Bancassurance Report Final

Bancassurance: The Lessons of GlobalExperience in Bankingand InsuranceCollaboration

Steven I Davis

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

II © 2007

The Author

Steven I Davis has spent his career in the banking and financial services sector as asenior 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 aParis-based research and M&A unit. For Bankers Trust Company, he ran a venturecapital subsidiary in New York, and later the bank’s European businesses from aLondon 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 hasmanaged several hundred strategy assignments for commercial and investment banks,global fund managers, insurers and other financial institutions. In 1993, he headed aDIBC team which advised the Norwegian Ministry of Finance on the restructuring ofthe country’s banking sector during the Nordic banking crisis. In addition, he and hiscolleagues have prepared over 60 research reports on the financial sector forpublication by investment banks and other clients.

Steven Davis is also the author of seven books on the banking sector (published byMacmillan in London). They include Excellence in Banking, Managing Change in theExcellent Banks, Leadership in Financial Services, Bank Mergers: Lessons for the Future,Investment Banking: Addressing the Management Issues and, most recently, Excellence inBanking – 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 insome cases. Historical conversions for all the currencies mentioned in this report can befound 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 aswell as other countries in the Pacific Ocean such as Australia, Korea and Japan. Oursources, however, sometimes use the term ‘Asia’ to refer to what appears to be roughlythe same area, and when using their data we employ the same term. Our intent is to castour net as widely as possible in the region by using the term ‘Asia-Pacific’ withoutattempting 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 theunderstanding that the author and publisher shall have no liability for any errors, inaccuracies or omissions of this report and, bythis report, the author and publisher are not engaged in rendering consulting advice or other professional services to the recipientwith regard to any specific matter. In the event that consulting or other expert assistance is required with regard to any specificmatter, 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

Contents

The Author........................................................................................................................iiCurrency conversions ......................................................................................................iiA 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..............................................................................11Assurbanking: The insurers’ response ............................................................................16

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

5. The bancassurance products......................................................................................21Product categories............................................................................................................21Key product trends ..........................................................................................................23

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

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

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The demand from the upscale customers for product choice in financial solutions has become even clearer........................................................................32

Mis-selling issues........................................................................................................32The concept of the ‘trusted adviser’ has gained traction..........................................32Prioritising the upscale segments ..............................................................................33

7. Competitive distribution channels............................................................................35Profile of the alternative channels ..................................................................................35

Agency sales forces and insurance company employees ..........................................36Brokers ........................................................................................................................36Other non-bancassurance channels ..........................................................................37

Trends in distribution market shares..............................................................................40Europe ........................................................................................................................40Asia-Pacific ................................................................................................................44The US ........................................................................................................................45

Multiple channel distribution and the insurers’ response to bank competition ..........46

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

9. The key national markets ..........................................................................................57Europe ..............................................................................................................................58

Market profile ............................................................................................................58Concentration of bank and insurance ownership....................................................59Relative integration of bancassurance manufacture and distribution ....................60A simple, tax-favoured investment product ............................................................60France..........................................................................................................................61Italy ............................................................................................................................62Spain ..........................................................................................................................64Germany ....................................................................................................................65The UK........................................................................................................................66

North America ................................................................................................................69The US ........................................................................................................................69Canada ........................................................................................................................71

Asia-Pacific ......................................................................................................................73Market profile ............................................................................................................73Japan ..........................................................................................................................74China ..........................................................................................................................75India ............................................................................................................................77Malaysia ....................................................................................................................78

10. Case studies ..............................................................................................................79Allianz ..............................................................................................................................80

Background ................................................................................................................80Bancassurance strategy ..............................................................................................81Evaluation of bancassurance strategy ......................................................................83

Aviva ................................................................................................................................83Background ................................................................................................................83Bancassurance strategy ..............................................................................................84Evaluation of bancassurance strategy ......................................................................85


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Citigroup ..........................................................................................................................86Background ................................................................................................................86Bancassurance strategy ..............................................................................................87Evaluation of bancassurance strategy ......................................................................88

CNP Assurances ..............................................................................................................89Background ................................................................................................................89Bancassurance strategy ..............................................................................................90Evaluation of bancassurance strategy ......................................................................91

Fortis ................................................................................................................................92Background ................................................................................................................92Bancassurance strategy ..............................................................................................93Evaluation of bancassurance strategy ......................................................................94

Hartford Financial Services Group ................................................................................95Background ................................................................................................................95Bancassurance strategy ..............................................................................................96Evaluation of bancassurance strategy ......................................................................96

HBOS................................................................................................................................97Background ................................................................................................................97Bancassurance strategy ..............................................................................................98Evaluation of bancassurance strategy ......................................................................99

ING Group ....................................................................................................................100Background ..............................................................................................................100Bancassurance strategy ............................................................................................101Evaluation of bancassurance strategy ....................................................................103

KBC ................................................................................................................................103Background ..............................................................................................................103Bancassurance strategy ............................................................................................105Evaluation of bancassurance strategy ....................................................................106

Maybank ........................................................................................................................106Background ..............................................................................................................106Bancassurance strategy ............................................................................................107Evaluation of bancassurance strategy ....................................................................108

UniCredit........................................................................................................................109Background ..............................................................................................................109Bancassurance strategy ............................................................................................110Evaluation of bancassurance strategy ....................................................................110

Wells Fargo ....................................................................................................................111Background ..............................................................................................................111Bancassurance strategy ............................................................................................112Evaluation of bancassurance strategy ....................................................................113

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

CONTENTS

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

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

Bibliography ................................................................................................................139


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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 ............................................14Figure 3.2: Advantages and disadvantages of alternative distribution structures ........15

Figure 5.1: Relationship between product complexity and distribution channel ........24Figure 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 ..............................................42Figure 7.4: The evolution of the share of life insurance broking in selected

European markets, 1998-2004 (%) ............................................................................43Figure 7.5: Distribution of life insurance in Europe, 1990-2000 (%) ..........................43Figure 7.6: US life insurance distribution is dominated by agents, 2006 (%) ..............45Figure 7.7: US variable annuity sales dominated by independent financial

planners, 2001-2005 (%) ............................................................................................46

Figure 8.1: Banks have higher productivity than traditional agents ............................50Figure 8.2: New distribution channels are much lower-cost ........................................51Figure 8.3: Bancassurance in Italy has succeeded because of a cost advantage ............52Figure 8.4: Relative profitability of selected products....................................................54Figure 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 (%) ................58Figure 9.2: Sales of life insurance by channel in France, 1990-2005 (%)......................61Figure 9.3: Bank penetration of individual life products in Italy, 1998-2001(%) ........64Figure 9.4: Evolution of life insurance and other investment products in Spain,

1993-2002 (€ 000s) ....................................................................................................65

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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..............................................................81Figure 10.2: Rapid progress in Allianz’s key Asia-Pacific businesses (€ m)..................82Figure 10.3: Comparative CNP bancassurance margins for France, Italy and

Brazil, end-December 2005 and end-June 2006 (%) ................................................91Figure 10.4: Bancassurance: A truly virtuous circle ......................................................99Figure 10.5: ING is well positioned for growth markets..............................................101Figure 10.6: Relative ING bancassurance growth in Asia-Pacific, 2002-2005 (%) ....102Figure 10.7: Wells Fargo’s insurance network ..............................................................112


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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 ..............................59Table 9.2: Life insurance distribution channels in major European countries,

2004 (%)......................................................................................................................60Table 9.3: Top ten French life insurers, 2005 (€ bn) ......................................................62Table 9.4: Evolution of Italian life insurance distribution channels, 2000-2005

(%) ..............................................................................................................................63Table 9.5: UK life and pensions market by distribution channel, 1999-2004 (%) ......67Table 9.6: Premium income from bank insurance sales, 2000-2005 (US$ bn

and %) ........................................................................................................................70Table 9.7: Comparison of European and Asia-Pacific bancassurance models..............74Table 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 (%) ........................................84Table 10.2: US Bancassurance – top ten banks by insurance income, 2005

(US$ m and %) ..........................................................................................................88Table 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......................................117Table 11.3: Three kinds of bancassurance sale ............................................................125

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Executive summary

Bancassurance – the sale of retail insurance products to a commercial bank’sclient base – has evolved in different models since its origins in the EuropeanUnion (EU) in the mid-1980s. The classic European model is an integrated onewith common ownership or some form of exclusive commitment between theinsurance provider and bank distributor. In the US, the model involves virtuallytotal separation between bank distributor and insurance provider, while inemerging markets like Asia-Pacific, where foreign insurers compete for shelfspace 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 bancassurersare fragmentary at best, it would appear that the integrated European modelnot only combines both the substantial manufacturing and distribution marginin insurance products but also offers significant operational economies in boththe back and front office. The available data thus indicate a relatively impressivereturn on equity and client penetration for experienced, integrated Europeanbancassurers, like Fortis in its home markets and Aviva in markets where it hasintegrated with a local bank distributor.

In the US, despite early indications that bancassurance might achieve marketpenetration levels in life insurance comparable to the one-third it has inEurope, US banks struggle to achieve a market share of 1-2% and essentiallyoffer a third-party insurance product to complete their financial product range.In contrast, in the booming markets of Asia-Pacific, incremental market sharesfor 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 insurancemarkets evolve, there will be a natural trend from agents to banks to brokers asthe market becomes more sophisticated and willing to pay for advice andchoice. The challenge for the future of bancassurance in this regard is the

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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 instructure, the role of banks, customer preference and a host of other variables.The survey conducted for this report thus found a totally pragmatic approachto product selection based on these variables. The core product grouping inEurope has been the life and related long-term investment products, but banksthere have become increasingly aware of the high margins available on non-lifeand other products sold in connection with a loan or even independently of thelending function. At the same time, across the world, lower-cost and simplertax-advantaged investment products such as mutual funds, guaranteed bankdeposits and annuities are playing a dominant role in the product offering. Lifeinsurance is understandably a more expensive product because of the regulato-ry and medical process involved, but it is also that much more difficult for abank 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 orinvestment product to a more advice-based, comprehensive approach to overallfinancial needs. In many markets such as the US and UK, banks find it difficultto 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 atrusted financial intermediary. As the client becomes more demanding in termsof product choice and experience-based advice, however, the broker or financialadviser channel becomes increasingly competitive.

For an insurer without a related bank distribution network, the challenge is tofind a major bank prepared to offer access to its retail client base on acceptableterms, 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 havebeen able to knit mutually satisfactory, long-term alliances which have so farstood the test of time. But this has been achieved only at the expense of allocat-ing skilled specialist personnel, investing heavily in marketing and informationtechnology (IT) systems, and being flexible enough to adapt to changing cir-cumstances.

Overshadowing even the most successful such joint ventures is the threat ofbreak-up, either because of external events such as a merger or at the behest ofthe 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 havebeen reluctant to offer exclusive access to their client bases and could takeadvantage of the insurer’s reliance on their client base. In retrospect, given thelack of durability of joint ventures in other businesses, the record of bancassur-ance alliances has been exceptionally good to date, with few publicised breakupsof major alliances.


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Bancassurance also involves addressing the cultural divide between banks,which take an institutional approach to selling, and insurance, where selling isdone 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 theUS banks’ reluctance in invest large amounts of capital in manufacturing theinsurance product. In Europe, the wave of bancassurance deals before the stockmarket peak of 2000 has left in its wake a number of transactions which havesince been undone or regretted.

EXECUTIVE SUMMARY

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Chapter 1

Introduction

In the consolidating world of financial services, with mergers across the sectorcombining 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 financialinstitutions.

In this report, ‘bancassurance’ is defined, quite simply, as the marketing of retailinsurance products to a commercial bank’s client base. As is discussed inChapter 3, this may or may not involve equity ownership or control as part ofthe 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 theresponse 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 the21st century, provides considerable background on the structural environmentfor the concept across the world. This study focuses on the major markets – theEU, Asia-Pacific and North America – where bancassurance has achieved themost significant development and therefore the basis for examining these les-sons of experience. Quite simply, the goal has been to synthesise this experiencefor the benefit of academics, consultants, students and, of course, for presentand future practitioners.

Given this approach, the methodology has been, first, to gather the relevant datain the public domain: industry statistics, consultant studies and material in thetrade 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 aswell as the report’s findings and conclusions in the following chapters.

At this point, it is necessary to acknowledge that the publicly available databasefor bancassurance, in particular the key metrics of margins and profitability, is

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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. Theauthor has thus indicated such instances with the phrase ‘latest available data’.

Following these introductory comments, the body of this report begins withChapter 2 and an analysis of the key drivers of bancassurance. Chapter 3 thendescribes the various possible structural models, ranging from an integratedfinancial conglomerate to an arm’s length distribution joint venture withoutany equity links. The critical role of regulation in its various forms is discussedin Chapter 4 – specifically the key aspects of taxation, controls on product rangeand diversification, efforts to control mis-selling and the use of capital.

Chapter 5 addresses the role of product range, specifically the distinctionbetween life/investment and protection products and how the banks’ productranges have evolved over time. Chapter 6 discusses the major client segments ofinterest to bancassurers, specifically the mass-market and affluent segments,and the various segmentation approaches used by the banks. Since the issue ofdistribution is central to the rationale for bancassurance, Chapter 7 is devotedto the role of alternative distribution channels, not only the traditional agencyand employee sales forces but also, in particular, the growing importance ofindependent financial advisers (IFAs). The limited publicly available insightsinto bancassurance profitability are summarised in Chapter 8.

In Chapter 9, the report examines in more detail how these key variables haveplayed out in a number of major bancassurance markets: the EU, where today’smodel 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 bankdistribution. 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 andprovides observations on its outlook for the future. Next, in Chapter 11 thefindings of these case studies and the author’s series of interviews are analysedto examine how bancassurers have addressed issues of strategy, structure andexecution. The report focuses in particular on the problems of managing differ-ent cultures and practices in the banking and insurance worlds. It also providessome conclusions on the lessons of best practice based on the interviews and ananalysis of the database. Finally, a view of the future of bancassurance is sum-marised in Chapter 12.


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Chapter 2

What drives bancassurance?

Bancassurance has evolved in different fashions at different historical points indifferent national markets. As indicated by Figure 2.1, using data provided bySwiss Re (Sigma) and AXA, life and non-life insurance have grown globally atan annual rate of 5% over the past decade, against only 4% in global grossdomestic product (GDP).

Figure 2.1: The insurance industry has been growing faster than the worldeconomy for the last ten years (%)

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 actualdemand for investment in retirement products has preoccupied govern-mental and private sector analysts as they attempt to quantify the needfor long-term savings of an ageing population for its retirement and thecorresponding inadequacy of most traditional pay-as-you-go or state

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Life premiumsCAGR: +5.1%

World nominal GDPCAGR: +4,2%

Non-lifepremiumsCAGR: +4.9%

Ann

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inco

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grow

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Life premiumsCAGR: +5.1%

World nominal GDPCAGR: +4.2%

Non-lifepremiums CAGR: +4.9%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

pension arrangements. Life insurance has been a core instrument – ifnot the only one – in many markets for the great bulk of the population.In Sweden, for example, until the 1990s tax-favoured life insurance wasthe long-term savings vehicle of choice for personal pensions, while inJapan an understandable mistrust of alternative long-term investmentshas ensured a similar role for life insurance.At the same time, however, life insurance in recent years has becomeonly one of several alternative products to meet this demand. Term bankdeposits, variable and fixed annuities, personal pension funds, mutualfunds, direct equity investment and other tax-favoured vehicles haveemerged as viable alternatives. The explosion of personal pension fundplans in markets like Australia, Chile, France and Italy provides yetanother alternative product. Interest in equity-linked products, in whichbanks often have greater expertise than insurers, has further opened thecompetitive gates.This explosion in product alternatives has also corresponded with a lev-elling of the tax treatment for all eligible long-term personal investmentsrather 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 thevehicle of choice for long-term savings. As result of these forces, in mostEuropean markets today the long-term saver is confronted with a widearray of alternatives which vary in yield, risk, tax status and maturity. InSpain, for example, banks define ‘customer funds’ as comprising threeelements: traditional bank deposits, pension funds and life insurance. InFrance, life insurance, termed épargne assurance, has in effect become abanking product.For life insurers, therefore, recent history is a double-edged sword. Thegood news is that their product is in even greater demand to meet thestructural need for greater long-term savings, but the bad news is that itmust confront an array of competitive propositions.

• The discovery of bank branches as an attractive alternative distributionchannel. While banks for decades sold life and non-life insurance asagents in markets like the UK and France, the great bulk of life insurancehas historically been marketed by the traditional channels of companysalesmen, agents and brokers. The discovery in markets like France inthe 1980s that simple life products could be sold easily by generalist bankbranch sales staff was a revolutionary development which continues toplay 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 andconvenience of a large branch network, the trust most clients have intheir bank and its brand, and a more frequent interaction with the clientthan is the case with traditional life channels. In addition, since banksalready held most of the funds used for purchase of life insurance intheir deposit and custody accounts in markets like France and Italy, only


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a simple internal recycling of the funds was necessary to create massiveapparent 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 ofbank distribution. In Europe, where banks generally boasted a largermarket 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 consolidatingfinancial services sector. At both the structural and operational level,banks and insurers have long eyed each others’ domain. Decades ago inthe US, institutions like American Express and Sears, Roebuck attempt-ed, with limited success, to provide a supermarket of retail financialservices.But today’s dominant model of bancassurance originated in Europe,where a liberal regulatory structure placed no barriers on the sale ofbanking 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 theycould grow their market capitalisation and – potentially – shareholdervalue by merging across sectors. Thus in markets like Benelux, with alimited number of potential partners in the financial sector, bank-insur-ance mergers created today’s major conglomerates such as Fortis, KBCand ING. As the 20th century drew to a close, a permissive capital mar-ket environment actually advocated such ‘cross-pillar’ mergers. One ofthe key arguments for such mergers was the perceived operational syner-gy from cross-selling a broader range of financial products to an existingclient base as well as expanding the overall client base by acquisition. InChapter 3, the report examines in more detail the models used, whileChapter 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 andSouth Africa, both consultants and the banks themselves concluded thatan additional advantage of bank distribution is lower costs. Not havingto 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 oftraditional sales forces was declining, whereas in contrast the ability of abank to produce ‘warm leads’ from existing clients gave it a considerableadvantage in sales productivity.Actually measuring this cost advantage is a complex calculation, as is theissue of whether banks actually reflected it in their insurance pricing orsimply absorbed it in their profit stream. Chapter 8 provides some esti-mates from reliable sources. What is certain is that, combined with therelationship and convenience advantages summarised above, any costadvantage made it clear that bank distribution would make substantialinroads into traditional alternatives.

WHAT DRIVES BANCASSURANCE?

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• 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 rulesgoverning ownership of banks and insurers. Chapter 9 analyses in moredetail how today’s bancassurance has evolved across the world’s majormarkets.

