to
30-40% of the market. The foreign joint venture segment increased its share of
the life market to 28.6% in fiscal 2006 – double the figure of 2004. At the same
time there has been an explosion in the population of life agents, which now is
estimated at 482,000 across the country. Little activity, however, has yet taken
place in the development of the brokerage channel.
For the private-sector banks the leading product, with an estimated 83% of the
market, is the ULIP, a unit-linked investment product with tax advantages.
Given the investment required to build a profitable insurance business, howev-
er, profits from the new joint ventures are slim. The only one to report a profit
in 2006 was State Bank of India’s joint venture with Cardif, which was set up in
2001.

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.

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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.

Figure 10.1: Allianz’s cross-selling in Germany


Product Channel Share of new CAGR new business 2001-2005
business 2005

Property and Dresdner Bank


casualty branches
(P&C) 98.4%

Life and health Dresdner Bank


(L&H) branches
26.5%

Mutual funds Allianz


agents
19.5%

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

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

HypoVereinsbank (HVB) in Germany. The two groups together bought


Bulbank in Bulgaria and also have bancassurance ties in Poland, the Czech
Republic and Croatia.
Allianz’ Asia-Pacific strategy has been built around alliances in India and China.
In the latter, the group has two partnerships: a joint venture (now branded
Allianz China Life) with Citic Trust and Investment, and the more recent part-
nership with the major state bank ICBC that was mentioned above. Figure 10.2
(below) profiles the progress made to date in these key markets.

Figure 10.2: Rapid progress in Allianz’s key Asia-Pacific businesses (€ m)

China – ICBC drives life sales India1 – strong growth


(GPW in € m) (GPW in € m)

494

22 304
220
185
134
43 96

2004 2005 8M 2006 2004 2005 8M 2004 2005 8M


2006 2006

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.

Evaluation of bancassurance strategy


A major strategic issue facing Allianz is the growing role of banks in life insur-
ance distribution, whether a developed market like the EU or an emerging one
in Asia-Pacific. As banks expand their product range to non-life and other long-
term investment products, they are increasingly able to demand a larger share of
the earnings of joint ventures as well as actually do without an insurance part-
ner. In Germany, a classic agency market, the simplification of life products
such as the Riester plan is a real threat. And in Asia-Pacific, the proliferation of
multiple alliances with a single bank, as well as the banks’ ability to control the
terms of these alliances, will seriously limit Allianz’ earrings growth.
On the other hand, in its home market Allianz has a much improved distribu-
tion vehicle in the form of Dresdner Bank, as well as its growing strength in the
asset management product. Abroad, its alliances with leading banks like
UniCredit, Standard Chartered and Banco Popular in Spain should enable the
group to continue to generate good growth in bancassurance earnings.

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,

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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.

Table 10.1: Bancassurance contribution to Aviva, 2006 (%)

2006

New business contribution as percentage of total:


Bancassurance 32%
Non-bancassurance channels 68%
New business margin:
Bancassurance 2.7%
Non-bancassurance channels 1.4%

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.

Source: Company data

Aviva’s 2006 operating profit on an International Financial Reporting Standards


(IFRS) basis increased 46% (compared with 12% on European embedded value
– or EEV) to generate an impressive 44% IFRS earnings per share growth to
86.9p (£0.869). ROE was 13.1%.
Driving this growth was a 21% increment in the core business segment of long-
term savings. In contrast, operating profit from general insurance increased
only 10%.
International business accounted for 56% of group sales and 61% of new busi-
ness contribution, with Italy representing 22% of sales and Asia-Pacific results
almost doubling. The group is now present in 20 countries with almost 20 mil-
lion clients. The bancassurance channel accounted for 22% of sales of long-
term savings products. Sales growth in the EU was 37% against 11% in the CEE.
Management anticipates 2007 growth in long-term savings will at least equal
the anticipated 5-10% increase in the overall UK market.

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.

Evaluation of bancassurance strategy


Aviva’s impressive global bancassurance success should be sustained in the
future. The diversity of its experience in developing a low-cost manufacturing
model, knitting durable alliances with banks in a variety of markets and devel-
oping products for diverse client needs should sustain its bancassurance
growth.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

The company is well positioned to adapt to the natural evolution of distribu-


tion channels from agency to bancassurance to independent advisers.
Management sees the CEE example being replicated in Asia-Pacific, where bro-
kerage groups are being formed in markets like China to sell to upscale clients.
These strengths are most apparent in the leading EU markets, where Aviva
seems to have ensured itself a durable leadership role in multichannel distribu-
tion. In Italy and Spain, for example, it benefits from having a single national
manufacturing platform for its major local distribution partners. While cost
savings are important, management attributes its global bancassurance success
to its understanding of the bank distribution business. In its formative years,
Aviva recruited experienced bankers for its joint ventures and was able to devel-
op a deep understanding of the banking culture while offering its unique
understanding of the insurance business.
In the critical dimension of management of banking alliances, Aviva can boast
an outstanding record of success. No major relationship appears to have broken
down, although the need to invest continually to sustain the relationship can be
a costly one. Aviva is confident that its integrated model, rather than the one
managed essentially by the bank, is the correct one.
Yet the model is not without some weaknesses. In Asia-Pacific, a relatively late
arrival on the scene, coupled with fierce competition from other joint ventures
in India and China, should limit the development of bancassurance profits. In
China, for example, non-exclusive deals are agreed for a specific location, prod-
uct array and time period. In the US, with its different culture and distribution
format, Aviva has only limited bank distribution, while in the home UK market,
recent sales have reportedly been below target.
In the long term, management considers a major unknown to be the future
client channel preference – in particular, the use of the internet rather than
bank branches for retail bancassurance products.