To summarise briefly, bancassurance has flowered in European markets likeFrance 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 gavebanks the ability to leverage their distribution strengths. In contrast, in a hand-ful of markets like Canada, banks have been effectively prevented from owningan insurer or marketing their products. In between are markets like the US,where a level competitive playing field was only introduced in 1999, and theUK, where strict regulations against mis-selling on long-term products work tothe advantage of brokers that can provide the necessary advice.


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Chapter 3

The alternative structural models

Bancassurance relationships between a bank and insurer can assume a widevariety of structures. This chapter examines the choices available, the advan-tages and disadvantages of each, and the critical factors which usually drive thedecision. In addition to bancassurance structures in which banks sell insuranceproducts 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 offinancial control and the degree of operational integration. Financial ownershipcan 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. Thusthe possibilities include:

• a financial conglomerate with little or no effort to integrate the bankingand insurance operations. Such a structure provides earnings diversifica-tion and a larger capital base but not the operational synergies from, forexample, cross-selling;

• a captive insurance company which is fully integrated with the bank atthe operational level and sells its products largely to group customers;

• a joint venture between a bank and insurer which involves a capitalcommitment from each, as well as a strategy based on cross-selling to thepartner’s client base; and

• a distribution agreement without an equity interest but an exclusive ornon-exclusive agreement to sell the insurer’s products to the bank’sclient base.

Table 3.1, taken from a Sigma study, provides a summary of the benefits of threeof these options to the bank and insurance partners.

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

Benefits to banks Distribution Joint Integratedagreements ventures operations

Secure an additional and more stable stream ✔ ✔ ✔

of income through diversification into insurance and reduce their reliance on interest spreads asthe major source of income

Leverage on their extensive customer bases ✔ ✔ ✔

and increase customer retentionSell a whole range of financial services to clients ✔ ✔

Reduce risk-based capital requirement for the ✔

same level of revenueWork towards the provision of integrated financial ✔ ✔

services tailored to the life-cycle of customersAccess funds that are otherwise kept with life ✔ ✔

insurers who sometimes benefit from tax advantages

Benefits to insurers Distribution Joint Integratedagreements ventures operations

Tap into the huge customer base of banks ✔ ✔ ✔

Reduce their reliance on traditional agents by ✔ ✔ ✔

making use of various channels owned by banksShare services with banks ✔ ✔

Develop new financial products more efficiently in ✔ ✔

collaboration with their bank partnersEstablish market presence rapidly without the ✔ ✔ ✔

need to build up a network of agentsObtain 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 andstructure of the banking and insurance sectors as well as different regulatoryand 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 andthe relative returns from the bank and insurance businesses. In most markets,the return on equity on the insurance business as calculated using bankaccounting practice (as opposed to embedded value) has been lower than thatof 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 ofoperational integration. Thus, in the Benelux markets, several of today’s majorbancassurance players began life as pure financial conglomerates but later inte-grated their operational units. Credit Suisse declined to integrate Winterthurafter acquiring the insurer, then integrated it, and finally sold it to AXA. In theother direction, Allianz in Germany initially did not integrate its Dresdner Bank


12 © 2007

retail business, but, as part of its ‘3+One’ strategy, has aligned the Dresdner unitas 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 asone partner is faced with an unacceptable new partner, or management maydecide to buy out the partner to capture its equity return.

The captive, or integrated approach, has been consistently adopted in marketslike France and Spain where a dominant bank manages its insurance business asa fully integrated element of its retail distribution function. Thus, Banco BilbaoVizcaya Argentaria (BBVA Seguros), Santander Central Hispano (SCH), SociétéGénérale (Sogecap), Crédit Agricole (Predica) and others treat the insurancefunction as a subset of the retail banking division.

In contrast, the joint venture approach has been widely adopted in Italy andother markets. Thus 50-50 ownership characterises Ecureuil Vie (CNPAssurances – CNP is an acronym for Caisse Nationale de Prévoyance – andCaisse d’Épargne) in France, BNL Vita (the insurer Unipol and BNL – BancaNazionale del Lavoro – in Italy), CAIFOR (Caixa and Fortis) in Spain, and theventure between Royal Bank of Scotland (RBS) and Aviva in the UK.

Finally, the pure partnership without any equity ownership is based entirely onan 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 Generaliin 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 bethe only structural alternative.

Interestingly, a 1997 study by McKinsey & Co set out three likely bancassurancepartnership models as the most likely result of the forthcoming deregulationwhich occurred in 1999 in the US. In reality, as discussed in Chapter 9, thebanks have almost exclusively simply acquired brokers, eschewing both productmanufacture as well as the joint venture approach.

What distinguishes many of these structures is how they vary over time as theperceived 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 therelative profitability of the manufacturing activity.

Thus, many Scandinavian banks, having acquired composite insurers duringthe 1990s, retained the life business but sold the non-life activity and boughtback the non-life product from the buyer under a partnership arrangement. Inthe US, the iconic Citibank/Travelers merger, which was viewed in 2000 as apathfinding venture in the recently deregulated US market, was undone whenCitibank management decided that ownership of neither the life nor non-lifebusiness was critical to the group’s strategy. A case study in Chapter 10 exploresthis evolution in more detail.

THE ALTERNATIVE STRUCTURAL MODELS

© 2007 13

Finally, in the UK many banks adopted the integrated approach to ownershipand management as they entered the bancassurance market in the 1990s, butmost eventually collapsed these de novo ventures in favour of joint ventures orpartnerships.

A survey by Finaccord in 2003 found that the exclusive distribution agreementwas 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 criticaldimensions: 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 opposedto simple distribution agreement).

Figure 3.1 sets out these options together with the choices made by a number ofEU bancassurers in the early years of the 21st century.

Figure 3.1: Four dimensions of the bancassurance model

Source: McKinsey & Co

Chapter 11 provides the report’s findings and conclusions on the choice ofstructure. At this point, it is clear that there is no ideal structure either in termsof 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 bankingbusiness;


14 © 2007

Product-focusedchannel

Singleintegratedchannel

Life

Life andP&C

In-houseproduction(Life, P&C)

Sourcedproduction(Life)

Distributionagreement

M&Agreenfield

The ‘right’bancassurance

model?

Distribution

Ownershipstructure

Productrange Production

• the relative profitability of the distribution margin. In Italy, for exam-ple, splitting the overall sales margin with the product provider seems toproduce 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, compensationand different distribution channels; and

• management strategy and culture. Many banks insist on wholly ownedor captive operations, while few others are comfortable with a numberof 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 servicesgroup, joint venture, strategic alliance and distribution agreement.

Figure 3.2: Advantages and disadvantages of alternative distribution structures

Source: Swiss Re

As will be discussed in more detail in Chapter 9, the bancassurance model hastaken 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 abancassurance 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.

THE ALTERNATIVE STRUCTURAL MODELS

© 2007 15

Banks distribute lifeinsurance products(standalone orbundled with bankproducts) in return forfee income

No or little sharing ofcustomer databases

Limited investments

A higher degree ofintegration in productdevelopment, serviceprovisions andchannel management

Possible sharing ofcustomer databases

Requires investmentsin IT and salespersonnel

Clear mutualownership ofproducts andcustomers

Sharing of customerdatabases

Requires strong andlong-termcommitments fromboth sides

Operations andsystems can be fullyintegrated

A high capability toleverage on banks’existing customersand other serviceprovisions

One-stop financialservices

Potential for fullyintegrated products

Distributionagreement

Strategicalliances

Joint ventures

Financialservicesgroups

Degree of integration

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 ratherthan the partnerships or financial conglomerates widely predicted. Banks havethus preferred simply to buy in both the product and the sales force rather thaninvest in the business itself.

Finally, in the key Asia-Pacific markets, regulation in the form of prohibition ofbank ownership of insurers, plus the dominance in many markets of familyowned 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 havereplied to the banking challenge by offering their own banking services througha subsidiary vehicle. Known as assurbanking, this strategy is underpinned bythe 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 inthe Netherlands, where all of its major peers bought or allied with a bankingpartner, Aegon went it alone by setting up a wholly owned bank.

A recent study on the French market by the rating agency Fitch confirms thatthe results of assurbanking have generally been fairly modest. The principalbarrier has been to persuade clients – perhaps a targeted 10% of the insurer’sbase – 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 largestFrench assurbank, AXA Bank, has won perhaps 500,000 clients but has onlyrecently 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 driverof the profile and outcome of bancassurance in markets across the world.Regulation in its various forms impacts bancassurance in several principaldimensions.

PERMITTED OWNERSHIP AND PRODUCTS

The ownership of insurance companies, as well as that between banks andinsurers, has shaped bancassurance in the key markets under review. At oneextreme is the European Union, whose liberal financial services directives placeno barriers on ownership links between banks and insurers, nor prohibitions inprinciple of foreign vs. domestic ownership.

Until 1999 and the passage of the Gramm-Leach-Bliley legislation, banks in theUS were largely unable to acquire insurers. The result of this deregulation hasbeen a wave of bank acquisitions of insurance brokers, in contrast to Europewhere banks have largely acquired insurance underwriters. Chapter 9 analysesthese 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 countriesplace major barriers to the sale of insurance products by banks. Thus, in SouthKorea, insurers have resisted the entry of bancassurance proposed for 2007. Inmany markets, the politically sensitive price of auto insurance is controlled. InJapan, South Korea and the Philippines, there are severe restrictions on theinsurance products banks can sell. Canada prohibits banks from selling mostinsurance 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

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 presencein the insurance sector, and liberalising governments lower traditional barriersdesigned to protect existing franchises. In Sweden in the 1990s, for example, thetax 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 asproduct profile across the markets under review. Given the social and economicimportance of encouraging long-term savings as discussed in Chapter 2, taxregimes 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 durationof the life product: tax deductibility of the premiums paid, tax-free roll-up ofincome received from the investment, and taxation on maturity or payout.Whatever the format, the global trend has been toward levelling the taxationplaying field by providing the same or similar tax treatment to a number oflong-term investment products as well as life insurance. Thus, long-term bankdeposits, mutual funds, annuities and other long-term investments in manycountries now have the same tax status as life insurance.

Thus, in the 1980s, the French and other so-called bancassurance markets inEurope were built around the similar tax treatment of life insurance and long-term bank deposits. Most recently, for example, in 2005 the German insurancemarket has been transformed by the withdrawal of tax benefits on the maturityof 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 whichapply consistently to both banks and insurers. As political barriers to the merg-er of different regulatory agencies are removed, however, other jurisdictionshave 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 byplacing it in the more lenient jurisdiction. As a recent study by Standard &Poor’s points out, “insurance capital needs are not represented in regulatorycapital”. For banks, this possibility has been effectively eliminated by Basel I andthe proposed Basel II, which oblige banks to take the full capital weighting intheir insurance operations.


18 © 2007

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 havethe opportunity of making a lower capital charge by utilising the more lenientjurisdiction. 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 understandablysurrounded 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 fullyunderstand 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 salesmenand 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, withstrong consumer lobbies and regulatory agencies. Chapter 9 discusses in moredetail 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 aparticularly significant one for bancassurers in view of the relatively high salesand manufacturing margins involved in such products as credit life, paymentprotection insurance (PPI) and health insurance.

THE INFLUENCE OF REGULATION

© 2007 19

Chapter 5

The bancassurance products

Bancassurance products – those sold to a bank retail client base – have evolvedover time as a response to local market conditions, global trends and the banks’growing experience with insurance-related products. This chapter analyses thedifferent 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 hastraditionally been the core product of insurers across the globe in both matureand emerging markets. As such a composite or complex product, it requiresadvice (which implies the cost of a trained sales force) and often a regulatoryand underwriting process which adds to the cost.

In addition, because of the presence of multiple risks – of death as well asinvestment return – it is arguably more expensive than individual products suchas term life or a pure investment instrument sold separately. In markets like theUS and Japan, the fixed or variable annuity, which pays out over a period oftime, is regarded as an insurance product because of the death benefit that isusually included. Most observers, however, view it as an investment product asit does not usually involve an intensive fact-find or medical examination.

The report discusses below how the life product in bancassurance markets likeFrance has been replaced by investment products with perhaps an insurancewrapper, as well as term life as a standalone product. In more traditional mar-kets like Germany, the life product has remained essentially unchanged untilquite recently, whereas in developing markets like Asia-Pacific, it remains thecore long-term investment product.

© 2007 21

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-terminvestments 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 profitedfrom these relationships to sell so-called credit or creditor life insurance –essentially protecting the borrower (and the bank) against the inability to repaya loan in the event of death or disability. In many markets, well over half ofthese retail loans are sold by banks with such protection attached – a cause ofconcern from regulators about tied sales. UK banks are estimated to provideroughly 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 theeffective cost of the insurance compared to the possible benefits.

Finally, banks have successfully sold simple non-life products independent ofbank services, including buildings and contents, automobile, travel and petinsurance. Often carrying substantial margins, these require little advice andcan 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 autoand 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) conflictingwith the bank’s brand. For years, for example, banks worried over the conflictswhich might occur in the event of a loss claim, when a valuable client wouldleave the bank in anger over a disputed insurance claim.

The net result of these constraints is the modest market share of bancassurancein non-life products. Despite the increasing contribution of credit life and otherproducts 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) andAsia-Pacific, non-life insurance is often the market entry offering of an insurerlike Allianz to establish the concept of insuring against risk. More profitableinvestment products in line with the bancassurer’s strategy of meeting retire-ment needs follow. But for many bancassurers, non-life remains simply anotherfinancial product designed to increase share of wallet and customer loyalty.

A pathfinding strategy for non-life products was launched in 1990 by CréditAgricole, the largest French retail bank. As a decentralised co-operative with anextremely loyal customer base, Crédit Agricole had pioneered, with CréditMutuel, 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 launch of the group’s non-life subsidiary, Pacifica, in 1990 addressed theissues of concern to bancassurers that hesitated to invest heavily in non-lifeproducts. In particular, potential conflict with bank clients over insuranceclaims was addressed by a totally separate online channel for such claims whichavoided 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 aphysical branch network.

Today Pacifica ranks among the top ten non-life companies in France, with thegoal of becoming one of the top five. The great bulk of sales are made to CréditAgricole banking clients via individual voluntary agreements with each of thegroup’s 41 regional banks, representing a branch network of over 7,000 units. Afull range of individual non-life products is offered – auto, household, privatehealth care, legal protection, personal accident and a range of specialty vehicles.By 2006, Pacifica had 5.3 million policies outstanding and dealt with 3 millionclaims.

Perhaps most importantly, the company has been consistently profitable sinceits start-up years, in contrast to the MSI (mutuels sans intermediaires) whichdominate the French non-life market.

In evaluating the attractiveness of all these products, the analyst is hampered bythe lack of transparency regarding production and distribution margins as wellas 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 alow-margin, commodity product in the US while, in Europe, banks often regardit as one of their most attractive offerings.

KEY PRODUCT TRENDS

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

The trend toward simple products in many sectors

Bancassurance today, both in name and heritage, reflects the discovery by banksin France in the 1980s that their simple, long-term, tax-favoured bank depositwas an attractive alternative to the traditional, more complex life insuranceoffering 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 lookingfor a long-term, low-cost, tax-favoured investment for their retirement. Theresult has been a marginalisation of the traditional life product as well as the

THE BANCASSURANCE PRODUCTS

© 2007 23

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 terminsurance volume has shrunk to a few percentage points of the overall sector.

In other markets as well, the traditional insurance product has been simplifiedby the regulatory authorities to encourage long-term savings. Thus in recentyears in Germany and the UK, where the traditional life product (in the form ofendowment insurance) remains the dominant offering, the authorities haveintroduced low-cost, simple, tax-advantaged products such as the so-calledSandler products in the UK and Riester products in Germany. These not onlyoffer much lower margins to the product manufacturer but, arguably, less needfor the advice which is the mainstay of the traditional life sales forces – bothnegatives 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 towin a share of these simpler products.

Figure 5.1: Relationship between product complexity and distribution channel

Source: DIBC, Saloman Brothers

Banks extend their insurance product range

In bancassurance countries like France, banks have moved from selling thelong-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 thebanking 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 internetand 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 inmarkets like France and Portugal, banks have begun to build share – admittedlyfrom a low base – in the non-life sector with auto, health care, travel, and build-ings and contents insurance.


24 © 2007

Bank staff/tellers(with minimal training)

Specialist advisors

Mobilesales force

Bank staff(with one to two weeks of training)

Complex products, eg grouplife/pension plans, estate planning

Demanding products ordemanding customers

Ordinary insurance products, egunit-linked products

Simple products, eg creditinsurance, term insurance

Increasing productcomplexity and level of service

Figure 5.2: European banks’ share of non-life insurance*, 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 oftenhave a competitive advantage. This has been driven in large part by a levelling ofthe tax playing field as governments remove the historical bias in favour of lifeinsurance. In Sweden, for example, the tax-favoured pension product, which isthe solution of choice for investors in this high-tax country, was effectively inthe hands of the insurance sector. In 1994, however, banks were permitted tooffer the same product advantages.

Thus in markets like Europe and the US, the client can now choose among arange of tax-favoured personal pensions, traditional life insurance, equity-relat-ed variable annuities, mutual funds and bank deposits. In this more complexworld in which the individual can select his own preferred investment vehicleand still retain tax benefits, the traditional life insurance general pooled fundmay 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-termsavings sector in recent decades, and banks would appear to have led this prod-uct innovation. For example, historically the core life insurance product wasbased on an insurer guaranteeing a fixed income return based on its pooledinvestment fund. In contrast, today’s most popular long-term retail investmentproduct is a bank-guaranteed deposit or annuity with an option on the equitymarkets.


© 2007 25

10.0%

15.0%

7.0%

9.0%

5.7%

11.0%

4.1%

5.7%

2.8%

4.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1998 2004

Sha

re o

f non

-life

insu

ranc

e (%

)

UKFrancePortugalBelgiumAustria

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 whereexpert advice is required to sell complex products. Thus in highly regulatedGermany 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 thatbanks should, in theory, win, but the results have often been disappointing.

Many banks have increasingly espoused the view that they are distributors ofmass-market financial products, including life and non-life.

Having bought insurance companies in the 1990s to augment their productrange, US and European banks like Citigroup and the Scandinavian banks havesubsequently sold the insurance manufacturer and bought back the product intheir role as distributor. Thus, Wells Fargo (see the case study in Chapter 10) hasled the US banking fraternity in acquiring insurance brokers while eschewingthe manufacture of the product. In cases where the manufacturing margin isattractive and the risk controllable, however, large banks like Crédit Agricolehave not hesitated to run an integrated insurance business.

In contrast, as discussed in Chapter 3, insurers have had less success in sellingbanking products. Margins of less than a fraction of 1% on traditional bankingproducts such as deposits and retail loans are not particularly attractive to aninsurance sales force accustomed to perhaps 3-4% on a life or mutual fundproduct, while the banks have successfully resisted the inroads of insurers ontheir 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 countryproducts to a less sophisticated environment. Thus, foreign insurers like Aviva,Hartford and AIG have been able to win market share in partnership with localbanks and insurers. The case study in Chapter 10 profiles how Hartford hasbuilt 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 strengthof alternative distribution channels. In the stock market euphoria of the late1990s, equity-related investments were the universal choice of retail clients, andthe banks benefited from their perceived expertise in the equity markets as wellas distribution strength. Since that time, cautious retail investors have almost


26 © 2007

universally chosen the capital guaranteed product with an equity kicker, and thebanks have also ridden this lucrative wave by providing their guarantees alongwith 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 andtrends

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 inclient demand over the past few decades.

CLIENT PROFILE

The starting point in the analysis of the client profile is segmentation: arrayingthe client base according to agreed and relevant criteria such as wealth/income,channel preference, stage in life-cycle, etc. This is particularly difficult for thetraditional 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 abancassurance context. Thus banks benefit from more day-to-day contact, butthe average product life span – and therefore ‘stickiness’ – may be longer for theinsurer. A 2006 report by Capgemini found that 71% of insurance customersnever or rarely (once a year) interact with their financial insurance distributor,while consumers interact their banks more than 200 times annually.

© 2007 29

Figure 6.1: The role of insurance products in the overall client relationship

Source: Citibank, Salomon Brothers

While there are many approaches to the segmentation issue, most banks andmarket 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 basicproducts;

• €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 investmentproducts; and

• over €1 million: high net worth. These desirable clients can be offered adesignated 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, membersof 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 andtailored to their needs. A bancassurance offering might well be part of such apackage.

In the context of bancassurance, the mass-market or mass-affluent segments arewell suited to the typical bancassurance product: standard long-term invest-ments such as life insurance and bank deposits, mortgage loans with protectionin the form of credit life, and standard non-life products. The typical branchsalesperson with perhaps several weeks of training, supported with product


30 © 2007

Ave

rage

pro

duct

life

spa

n

DDA

Savings plan

Car insurance

Life

Accident

Personal liability Savingshousehold account

0 5 10 15 20 25 30 35 40 45 50

Low High

Frequency of (personal) contacts per year

20

15

10

5

0

brochures, should be able to offer the necessary level of service and adviceregardless of the client’s level of wealth.

Problems arise, however, when a certain level of expert advice is required. Thetypical 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 anunderstanding of the securities markets all call for both the time and expertiseaway from the daily routine of the bank branch.

Most banks address this problem by using specialist bank staff, or experts froma partner insurance company (who are assigned to provide support for insur-ance and other investment products to a number of branches). The theory isthat a branch generalist, confronted by a problem requiring specialist advice,makes an appointment with the relevant specialist. In practice, however, thehandover is often difficult to make, and the client goes elsewhere or does notpursue the dialogue.

For the affluent or high net worth individual with access to advice from anexisting relationship, such as a private banking adviser or broker, the solution isto 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 insuranceclients. 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 theacquired broker.

Another approach to segmentation and cross-selling in bancassurance is tomeasure product penetration for key client segments. In the case study on KBCin Chapter 10, the report discusses this bancassurer’s segmentation on the basisof the number of banking and insurance products sold to a given priority client.

Bancassurance leaders such as Fortis and Crédit Agricole achieve life insuranceclient penetration rates of 25-35%, a target to which many others aspire. In therealm of credit life sold in connection with a credit product, penetration rateswith retail borrowers can easily exceed 80%.

Limited data exist in the public domain on the relative size of bancassuranceclient segments, but a consultant study provided by one of the interviewees in amajor EU market indicates that the mass market is only a fraction of theabsolute 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 amuch smaller share of the other two markets.

THE BANCASSURANCE CLIENT – PROFILE AND TRENDS

© 2007 31

KEY TRENDS IN CUSTOMER BEHAVIOUR – AND THE RESPONSE TOTHESE TRENDS

On the basis of the limited statistical evidence on bancassurance customerbehaviour, the following trends – and responses to the trends – stand out.

The demand from the upscale customers for product choice in financialsolutions 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 asstraightforward investment alternatives.

Brokers in markets like the UK and Germany sustain their client relationshipsthrough their perceived independence in an open architecture context – eventhough they support themselves largely from the sale of products they recom-mend. In the UK, the former polarisation has now been replaced by associationwith 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 allthe providers in the market.

Mis-selling issues

The repeated examples of mis-selling – selling a product that is not appropriatefor the client or not sold in a transparent fashion – has led regulators in marketslike the US and UK to demand greater transparency and regulation of sellingpractices. Bancassurance products – in particular endowment mortgages andPPI – have figured prominently on the list of such problems. In the UK, the FSAhas given top priority to what it terms “treating customers fairly” by demandingthat 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 metricfor such surveys, as well as an element in the banker’s balanced score card.Reconciling this metric with that demanding superior sales performance is areal challenge for sales staff.


32 © 2007

Prioritising the upscale segments

Both banks and insurers have responded to competition for the mass marketand the commoditisation of traditional products by prioritising the upscalesegments. Margins on simple investment products like term deposits and loanshave been slashed by price competition. Banks in particular are moving towardsrewarding client loyalty by price concessions in the form of gold, silver andbronze classifications. In the bancassurance world, this means a focus on privatebanking 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 ofthe mass market.

THE BANCASSURANCE CLIENT – PROFILE AND TRENDS

© 2007 33

Chapter 7

Competitive distribution channels

Bancassurance distribution cannot be evaluated in a vacuum. This chapter firstexamines the alternative channels with which bancassurance competes to deter-mine the relative advantages and disadvantages of each major channel. Thereport then reviews how bancassurance has fared against these channels in thethree major regional markets in the report survey. Finally, it reviews the issuesinvolved in multichannel distribution and the competitive response by insurersto bank distribution

In practice, the choice of channels in a given market is driven by the complexinteraction of a number of variables: regulation and taxation, product profileand complexity, the brand strength of major providers and the local culture. Asdiscussed below, both banks and insurers make use of multiple channels in agiven 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, therelative priority of the two functions often changes, and bancassurers oftenterm themselves ‘product providers’ or ‘distributors’. Relative product profitabil-ity, capital requirements, client needs, the strength of the distribution networkand 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 Europeto divest themselves of both life and non-life manufacture in favour of buyingback 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

Agency sales forces and insurance company employees

The starting point for retail insurance distribution is the classical combinationof company salesmen and agency channel: a sales force committed to a single orlimited number of insurers’ brands and product lines.

The great strengths of such a force are its commitment to the carrier as well asits personal relationships with the insured. On the other hand, in a world whererelatively sophisticated clients are increasingly demanding choice, the competi-tive positioning of channels such as brokers offering a choice of many providersis 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 companysalesmen 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 andMarket Research Association) survey in 2000 in Asia found that 79% of theinsurers 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 tonew products such as equity-linked and derivative-based offerings, as well asaggressively seeking out new clients. In Europe, for example, traditional insurerssuch 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 alongthese lines.

Brokers

Brokers – essentially firms or individuals selling a wide range of insuranceproducts – have experienced mixed results in the major markets in the face ofbancassurance.

Remunerated largely by commissions which appear to be little changed over theyears, brokers are highly motivated individuals who generally have earned thetrust of their clients and are widely perceived to ‘own’ the client relationship. Incontrast, insurance carriers have suffered from the lack of direct relationshipswith 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

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 inthe hundreds of broker acquisitions by US banks. The Wells Fargo case study inChapter 10 highlights the value of broker relationships.

In several European markets, a number of large brokerage firms focusing oninvestment products have won market share on the basis of their relationshipswith upscale clients, perceived independence and the ability to provide financialadvice 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 appropriatelong-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 AllgemeinerWirtschaftsdienst (AWD) in Germany, and Fideuram in Italy.

The model for many of these brokerages involves extensive training, a focus onselected client segments, significant upside earnings potential and a rigorousselection of sales personnel. In markets like Germany, they are known as struc-tured sales forces – a pyramidal organisation in which the superior levels of thepyramid receive a share of the commission of the lower levels, thus providingextra leverage and rewards to the upper echelons. In Italy, such sales forces areknown as promotori finanziarie. Usually owned by financial institutions, theyare also used to tap the more affluent client segments.

Such a model enables the brokerage to attract the most highly motivated andwell-connected sales personnel, often providing levels of commission earningswhich banks are unwilling or unable to offer within their pay scales. A majorchallenge 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 productsfor them to sell, while on the other to manage the model in a disciplined fashionto prevent mis-selling.

Other non-bancassurance channels

The internet and other direct channels have become an attractive channel forthe sale of simple non-life products such as auto and home insurance. The rolemodel for such direct marketing is Direct Line, now owned by RBS, which inthe 1990s won a dominant market share in the UK auto insurance sector byoffering superior service as well as competitive pricing.

On the other hand, life insurance has not been a particularly successful productfor this channel due to the perceived need for advice and an offline medicalexamination.

Direct banks have become a significant provider of life, health and property andcasualty (P&C) products. Table 7.1 lists 15 direct banks in the Canadian and UK

COMPETITIVE DISTRIBUTION CHANNELS

© 2007 37


38 © 2007

Tabl

e 7.1

:Pr

ofits

and

pro

duct

offer

ings

for

dire

ct b

anks

in C

anad

a an

d th

e U

K,2

003

Direc

tLa

unch

ed

Pro

fit/

Cur

rent

Sav

ings

Loan

sC

redi

tM

ortg

ages

Mut

ual

Life

Hea

lth

P&

CPen

sion

sB

roke

rage

bank

(l

oss)

1a/

ca/

c ca

rds

fund

s se

rvic

es

(£ m

)

Tesc

o Per

sona

l 1997

173.0

✔

✔✔

✔✔

✔

Fina

nce

Firs

t D

irec

t 1989

49.9

✔

✔✔

✔✔

✔✔

✔✔

✔

Sco

ttis

h W

idow

s1995

16.5

✔

✔✔

✔

Ban

kTh

e O

ne A

ccou

nt

1997

23.0

✔

✔✔

✔✔

Sai

nsbu

ry’s

Ban

k1997

22.0

✔

✔✔

✔✔

✔✔

Sta

ndar

d Li

fe

1998

4.6

✔

✔✔

Direc

t Li

ne R

escu

e 1998

31.0

✔

ING

Direc

t C

anad

a 1997

prof

it2✔

✔✔

✔✔

Cah

oot

2000

(15.0

) ✔

✔✔

✔✔

✔✔

✔

Gol

dfis

h 1996

(30.0

) ✔

✔✔

✔✔

Egg

1998

(34.0

) ✔

✔✔

✔✔

✔✔

✔

Inte

llige

nt F

inan

ce

2000

(53.0

) ✔

✔✔

✔✔

✔✔

Fina

ncia

lP

resi

dent

’s C

hoic

e 1998

(104.0

) ✔

✔✔

✔✔

✔✔

ING

Direc

t U

K

2003

loss

2✔

Cit

izen

s B

ank

of

1997

loss

2✔

✔✔

✔✔

✔✔

✔

Can

ada

Not

e:1. Pr

e-ta

x pr

ofit

befo

re e

xcep

tiona

l ite

ms.

2. S

peci

fic fig

ures

not

giv

en.

Sou

rce:

Fin

anci

al S

ervi

ces

Dis

trib

utio

n

markets, of which six sell life, four health and nine P&C offerings in addition todeposit 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 asbancassurance. While overall only 20% of the customers surveyed cite the inter-net as their primary channel for buying insurance, in the UK the preference inthe life sector is a remarkable 46% and for non-life 30%. In contrast, in the USonly 12-13% of those surveyed prefer this channel for life and non-life purchas-es. While national preferences clearly differ, the trend towards direct sellingseems clear.

Post offices, which are often lumped together with bank branches for statisticalpurposes, 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 theItalian Post Office which, under the leadership of the current CEO of BancaIntesa, 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. Thecurrent privatisation of Japan Post, the country’s largest financial institution, isthus of great strategic interest.

Figure 7.1 (on the following page) provides an indication of the role played byfinancial services in a number of European markets. Italy leads the league withan impressive 42% of total post office revenues. A number of vehicles are usedby post offices to leverage their vast distribution networks: directly ownedbanks (Deutsche Postbank), joint ventures with banks (An Post in Ireland) andwhite-labelling of third-party products (Poste Italiane). In 2006, Japan’s largestbank was formed with the break-up of the country’s post office: Yucho Bankwill have 233 branches and operate through the nation’s 24,000 post offices.


© 2007 39

Figure 7.1: Share of revenues by postal services associated with financialservices, 2006 (%)

Source: Financial Services Distribution, La Poste

Supermarkets and other retailers offer the bancassurer the advantage of strongbrands and large customer bases. In the UK, Tesco and Sainsbury have beensuccessful in selling simple, low-cost auto and homeowners insurance via theirdirect 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 withbasic investment products.

TRENDS IN DISTRIBUTION MARKET SHARES

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

Europe

While retail banks in many European markets had traditionally sold life andnon-life products as agents, today’s bancassurance model originated in Europein 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% ofthe non-life sector. Europe is often characterised as having two distinct models– the bank-dominated countries like France and Spain, where banks control atleast half of the life market, and the broker model, which dominates in the UKand the Netherlands. The database on Germany is sparse, but it would appearthat all three channels – traditional agents and employees, brokers and banks –have significant shares of the market.


40 © 2007

42%

28% 25% 23% 20% 17%

9%

58%

72% 75% 77% 80% 83%

91%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Italy Hungary Poland France Switzerland Germany Belgium

Sha

re o

f rev

enue

s (%

)

Financial services Mail and other services

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 combinedagency and employee distribution in selected European markets since 1998, adate when significant attrition had already taken place in these countries.

Figure 7.2: The declining role of insurance company employees and agents inselected European life insurance markets, 1998-2004 (%)


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 Franceover the period from 1985 to 2003.


© 2007 41

27.0%

44.0%

33.3%

23.0%

31.2%

24.8%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

France Italy Austria

Tota

l new

life

sal

es (%

)

19982004

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

Source: DIBC – latest available data

One question remains: what has been the fate of the thousands of companyemployees and agents displaced by bancassurance? This report was unable tofind any reliable data, but interviewees believe that many, if not most, of themconverted to brokerage status by broadening their range of carriers or joinedbancassurers 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 7.4shows how this share has increased in markets like the UK, France and Austriasince 1998, while declining in Belgium.


42 © 2007

22,600

13,200

13,540

13,590

14,450

15,050

15,700

16,280

16,780

0

5,000

10,000

15,000

20,000

25,000

1985 1996 1997 1998 1999 2000 2001 2002 2003

No.

of t

ied

agen

ts

Figure 7.4: The evolution of the share of life insurance broking in selectedEuropean markets, 1998-2004 (%)


In summary, a Euronet survey for the European market as a whole indicatesthat the share of brokerage distribution in the life sector has increased margin-ally over the years between 1990 and 2000. In contrast, bank distribution hassoared from roughly 10% to 30% of the total retail market. Figure 7.5 depictsthis erosion of traditional life distribution channels.

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

Source: Euronet – latest available data


© 2007 43

8.0%

63.1%

15.6%

35.4%

10.0%

66.2%

17.2%

27.2%

0%

10%

20%

30%

40%

50%

60%

70%

France UK Austria Belgium

Tota

l life

insu

ranc

e so

ld b

y ch

anne

l (%

)

19982004

29%

10%

39%

31% 30%

61%

0%

10%

20%

30%

40%

50%

60%

70%

Tied Agents IFAs Banks

Dis

tribu

tion

of li

fe in

sura

nce

sold

(%)

19902000

In broad terms, the European distribution model has moved from proprietarydistribution, 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 relationshipsare exclusive – either between a captive insurer and the stockholding bank, or ajoint venture between independent provider and distributor with some degreeof exclusivity for the relevant market. Subsequent chapters of this report willexplore 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 manynational markets.

A study by Swiss Re in 2002, summarised in Table 7.2 (below), confirms thatsuch channels were the main sales conduit with at least 75% of life sales at theend of the last century. Yet the bancassurance channel was not allowed then inkey markets like South Korea and the Philippines, and in recent years it hasprobably increased from a low base in Japan, India and other countries. Themore 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

In Asia-Pacific, as indicated in Table 7.2, the brokerage sector to date hasremained a marginal player in the face of the traditional company and agencysales forces and the growing strength of the bancassurance competitors.

For domestic and foreign newcomers to the Asia-Pacific insurance market, bankdistribution is a much cheaper and faster means of building market share thanrecruiting, 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% ofthe life market against 35% for tied agents. Banks for that period accounted foronly 2% of the total.

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

Source: LIMRA International

Traditionally, individual buyers of insurance have relied on their local agent fortheir insurance needs. This close personal relationship has survived the arrivalof 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 theindependent financial planner, whose market share has increased to 41% in2005 against only 28% in 2001. Figure 7.7 profiles this evolution.


© 2007 45

Banks2%

Others9%

Independent agent54%

Tied agent35%

Figure 7.7: US variable annuity sales dominated by independent financialplanners, 2001-2005 (%)

Source: VARDS, AXA – latest available data

MULTIPLE CHANNEL DISTRIBUTION AND THE INSURERS’ RESPONSETO BANK COMPETITION

The business model for many bancassurers, as well as the insurers themselves, isa multiple channel strategy. In many cases, such a strategy is the product of aninsurance acquisition designed to build a larger overall client base and obtaininsurance 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 companyemployee/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 beena major problem for bancassurers, particularly in markets where brokers arewell entrenched or geographic monopolies had been granted to specific agentsor employees.

Thus in the early days of bancassurance, French carriers like the former UAP, aswell 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 theNetherlands, a brokerage stronghold, when the insurer Nationale-Nederlanden(NN) in 1991 announced the acquisition of NMB Bank along with its directbanking affiliate Postbank. A boycott of NN by the brokerage community wassettled only by a compromise which is believed to have involved product pricingand channel usage.


46 © 2007

30% 30%39%

27% 27%

12% 13%

17%

17% 17%

28% 29%

38%

39% 41%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005

Sha

re o

f var

iabl

e an

nuity

mar

ket (

%)

PlannersBanksBrokers

CAGR 2001-2005

+10.1%

+10.0%

(3.2%)

The ideal strategic solution for multiple channel bancassurers is to match prod-ucts and clients with channels. Thus, low-cost, simple products like auto andhomeowners 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 ofbrokers or specialists operating in the bank branch network. Thisproduct/channel interface is overlaid with the client dimension: upscale clientsshould be offered a higher service level across the relationship.

In the developed bancassurance model in Europe, banks with multiple channelshave generally managed the bank and other channels separately in each nation-al market. Different compensation structures, cultures and channel economicslie behind the separation. Yet banks like KBC, as described in the case study inChapter 10, have made significant efforts to bring the two sales forces togetherboth 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 retailbranch network’s marketing capability.