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.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

Table 10.2: US Bancassurance – top ten banks by insurance income, 20051


(US$ m and %)

Income (US$ m) % of total2

Citigroup 3,312 7.1


Wells Fargo 1,215 2.8
HSBC North America 986 2.2
Countrywide Financial 970 2.2
JPMorgan Chase 874 2.0
BB&T 714 1.6
Wachovia 397 0.9
Bank of America 258 0.6
MBNA 256 0.6
Greater Bay Bancorp 155 0.4

Note:
1. Out of 2,257 top-tier bank holding companies.
2. Total incomes: US$44.1 billion.

Source: American Bankers Insurance Association, Life Insurance International

Simplified term life (which involves a limited number of questions and an


approval time frame of perhaps 30 minutes) is a high-volume, low-margin
product with perhaps 30,000 applications annually against 1,500 for the higher-
margin, fully underwritten whole life with its extensive application form and
questionnaire as well as a full medical examination.
Clients for simplified term life are relatively young, lower middle class individu-
als with an average policy amount of about US$90,000, whereas whole life poli-
cies can run to cover of US$1.5 million.
Three sales forces in Citi’s branch network are involved in bancassurance sales.
Platform reps in the branch network generally sell only the simplified term
product, whereas Citi’s Smith Barney brokerage unit and a dedicated bancas-
surance force sell and support the higher margin whole life business as well as
term life. Suppliers like Met Life are not involved in the sales process.
In terms of profit contribution, the interviews conducted for this report indi-
cated that Citi earns a margin of roughly 20% on its sales volume – equivalent
perhaps to an average of 95% of first-year premiums. In absolute terms, it is
understood that the bancassurance profit contribution amounts to several mil-
lion dollars annually.

Evaluation of bancassurance strategy


Like many of its peers, Citi’s bancassurance strategy is focused on selling high-
er-value insurance products such as whole life in connection with a financial
planning, rather than simple product sale, approach. In this context, offering
bancassurance as part of the Smith Barney brokerage armoury should prove
successful.

88 © 2007
CASE STUDIES

On the other hand, bancassurance’ overall profit contribution in absolute terms


to Citi’s massive consumer banking business is quite modest. While it dwarfs
the profit contribution of other US bancassurance businesses, its size is an indi-
cation of the very small size of total US bancassurance revenues – a far cry from
the aspirations of the early post-GBL era.
Interestingly, as was pointed out in Chapter 9, across the Atlantic in Germany,
Citi’s retail banking unit is a leader in credit life sales. It is understood that there
is little communication between the two units in the bancassurance realm –
perhaps an indication of the concern in the US about regulatory action against
tie-in sales.

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

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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%

31/12/05 30/06/06 31/12/05 30/06/06 31/12/05 30/06/06 31/12/05 30/06/06

France Italy Brazil Total

Note: NB: new business


APE: annual premium equivalent

Source: CNP Assurances

Management attributes CNP’s success at home and abroad to a disciplined


focus on the ability to design simple products which can be sold by a generalist
sales force, ‘industrialised’ manufacturing processes geared to local needs with
the necessary quality controls, and the ability to work with banking clients to
achieve common objectives. Joint ventures are only undertaken when the part-
ner contributes some capital to the venture. Major and on-going adaptation of
IT systems is needed to keep up with market needs and developments in tech-
nology.
In its global expansion programme, CNP has encountered three major issues.
Agreeing a split of commissions has usually been resolved by the distribution
partner taking 40-60% of the sales commission. CNP does, however, negotiate
agreements which provide for penalties or bonuses if sales targets are not met
or exceeded.
A second issue is IT investment. CNP has often been obliged to make major
changes – including total replacement – when it takes over a partner’s existing
manufacturing facilities. Finally, local professionals are recruited for all but a
handful of non-French operations, as the company has largely been able to find
competent staff locally. In CNP’s experience, bancassurance joint ventures usu-
ally fail either because there is no exclusivity in the relationship or because the
expertise partner takes an ‘imperialist’ approach to running the business.

Evaluation of bancassurance strategy


In its global network, CNP will continue to offer both P&C as well as savings
products depending on market demand. Thus, in France demand for P&C prod-
ucts is expected to grow, while savings/investment will continue to dominate. In

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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

which grew 57% in 2005, achieved an above-average 35% risk-adjusted return


on risk-adjusted capital (RARORAC), and increased its share of group net prof-
it from 4% to 6% of the total. International Insurance net income is projected
to grow at an above-average 15-20% in the period from 2005 to 2009.
Fortis’ outstanding 2006 financial performance, which surpassed the target for
the year 2009, has triggered a more aggressive goal for the period ending 2011.
Led by a 29% growth in banking earnings, group net earnings in 2006 rose 24%
before divestitures to €4.35 billion.
Insurance growth was led by life insurance with 25% expansion in embedded
value against non-life growth of only 5%. The new business margin increased
from 2.9% to 3.3%, while insurance RARORAC rose from 30% to 35% in 2006.
RARORAC at group level reached 24% against a hurdle rate of 15%.
Of strategic importance was the increase in earnings outside Belgium from 18%
to 21% against a long-term goal of 30%. Non-Benelux net income soared 50%
to €9 billion.