In addition, most major European bancassurers have taken a pragmaticapproach to channel selection in different markets. Thus, global competitorslike 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 remainindependent, the response has been almost universal: employ all possible chan-nels to meet the challenge. Chapter 3 summarised how some banks have set upor acquired small banks so as to be able to offer standard banking products totheir insurance clients.

For those insurers not prepared to invest in the banking business, alliances withexisting retail banking networks as well as the usual array of employee, agencyand broker channels are exploited. The case studies in Chapter 10 examine howbancassurers like Aviva, CNP and Fortis have successfully built profitable bankdistribution in a variety of markets.


© 2007 47

Chapter 8

The profit profile

Having examined the key dimensions of bancassurance, the report turns now tothe database on bancassurance profitability to address a number of issues. Isbancassurance 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 profitabilityreflected in pricing to benefit the client or, on the contrary, simply absorbedinto 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 relativelytransparent, 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 oftrade associations and leading bancassurers. Comparability is made even moredifficult 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 profitabilityare summarised next, followed by insights into bancassurance pricing. Finally,the report provides some indications of overall profitability. Most of this dataare 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 traditionalagency and broker channels. A number of reliable consultant studies, some of

© 2007 49

which are incorporated below, quantify this differential. It should be pointedout, however, that actual operating data from individual bancassurers are rarelymade available to support these conclusions.

Underpinning this cost advantage is bancassurance’s higher productivity. Sincethe origins of bancassurance in the mid-1980s in Europe and South Africa, ithas been assumed that a bank employee working off the so-called warm clientbase provided by the branch network can generate a multiple of the revenue ofan 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, thebank channel is deemed able to convert 25% into actual business against only10% for the agent. Similarly, a study by the consulting firm Tillinghast estimatesthe bank productivity advantage at four times that of the agent. A study byAccenture indicates that the bancassurers’ cost advantage translates into aninternal 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

Conversion rateTraditional 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 bankchannel in that market. Another consultant study by McKinsey & Co, shown in


50 © 2007

2.5

5

10

1

3

10

No. of closes

No. of appointments

No. of cases

Salaried agents with warm leads from bank branches Traditional insurance agent

Figure 8.2 (below), fixes the cost of bank distribution at 60% of the first yearpremium against 152% for career agents, and is undercut only by direct selling.

Figure 8.2: New distribution channels are much lower-cost

* Ordinary life acquisition cost** UK experience


Italian data from 1995, shown in Figure 8.3, track not only the lower cost ofbank distribution but also show how it probably contributed to the explosion ofItalian bancassurance from 4% in 1990 to 37% of the total in 1995.

THE PROFIT PROFILE

© 2007 51

10%

20%

60%

65%

116%

152%

Online

Direct**

Bank*

Worksite

Independent brokers

Career

Percentage of first-year premiums (%)

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

* First-year premiums + increases of single premiums for banks; first-year premiums + 1/10 of single premium forother 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 OliverWyman for ABI (the Association of British Insurers) found that bancassurancewas the lowest cost of the principal delivery channels for regulated, long-terminvestment products of any of the major channels. Thus, taking into considera-tion the time per sale, including time for unsuccessful leads, a bancassurancesale required only 6.8 hours against 13 hours for an independent adviser and 11hours for a direct sales force.


52 © 2007

Cost ratio by channel (C$ bn)

14.511.5

5.8

5.4

3.0

3.0

Agents Financial services Banks

Commissions General expenses

New life business* (C$ bn and %)

76.2

35.7

17.7

10.4

4.1

52.9

1990 1995

19.9

14.5

8.8

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

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 potentialcost advantage of perhaps 5-10% of premium income against the agency salesforce.

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 clientbase that is open to offers from its bank, but these sources point out that muchdepends on the product chosen and the bank’s accounting policies. Much moreeffort 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, whichare the province of the banks, require much less time and skill. And while themarginal cost of a bank branch sale may be nominal, if the training, systemsand other overhead costs of bancassurance are fully charged, any cost advantagemay disappear.

RELATIVE PRODUCT AND FUNCTIONAL PROFITABILITY

One of the clear findings of this research is the wide differential in productprofitability, 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 inEurope, having been introduced to bancassurance by the ease with which theycan sell tax-advantaged investment products, have found that they are also wellequipped to offer relatively high-margin term life as a standalone product. OneDutch bancassurer thus calculates that term life offers the highest return onbancassurance 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 acrossnational markets on relative profitability even for such standard products. Theexcuse given invariably is that such comparisons cannot be made because oflocal 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 wholelife lead the list with spreads of at least 50 basis points, while term insurance, asindicated above, produces only five basis points.

THE PROFIT PROFILE

© 2007 53

Figure 8.4: Relative profitability of selected products


As indicated above, the relative ease with which a bank sales force can cross-sellan insurance product can be a major competitive advantage. Thus, term lifemay, in some markets, be a low-margin product, but a bank providing creditorlife 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 serviceprocess can achieve substantial margins on products which are associated with aloan 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-lifeproducts (%)

Source: McKinsey & Co (presentation to EBR Forum, 2002 – no subsequent data available from this source)


54 © 2007

Spreads (basis points)

5

20

25

30-50

50-60

75-100

Term

Variable life

Universal life

Variable annuities

Wholelife

Fixed annuities

DistributionDistribution

Production

35%

65%

Life insurance

Production

P&C insurance

48%

52%

Life insurance P&C insurance

BANCASSURANCE PRICING

Whatever cost advantages bancassurers may have, there is little evidence todayof their products selling at a discount to that of their traditional insurancepeers.

A survey in 2005 by DIBC in Europe found that several pioneers in the late1980s and early 1990s did indeed offer a price advantage under the insurers’ lifeofferings. In Germany, for example, Deutsche Bank’s new captive life company,Deutsche Leben, amortised the commission element of the policy over the lifeof 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 chargethe traditional 3% sales load on its flexible, low-cost pension product designedfor 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 oneof 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 theirprices to meet bancassurance competition, or the latter raising theirs under theformer’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. Inaddition, banks in markets like Spain are selling such products to third-party,non-bank clients based on their lower manufacturing costs and strong brandname. At the same time, margins on the traditional tax-advantaged pure invest-ment products are being eroded by competition. Protection products, especiallythose sold in connection with a bank loan, have a high strategic priority formost European banks.

ACTUAL PROFITABILITY DATA

As indicated above, even in the mature European market the database on actualbancassurance profitability – as opposed to consultants’ estimates – is quitemeagre. On the other hand, several leading bancassurers – not surprisingly, per-haps, those with a good story to tell! – have not only revealed current key profitnumbers in their investor reporting but also compared them with distributionalternatives.

Table 8.1 (on the following page) provides data from two such bancassuranceleaders which are profiled in Chapter 10 – Fortis (in its Belgian home market)and Aviva (for its global business) – during the period 2005-2006. Margins (onan embedded value basis) are substantially higher for the bancassurance

THE PROFIT PROFILE

© 2007 55

channel for both groups. More importantly, the internal rate of return (IRR) forFortis’ bancassurance channel in Belgium, at 20%, is roughly double that ofbroker 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 publishingtheir results by distribution channel, analysts will study them with interest todetermine 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 ownprofit performance – and thus enable them to meet the competitive challenge ofthe banks.

Insurers like Aegon, Aviva, AXA and others have transformed their businessmodel since the 1990s. The productivity of the sales force has been improved bythe culling of agents who did not meet productivity standards. Multichanneldistribution 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 theirclients’ demand for choice. Client segmentation has been improved, and priori-ty given to the more affluent segments seeking advice. One wonders whetherthis 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 keyvariables whatever the inherent cost and other advantages of bancassurance.Chapter 11 explores the drivers for these results and the lessons of severaldecades 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 todetermine how these elements fit together to drive relative bancassurance suc-cess or failure, as well as lay the foundation for the final chapters which examinecase studies of success, the issues encountered and resolved, and the outlook forthe future.

In selecting national markets, the focus has been on those which meet some orall 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 threeregions which dominate the overall bancassurance universe: North America,Asia-Pacific and Europe. A typical segmentation of the global life insurancemarket, the dominant bancassurance product, is provided by the ComitéEuropéen des Assurances (CEA) in Europe. The evolution of these three lifemarkets between 1985 and 2004 is provided in Figure 9.1 (on the followingpage).

© 2007 57

Figure 9.1: Evolution of three major regional life markets, 1985-2004 (%)

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 theexpense of the US, which has fallen from 50% to 36% of the total. As discussedbelow, 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% ofthe European market, 12% of Asia-Pacific, and only 1-2% of US life insurancesales.

The preference of this report has thus been to provide an in-depth analysis ofwhat it regards as significant national markets rather than attempt to cover all.For readers interested in such broader coverage, VRL KnowledgeBank’s earlierstudy, 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 concentrationof 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

1985

Others, 4.1% Europe, 25.9%

Asia-Pacific, 19.6%North America, 50.3%

2004

Asia-Pacific, 22.7%

Others, 4.4%

Europe, 36.9%North America, 36.0%

Concentration of bank and insurance ownership

Over the past decade, the European financial services sector has experiencedmassive consolidation which has not only reduced the number of competitorsbut 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 particularsought 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 BelgiumDexia DVV Insurance BelgiumRabobank Interpolis NetherlandsSNS Reaal NetherlandsSEB Trygg-Hansa SwedenHandelsbanken SPP SwedenDanske Bank Danica DenmarkNordea (Unidanmark) Tryg Baltica DenmarkNordea (CBK) Vesta NorwaySparebanken NOR Gjensidige NorwayDnB Vital NorwayCredit Suisse Winterthur SwitzerlandDeutsche Bank Deutscher Herold GermanyLloyds Bank Abbey Life UKLloyds TSB Scottish Widows UKAbbey National Scottish Mutual UK

Scottish Provident UKHalifax Clerical Medical UK

Dominant insurers Bank partners Country

Fortis (Groupe AG) ASLK-CGER BelgiumGenerale Bank Belgium

Fortis (Amev) VSB NetherlandsING (Nationale-Nederlanden) NMB Postbank NetherlandsSampo Leonia FinlandSwiss Life Banca del Gottardo SwitzerlandAllianz Dresdner Bank GermanyAMB BfG GermanyGAN CIC FranceAXA (UAP) Banque Worms FranceAXA Banque Directe FranceIrish 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 sectorare bancassurers – groups with both a banking and insurance activity.

THE KEY NATIONAL MARKETS

© 2007 59

Relative integration of bancassurance manufacture and distribution

All structural models are present in Europe – captives, capitalised joint venturesand simple distribution agreements – but the captive model is particularlywidespread. Thus, major banks in Spain, France, Benelux and Italy have fullyintegrated their insurance units. Unlike the case in the US and Asia-Pacific, dis-tribution agreements tend to be exclusive, which offers greater opportunities forfront- and back-office integration. The increased interest by banks in productmanufacture 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, infavour of a simple, tax-favoured, lower-cost investment product. In markets likeFrance and Spain, this traditional life product has virtually disappeared, as cus-tomers appear to prefer to buy their investment and protection separately. Thebank distribution network has been the major beneficiary of this trend.

Table 9.2 profiles the distinction between bancassurance markets in developedEurope 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 Othermulti-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/AItaly 68% 19% 1% 13% -Netherlands 19% 55% - 26% -Sweden 45% - 19% 28% 8%

Note: * Including other networks such as post officesFigures 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 isaccounted for by bank distribution. While the banks’ share is less than 25% inthe 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

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 CréditAgricole – realised that their tax-favoured term bank deposit was an attractivealternative to the traditional high-cost whole life policy. Thus began a majorshift – often involving a transfer from custody accounts already held in thebanks – to what is known today as épargne assurance, which is the dominant lifeproduct today in France. Essentially a bank deposit with a modest life wrapper,this permitted banks to market a wider range of equity-linked term insuranceproducts also benefiting from a tax preference. At the same time, the traditionalwhole 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 from39% in 1990 to the current level of about 62%. As indicated by Figure 9.2, thislatter share has remained roughly unchanged since 1999, an indication of thesuccess of other channels in preventing further attrition.

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

* 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 thistransformation. Of the top six life insurers, three are banks (Crédit Agricole,BNP Paribas and Société Générale) and the largest (CNP) is heavily dependenton bank distribution.


© 2007 61

39

56 59 61 59 60 61 60 61 62

18

12 11 10 10 9 8 8 811

7 7 7 8 9 9 9 9

28 19 17 16 17 17 16 17 16

4 6 6 6 6 5 6 6 6

38

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 1995 1996 1997 1998 1999 2000 2001 2002 2005*

Sal

es o

f ret

ail l

ife in

sura

nce

(%)

Banks Agents Brokers Insurance company employees Direct channels All others

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

Insurer Premium income (€ bn)

CNP Assurances 21.4Crédit Agricole 18.8AXA 13.2Generali France 9.6BNP Paribas 9.0Société Générale 7.7AGF 6.2ACM 5.9Groupama 5.8Aviva France 5.2

Source: FFSA

The substantial benefit of deductibility from income tax of premiums paid wasremoved in the 1990s in favour of exemption from inheritance tax. On theother hand, newer products such as the plan d'épargne retraite populaire (PERP)have the reverse benefit: premium deductibility but taxation on maturity. In thelate 1990s, the banks moved aggressively into selling protection or credit lifeproducts as part of retail lending packages.

Thus between 1998 and 2002, the banks increased their share of the term lifemarket 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 frompure savings/investment products.

France’s largest life insurer, CNP, markets life insurance largely through savingsbank 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 theappearance of independent financial adviser networks along the lines of theIFAs 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 agreementswith French bancassurers, banks began to sell life insurance only in 1990. AsTable 9.4 (on the following page) shows, since then the share of banks hasincreased steadily to roughly 59-60% in recent years.


62 © 2007

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 60.7Agents 27.0 17.9 19.6 18.3 18.6 18.2Direct sales 8.6 8.8 8.9 10.9 12.6 12.4Financial advisers 9.4 11.2 14.3 11.2 9.5 7.6Brokers 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, orinvestment, product, was originally tax-favoured, but this relative advantage hasbeen continually reduced in recent years as Italy moves towards tax-favouredpersonal pensions.

The banks profited from the equity boom of the 1990s to leverage their equityexpertise through the unit-linked product. Since the equity market peaked in2000, they have been able to sell alternative investment products, in particularthe guaranteed capital note with an option on equity indices, which provides amost attractive margin to the banks. The result is that the life product is widelyregarded as only one of a number of such long-term investment vehicles whoseappeal depends on current tax or other advantages.

Figure 9.3 (on the following page) provides one of the rare data sources inEurope on distribution channels by individual product. It shows how bankshave dominated the unit-linked and capitalisation sectors during a recent peri-od with their similarity to bank products, in contrast to the much smaller shareof the health care and individual pension product sectors, which are dominatedby agents.


© 2007 63

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

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 hasremained roughly constant since the mid-1990s. Banks have benefited in Spainfrom particularly high levels of client trust, with only marginal penetration bythe brokerage community. Of the top four life insurance providers, three (theCaixa 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 aroughly 50% market share against perhaps 22% in life products.

Since the initial entry via the tax-advantaged single premium life product in theearly 1990s, the life product has been grouped by the banks along with mutualfunds and personal pensions as one part of the generic category of ‘customerfunds’. 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 mutualfund 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 hasshown a steady increase, while the much larger mutual fund sector peaked in1999. Figure 9.4 plots this evolution.


64 © 2007

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Whole life Unit-linked Long-termhealth care

Capitalisation Pensionfunds

Individualpensions

Pen

tera

tion

(%)

Banks Agents Other

€19.4m €23.6m €0.01m €3.2m €0.1m N/A

Figure 9.4: Evolution of life insurance and other investment products in Spain,1993-2002 (€ 000s)

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 pureprotection in the form of term life as a standalone product as well as to brokersas an element in the pension packages they market to group policies. Anotherbank, which only sells 5% of the credit life policies to its mortgage clients, plansto increase this ratio to 80%. Interviews conducted for this report indicate thatmargins on credit life in Spain exceed 50% after commissions.

On the other hand, the tax advantages once associated with the single premiumlife 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 inproduct and distribution channels over the past few decades. While no officialfigures on product breakdown or distribution channel are available, the coreendowment 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 withone of 19% in 2002, albeit from a different source.

Until a change in tax regulation that became effective in January, 2005, thiscombined protection and investment product offered substantial tax benefits(to those holding the product for a minimum of 12 years) in the form of limit-ed premium deductibility, tax-free roll-up and tax-free distribution. Under


© 2007 65

0

50,000

100,000

150,000

200,000

250,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Pro

duct

sal

es (€

000

s)

Mutual funds Life insurance Pension funds

pressure from the banking sector as well as other factors, the remaining tax-deductibility benefits have been removed, while the critical tax-free status ofpayouts has been substantially reduced in an effort to create a more level taxplaying field for long-term investments.

The primary product innovation in recent years has been the introduction ofthe so-called Riester private pension. Designed as a tax-advantaged (in the formof premium deductibility) pure investment vehicle for a mass market, in theearly years it failed to meet its volume targets. In 2005, however, volume reachedan 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 banksas well as the traditional tied agents and so-called structured sales forces (brokernetworks). Among the banks, by far most impressive performance has beenshown by the retail unit of Citigroup. As the leading bank provider of credit lifeproducts, Citi has achieved productivity levels estimated at eight times those ofits peers by marketing a line of simple products sold by bank staff with trainingand support supplied by an alliance with HDI, a domestic insurer.

The domestic banks have struggled since the early 1990s with problems ofunion restrictions on incentive compensation, a lack of selling culture, theproblems of selling a different brand and a lack of co-ordination with the insur-ance partners that provide the product. Most recently, the market leaderAllianz, with a 20% market share in life, has invested heavily in its subsidiaryDresdner Bank’s insurance capabilities by assigning an Allianz specialist to eachbank branch to provide support in selling complex products. These efforts areprofiled in the case study on Allianz in the next chapter.

The combination of success in marketing the simple Riester products and theloss of tax privileges on the traditional whole life product have offered interest-ing selling opportunities for bank distribution, and analysts note with interestthe decline in sales of traditional life insurers in 2005.

The UK

British banks have adopted a variety of business models over the past fewdecades to address the issue of life and non-life distribution. Two of the top tenUK life carriers are integrated bancassurers – HBOS and Lloyds TSB – whileothers (such as RBS) have followed the joint venture or distribution allianceroute.

In recent years, bancassurance has won market share. Table 9.5 indicates that itsshare over the 1999-2004 period has risen steadily from 9.1% of the life andpension market to 17.5%.


66 © 2007

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 10.1Direct 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 3.7Tied 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 2.8Others 0.7 1.8 2.3 3.3 3.8 3.8 3.1Total 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 over60% of the life/pension market.

The major factor in limiting bank penetration of the UK life market has beenproduct complexity and the associated need for regulatory oversight. Protectionand investment have been combined in most products traditionally sold by thelife sector, such as whole life, endowment and unit-linked. A complex regulato-ry mechanism designed to protect the client has not only polarised – untilrecently – 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 salesforces operating from the branch network: one selling unregulated products –essentially bank-like liquidity and medium-term savings products – and theother offering regulated products like personal pensions, unit-linked andendowments. Banks understandably find it a challenge to manage these twosales forces with different compensation and other variables, while still offeringthe 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 bankshave been quite successful in selling simple, tax-advantaged investment prod-ucts like individual savings accounts (ISAs). According to trade associationdata, they are the largest single distribution channel of ISAs with 32% of themarket.

The advent of ‘A Day’ in April 2006 may, however, be a landmark in the contextof the battle for market share. Until then, with up to eight different tax regimesapplied to the personal pension product, extensive advice – usually provided byIFAs – has usually been required to make the sale. Henceforward, however, therewill be only one tax and regulatory regime, and many observers predict marketshare loss for the IFAs and gains for the banks.


© 2007 67

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 productprovider. 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 productshas enabled IFAs to attract some of the most effective and highly motivatedmarketing talent in the retail financial sector, in contrast to the banks, who areoften restrained in their compensation and other structures by bank-wide poli-cies. Having recently convinced the FSA that they should be able to retain thetitle ‘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 customersfairly” in the terminology of the FSA. The FSA has undertaken a broad study ofretail insurance distribution in view of the high level of product churn (cancel-lation before maturity), evidence that the client does not have an adequateunderstanding of the risks involved in some policies and the constraints onmarketing relatively low-cost investment products to fill the retirement savingsgap.

In a seminal presentation in 2006 to a gathering of senior executives in the UKlife and pension sector, Callum McCarthy, chairman of the FSA, concluded thatthe UK has a “system which serves neither the producer of the services nor theconsumer of the services. It is doubtful whether it serves the intermediaryeither.” He criticised the focus on business volume rather than quality, pointingto a “merry-go-round”, or churn, with a substantial volume of ‘new’ businessbeing in effect transferred from other providers. Behind this concern lies evi-dence that, despite commission levels and costs which have been criticised byregulators, 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 haveswitched providers in the last five years, with the UK figure rising to 63%. Thechurn 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 ofmis-selling to providers is given by the FSA’s estimate at year-end 2006 that thetotal compensation bill for mortgage endowment mis-selling alone is approach-ing £3 billion. A review of compensation procedures at 52 firms responsible formore than 90% of this key bancassurance product uncovered evidence of poorcomplaints procedures at 22 of them. In addition, the regulatory spotlight has


68 © 2007

focused on so-called precipice bonds (in which the principal repayment can fallsharply with market declines) and PPI insurance. The latter, which is seen tooffer the banks high margins in comparison with the benefits available, will bethe subject of a regulatory report during 2007.

This level of regulatory concern, which could seriously impact the profitabilityof some popular and high-margin bancassurance products, must be viewed inthe context of perceived low profitability of both insurance providers and theIFA 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 spreadto other markets.

NORTH AMERICA

This report first examines the key US market, followed by a profile of theunique 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 theGramm-Leach-Bliley (GLB) legislation. Until then, the Glass-Steagall Act hadblocked ownership ties between banks, insurers and securities firms, as well asthe sale of most insurance products through most bank channels. During the1990s, 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’ strategicfocus has traditionally been on selling investment products such as mutualfunds.

The passage of the GLB landmark legislation, in the view of many analysts, waspredicted to transform the banking and insurance sectors. Consultant studiesopined on the right combination of mergers and alliances along the lines estab-lished in Europe. And the passage of the GLB legislation coincided with themerger 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 theinsurance and banking businesses. The case study on Citigroup in Chapter 10discusses the outcome of this merger.

Bancassurance was widely viewed as a ‘win-win’ prospect. Banks would earnvaluable fee income and broaden the base of their client relationships, whileinsurers 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 ratherthan product providers. Thus by the end of 2003, banks owned 25% of the top


© 2007 69

40 insurance brokers, with BB&T (as Branch Banking and Trust has beenknown since 1913) in North Carolina alone having acquired 56 of thembetween 1995 and 2006. A total of 1,395 bank holding companies, includingsome 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-interestincome from insurance sales.

A few insurers such as Met Life and State Farm have acquired small banks as thebasis for assurbank activity – selling banking products to an insurance clientbase. Impressive growth figures for incremental insurance sales are reported bythe American Bankers Insurance Association (ABIA), with US$80 billion inbancassurance 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, asindicated by Table 9.6. Whereas annual bancassurance premium growth in the2000-2002 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, whileless than 1% of the retail clients of these banks had acquired insurance fromtheir bank. The average income from life and health insurance marketing in2004 was a modest US$2.33 per bank customer household.

Finally, the pathfinding Citigroup/Travelers merger has been undone with thesale 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 41.9Commercial lines2 5.4 8.9 11.5 14.2 24.3Personal property/casualty 3.7 4.1 5.0 6.3 7.7Credit insurance 2.7 2.8 2.5 2.4 2.1Individual life/health3 2.1 2.3 2.8 3.6 4.1Total 44.9 55.2 69.5 78.1 80.1Annual 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 theannuity 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

product sold successfully in France and other markets, and therefore well suitedto marketing by a generalist bank sales force. Another 24% is represented by therapidly growing figure of commercial lines, sold essentially to the banks’ smalland 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 volatilityof insurance risk and lower return on equity for underwriters have been cited.Instead, banks have preferred to buy distribution in the form of the insuranceagencies whose client relationships dominate the US retail brokerage scene.

Bancassurance in the US is thus essentially a distribution business, with banksmanufacturing 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 variableannuities. Their providers are the insurers themselves as well as third-partymarketers (TPMs), independent firms that now sell a range of insurance andinvestment products, mostly to community banks.

Within the bank branch networks, the key marketing role is played by platformreps – essentially generalist salespeople who are licensed to sell annuities andlife 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 aswell as in-house wholesalers/coaches.

Chapter 11 discusses the findings from the author’s interview series on theobstacles to bancassurance growth in the US and its likely evolution.

Canada

While the tide of deregulation has swept over virtually the entire bancassuranceworld, Canada remains the only major developed national market in whichbanks are legally unable to sell most life and non-life products to their retailclients. This has provoked a major debate between the leading banks, which areanxious to leverage their retail client base, and insurers, which have to date beenable to defend against changes in these regulation. Yet the Royal Bank ofCanada, the country’s leading financial institution and one of the top ten banksin 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 businessas well as acquire life companies legally. Yet the country’s Banking Act, whichwas last reviewed in 2006, prohibits banks from selling life, home and motorinsurance to the clients of their retail network. Banks are also prohibited fromusing their client lists to target market these insurance products.


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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 unfairlycherry-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 otherwisehealthy insurance sector. More importantly, it is suggested that the potential fortied insurance sales from deregulation could lead to the kind of mis-sellingwhich has occurred in the US and the UK.

The banks counter these arguments with those used by bancassurers across theworld. As relatively low-cost insurance providers, banks could offer their clientslower prices. With their massive nationwide retail networks, banks can tapclient segments – especially the less well-off or those in rural areas, which arenot well serviced by insurance agents and brokers. And finally bancassurers, asin the US, would offer a choice of insurance products to their clients.

Determined to become the undisputed leader in Canadian financial servicesdespite 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 thecountry. Utilising primarily the brokerage channel, RBC sells through 17,000independent life and health insurance brokers in Canada and a direct sales forceof roughly 650 salesmen, as well as the online channel.

Its insurance subsidiary, RBC Insurance, is the leader in credit life in Canadawith 28% of the market as well as being the number one in travel and livingbenefits insurance. It has become the leader in new individual life policies andwas the first insurer to sell auto insurance online. In the non-life arena, thecompany 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-ownedinsurer, RBC Insurance now sells to around 5 million insurance clients, whichcompares 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 wellas the sales force of its US regional commercial bank, Centura.

Most recently, the group has launched a pilot policy of opening insurancebranches next to existing units of its vast Canadian network of over 1,100branches.

The outcome of the long-running debate over removing the prohibition ofcross-selling to bank clients is uncertain. Ranged against the banks are not onlyinsurers but also insurance agents who are concerned about their future. Mostrecently, a survey undertaken in 2006 on behalf of the Financial Advisors


72 © 2007

Association of Canada (Advocis), found that most Canadians are wary of theremoval of these restrictions. A total of 78% of those surveyed said they do notsupport expanding banks’ powers. Also, 91% of those interviewed feel that thebanks have enough, or more than enough, information about them. And on thequestion of product choice, the survey concluded that “more than six out of tenCanadians believe that removing protections will lead to less choice”.

ASIA-PACIFIC

Market profile

The bancassurance model in the emerging markets of Asia-Pacific, such asChina, 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 arenot yet a major influence. As late as 2001, Sigma estimated the share ofagency distribution at an overwhelming 96% of the total, with bancas-surance a miniscule 2%. Across Asia-Pacific, it was estimated then thatonly 5-10% buy insurance from their bank. By 2004, however, a morerecent Sigma report on China and India noted that over 20% of newpremiums in these markets were generated by the bank channel. Fordomestic and foreign insurers aiming to build market share, the bankchannel is both cheaper and quicker than building an agency sales force.

• The bank channel benefits from mass-market, unsophisticated clientsprepared to buy a range of financial products from their local bank.Partnerships with these local banks are thus at a premium, with foreignand domestic insurers competing to obtain multiple distribution arrange-ments. Sales are made by agents of the bank or insurer based in individualbranches. Most products in growing markets like India and China areessentially simple deposit-like instruments easily sold by bank branchstaff.

• 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 insurerscan make a major strategic contribution to bancassurance alliances. Onthe 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 likeSouthern Bank and Maybank in Malaysia and OCBC in Singapore haveacquired insurers. Local regulators have used barriers to entry to regulatethe flow of new competitors. Foreign bank entry to retail markets has beenstrictly limited, so that foreign insurers are leading the bancassurancemovement.


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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 forbiddenMarket growth Mature markets but pension reforms High growth potential

could spur growth in the life insurancesector

Bancassurance Highly integrated models Mostly distribution alliances and joint model venturesTax 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 marketProducts 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 branchesMajor 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 asAustralia, with a mature bancassurance structure, as well as relatively developedones such as Hong Kong and Singapore where bancassurance has already wonshares of 25% or more. Of interest in this study are the rapidly growing marketslike Japan, China, India and Malaysia, in which foreign insurers have been sosuccessful and which appear to offer the prospect of further significant gains todomestic 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 insurancemarket but also the largest in the world, with an impressive 30% of householdfinancial assets and over US$16 billion in premium income. It is also the world’smost saturated market, with an estimated 90% of Japanese households holdinga life policy.

This remarkable result is the product of the meagre gains from bank deposits ina zero rate environment, disillusionment with stock market performance, sim-ple life products and a distribution structure based on thousands of part-timehousewives selling door-to-door.


74 © 2007

Figure 9.5: Relative size and growth of Asian insurance markets, 2005 (US$ mand %)

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 in2000 were estimated by Sigma to represent less than 1% of total distribution,are now believed to have achieved 25% penetration. US insurers such as AFLACand AIG have won an estimated 15% of the life market. AIG now distributesthrough 95% of the country’s banks, while AFLAC derives 75% of its earningsfrom the Japanese market. The case study in Chapter 10 on Hartford describeshow a US insurer has pioneered the variable annuity sector in Japan.

Deregulation is proceeding, with full deregulation of prices and productsplanned for 2007. In 2005, insurers were permitted to sell single premium lifeand 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 in2004.

China

Dominated by three state-owned insurers with an estimated 90% of the lifemarket, China is another giant moving into bancassurance from the dominantagency model. China Life alone, with its 11,000 branches and 1.8 millionemployees, accounts for an estimated 49% of the total life market, while its jointventure with Generali of Italy also dominates the segment of foreign life insur-ers in the country.


© 2007 75

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For foreign banks and insurers anxious to penetrate the Chinese bancassurancesector, a joint venture or alliance with a Chinese bank or insurer is effectivelythe sole means of entry. Only 233 foreign bank branches existed in the countryat the beginning of 2006, representing perhaps 2% of total banking assets.Government regulations strictly limit the entry of new players, the ownershipshare held by foreign institutions (currently 25%), and the number, as well asthe location, of their branches.

With only an estimated 4% of its 1.3 billion inhabitants holding an insurancepolicy, and projections indicating that the country will move from 11th tofourth place in relative ranking in the insurance world, China is a natural targetfor foreign banks and insurers hoping to build bank distribution and introducenew products. The Chinese middle class – defined as those with an annualincome 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 bankbranches, against only 1% at the turn of the century. Of particular interest tobancassurers, however, is the roughly 25% share of major urban markets inChina estimated by that time by Sigma.

Table 9.8, taken from a recent report by KPMG, profiles the market shares ofdomestic insurers and joint ventures with foreign insurance partners. The latterhad 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 fivemonths of 2005 (CNY bn and %)

Premium (CNY bn) Market share (%)

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

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

Source: KPMG, Reuters and Life Insurance International


76 © 2007

In recent years, the four leading state banks, as well as major insurers, haveestablished joint ventures with foreign minority partners, one of whose strate-gic goals is often to tap the bancassurance market. These state banks are alsotaking stakes in domestic insurers, thereby creating a complex web of interests.

Thus, Allianz at the beginning of 2006 established a bancassurance joint venturewith Industrial and Commercial Bank of China (ICBC), one of the four majorstate-owned banks, in which it has taken a 2.5% equity stake. Allianz’ globalbancassurance strategy is described in the case study in Chapter 10. Through its20% investment in Ping An, the country’s second-largest insurer, HSBC hasbeen opening offices in markets like Shanghai. Fortis, with a 25% holding inTaiping, sells roughly half of its policies through ICBC. AIG is the only foreigninsurer with a licence permitting it to own 100% of a Chinese carrier.

Investment in the Chinese market by foreign banks and insurers is widelyassumed to have a very long-term payoff. Dozens of new licenses have beenissued by the authorities to domestic and foreign players, and the major con-straints placed on equity ownership and the ability to open new offices willseverely 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 foreignpartners’ systems, marketing, product development and staff training. is sub-stantial. And looming in the background is the Postal Savings and RemittanceBureau of China Post, the fifth-largest financial institution in the country withthe 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 formerstate-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 investmentsin 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% infiscal 2006, and market sources predict that the overall insurance market willincrease 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 whichbenefits from the confidence of retail savers in their local bank and the resultingwillingness to buy more financial products from that provider. The standardformula is an alliance with a foreign bank or insurer such as Allianz, AIG, SunLife AMP or Standard Life. Virtually all domestic insurers now have at least oneforeign partner. Aviva alone, as is discussed in a case study in this report, has


© 2007 77

over 30 such partnerships with Indian banks. Typically a bancassurance agent isplaced in the relevant bank branch. The largest joint venture insurer, BajajAllianz, thus has alliances with seven major rural banks.

The proportion of new sales of life insurance through banks has thus soared to30-40% of the market. The foreign joint venture segment increased its share ofthe life market to 28.6% in fiscal 2006 – double the figure of 2004. At the sametime there has been an explosion in the population of life agents, which now isestimated at 482,000 across the country. Little activity, however, has yet takenplace in the development of the brokerage channel.

For the private-sector banks the leading product, with an estimated 83% of themarket, 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 profitin 2006 was State Bank of India’s joint venture with Cardif, which was set up in2001.

Malaysia

A mid-sized insurance market by global standards, Malaysia is one of the fewbooming Asia-Pacific markets which have permitted foreign banks to buildtheir 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 profitablebusiness in Malaysia: the return on equity (ROE) for the LIFBs in 2005 was inthe 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 2003represented 38% of new premium income for the sector, rising to over 50% in2004. Agency sales are still the leading distribution channel with an estimated56% of the total.

The case study of Maybank, the country’s leading bank, profiles its success inbancassurance in company with its joint venture partner, Fortis. Maybank andFortis 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 overallinterview series to provide a profile of best practice in bancassurance across themajor world markets. Peer recommendations thus played a major role in thisselection process, although every effort was made to include those banks andinsurers whose statistical performance indicated a successful strategy. In fact,one of the case study institutions had actually carried out its own survey of bestpractice 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 majorbancassurance regions: the US, Europe and Asia-Pacific. In many cases, such asING, Fortis and Allianz, major EU financial institutions have led the assault onthe fast-growing Asia-Pacific region. A balance was also achieved between pureinsurers like Hartford, CNP Assurances and Aviva, which have successfullyleveraged bank distribution at home and abroad; highly integrated EU groupslike KBC; and commercial banks like Wells Fargo, Citigroup, Unicredit andHBOS, 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 otherregions, the choice was Wells Fargo (which is using brokerage acquisitions tobuild its bancassurance strategy), Citigroup (as the largest bancassurer )and theinsurer Hartford (as a major product provider to banks).

In no way should this selection of case studies be regarded as a league table ofsuccess 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 assuccess stories by interviewees.

© 2007 79

ALLIANZ

Background

Germany’s dominant insurer with roughly 20% of the national market, Allianzis midway through a comprehensive change programme called ‘3+One’, whichis designed to protect and enhance its capital base, improve profitability andreduce 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 profitablebancassurer as well as reduce costs, revise inefficient and complex capital struc-tures, divest itself of non-strategic investments, build its life insurance businessin growth markets and improve cross-selling across the group.

Good progress has been made in turning around the former loss-makingDresdner 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’ equityhas 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 changedfundamentally in the past few years. A total of 91% of revenues are still derivedfrom 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 overallgrowth programme.

Allianz enjoyed a record year in 2006 based on preliminary figures as operatingprofit jumped 30% to €10.4 billion, net income soared 60%, and earnings pershare (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/healthmarket reached a remarkable 37%, while banking income doubled as DresdnerBank continued its recovery.

The small but strategically important New Europe region achieved a satisfacto-ry 22% RORAC.


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Bancassurance strategy

Allianz’ overall bancassurance strategy is built around two core challenges: inthe home market, to convert Dresdner Bank into an efficient vehicle for sellinginsurance products to Dresdner Bank retail clients; and outside Germany, toexploit growth markets like the CEE and Asia-Pacific.

In the German market, it would appear that the group’s assurbank strategy ofselling banking products to insurance clients has been quite successful. In 2005,Allianz’ tied agents exceeded their target of 300,000 new clients by 20%, withrevenue of €100 per client. In bancassurance, where Dresdner Bank had beenselling Allianz products for decades prior to the assumption of control, newbusiness 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 businessand 12.3% of its new life business in Germany. Figure 10.1 profiles this Germancross-selling achievement.