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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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

is segmented into three categories – private, personal and mass-market – on the


basis of available investment funds. Market penetration in bancassurance is
measured both by sales to individual segments as well as specific products.
Abroad, priority is given to identifying a major banking partner with substan-
tial retail distribution strength, and a joint business plan is worked out with
such partners to take full advantage of the client base and local market condi-
tions. In practice, it is understood that it has been difficult to export the inte-
grated Belgian model, and Fortis has had to work within the framework of the
local partner’s strategy. Thus, in China, the model tends to be one of a pure dis-
tribution alliance with the bank selling insurance products, whereas in other
markets Fortis has an equity stake in the partner or joint venture. Invariably, the
key issue is that of the scarce resource of experienced and talented people able
to direct and manage this new activity.

Evaluation of bancassurance strategy


In non-Benelux markets like Portugal, Spain and Malaysia, Fortis is well placed
with strong bank distribution partners and a financial stake in a proven
alliance. Like others, Fortis has found that banks in these markets are more
highly regarded as a source of financial products than insurers. Even in these
markets, however, there is always the threat of a partner taking over the bancas-
surance business over time by buying out Fortis once the local partner has
become comfortable with the responsibility.
In the meantime, there remains the challenge of aligning interests between the
local partner and Fortis. Thus, a decision by the partner to add to or change its
product mix can potentially damage Fortis’ profit stream. And in China it
would appear that the threat of eventually being squeezed out by the local part-
ner is real, given the aggressive stance being taken by local banks. It is thus pos-
sible that the joint venture/alliance strategy will prove to have been an interim
one of perhaps five to seven years on the way to full integration as a wholly
owned entity. In this context, it should be noted that ASLK’s highly successful
model was developed only over a period of decades.
In terms of earnings potential, however, the long-term growth prospects for
mature markets like Belgium are attractive, with an ageing population demand-
ing more life coverage and products offering a guaranteed income stream for
retirement. In addition, unit trust-based products have come back in fashion as
investors take a more positive view on market trends. And in emerging Asia-
Pacific, rapid growth in sales should go a long way to offsetting rising costs and
margin pressure.

94 © 2007
CASE STUDIES

HARTFORD FINANCIAL SERVICES GROUP

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.

Evaluation of bancassurance strategy


Hartford’s pioneering role in developing the bank distribution channel for vari-
able annuities in the US and Japan has made a unique contribution to its overall
strategy.

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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Management targets a UK market share in key retail products in the region of


15-20%; its share of auto and household insurance as well as investments is now
in single digits.
Expansion in Ireland and Australia continues, with total international pre-tax
earnings up from 12% to 14% of the group figure in 2006.

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

Figure 10.4: Bancassurance: A truly virtuous circle

Source: HBOS

Management attributes much of its success to a non-hierarchical culture with


good team spirit – which seems to be lacking in its more structured rivals. The
specialist sales force which supports the branch network is structured to repli-
cate the geographic hierarchy of the branch system, with close interaction
between the two at all levels. Common sales objectives for bancassurance are
agreed between staff experts and branch platform personnel, with a portion of
the latter’s performance bonus tied to success in achieving sales targets.
Roughly 70% of bancassurance sales are investment products such as unit trusts
and ISAs, with another 20% in regular savings plans. True life insurance is thus
a small portion of the total, but there are plans to increase it by simplifying the
sales process.
A major marketing advantage is HBOS’ practice of not charging entry and exit
fees on investment products. HBOS is widely regarded as customer-friendly,
which drives considerable loyalty among its mass-market clients.

Evaluation of bancassurance strategy


Having developed its bancassurance business rapidly over the past five or six
years, there are limits on further growth posed by the existing number of
branches, branch staff and interview space in the network. UK demographics,
however, are positive, with substantial inherited wealth passing down to the
younger generation. Cost-cutting will continue as further process improve-
ments are achieved. In addition, priority is being given to tapping what are
called ‘secondary markets’ – essentially funds of existing bank clients held out-
side the bank in the form of a personal equity plan (PEP), ISA and other savings
vehicles.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

An interesting dimension of HBOS’ overall distribution strategy is its control-


ling ownership in St. James’s Place Capital, a highly regarded distribution force
of professionals selling investment and protection products to upscale UK
clients. No efforts have been made to co-ordinate the sales of the branch chan-
nel with this IFA arm, and the track record of doing so in other banks has not
been particularly successful. On the other hand, in markets like Italy, bank-
owned financial adviser sales forces have successfully tapped the bank client
base, an opportunity which might be considered in the future.
Another opportunity might be exploitation of the client base of HBOS’
Australian bank, which also markets bancassurance products but does not
appear to have benefited from the group’s experience in the UK.

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.

Figure 10.5: ING is well positioned for growth markets


• ING is strong in the current big markets
Greenfield / Future
• Well placed in the future big markets
16% China
• ING is steadily increasing its regional market share
14%
India
12%
Inforce Thailand
Premium 10% Malaysia
Mature / Current
Growth
8%
Rate
Hong Kong
CAGR 6%
2006 - 2015 Australia Korea
4%
Taiwan Japan
2%

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

Source: ING Group

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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.

Figure 10.6: Relative ING bancassurance growth in Asia-Pacific, 2002-2005 (%)


45
Bancassurance as percentage

2002 2003 2004 2005


40
35
of total sales (%)

30
25
20
15
10
5
0
a

ng

a
nd
an
na

a
si

di
pa

re
Ko

la
iw
ay

hi

In

Ko
Ja
ai
C

Ta
al

Th
M

on
H

Source: ING Group

ING’s Asia-Pacific strategy is keyed to the selection of markets and positioning


within those markets. Having selected target markets on the basis of such vari-
ables as growth potential, the challenge is to position the group against its rivals.
With over 100 banking alliances in the Asia-Pacific region, alliance management
is a critical success factor. ING’s goal is to offer a total solution concept, rather
than become simply a product provider at a price. Thus, contributions such as
IT support, training, compliance and product development are critical dimen-
sions of the relationship. Management accepts that this is a dynamic relation-
ship with some change being inevitable; thus, the number of alliances with
Chinese banks has been cut back due to such issues as compliance and pricing.

102 © 2007
CASE STUDIES

Despite ING’s significant minority interest in Vyasa Bank in India, management


believes action must be taken to increase the ING profile in that country.
The goal for ING is engagement with the alliance partner, and the challenges
vary with the partnership, often requiring an equity stake to firm up the rela-
tionship. Flexibility is often required. For example, ING’s relationship with
Korea’s largest bank, Kookmin Bank, which has a 20% stake in the bancassur-
ance joint venture, was threatened when the Korean authorities required
Kookmin to give up exclusivity in selling insurance. ING was prepared to sup-
port the new venture bearing the Kookmin brand, even though it arguably
competes with its own joint venture.
Success in the joint ventures is measured by the traditional metrics of APE, IRR
and the value of new business. Over time, however, management will be
employing more sophisticated measures such as cross-selling and the extent of
client penetration.

Evaluation of bancassurance strategy


As the region’s second-largest foreign bancassurer with over 100 banking
alliances and a focus on investment products, ING is well positioned to benefit
from the well-advertised dynamic growth in customer demand. It has the
strategic commitment to invest in its alliances as well as the capability of offer-
ing the full range of support services.
On the other hand, like all foreign competitors reliant on its banking partners’
distribution networks, ING is vulnerable to pressure from these partners to
alter the terms of trade to their benefit. Thus, continued investment in the net-
work will be required to meet the needs of both clients and partners. And the
growth of the advisory channel in markets like China and Japan is a long-term
threat to any bancassurer that cannot meet the likely demand for personal
advice. On balance, however, the strategy is an intelligent one and ING is well
positioned to achieve its ambitious growth objectives in the region.

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

KBC’s retail product portfolio is characterised by strength in two key sectors:


life insurance and fund management. The bank is the Belgian leader in mutual
funds with a third of the market as well as a majority of the capital-guaranteed,
indexed products sold in Belgium. In life insurance the group has a leading
market share of 22% in its home market.
During the first half of 2006, overall return on equity soared to an impressive
25% from 18% in 2005, with the Belgian businesses producing an even higher
ROE of 36%.
In 2005, the bank carried out a major reorganisation to create common bancas-
surance management structures for the home market as well as CEE units. A
key strategy has been to build market share in the CEE, where profit growth in
insurance is projected to increase at an annual rate of 25-35% in contrast to 10-
15% in banking in the home market and CEE. The group’s long-term market
share target in CEE banking and insurance is 10%. Table 10.3 (below) profiles
KBC’s current market shares for banking and insurance by geographic market.

Table 10.3: KBC market share by country and business, 2005 (%)

Banking Life assurance Non-life insurance


business business business

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

Source: KBC Group, European Banker

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.

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CASE STUDIES

Growth in CEE markets continued to outpace expansion in the home market.


Thus life reserves in Belgium increased 11% against 35% in the CEE markets,
where risk weighted assets soared 28%. The group’s CEE strategy based on EU
convergence continued, with three minority interests and a Bulgarian insurer
acquired during the year. KBC figures among the top five banks in Hungary,
Poland, Slovakia, Slovenia and the Czech Republic with about 30,000 employees
in the region.

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.

Evaluation of bancassurance strategy


Achieving KBC’s bancassurance goals is largely a function of the success in
exporting the group’s integrated domestic model to its core CEE markets.
Whereas the original 1998 merger in Belgium was the fruit of agreement in
advance on the model by the three merging parties, in the CEE a number of
barriers have had to be confronted. Separate banks and insurers were acquired
without the advance commitment to integrate; cultures are more hierarchical
than in Belgium, distribution channels more complex, and in some cases the tax
advantages of life insurance are less marked than in the home country.
On the other hand, management believes the new organisational structure
combining the bank and insurance management of each national unit should
encourage integration, along with common financial metrics. This should be
supplemented by the group concept of distribution leadership centres bringing
together around the same table the product, marketing and distribution func-
tions of the operating units. As was the case in Belgium, it will take time to
implement these objectives in practice, but KBC management now has in place
the systems and structures to do so.

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.

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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.

Evaluation of bancassurance strategy


Maybank has benefited from the active assistance of one of the most successful
European bancassurers. Unlike joint ventures and alliances elsewhere in the
booming Asia-Pacific market, Maybank has an exclusive relationship with
Fortis which should avoid the problems of conflicting, non-integrated bancas-
surance offerings in other national markets with multiple alliances.
Looking to the future, the Malaysian market should experience significant
growth in the sectors of wealth management and health insurance, which will
require a further evolution of the product line. Another challenge is competi-
tion for staff, in particular those with actuarial experience. As the leader in ban-
cassurance, Maybank is the logical recruitment target for new competitors in
the booming takaful sector in Malaysia.
On balance, however, Maybank is well positioned to grow with this rapidly
evolving market.

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.