Figure 10.1: Allianz’s cross-selling in Germany

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 thegroup 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/pensioncapability. Tied agents are a critical dimension of the strategy. In Hungary,where Allianz has sold insurance for 20 years, the group has recently opened aretail banking subsidiary.

Having moved into the key Russian market in 1990, which Allianz brackets instrategic importance with India and China, Allianz teamed up with the Sistemagroup to create Rosno Life. In Hungary, the company has the second-largestbranch network in the financial sector.

Another key ingredient of the CEE strategy is the alliance with UniCredit, theItalian banking group, which seems to have survived UniCredit’s acquisition of

CASE STUDIES

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CAGR new business 2001-2005

Product Channel Share of newbusiness 2005

Property and casualty (P&C)

Life and health (L&H)

Mutual funds

Dresdner Bank branches

Dresdner Bank branches

Allianz agents

98.4%

26.5%

19.5%

HypoVereinsbank (HVB) in Germany. The two groups together boughtBulbank in Bulgaria and also have bancassurance ties in Poland, the CzechRepublic 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 brandedAllianz 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)

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 netprofitability to Allianz of the unit/vehicle, and relative performance in terms ofmarket penetration compared with the vehicle’s overall market share. Thus forthe latter metric, Dresdner Bank has only 4% of the German retail bankingmarket but an impressive 13% of Allianz’ German sales.

The choice of entry into a new market is a function of the availability of strongdistribution partners with a major market position. Thus in Italy and severalCEE 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 iscalled for – hence the large number of different banking partners in India, noneof which has a major market share.

On balance, Allianz has been most successful in agency markets like Germanyand greenfield ones such as the CEE, where it can build an agency capability. Inthe US, a broker market where it has no major distribution partner, Allianz hasachieved relatively low market penetration.

In most of its bancassurance ventures, Allianz trains the bank selling staff andprovides sales support. Actually placing Allianz agents in the bank branches isnot appropriate because of the possible conflict between independent agentsand bank staff in competing for the client relationship. In the case of Dresdner,


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India1 – strong growth

China – ICBC drives life sales (GPW in € m)(GPW in € m)

22

43

2004 2005 8M 2006

134220

96

494

304

185

2004 2005 8M2006

2004 2005 8M2006

(GPW in € m)(GPW in € m)

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 Dresdnerselling 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 onein 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 ofthe earnings of joint ventures as well as actually do without an insurance part-ner. In Germany, a classic agency market, the simplification of life productssuch as the Riester plan is a real threat. And in Asia-Pacific, the proliferation ofmultiple alliances with a single bank, as well as the banks’ ability to control theterms 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 theasset management product. Abroad, its alliances with leading banks likeUniCredit, Standard Chartered and Banco Popular in Spain should enable thegroup to continue to generate good growth in bancassurance earnings.

AVIVA

Background

Formed from the merger of Commercial Union and Norwich Union and nowthe largest UK insurer, Aviva has transformed itself in a few years from a UKcomposite insurer into a highly profitable, global, multichannel distributor oflife and non-life products. Low-margin or unprofitable business lines or coun-try operations have been exited, while heavy investment has been made in thelife sector.

The result has been a 13% ROE in 2006, which compares favourably with itsinsurance 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, withContinental Europe 49% and the rest of the world 7%. International earningsnow exceed domestic profits on an EEV (European embedded value) basis.Aviva’s restructured US operation is now a leader in the rapidly growing equityindex sector, while heavy investment is being made in the booming Asia-Pacificmarket.

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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accounted in the first half of 2006 for 26% of the group’s long-term insurancesales, but a distribution balance has been achieved with financial advisers at44%, direct sales for 26% and partnerships the remaining 4%. New businessmargins (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 asa 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 to86.9p (£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 increasedonly 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 resultsalmost 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 equalthe anticipated 5-10% increase in the overall UK market.


Aviva’s bancassurance strategy is marked by its high margins, successful pene-tration of growth markets, balanced distribution channels and partnershipswith banks in virtually all of its national markets.


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The group as a whole has over 50 bancassurance partners and bank distributionagreements, which range from exclusive relationships with major banks tononexclusive distribution deals with much smaller entities. Major bank part-ners include RBS in the home UK market, Crédit du Nord in France, UniCreditand several regional and co-operative banks in Italy, Allied Irish Banks inIreland, ABN Amro in the Netherlands, and five regional savings banks inSpain. In many cases, Aviva has invested capital in the partnership to ensure itssuccess. In addition, Aviva has wholly owned life companies abroad, such asDelta Lloyd in the Netherlands.

Its multichannel distribution strategy has propelled Aviva into the top tier ofmajor 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-largestlife insurer with a new business market share of 7.4%. Spain (with 23%) andItaly (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 localclient needs and alignment of interests with its partner. Possible issues such aschannel 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 theUK. 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 withits multichannel strategy in the mature Singapore and Hong Kong markets inpartnership 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 jointventure operation with offices in 15 major cities, while in India it has over 30bank 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 HongKong, is to provide unique product offerings both to the IFA and bank chan-nels.


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

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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 Avivaseems to have ensured itself a durable leadership role in multichannel distribu-tion. In Italy and Spain, for example, it benefits from having a single nationalmanufacturing platform for its major local distribution partners. While costsavings are important, management attributes its global bancassurance successto 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 uniqueunderstanding of the insurance business.

In the critical dimension of management of banking alliances, Aviva can boastan outstanding record of success. No major relationship appears to have brokendown, although the need to invest continually to sustain the relationship can bea costly one. Aviva is confident that its integrated model, rather than the onemanaged essentially by the bank, is the correct one.

Yet the model is not without some weaknesses. In Asia-Pacific, a relatively latearrival on the scene, coupled with fierce competition from other joint venturesin India and China, should limit the development of bancassurance profits. InChina, 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 distributionformat, 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 futureclient channel preference – in particular, the use of the internet rather thanbank branches for retail bancassurance products.

CITIGROUP

Background

The world’s largest banking institution, Citigroup played a seminal role in theliberalisation of the US bancassurance market with its decision to acquire theTravelers Group prior to the passage of the GBL legislation in 1999. Marketobservers 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 USbranch network as well as its brokerage and other retail networks. The presenceof Sandy Weill, former head of Travelers, as CEO of Citi, reinforced thisassumption.


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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) in2005.

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 comparedto Citigroup’s demanding ROE targets, it is quite possible that lower insurancereturns 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 isthe widespread focus of US banks as distributor of retail financial products asopposed to a manufacturer. Thus, in addition to bancassurance, Citi sold itsfund management businesses in the early 2000s to the broker Legg Mason, inexchange for bolstering its brokerage distribution capacity.

In 2006, Citi reported an increase of only 1% in pre-tax income on the back of a7% rise in operating income from continuing operations, while ROE fell to18.8% from 22.3% in 2005. EPS from continuing operations increased 11% toUS$4.21 per share.

Citigroup’s core US consumer business provided revenue growth of only 2% incontrast to the double-digit results from corporate/international and wealthmanagement. The US consumer business now represents only 35% of total con-sumer revenues, as priority is being placed on international growth (despite amanagement priority being given to the US consumer in 2007).

Priority is also being given to introducing Smith Barney brokers into Citibranches in the US to boost sales of life and other investment products.


Whatever the rationale, in its home US market Citi’s bancassurance strategy is arelatively small part of its overall retail distribution group, which accounts for32% of the revenues of Citi’s consumer banking function. Its core products areterm 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 bankingpeers with an impressive 7% of the total life products sold by banks.

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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 anapproval time frame of perhaps 30 minutes) is a high-volume, low-marginproduct with perhaps 30,000 applications annually against 1,500 for the higher-margin, fully underwritten whole life with its extensive application form andquestionnaire 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 termproduct, whereas Citi’s Smith Barney brokerage unit and a dedicated bancas-surance force sell and support the higher margin whole life business as well asterm 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 – equivalentperhaps to an average of 95% of first-year premiums. In absolute terms, it isunderstood that the bancassurance profit contribution amounts to several mil-lion dollars annually.


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 financialplanning, rather than simple product sale, approach. In this context, offeringbancassurance as part of the Smith Barney brokerage armoury should provesuccessful.


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On the other hand, bancassurance’ overall profit contribution in absolute termsto Citi’s massive consumer banking business is quite modest. While it dwarfsthe 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 fromthe 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 thereis little communication between the two units in the bancassurance realm –perhaps an indication of the concern in the US about regulatory action againsttie-in sales.

CNP ASSURANCES

Background

France’s leading insurer with 18% of the domestic life market and 2005 globalpremium income of €26.5 billion and 22 million customers worldwide, CNPAssurances has successfully exported its model of strategic bancassurancealliances 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 over20,000 points of sale: the postal system (La Banque Postale), the savings banknetwork (caisses d’épargne) and the CNP Tresor financial adviser network,which it has acquired from the French government. A total of 74% of CNP’sequity is owned by these French distribution partners, with the balance held byinvestors. Long-term distribution contracts set out the financial relationshipsbetween CNP and the respective distribution partner.

Outside the bancassurance channel, CNP sells through independent financialadvisers and asset managers; in 2005 it acquired from Dexia a vehicle accessingthis 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, aswell as protection/credit life products. During the first half of 2006, the postalnetwork accounted for 43% of total French premium income, with the savingsbanks contributing 53%. The key unit-linked product accounted for 27% oftotal group savings and pension premiums during that period. Over 90% ofsales in Italy and Brazil were unit-linked as opposed to 17% in France. InFrance, 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 a19.5% pro-forma increase in global life premium income. Adjusted for income

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transfers under the Fourgous amendment, CNP increased its market share inFrance.

More specifically, after this adjustment CNP’s new premium income in thehome 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%. Inthe key Italian market, where the Capitalia acquisition made a major contribu-tion, pro-forma earnings (including Capitalia for both 2005 and 2006) rose10% against an actual decline for the overall Italian market.


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 distributionprocess with support from CNP, and with administration largely handled byCNP. The overseas network consists of bancassurance alliances in Brazil andItaly plus wholly owned operations in Portugal, Spain, Argentina and a newlyformed Chinese unit, which was opened in 2006 with the Chinese Post Office.

In 2005, CNP acquired 58% of Capitalia’s Fineco insurance subsidiary, whichmarkets to the clients of Italy’s fourth-largest bank with 5 million clients. Alsoin Italy, CNP’s branch offers protection products to the San Paulo/IMI bankinggroup. In Brazil, CNP owns 52% of a joint venture with the second-largestBrazilian bank, Caixa Economica Federal, and holds 8% of the market. CNP’sPortuguese 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. Duringthe first half of 2006, these higher margins actually increased as opposed to themodest decline in France, where the distribution partners were give a highershare of revenues.


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Figure 10.3: Comparative CNP bancassurance margins for France, Italy and Brazil,end-December 2005 and end-June 2006 (%)

Note: NB: new businessAPE: annual premium equivalent

Source: CNP Assurances

Management attributes CNP’s success at home and abroad to a disciplinedfocus on the ability to design simple products which can be sold by a generalistsales force, ‘industrialised’ manufacturing processes geared to local needs withthe necessary quality controls, and the ability to work with banking clients toachieve common objectives. Joint ventures are only undertaken when the part-ner contributes some capital to the venture. Major and on-going adaptation ofIT 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 distributionpartner taking 40-60% of the sales commission. CNP does, however, negotiateagreements which provide for penalties or bonuses if sales targets are not metor exceeded.

A second issue is IT investment. CNP has often been obliged to make majorchanges – including total replacement – when it takes over a partner’s existingmanufacturing facilities. Finally, local professionals are recruited for all but ahandful of non-French operations, as the company has largely been able to findcompetent staff locally. In CNP’s experience, bancassurance joint ventures usu-ally fail either because there is no exclusivity in the relationship or because theexpertise partner takes an ‘imperialist’ approach to running the business.


In its global network, CNP will continue to offer both P&C as well as savingsproducts 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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BrazilItaly

9.8% 9.7%

Margin rate: NB/APE

Total

31/12/05 30/06/06

8.3%

12.6%

20% 20.1%

10.5% 11%

France

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

Portugal, P&C will be the dominant offering, while both savings and P&C willbe in demand in Brazil. Offering health support faculties in France is also agrowth 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 channelin France, for example, CNP sees this relatively new channel continue toexpand. In Italy, bancassurance is supplemented by sales through Capitalia’sprofessional 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 durablejoint venture strategy. China would appear to be a difficult market for CNPgiven its scale, the different operating model in that market, and the investmentneeded 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 theNetherlands, Fortis derives roughly 80% of its profits from the relatively matureBenelux region, with a growing share from bancassurance investments in Asia-Pacific and elsewhere in Europe. It is the dominant insurer in Belgium with22% of the life and 14% of the non-life markets, as well as the market leader inbanking with 31% of the savings deposit market. In the Netherlands, Fortis isthe fourth-largest bank, with 5% of the market, and the third-largest insurerwith 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 (BelgiumInsurance, Netherlands Insurance and International Insurance). During thefirst half of 2006, banking profits represented a dominant 75% of the total netprofits. Management has recently taken measures to increase integration of thebanking and insurance elements of its predecessor institutions.

Under a new CEO, Jean-Paul Votron, management has targeted an increase innon-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 itsaffiliate Assurant.

Fortis is relying on its non-Benelux bancassurance strategy to meet a majorportion of its commitment to double-digit annual earnings growth. This busi-ness is the major component of the business line of ‘International Insurance’,


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which grew 57% in 2005, achieved an above-average 35% risk-adjusted returnon 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 projectedto grow at an above-average 15-20% in the period from 2005 to 2009.

Fortis’ outstanding 2006 financial performance, which surpassed the target forthe 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 embeddedvalue against non-life growth of only 5%. The new business margin increasedfrom 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.


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 newmarket – from the CEE to the Iberian peninsula to emerging Asia-Pacific – isdifferent, and the group has adapted its model to the local environment.

While Fortis sells through all the major distribution channels in its homeBenelux market, abroad it has relied primarily on joint ventures/equity interestswith 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 Portugalwith 19% of the market, the largest bancassurer in Spain (Vida Caixa), and theleader for new life business in Malaysia (see case study on Maybank). In Chinaand Thailand, it ranks sixth in life insurance. Typically, Fortis holds a large stakein these affiliates, ranging up to 51% in Portugal and 60% in Spain. The Iberianmodel 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), aBelgian 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 hasreached 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 aselected basis. In its home market of Belgium, the retail client base of 3.5 million

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is segmented into three categories – private, personal and mass-market – on thebasis of available investment funds. Market penetration in bancassurance ismeasured 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 withsuch 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 thelocal 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 othermarkets Fortis has an equity stake in the partner or joint venture. Invariably, thekey issue is that of the scarce resource of experienced and talented people ableto direct and manage this new activity.


In non-Benelux markets like Portugal, Spain and Malaysia, Fortis is well placedwith strong bank distribution partners and a financial stake in a provenalliance. Like others, Fortis has found that banks in these markets are morehighly regarded as a source of financial products than insurers. Even in thesemarkets, 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 hasbecome comfortable with the responsibility.

In the meantime, there remains the challenge of aligning interests between thelocal partner and Fortis. Thus, a decision by the partner to add to or change itsproduct mix can potentially damage Fortis’ profit stream. And in China itwould 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 interimone of perhaps five to seven years on the way to full integration as a whollyowned entity. In this context, it should be noted that ASLK’s highly successfulmodel was developed only over a period of decades.

In terms of earnings potential, however, the long-term growth prospects formature markets like Belgium are attractive, with an ageing population demand-ing more life coverage and products offering a guaranteed income stream forretirement. In addition, unit trust-based products have come back in fashion asinvestors 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 andmargin pressure.


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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. Itsproduct specialty is the variable annuity, where it is one of the market leaders inthe 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 inassets under management at year-end 2005, followed by mutual funds withUS$30 billion. After an extended period of leadership in the key US variableannuity 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 rateover the period 2001-2005. Hartford targets a return on equity in the range of13-15% as well as a double-digit annual increase in book value per share.

In 2000, Hartford pioneered the development of the variable annuity sector inJapan, 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% andUS$30 billion equivalent in managed assets. Over the period 2002-2006,Hartford’s annual compound growth in that key product was an impressive170%.

In 2005, Hartford entered the UK market with its variable annuity product,thus positioning itself in three of the major retirement services markets – theUS, Japan and Europe. International now represents 12% of the group’s lifeinsurance income.

The year 2006 was a highly successful one for Hartford in financial terms. CoreEPS 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% – somewhatabove 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 makingmajor efforts to regain its number one position in the US, where total industryvariable annuity sales increased 18% as the number of individuals reachingretirement age continues to mount.

In Japan, increased competition in the core variable annuity product hasdepressed Hartford’s sales and funds under management. As of September 2006,

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the company remained the leading variable annuity provider in the country, butmajor marketing and product development efforts have been required to sustainits position.

In the UK, efforts to build variable annuity distribution through IFA networkscontinued.


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 investmentproducts sold through broker-dealers and banks by some 200 agents.

In this context, banks play a major role as variable annuities are the principalinsurance product bought by their retail clients. In the US, the group is thelargest 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% ofsales by the top ten issuers.

Building the bancassurance channel in the US and Japan was a pioneering effortinvolving extensive product design, marketing what was an innovative conceptto banks in both countries, and negotiating the necessary changes in regulationin Japan to permit banks to offer what was then a product which had not beenauthorised for bank sale. In both markets, Hartford management convincedbanks that disintermediation – losing a deposit but gaining a revenue streamfrom the annuity – was a constructive idea with a positive impact on capitalrequirements and earnings.

The result has been a distribution channel which, it is understood, nowaccounts for about 40% of Hartford’s retail insurance sales in the US. It hasinvolved building a distribution sales force uniquely serving the banking sector.

In terms of economics, the interviews conducted for this report indicate thatrevenues to Hartford are comprised of a share of the fees on the mutual fundwhich underpins the variable annuity product, as well as about a 1% per annumcharge for the mortality risk and operating expenses which, as indicated above,are significantly lower than those of many peers because of Hartford’s massivevolume. The full distribution fee of perhaps 5-7% is earned by the bank distrib-utor, as Hartford is purely a product provider.


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 overallstrategy.


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This effort has understandably sparked competitive efforts by its peers in bothmarkets. As indicated above, in 2005 Met Life displaced Hartford at the top ofthe life distribution league tables, and in Japan the group has lost market sharein variable annuities to competitors. In both markets, it would appear that thetypical bank now offers a number of competing products.

It is difficult to evaluate the likely success of Hartford in its latest effort to buildvariable annuity distribution in a new market. In the UK, where the companyhas commenced its efforts to build distribution through banks and brokers,Hartford faces a highly sophisticated market with a variety of competitors forthe annuity product. Analysts will watch its progress with great interest.