Evaluation of bancassurance strategy


To date, UniCredit is one of the rare cases of a major retail bank based in a lead-
ing EU bancassurance market which has relied on insurance partners rather
than integration back into product manufacture. Whether this will remain the
case – especially after the acquisition of HVB – is an open question. One can
only assume that the economics argue for a pure distribution role for the time
being .
UniCredit’s relatively modest client penetration for the life product in Italy may
be attributable to the lack of fiscal incentives, which could argue for focus on
the unit trust product. In any case, success in cross-selling credit life against the
booming consumer loan business should generate useful profits.
Looking to the future, the EEC markets clearly offer greater bancassurance
potential than ‘Old Europe’ markets like Austria, Germany and Italy. As man-
agement turns the HVB businesses around, however, the author would antici-
pate superior bancassurance growth in these markets. Across the board, howev-
er, management anticipates greater competition and margin pressure.

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: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

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.

Figure 10.7: Wells Fargo’s insurance network

• No. 1 bank-owned insurance agency in the US.


• No. 5 insurance broker in the world.
• Places US$10.1 billion in annual risk premiums.
• Over 150 locations across the US; 4,500 insurance agents.
• 23 new agencies acquired in the last five years.

Source: Wells Fargo & Co

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

112 © 2007
CASE STUDIES

to a broker. It is estimated that perhaps 15-20% of group’s insurance revenues


are thus introduced by the bank channel. In contrast, unlike other bancassurers,
Wells does not expect insurance brokers, who traditionally view themselves as
professionals who evaluate insurance risk and recommend coverage, and not as
salesmen for bank products. Management acknowledges the cultural gap
between the two sales forces, but believes that, over time, the relationship value
of the referrals to its insurance brokers will be recognised by both sides of the
organisation.
Another critical dimension of the bancassurance strategy is choice – essentially
open architecture. In the future Wells model, call-centre specialists will provide
a bank customer with a range of product solutions as well as a ‘recommended’
one.

Evaluation of bancassurance strategy


While still early days for the cross-sell strategy, the bank seems to be developing
a reliable source of insurance earnings while at the same time offering choice to
its 23 million clients across the US. An estimated 1.6 million clients have bought
insurance products from the bank. If the penetration rate can be increased from
the present 4% of the retail client base to a possible 20% in line with best
European practice, the revenue gain will make a significant contribution to the
10% group annual revenue increase management has promised investors.
Another positive dimension is the determination that brokers cannot be expect-
ed to sell banking products. European bancassurance reflects the frustration
banks there have experienced in targeting useful referrals in this direction.
On the other hand, the clear strategic preference for protection rather than
investment products does not appear to contribute significantly to Wells’ goal of
increasing sales of investment products to achieve its ambitious goal of eight
products per retail client.

© 2007 113
Chapter 11

The lessons of global experience:


Addressing the issues

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.

OWNERSHIP AND CONTROL


As discussed in Chapter 4, the birth of bancassurance in Europe during the
1990s was characterised by a wave of mergers between banks and insurers.
Three drivers were widely cited to justify this integration of ownership:
• to obtain a full range of retail financial products for the client base;
• to increase the market capitalisation for strategic purposes; and
• to achieve cost and revenue synergies.
In retrospect, achieving these objectives by merger has been possible only at
great cost.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

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.

Table 11.1: Bancassurance divestitures by European banks and insurers, 1990-


2006

Banks sell insurers (in whole or part) Insurers sell banks


Bank Insurer Insurer Bank

SEB Trygg Hansa non-life Sampo Sampo Bank (ex-Leonia)


Danske Bank Danica non-life Swiss Life Banco del Gottardo
Nordea Tryg Baltica AMB Bank für
Vesta non-life Gemeinwirtschaft
Credit Suisse Winterthur AXA/UAP Banque Worms
Deutsche Bank Deutscher Herold GAN CIC
Barclays In-house life subsidiary
Alliance & Leicester In-house life subsidiary
RBS In-house life subsidiary
ABN Amro In-house life subsidiary
BBVA Aurora Polar
Plus Ultra
SCH Vitalicio

Source: DIBC

Overshadowing these decisions – as well as possibly the outcome of the land-


mark US merger in 2002 between Citibank and Travelers in the US – has been
the issue of different cultures. While banking and insurance are both providers
of financial products, insurers are known for their proactive, sales-oriented
individual marketers, whereas bankers are more institutionally oriented,

116 © 2007
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.

Table 11.2: Cultural differences between insurers and banks

Banks Insurers

Sale by the institution Sale by individual


Branch offices are expensive Intermediary earns his own money
Daily and personal management Management by production
Reactive Proactive
Short, frequent client contacts Long, infrequent client contacts
Good information on clients Little information on clients
Fixed working hours Flexible working hours
Salaried employees Commission-based employees
Problem solvers Product sellers
Standardised sales approach Individual sales approach
Positive image Doubtful image

Source: Deutsche Bank, Salomon Brothers

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.

CHOICE OF NATIONAL MARKET


The case study interviewees overwhelmingly point to the choice of national
market as a critical strategic decision. It is widely acknowledged that each mar-
ket is different in terms of such variables as size, growth potential, product pro-
file, nature of distribution channels and client preferences. In practice, there is
widespread agreement that the emerging markets of the Asia-Pacific region
offer unparalleled growth opportunities for an insurer based in a more devel-
oped market like the EU.

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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.