HBOS

Background

Formed from the merger in 2001 of the leading UK retail mortgage providerHalifax 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 businesslines as well as a multiple channel approach in the key business line ofInsurance and Investment products, in which its bancassurance business isincorporated. In the retail sector, for example, HBOS makes use not only of theHalifax 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 22million, a leading 21% market share in the core retail mortgage product and16% of UK savings deposits, HBOS has been a price leader while at the sametime achieving its ROE target of 20%.

Abroad, overseas earnings from retail and other businesses in Australia andIreland account for 14% of the total.

In 2006, HBOS’s underlying pre-tax earnings rose 14% to £5.7 billion to boostper 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 adeclining cost:income ratio.

In the key investment sector, HBOS became the largest UK provider of newinvestment 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% viaIFAs.

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Management targets a UK market share in key retail products in the region of15-20%; its share of auto and household insurance as well as investments is nowin single digits.

Expansion in Ireland and Australia continues, with total international pre-taxearnings up from 12% to 14% of the group figure in 2006.


HBOS is the UK leader in bancassurance, well ahead of Lloyds TSB with itsScottish Widows subsidiary, with a 29% annual compound growth in premiumincome over the 2001-2005 period. At the same time, sales productivity hasincreased at a 23% annual clip. Bancassurance margins (new business contribu-tion as a percentage of annual premium equivalent) of 26% in the first half of2006 were double that of sales through IFAs.

The generic business line Insurance and Investment includes a full range of lifeand 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 playerin 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 over1,000 advisers as well as through IFAs via its Clerical Medical brand. Its marketshare in the highly profitable credit life product (sold in conjunction with retailmortgages) is an impressive 20%. Overall sales of insurance products haveincreased at a compound annual rate of growth of 17% during the past fiveyears. 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 inboth revenue generation and cost reduction.


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Figure 10.4: Bancassurance: A truly virtuous circle

Source: HBOS

Management attributes much of its success to a non-hierarchical culture withgood team spirit – which seems to be lacking in its more structured rivals. Thespecialist sales force which supports the branch network is structured to repli-cate the geographic hierarchy of the branch system, with close interactionbetween the two at all levels. Common sales objectives for bancassurance areagreed between staff experts and branch platform personnel, with a portion ofthe latter’s performance bonus tied to success in achieving sales targets.

Roughly 70% of bancassurance sales are investment products such as unit trustsand ISAs, with another 20% in regular savings plans. True life insurance is thusa small portion of the total, but there are plans to increase it by simplifying thesales process.

A major marketing advantage is HBOS’ practice of not charging entry and exitfees on investment products. HBOS is widely regarded as customer-friendly,which drives considerable loyalty among its mass-market clients.


Having developed its bancassurance business rapidly over the past five or sixyears, there are limits on further growth posed by the existing number ofbranches, branch staff and interview space in the network. UK demographics,however, are positive, with substantial inherited wealth passing down to theyounger generation. Cost-cutting will continue as further process improve-ments are achieved. In addition, priority is being given to tapping what arecalled ‘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 savingsvehicles.

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An interesting dimension of HBOS’ overall distribution strategy is its control-ling ownership in St. James’s Place Capital, a highly regarded distribution forceof professionals selling investment and protection products to upscale UKclients. 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 notbeen particularly successful. On the other hand, in markets like Italy, bank-owned financial adviser sales forces have successfully tapped the bank clientbase, 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 notappear to have benefited from the group’s experience in the UK.

ING GROUP

Background

The leading financial institution in the relatively mature Benelux market, INGGroup has built its overall growth strategy around three key businesses: directbanking globally (with ING Direct), life insurance and retirement services inthe US, and life insurance in emerging markets, in particular Asia-Pacific. Itscore product groups are banking, life insurance and asset management, withmajor geographic units in Europe, the US and Asia-Pacific.

One of the first major bank-insurance mergers, ING was formed in 1991 fromthe merger of the leading Dutch insurer, Nationale-Nederlanden, and NMBPostbank Group. It is now one of the top ten European financial institutions bymarket capitalisation. In 2005, its operating ROE was 26.6%. Operating profitin that year was split 55-45 between banking and insurance.

From its origins, the group has adopted a multichannel distribution strategy. Inthe developed markets such as the US, Canada and Western Europe outside theBenelux area, its key channel is ING Direct plus its retirement savings networkin the US. In CEE, the group has generally entered the market with a greenfieldoperation and built distribution through its own sales force of tied agents, withother channels such as bancassurance developing later. In Asia-Pacific, as dis-cussed below, a combination of greenfield insurance, joint ventures andalliances is the chosen distribution strategy.

The Insurance Europe division represents 22% of group pre-tax profits, largelyin 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 fiveproviders of life insurance and retirement services.


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ING’s EPS in 2006 increased 6.7% to €3.57 per share with ROE at 23.5%, asbanking profit rose marginally against a pre-tax increase in insurance earningsof 24%. Growth slowed in ING Direct as management built the mortgage bookbut attempted to balance growth with profitability.

A major growth engine was a 14% increase in new sales of life insurance in thedeveloping markets, which generated a rise of 32% in pre-tax underlying profitsfor that sector. Outstanding results were achieved, particularly in Asia-Pacific,where underlying pre-tax income from insurance soared 39% despite a declinein Japan due to competitive pressures. Overall, the underlying profit from bothlife and non-life grew 23% over the 2005 level.


Given the relatively limited growth prospects of the Dutch financial servicesmarket, ING has focused its bancassurance strategy around selling life insur-ance in the developing markets in the CEE and Asia-Pacific. The IRR of thisbusiness line reached 19% for the first nine months of 2006. While pre-taxincome in the second quarter of 2006 from the Insurance Asia-Pacific groupwas 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. Thegroup regards itself as being well positioned for the massive growth expected inemerging Asia-Pacific. Figure 10.5 (below), based on Sigma data, reflects, thesplit between ING’s mature current markets and those rapidly growing oneswith outstanding growth potential.

Figure 10.5: ING is well positioned for growth markets

Source: ING Group

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0%

2%

4%

6%

8%

10%

12%

14%

16%

0% 2% 4% 6% 8% 10% 12%

Inforce Premium as % of GDP

InforcePremium Growth

Rate CAGR

2006 - 2015

Japan

Korea

Hong Kong

Taiwan

Australia

India

MalaysiaThailand

China

Mature / Current

Greenfield / Future

= Insurance Density is the average per capita spend for Life Insurance premiums, base = Euro 1,000

• ING is strong in the current big markets

• Well placed in the future big markets

• ING is steadily increasing its regional market share

In these targeted markets, ING has relied on a mix of bank acquisitions andalliances 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-largestlife and asset management provider by its acquisition of a 51% share in ANZBank’s fund management and life business. ING also owns 19.9% of Bank ofBeijing in China. Other alliances include joint ventures with Kookmin Bank inKorea, where it is the fourth-largest provider of life and savings products, ChinaMerchants Securities Ltd in China, and Rajan Raheja Group in India.

Over the period 2002-2005, the value of new business rose at a compoundannual rate of 14% in the Asia-Pacific region, with underlying profit increasing17% per annum.

Growth in Asia-Pacific bancassurance has been particularly impressive: in 2005,sales (APE) soared 106% against those of tied agents (37%) and independentagents (65%). As indicated by Figure 10.6, the share of ING’s bancassurance hasrisen 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 (%)

Source: ING Group

ING’s Asia-Pacific strategy is keyed to the selection of markets and positioningwithin 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 managementis a critical success factor. ING’s goal is to offer a total solution concept, ratherthan become simply a product provider at a price. Thus, contributions such asIT 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 withChinese banks has been cut back due to such issues as compliance and pricing.


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2002 2003 2004 2005

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Despite ING’s significant minority interest in Vyasa Bank in India, managementbelieves action must be taken to increase the ING profile in that country.

The goal for ING is engagement with the alliance partner, and the challengesvary with the partnership, often requiring an equity stake to firm up the rela-tionship. Flexibility is often required. For example, ING’s relationship withKorea’s largest bank, Kookmin Bank, which has a 20% stake in the bancassur-ance joint venture, was threatened when the Korean authorities requiredKookmin to give up exclusivity in selling insurance. ING was prepared to sup-port the new venture bearing the Kookmin brand, even though it arguablycompetes with its own joint venture.

Success in the joint ventures is measured by the traditional metrics of APE, IRRand the value of new business. Over time, however, management will beemploying more sophisticated measures such as cross-selling and the extent ofclient penetration.


As the region’s second-largest foreign bancassurer with over 100 bankingalliances and a focus on investment products, ING is well positioned to benefitfrom the well-advertised dynamic growth in customer demand. It has thestrategic 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 toalter 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 thegrowth of the advisory channel in markets like China and Japan is a long-termthreat to any bancassurer that cannot meet the likely demand for personaladvice. On balance, however, the strategy is an intelligent one and ING is wellpositioned to achieve its ambitious growth objectives in the region.

KBC

Background

Formed from a three-way merger between two Belgian banks (Kredietbank andCERA) and an insurer, ABB, in 1998, KBC is one of the three leading bankinggroups in the country with roughly 20% of the major retail deposit and lendingproducts. Outside Belgium, KBC’s second ‘home’ market is CEE, where it isactive in five countries which together generate 25-30% of group profits and amajor portion of future growth.

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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 mutualfunds 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 leadingmarket share of 22% in its home market.

During the first half of 2006, overall return on equity soared to an impressive25% from 18% in 2005, with the Belgian businesses producing an even higherROE 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. Akey strategy has been to build market share in the CEE, where profit growth ininsurance 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 marketshare target in CEE banking and insurance is 10%. Table 10.3 (below) profilesKBC’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 insurancebusiness business business

Belgium 22 22 9Hungary 11 4 4Poland 4 2 11Czech Republic 21 9 4Slovakia 7 4 4Slovenia 42 8 N/A

Source: KBC Group, European Banker

In the CEE, the group’s strategy has been to make early acquisitions of bothmajor banking and insurance groups in the larger accession countries. Thus, inthe Czech Republic, its CSOB subsidiary is the second-largest hank with 21% ofthe 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-largestbanking institution. Unfortunately, in Slovenia its affiliate, Nova LjubljanskaBanka with a dominant 42% market share, is no longer a strategic holdingbecause of a disagreement with the majority interest owned by the government.

Overall, however, the group has some 10 million CEE clients and 1,200 bankbranches.

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 retaillending 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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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 EUconvergence continued, with three minority interests and a Bulgarian insureracquired during the year. KBC figures among the top five banks in Hungary,Poland, Slovakia, Slovenia and the Czech Republic with about 30,000 employeesin the region.


KBC’s bancassurance strategy is built around an integrated approach with a sin-gle retail function marketing both banking and insurance products. This hasgenerated some of the highest cross-sell ratios in European banking; a study in2002 by Citigroup placed KBC at the top of 34 major European banks in thenumber of products per retail client – an impressive 3.6. Unlike some of itspeers who retain an organisational split between banking and insurance, KBChas made major efforts to ensure collaboration among its marketing channelswith 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 andone insurance product, while 16% of the total are viewed as ‘stable’ bancassur-ance clients with at least three banking and three insurance products. Cross-sellratios of mortgage loans, home insurance and death cover insurance in Belgiumapproximate 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 amajor boost in insurance penetration.

Another strategic objective is to boost KBC’s share of non-life insurance acrossthe group. In 2006, management expects to achieve a 10% share of non-life inthe home market. With sustained pressure on margins in the core home mort-gage product, the contribution made by related insurance offerings like creditlife is critical.

Product priorities in Belgium are driven largely by tax regulations. Thus thechoice of life or mutual fund is a function of which can best incorporate fiscaladvantages.

In terms of client priorities, KBC segmentation is underpinned by a distinctionbetween ‘stable’ and ‘unstable’ clients, which are further broken down into bank,insurance and bancassurance clients. As indicated above, the key segment ofstable 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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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 independentexclusive insurance agents to co-operate with the branch-based bankers. Inorganisational terms, the problem has been to resolve the classic issue of ‘whoowns the client?’ and to motivate both bankers and insurance agents to sell tothe same client.

Management’s response has been to assign the particular client as a ‘stable’ oneto the intermediary who first sells three distinct non-life insurance products tothe client; he then receives all recurring credits for that client, while new salescredits go to the salesman who made them.


Achieving KBC’s bancassurance goals is largely a function of the success inexporting the group’s integrated domestic model to its core CEE markets.Whereas the original 1998 merger in Belgium was the fruit of agreement inadvance on the model by the three merging parties, in the CEE a number ofbarriers have had to be confronted. Separate banks and insurers were acquiredwithout the advance commitment to integrate; cultures are more hierarchicalthan in Belgium, distribution channels more complex, and in some cases the taxadvantages of life insurance are less marked than in the home country.

On the other hand, management believes the new organisational structurecombining the bank and insurance management of each national unit shouldencourage integration, along with common financial metrics. This should besupplemented by the group concept of distribution leadership centres bringingtogether 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 toimplement these objectives in practice, but KBC management now has in placethe systems and structures to do so.

MAYBANK

Background

Malaysia’s dominant financial institution with interests in banking, insuranceand fund management, Maybank has a one-third share of the country’s retailsavings as well as a physical network of 420 outlets to service its retail client baseof over 6 million clients.


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The bank has faced strong competition from the three major foreign-ownedbanks in the country – Citi, HSBC and Standard Chartered. In response, man-agement has transformed its branch network, culture and systems to achieve asingle view of its clients. As will be discussed below, in 1994 Maybank pioneeredthe concept of bancassurance in Malaysia. It was also a leader in establishing adedicated sales/service force for wealth management, selling a range of in-houseproducts including life insurance. Maybank has also played a leadership role inMalaysia’s burgeoning takaful, or Islamic banking market, which is growing atan annual rate of 15-20%.

The results have been excellent. One of the few Asia-Pacific banks to publish itscross-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 andEurope. Overall, profits have increased steadily in recent years and provided ahighly competitive 17% ROE in fiscal 2006.

Net earnings for the six months ended December 2006 increased slightly by4.4% over the prior year period as a result of higher margins, an increased con-tribution from international operations and the initial contribution from theacquisition of Malaysia National Insurance (MNI). ROE increased slightly to16.8%.

Results from the insurance and takaful unit more than doubled over the prioryear 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.


Challenging the Malaysian life insurance sector with its reliance on agency dis-tribution, since 1994 Maybank has pioneered the bancassurance concept in itshome market. Malaysia’s high life penetration ratio of 37%, combined with theabsence of government pension provision for the private sector, make the lifemarket a particularly attractive one. While relatively small in the group’s overallprofits 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 fiscal2006.

In 2001, Maybank allied itself with Fortis, the Belgo-Dutch bancassurer, as partof Fortis’ bid to win market share in Asia-Pacific. Fortis has a 30% share in thebancassurance 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’sdistribution capability with thousands of agents in the agency, corporate andgovernment channels.

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The arrival of Fortis in 2001 was a seminal event in Maybank’s retail evolutionas seconded Fortis professionals addressed both the bank’s overall retail strate-gy, as well as bancassurance in particular. Essentially, Maybank’s bancassurancemodel is based on the original Fortis structure used in Belgium – effectivelytotal integration of the insurance activity with the retail business in both thefront (client-facing) and back offices.

Maybank’s aggressive bancassurance strategy won it the second position in thesales 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 (bothlife and non-life) as well as customer penetration. Currently roughly 14% ofbanking clients have an insurance policy, a figure which is projected to increaseto perhaps 20% by 2009.

The core life product is a simple single premium policy with an investmentlinkage. The bank’s strategy is to move clients from such products to the genericcategory of long-term investment and advice with mutual funds, guaranteedinvestments and similar products. The client base is segmented into the corecategories of mass market, mass affluent, affluent and high net worth. Typicallymass-market clients start with non-life products, with wealthier clients offereda financial planning package.

The major issues encountered in building the bancassurance business have beendevelopment of the product range and improving the competence of the salesprofessionals. Significant effort has also been made to incentivise this salesforce, with the introduction of a bonus plan which enables salesmen to earn upto twice their salary.


Maybank has benefited from the active assistance of one of the most successfulEuropean bancassurers. Unlike joint ventures and alliances elsewhere in thebooming Asia-Pacific market, Maybank has an exclusive relationship withFortis 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 significantgrowth in the sectors of wealth management and health insurance, which willrequire 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 inthe booming takaful sector in Malaysia.

On balance, however, Maybank is well positioned to grow with this rapidlyevolving market.


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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 oneof Europe’s top ten banks by market capitalisation, with strength in one ofEurope’s wealthiest regions as well as the rapidly growing CEE.

More specifically, the merged bank is Italy’s second-largest with 11% of thelending market, Germany’s second-largest with 5% of the lending market, andAustria’s largest with 19% of loans. In the CEE, the group is one of the largestbanking entities. In all, the group has some 7,000 branches in 21 countriesacross Europe.

Having created one of Italy’s most profitable banks, UniCredit’s highly regardedmanagement team has been making a major effort since 2005 to turn aroundloss-making retail entities in Germany and Austria. This has been done byapplying UniCredit’s management disciplines of a focus on customer satisfac-tion; the use of financial incentives to cross-sell in the branch network; strictcustomer 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 ofthe merged entity. All retail businesses report to the head of retail, RobertoNicastro, 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 softdimensions. 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 isregularly 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, reflectingorganic 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 ona 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% andthe contribution from CEE rising 30.7%.

Impressively, the cost-income ratio fell to 56.5% against 61.7% as productivityimprovements 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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The group’s bancassurance strategy is based on distribution through its branchnetwork, alliances with insurance providers and a product range driven by local– essentially fiscal – factors.

In Italy, separate alliances with Aviva and Allianz dominate the distributionstrategy, as UniCredit has traditionally looked to partners for product manufac-ture. A typical Italian branch will sell only products from one partner. Suchalliances generally are based on a split of the selling commission of perhaps 7%,with the distributor receiving 70% of the sales margin. The insurance productline 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-marketsegment in Italy for the key life product of about 5%, which compares withmortgages of 12% and asset management of 16%.

In the German market, client penetration of HVB’s 2.4 million mass-marketclient base is even lower at 3% for recurring premium life insurance. A keyoffering is the low-cost Riester product under the post-2005 fiscal regime.

In the strategic growth target of the CEE, the Polish bancassurance sector standsout as UniCredit’s major bancassurance market. No major insurance partner-ships exist there, in contrast to the two in Italy. Credit life offers significantgrowth potential in the CEE.


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 ratherthan integration back into product manufacture. Whether this will remain thecase – especially after the acquisition of HVB – is an open question. One canonly assume that the economics argue for a pure distribution role for the timebeing .

UniCredit’s relatively modest client penetration for the life product in Italy maybe attributable to the lack of fiscal incentives, which could argue for focus onthe unit trust product. In any case, success in cross-selling credit life against thebooming consumer loan business should generate useful profits.

Looking to the future, the EEC markets clearly offer greater bancassurancepotential 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.