PRODUCT RANGE AND STRATEGY


In sharp contrast to the commitment to multiple channel distribution, the lead-
ing bancassurers take widely different approaches to product strategy. Wells
Fargo, for example, has given top strategic priority to the non-life or protection
products in its efforts to increase the number of ‘touch points’ for its targeted
segments, while ING has little interest in such products in its Asia-Pacific strat-
egy.
Several interviewees point to a preference for basic non-life products such as
auto or buildings and contents for initially penetrating less sophisticated mar-
kets, to be followed by investment/life products at a later stage. And others like
CNP Assurances take a totally pragmatic approach to individual markets.
Yet one common factor emerges from the interviews with bancassurers: a rela-
tive decline in the traditional life product which, by definition, requires a
detailed fact-find and individual underwriting process. Whatever the overall
trend in life sales in a given market, bancassurers are finding it difficult to rec-
oncile the extensive sales and relation-building process with their focus on sim-
ple products which can be easily sold to a mass-market clientele.
At one extreme is the practice in EU bancassurance countries like France where
the traditional life product – a combination of protection and investment – has
virtually disappeared in favour of what is essentially an investment product. In
markets across the EU and Asia-Pacific, the same trend toward investment
products – usually relatively low-cost, single premium, equity-linked offerings –
is present.
The traditional whole life product may be in demand overall in a given market,
but bancassurers are not winning significant market share. Several interviewees
such as HBOS, the UK leader for whom life sales are less than 10% of the total
‘Investment and Insurance’ business, hope for better penetration in the future
by simplifying the sales and underwriting process while Citigroup in the US
hopes to build sales of life products around an advisory relationship, but the
experience of banking peers is not encouraging.
Thus in the US, where banks have been able to sell life for perhaps a decade,
their life market share has remained at a modest 1-2% against 30% or more in
annuities, essentially a tax-favoured investment product. The answer given by

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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.

CLIENT SEGMENTATION AND STRATEGY


Interviews confirmed the core assumption that banks’ priority for insurance
products is the mass market which relies on banks to provide most if not all
basic financial products. The banks interviewed usually segment their clients
along traditional lines by investible wealth or income into mass market (up to
perhaps US$100,000 in investible funds), mass affluent and affluent (up to
US$1 million) and high net worth (over US$1 million).
Some of the more experienced bancassurers like Fortis drill down further into
sub-segments and product categories, but perhaps the most interesting metric
is penetration of individual segments with insurance products. In its home
market of Belgium, where it has built its bancassurance business over more than
100 years, Fortis has achieved penetration ratios of over 30% dependent on the
segment and product involved – ratios to which its competitors aspire. Its rival
KBC takes pride in the fact that 16% of its total retail client base has a ‘stable’
bancassurance relationship with at least three banking and three insurance
products.

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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.

JOINT VENTURE/ALLIANCE SELECTION AND MANAGEMENT


For a bancassurer without its own retail bank network in a target market, the
selection and management of a joint venture or distribution alliance partner is
a critical success factor. Not only must any national differences be managed, but
also the cultural bank-insurance divide has to be addressed. At the same time,
the insurance partner has a clear preference for controlling, if not actually man-
aging, the bancassurance venture, which poses a clear issue of meshing the part-
ners’ respective strategies and objectives.
Faced with these challenges, the clear preference of the foreign insurance part-
ner is a retail bank with a substantial market share and willingness to establish
an exclusive distribution relationship. If this is not possible, what is known as an

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THE LESSONS OF GLOBAL EXPERIENCE: ADDRESSING THE ISSUES

opportunistic strategy is adopted – essentially agreements with smaller banks


which may not be exclusive. In attractive markets such as India and China, the
latter approach has been chosen by interviewees as the best possible strategy in
the circumstances.
Having identified the appropriate local partner, the challenge is to strike a
financial arrangement which ensures mutual commitment yet meets each
party’s financial and control objectives. Some insurance partners such as CNP
and Fortis insist that each party has a significant financial interest in the success
of the project. Agreement must be reached on the split of the sales and manu-
facturing revenues, as well as the possibly substantial cost of installing the
appropriate IT systems, training, product development, compliance and process
controls. As in any joint venture, the insurance partner is vulnerable to changes
in strategy by the banking partner; thus for example the introduction of a com-
petitive investment product may well undermine the success of the insurance
offering.
The research did not uncover any useful benchmark metrics for these critical
decisions. Interviewees were generally reluctant to discuss specifics except pos-
sibly the split of sales commissions. In Italy, for example, traditionally a 7% sales
commission has been split roughly half to each partner, while CNP Assurances
speaks of a range of 40-60% earned by the local partner.
What is clear, however, is that best practice requires flexibility, the willingness to
commit funds, and engagement – essentially building relationships of trust and
confidence at all levels between the partners. It was pointed out that each joint
venture/alliance is different, and each governance structure must adapt to local
circumstances.
Overshadowing such alliances is the historical record of joint ventures in other
sectors either failing because of business reasons or one partner insisting on
buying out the other. Given the extensive financial and reputational investment
made by bancassurers such as ING, Fortis and Aviva in these ventures, such a
possible failure or break-up must be a real concern. Access to a bank client base
is an extraordinarily valuable bancassurance commodity, and one can assume
that the banking partner is in a position to take advantage of this leverage.
Bancassurance alliances or joint ventures represent a particularly unique chal-
lenge compared to that of a traditional product supplier who sells to a distribu-
tor’s clients. This report’s interviews emphasised the vital need for ‘end-to-end’
or seamless front-end and back-end linkages. Thus the sales process ideally
should not involve an awkward hand-off between employees of the two part-
ners, while at the back end a bank’s database and payments mechanism ideally
should be used for the insurance transaction. Shared decision-making between
the two partners up and down the organisation is thus a critical success factor.
Given these challenges, the track record to date of durability in bancassurance
joint ventures and alliances is impressive. While ING and others with over 50-
100 such international agreements and alliances admit that some work better

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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.

CULTURE AND PEOPLE ISSUES


Bridging the cultural gap between bankers and insurers remains a major chal-
lenge to bancassurers. Even Wells Fargo, which does not expect its brokers to
cross-sell banking products – as do other bancassurers – and which has a well-
developed cross-selling culture, admits that bridging the gap is largely a matter
of acquainting bankers over time with the contribution insurance can make to a
client relationship – while, at the same time, double-counting insurance rev-
enues.
Recruiting bankers for the bancassurance business is a successful strategy for
Aviva and others in their efforts to understand and deal with the banking cul-
ture. And sending multicultural, multi-tasking seniors to overseas postings,
while recruiting local staff for the bulk of the jobs, works for Fortis. Yet the
shortage of qualified individuals with specialist skills like actuarial experience,
as well as individuals who can be trained for sales responsibilities, is a frustrat-
ing challenge for bancassurers in booming markets like China.
A common concern, particularly in emerging markets like CEE and Asia-
Pacific, is the relative absence of a sales culture and the need not only to provide
intensive sales training but also incentive schemes which can be quite costly.
In summary, the availability of key multicultural individuals with the relevant
experience in both insurance and banking is a vital factor in the success of the
alliances in the growth markets of Asia-Pacific and CEE. Veteran bancassurers
like ING, Fortis and KBC note that they have taken years in a single national
culture to blend the skills needed for success; to do the same in a totally differ-
ent market is an even greater challenge.

MANAGING THE SALES PROCESS


Typically bancassurers rely on platform staff – generalist bankers with limited
insurance training and a host of other products to sell – to do the bulk of insur-
ance selling. They are generally supported by financial advisers qualified to sell
insurance as well as a range of other investment products such as mutual funds,
annuities, guaranteed deposits and alternative investments. In the background
may be an insurance specialist provided by the insurance partner for training
and support in complex situations.
While this structure may be ideal in concept, in practice bancassurers often suc-
cumb to a one-size-fits-all approach which does not match client needs with the
appropriate selling skills and profit potential. In one of the few consultant
studies which addresses the unique challenges of bancassurance (entitled Sales

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THE LESSONS OF GLOBAL EXPERIENCE: ADDRESSING THE ISSUES

success in European bancassurance), Mercer Oliver Wyman identifies three


generic types of bancassurance sale: the annex (the product sold as a result of
another sale, such as a loan); transactional (“this is a good product for you”)
and relationship (“let us look after you”). The latter is the most demanding in
terms of time and effort, while the first category may well be the most prof-
itable. Table 11.3 profiles the challenge.

Table 11.3: Three kinds of bancassurance sale

Annex Transactional Relationship

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

Source: Mercer Oliver Wyman

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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Many leading bancassurers provide an indication of margins (value of new


business as a percentage of business written) and pre-tax margins. On occasion,
bancassurers may provide an indication of changes in the terms of long-term
distribution agreements. Returns on invested capital are rarely provided, and
the use of both EEV and standard bank accounting data complicates the ana-
lyst’s tasks.
In summary, no publicly available bancassurance profitability comparisons
across a wide range of competitors could be found. As indicated above, only a
handful of these firms make useful metrics available, and these can rarely be
compared to those of competitor institutions.
The lack of comparable performance data across the bancassurance world can
also be explained in part by differences in structure, maturity and scope of the
various entities. The interviewees pointed out that, quite apart from the dimen-
sions of degree of integration and product range, bancassurers differ in their
cost and revenue allocations as well as age and sophistication of technology sys-
tems. Cost and revenue allocations are driven in part by negotiations between
bancassurance partners and may or may not reflect actual profit and loss (P&L)
items. Bancassurer technology may be new and efficient or old and fully amor-
tised.
In brief, until bancassurers – in particular, joint ventures – are driven by the
incentive to disclose realistic profit results under the scrutiny of the markets, it
is unlikely that analysts will benefit from a significant increase in disclosure.
Probably the most useful bancassurance performance data is relative: compari-
son with domestic margins and relative growth compared to other distribution
channels. As indicted above, overseas margins tend to be higher than domestic
ones, while the bancassurance channel appears to be growing faster than others.
The external analyst can thus only guess at the underlying profit performance
and its drivers. Assuming the sales commission is split roughly 50-50 between
the insurance and banking partners in a joint venture, the key variables are the
efficiency of the sales process, investment in IT systems and training, and com-
pliance. In theory, having a modern, central national processing unit, as Aviva
does for its key EU markets, should be a competitive advantage.
Product pricing varies widely across national markets, and the interviewees
were reluctant to generalise on this key variable. But in the case of annex prod-
ucts, like credit life sold in connection with retail loans, it is reasonably certain
that the combined sales commission and manufacturing margin can exceed
50% in many markets.
Having a capitalised joint venture has the advantage of aligning the partners’
interests but the disadvantage of sharing the profits. A pure distribution
arrangement may involve less capital investment but perhaps function less effi-
ciently. One does have the impression, as the HBOS case study points out, of a
virtuous circle in which successful sales drive down unit costs, which permit
product pricing to generate yet more sales.

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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.

THE IMPACT OF REGULATION


Since the origins of bancassurance in Europe in the 1980s, regulation has played
a key role in its evolution.
First, there has been a global drive towards a level regulatory playing field in the
sale of insurance products. In many European markets, insurers originally ben-
efited from privileged tax and other treatment for life and similar products so as
to promote long-term savings. Today in these markets there is similar tax treat-
ment, regardless of the provider, for all major long-term investment products,

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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.

128 © 2007
Chapter 12

Summary and outlook

In summary, bancassurance as a whole will remain a dynamic distribution


channel. A typical projection for the next decade of life products as a whole is
that of AXA, which forecasts growth of 5% per annum in gross written premi-
ums over the period 2005-2012, with a 3% estimate for P&C – not far from the
growth rates experienced during the last decade.
More specifically, the report evaluates the prospects in terms of the following
key dimensions:
• geography;
• product;
• channel;
• structure of joint ventures and alliances;
• profitability;
• client; and
• regulation.

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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In the US market, it is difficult to see banks extending their current modest


market penetration. Life insurance in particular will probably remain a margin-
al product for bank management, while bancassurance has already achieved sig-
nificant penetration in other investment products such as annuities and mutual
funds. As long as bank management eschews underwriting risks and does not
achieve integration economies, profits from life and other insurance products
are unlikely to justify the investment in systems and training to win market
share from the dominant agent/broker community.
The evidence from the period since full deregulation in 1999 is that cross-sell-
ing of bank products even through acquired brokers will be limited in view of
the cultural mismatch and different client/product segments targeted by banks
and brokers.
In Asia-Pacific and other emerging markets like CEE, bancassurance will con-
tinue to win market share. Customers’ reliance on their banker as a provider of
a range of basic financial products, the banks’ cost advantage over agencies, the
expertise contribution made by foreign partners and the extensive branch net-
works will bring bank distribution closer to the one-third of the market it has in
developed Europe. In those markets without vertical integration, such as India
and China currently, penetration may fall short of its potential because of inef-
ficient sales process and technology.
In sum, there will be sharply divergent trends in the three major geographies.
The fastest growth in volume will understandably take place in the relatively
unsaturated markets of CEE and Asia-Pacific. Yet the outlook for profits is less
exciting in view of the relative lack of structural integration, price competition
in the struggle for market share, and the substantial set-up costs of recruitment
and training of scarce talent, installation of modern IT systems and applying
Western standards of corporate governance. While bancassurance market share
may not approach the one-third of the total life market in the developed EU
markets, the absolute potential size of markets like China and India make them
difficult for a bancassurance competitor to ignore.
Perhaps the most frustrating market for bancassurers will be the US. Despite
the major investment by banks in insurance brokerages and earlier hype on the
potential for the bank channel, there is substantial evidence that the major US
banks like Wells Fargo and Citibank see bancassurance largely as a means of
broadening their existing customer relationships rather than a source of signifi-
cant profit growth. The interviews revealed the frustrations of obtaining ‘shelf
space’ for insurance in the retail network, the relative lack of bank top manage-
ment commitment to the product and the universal problem of co-ordinating
the efforts of bankers and brokers.

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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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

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.

STRUCTURE OF JOINT VENTURES AND ALLIANCES


The durability of the integrated joint venture in the developed European mar-
kets has been impressive, indicating that a satisfactory balance has been
achieved by the partners in corporate governance and allocation of financial
risks and rewards. Yet the overall record of such alliances indicates that this is a
dynamic relationship which can be altered by the consolidation of the financial
sector, changes in strategy and the desire to obtain all the benefits of a joint ven-
ture.
The author would thus not be surprised to see the break-up of some hitherto
successful bancassurance joint ventures. In the view of several interviewees, the
classic joint venture may well be viewed in retrospect as an intermediate stage of
perhaps five to seven years before full consolidation and integration takes place.
Should a bank/insurance alliance break up, the likely survivor – in Europe at
least – will be the banking partner in view of its control of the distribution
channel. One of the drivers of such a change could be the classic cultural gap
between banks and insurers.
In the fast-moving emerging markets of Asia-Pacific, with their dominance of
multiple alliances with insurance providers, this threat of structural change is
particularly real. The interviews indicate a serious concern over the future of
today’s pairings. In China in particular, several interviewees expressed the view
that integrated Chinese bancassurers would come to dominate not only the
Chinese market but also others in the region.
To summarise, the greatest leverage in bancassurance can be achieved by the
fully integrated model, yet this model poses by far the greatest management
challenge. As indicated in Chapter 11, the extent of operational integration in
bancassurance is almost unique in the world of joint ventures, and the track
record of such alliances in general is that most terminate by liquidation or split
between the partners. Given the substantial financial, brand and management
effort invested in bancassurance alliances, the downside for the partners – in
particular the insurance provider – is substantial.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

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.

134 © 2007
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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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

banks will continue to dominate the distribution of insurance products in most


growth markets.
In terms of the issue of customer protection, the UK will be the focus of most
regulatory attention. A forthcoming report in 2007 by the UK authorities on the
cost/benefit of such high-margin products as PPI may well be a bancassurance
landmark. An adverse (to the banks) judgment could well have a significant
impact on retail bank profitability.
To date, outside the US and UK, there have been few visible signs of regulatory
concerns over the possible mis-selling of bancassurance products. Yet the public
posture of the FSA in the UK, supported by research by consultants such as
Capgemini, would appear to confirm that there is a global issue linking a lack of
customer sophistication with the high margins and selling practices of distribu-
tion channels including bancassurance. In early 2007, US regulators in
Minnesota filed the latest in a series of US lawsuits against insurers for mis-sell-
ing a range of annuities, while the National Association of Securities Dealers
lists “dishonest annuity sales practices” as one of the top ten threats to US
investors.

136 © 2007
Appendix: List of interviewees

A number of financial services organisations were interviewed in the prepara-


tion of this report, whose comments, insights and opinions appear in Chapter
11.

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

CONSULTANTS AND OTHERS


Council on Financial Competition
Deutsche Vermögensberatung (DVAG)

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION

Financial Services Authority (FSA)


Kenneth Kehrer Associates
Mercer Oliver Wyman
Novantas
Renaissance Fund Advisors

138 © 2007
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