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WELLS FARGO

Background

The product of a merger of equals in 1998 between San Francisco-based WellsFargo and Norwest Corporation in Minneapolis, Wells Fargo has grown organi-cally and by the acquisition of smaller banks to become the fourth-largest USbank with retail distribution strength in the West as well as several nationwidebusinesses.

Management is committed to a broadly based financial services strategy andcompound annual growth targets exceeding 10% in sales and EPS. Over the fiveyear 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 to19-20%.

Wells has become a global role model of a sales and service culture-driven bankwhich has sustained above average results. More specifically, the bank is a globalicon of successful cross-selling of retail products, while maintaining high cus-tomer and staff satisfaction ratings. Its well-advertised metric of sales per retailclient 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 16of the 23 Western states constituting its core market area. In addition, Wells isthe largest home mortgage originator and second in mortgage servicing in theUS.

In 2006, Wells continued on track for its strategic goals of double-digit revenueand earnings growth, with a 12% EPS increase in the fourth quarter and five-year annual compound EPS increase of 21%. Average core deposits and productsales rose by 11% and 19%, respectively.

Equally important was progress in broadening the business base and improvingcross-sell and productivity ratios. The benchmark figure of core sales perbanker edged up from 4.9 to 5.0. In the small business sector, Wells is now thelargest 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% to20% of the total, while the proportion of wholesale clients buying more than sixWells products also set a record.

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Wells’ bancassurance strategy is driven by its management’s view that the bankshould be present for its priority client segments for all five major financialneeds: transaction services, savings, short term and long-term credit, and pro-tection. Bancassurance thus targets protection services, essentially non-lifeproducts, although investment needs are met by the sale of annuity products.Roughly US$1 billion in brokerage revenues is currently earned from insuranceproducts, 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 estatedevelopers. It has thus built by acquisition an impressive network of insurancebrokers across the US. Under the Wells Fargo Insurance Services (formerlyAcordia) brand, this network now constitutes the largest bank-owned networkand 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 toCitigroup 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 insurancesector is based on cross-selling of insurance products through referrals from thebank branch channel to the Wells Fargo Insurance Services brokerage network.Bank platform staff thus receive credit for referring possible insurance business


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to a broker. It is estimated that perhaps 15-20% of group’s insurance revenuesare thus introduced by the bank channel. In contrast, unlike other bancassurers,Wells does not expect insurance brokers, who traditionally view themselves asprofessionals who evaluate insurance risk and recommend coverage, and not assalesmen for bank products. Management acknowledges the cultural gapbetween the two sales forces, but believes that, over time, the relationship valueof the referrals to its insurance brokers will be recognised by both sides of theorganisation.

Another critical dimension of the bancassurance strategy is choice – essentiallyopen architecture. In the future Wells model, call-centre specialists will providea bank customer with a range of product solutions as well as a ‘recommended’one.


While still early days for the cross-sell strategy, the bank seems to be developinga reliable source of insurance earnings while at the same time offering choice toits 23 million clients across the US. An estimated 1.6 million clients have boughtinsurance products from the bank. If the penetration rate can be increased fromthe present 4% of the retail client base to a possible 20% in line with bestEuropean practice, the revenue gain will make a significant contribution to the10% 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 frustrationbanks there have experienced in targeting useful referrals in this direction.

On the other hand, the clear strategic preference for protection rather thaninvestment products does not appear to contribute significantly to Wells’ goal ofincreasing sales of investment products to achieve its ambitious goal of eightproducts per retail client.

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Chapter 11

The lessons of global experience:Addressing the issues

This chapter summarises insights from the more than 20 in-depth interviewsand case studies, examined in the light of the evidence from Chapters 1-9. Theyare 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 the1990s 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 atgreat cost.

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First, the projected cost and revenue synergies rarely exceeded 5% per annum,even by the merging entities’ own calculations before the transaction. Such syn-ergies, if achieved, must be set against the human and financial cost of suchmajor 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 divestedthemselves of problem banks. Most recently, the insurer Sampo sold off itsbanking interests (which had only been acquired a few years earlier) to DanskeBank, 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 ofLukas Mühlemann, the former CEO of the bank.

Third, many of these decisions to exit the insurance business were made as aresult of the subsequent collapse of the equity markets in 2001-2003, whichseverely undermined the capital base of insurers in markets like Switzerland, theUK and Germany and obliged new bank stockholders like Lloyds TSB andCredit 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 banksby insurers.

Table 11.1: Bancassurance divestitures by European banks and insurers, 1990-2006

Banks sell insurers (in whole or part) Insurers sell banksBank 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 beenthe issue of different cultures. While banking and insurance are both providersof financial products, insurers are known for their proactive, sales-orientedindividual marketers, whereas bankers are more institutionally oriented,


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salaried employees. Table 11.2, taken from a Deutsche Bank report in the early1990s, 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 moneyDaily and personal management Management by productionReactive ProactiveShort, frequent client contacts Long, infrequent client contactsGood information on clients Little information on clientsFixed working hours Flexible working hoursSalaried employees Commission-based employeesProblem solvers Product sellersStandardised sales approach Individual sales approachPositive image Doubtful image

Source: Deutsche Bank, Salomon Brothers

This report discusses below how these cultural differences are still present inbancassurance mergers of a decade ago as well as a major factor in the successor failure of recent joint ventures and alliances.

Thus the wave of optimism which created the integrated bancassurer in the late1990s has receded and even been reversed in many cases. Whatever the argu-ment against financial integration – the perceived equity risk, possible lowerROEs in the insurance sector or cultural differences which hamper the smoothrunning 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 integratedSpanish and French bancassurers contrast sharply with the current preferencein 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 Indiaand China where the leading banks have flexed their muscles by insisting onnon-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. Throughoutthe 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 costsof acquiring and turning around the bank in recent years, Allianz now caneffectively direct bancassurance execution in Dresdner via its total financialcontrol.

On the basis of the interview series, it is clear those acquisitions of a bank (by aninsurer) 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 amass-market bank are significantly different from those of an insurance under-writing or brokerage business. Some bancassurers like KBC and Fortis havebeen relatively successful in managing this conflict, but others, like many EUbank acquirers and Citigroup, have decided to divest the manufacture of theinsurance product and buy it in from third parties to broaden their productrange. 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 bybrokers, while the brokers’ advice is difficult to provide to a mass-market bankclientele.

Conversely, insurers attracted to assurbanking by extending their product rangeto 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, theglobal equity crash of 2001 following a string of insurance acquisitions mayhave been pure coincidence, but it has soured the appetite of bank investors andmanagement alike.

However, operational integration, as discussed below, can be essential to thesuccess of a bancassurance business – whether achieved by ownership or arm’slength agreement though a joint venture.

CHOICE OF NATIONAL MARKET

The case study interviewees overwhelmingly point to the choice of nationalmarket 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 iswidespread agreement that the emerging markets of the Asia-Pacific regionoffer 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 distributionhas not been an attractive bancassurance market even for veteran bancassurerslike Fortis.

Interviews revealed that a major driver of market choice is the availability of theideal banking partner for those insurers seeking to enter a new market. Such apartner would have a large retail market share and good brand, as well as thewillingness to commit to an exclusive alliance in which management is essen-tially shared between the bank and insurer. Thus Allianz not only has such analliance in Italy with UniCredit but has also benefited in the CEE fromUniCredit’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 bankor one not prepared to integrate on an exclusive basis. In the booming Chineseand 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 retailclients, low-cost distribution of simple products and strong client loyalty inmany markets. Yet successful bancassurers as different as Hartford, ING,Maybank and CNP Assurances all are committed to a comprehensive approachto channel management. Thus in Asia-Pacific, Malaysia’s leading bancassurerhas acquired a traditional agency-based insurer, while in France CNPAssurances 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 andclient loyalty strong, a bank channel can add more value than a market like theUK, 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, theneed to anticipate future changes in channel usage is clearly on the minds ofbancassurer management. Thus the potential growth of internet, or direct,banking is a significant threat to the sale of insurance products through thebank branch network.

Research has highlighted the enduring differences of each channel. Thus, bro-kers thrive when complex products with correspondingly high commissions aresold, usually to a relatively affluent client base. Banks are successful in sellingsimple offerings to a mass-market client base, which either resemble bankingproducts or are sold in connection with them. Shifts between channels occurwhen, 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, brokersbenefit when a more demanding client base insists on choice and independentadvice. 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 brokeragesector 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. WellsFargo, for example, has given top strategic priority to the non-life or protectionproducts in its efforts to increase the number of ‘touch points’ for its targetedsegments, 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 asauto or buildings and contents for initially penetrating less sophisticated mar-kets, to be followed by investment/life products at a later stage. And others likeCNP 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 adetailed fact-find and individual underwriting process. Whatever the overalltrend 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 wherethe traditional life product – a combination of protection and investment – hasvirtually disappeared in favour of what is essentially an investment product. Inmarkets across the EU and Asia-Pacific, the same trend toward investmentproducts – 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 intervieweessuch 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 futureby simplifying the sales and underwriting process while Citigroup in the UShopes to build sales of life products around an advisory relationship, but theexperience 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 inannuities, 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 theimplication 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 expensiveone, and clients have shown their preference for a lower-cost, simpler solution.

The US experience reinforces the lessons of product simplification learned inthe 1990s in Europe. Products designed by insurers there for their client base foryears 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 designedby bankers with their clients in mind. Simple products may not have the ‘bellsand 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 maymean front-office and back-office integration, such as common sales processesand IT systems which use existing client data and move money from a currentaccount to pay a premium. In the US environment, where banks are essentiallyprocessing a third-party product, this is not a simple task.

The dominant product theme from interviews with successful bancassurers hasbeen ‘make the product easy to sell’. Thus straightforward investment productssuch 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 productwhich 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-lifeproducts in connection with a bank loan. The combination of generous sellingcommissions plus, in many cases, all or a major portion of the manufacturingmargin provides a substantial share of the revenues of many retail banks in theEU.

CLIENT SEGMENTATION AND STRATEGY

Interviews confirmed the core assumption that banks’ priority for insuranceproducts is the mass market which relies on banks to provide most if not allbasic financial products. The banks interviewed usually segment their clientsalong traditional lines by investible wealth or income into mass market (up toperhaps US$100,000 in investible funds), mass affluent and affluent (up toUS$1 million) and high net worth (over US$1 million).

Some of the more experienced bancassurers like Fortis drill down further intosub-segments and product categories, but perhaps the most interesting metricis penetration of individual segments with insurance products. In its homemarket of Belgium, where it has built its bancassurance business over more than100 years, Fortis has achieved penetration ratios of over 30% dependent on thesegment and product involved – ratios to which its competitors aspire. Its rivalKBC 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 insuranceproducts.


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Given the growth and profit potential of an increasingly wealthy and ageingpopulation, selling wealth management and retirement products to upscale seg-ments is a strategic target of many bancassurers. Here they must confront thetraditional competition of agents and brokers with the financial incentives andtime 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 uphillstruggle.

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, whichowns 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 onlyassume 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 tobuild such a relationship means less effort in selling easier-to-sell products aswell as the proliferation of administrative tasks typical in a large bank. Many ofthe complaints by insurers about bankers who are not willing or able to sellstem 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 insales productivity across European banks, highlight the need to segment theclient 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, thelong-term challenge will be to move upmarket to meet the need for advice andchoice. The research mentioned in Chapter 6 shows how the affluent segmentrepresents a multiple of the wealth of the mass market in a typical developedcountry.

JOINT VENTURE/ALLIANCE SELECTION AND MANAGEMENT

For a bancassurer without its own retail bank network in a target market, theselection and management of a joint venture or distribution alliance partner isa critical success factor. Not only must any national differences be managed, butalso 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 establishan exclusive distribution relationship. If this is not possible, what is known as an


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opportunistic strategy is adopted – essentially agreements with smaller bankswhich may not be exclusive. In attractive markets such as India and China, thelatter approach has been chosen by interviewees as the best possible strategy inthe circumstances.

Having identified the appropriate local partner, the challenge is to strike afinancial arrangement which ensures mutual commitment yet meets eachparty’s financial and control objectives. Some insurance partners such as CNPand Fortis insist that each party has a significant financial interest in the successof 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 theappropriate IT systems, training, product development, compliance and processcontrols. As in any joint venture, the insurance partner is vulnerable to changesin strategy by the banking partner; thus for example the introduction of a com-petitive investment product may well undermine the success of the insuranceoffering.

The research did not uncover any useful benchmark metrics for these criticaldecisions. Interviewees were generally reluctant to discuss specifics except pos-sibly the split of sales commissions. In Italy, for example, traditionally a 7% salescommission has been split roughly half to each partner, while CNP Assurancesspeaks of a range of 40-60% earned by the local partner.

What is clear, however, is that best practice requires flexibility, the willingness tocommit funds, and engagement – essentially building relationships of trust andconfidence at all levels between the partners. It was pointed out that each jointventure/alliance is different, and each governance structure must adapt to localcircumstances.

Overshadowing such alliances is the historical record of joint ventures in othersectors either failing because of business reasons or one partner insisting onbuying out the other. Given the extensive financial and reputational investmentmade by bancassurers such as ING, Fortis and Aviva in these ventures, such apossible failure or break-up must be a real concern. Access to a bank client baseis an extraordinarily valuable bancassurance commodity, and one can assumethat 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 ideallyshould 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 ideallyshould be used for the insurance transaction. Shared decision-making betweenthe two partners up and down the organisation is thus a critical success factor.

Given these challenges, the track record to date of durability in bancassurancejoint 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 majorbancassurance venture in which both parties have invested. In the followingchapter, 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 tocross-sell banking products – as do other bancassurers – and which has a well-developed cross-selling culture, admits that bridging the gap is largely a matterof acquainting bankers over time with the contribution insurance can make to aclient relationship – while, at the same time, double-counting insurance rev-enues.

Recruiting bankers for the bancassurance business is a successful strategy forAviva 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 theshortage 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 provideintensive sales training but also incentive schemes which can be quite costly.

In summary, the availability of key multicultural individuals with the relevantexperience in both insurance and banking is a vital factor in the success of thealliances in the growth markets of Asia-Pacific and CEE. Veteran bancassurerslike ING, Fortis and KBC note that they have taken years in a single nationalculture 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 limitedinsurance 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 sellinsurance as well as a range of other investment products such as mutual funds,annuities, guaranteed deposits and alternative investments. In the backgroundmay be an insurance specialist provided by the insurance partner for trainingand 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 theappropriate selling skills and profit potential. In one of the few consultantstudies which addresses the unique challenges of bancassurance (entitled Sales


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success in European bancassurance), Mercer Oliver Wyman identifies threegeneric types of bancassurance sale: the annex (the product sold as a result ofanother 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 interms 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 motorinsurance

Transaction volume Medium Large SmallPremium size Small Premium LargeMargin 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 salesmanin Europe to inefficiencies in systems integration and sales training. Thus in thehighly 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 inselling annex products, making use of single application forms and using a sin-gle database. In its research in Germany, Mercer found that best-performingbancassurers sold more than 60 policies per bank clerk annually, while themajority sold fewer than 20.

As indicated above, banks have struggled to get the model right for relationshipsales, often spending considerable amounts of time building relationships withthe 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 USwith 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 bancassurancedomain. As indicated by the case study material, the available data usuallyfocuses on growth indicators such as premium volumes and market share.


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Many leading bancassurers provide an indication of margins (value of newbusiness as a percentage of business written) and pre-tax margins. On occasion,bancassurers may provide an indication of changes in the terms of long-termdistribution agreements. Returns on invested capital are rarely provided, andthe use of both EEV and standard bank accounting data complicates the ana-lyst’s tasks.

In summary, no publicly available bancassurance profitability comparisonsacross a wide range of competitors could be found. As indicated above, only ahandful of these firms make useful metrics available, and these can rarely becompared to those of competitor institutions.

The lack of comparable performance data across the bancassurance world canalso be explained in part by differences in structure, maturity and scope of thevarious entities. The interviewees pointed out that, quite apart from the dimen-sions of degree of integration and product range, bancassurers differ in theircost and revenue allocations as well as age and sophistication of technology sys-tems. Cost and revenue allocations are driven in part by negotiations betweenbancassurance 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 theincentive to disclose realistic profit results under the scrutiny of the markets, itis 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 distributionchannels. As indicted above, overseas margins tend to be higher than domesticones, while the bancassurance channel appears to be growing faster than others.

The external analyst can thus only guess at the underlying profit performanceand its drivers. Assuming the sales commission is split roughly 50-50 betweenthe insurance and banking partners in a joint venture, the key variables are theefficiency of the sales process, investment in IT systems and training, and com-pliance. In theory, having a modern, central national processing unit, as Avivadoes for its key EU markets, should be a competitive advantage.

Product pricing varies widely across national markets, and the intervieweeswere 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 certainthat the combined sales commission and manufacturing margin can exceed50% 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 distributionarrangement may involve less capital investment but perhaps function less effi-ciently. One does have the impression, as the HBOS case study points out, of avirtuous circle in which successful sales drive down unit costs, which permitproduct 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, asbenefiting from integrating both the sales and processing functions.

In contrast, a US bank essentially selling third-party insurance products earnsonly a selling margin and does not capture the advantages of integration. Theoutside analyst cannot quantify this differential, yet it must account for much ofthe 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 inChapter 10, these numbers have largely been impressive in terms of relativegrowth 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 forHBOS, 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 in2006 for several insurers like Allianz, Fortis, CNP and Hartford as they success-fully address major strategic issues. In contrast, more modest earnings growthin the region of 10% continues for institutions like Wells Fargo, KBC andMaybank.

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 theimportant 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 playeda key role in its evolution.

First, there has been a global drive towards a level regulatory playing field in thesale of insurance products. In many European markets, insurers originally ben-efited from privileged tax and other treatment for life and similar products so asto 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 andlong-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, newdistribution channels are permitted, and entry to the long-term savings marketis 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 theassumption of further deregulation.

Regulation also plays a large part in the design of insurance products. Thus in amarket 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 seriousissues of transparency and the fair treatment of insurance buyers. In marketslike the UK, it is clear that the level of understanding of financial products ingeneral, and complex insurance products in particular, is low. Combined withthe banks’ ability in practice to tie the sale of life and non-life to core bankingproducts such as retail loans, and the high overall margins often available onthese products, there is a high level of regulatory concern over such cross-sellingefforts. The interviews indicate that management is well aware of these con-cerns, and their enthusiasm for the bancassurance business is somewhat attenu-ated because of the negative publicity attached to possible regulatory action.


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Chapter 12

Summary and outlook

In summary, bancassurance as a whole will remain a dynamic distributionchannel. A typical projection for the next decade of life products as a whole isthat 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 thegrowth rates experienced during the last decade.

More specifically, the report evaluates the prospects in terms of the followingkey 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, Europeand Asia-Pacific – is likely to continue along the same lines developed in thepast few years.

In the developed markets of Europe, bancassurance will continue to gainground, particularly in the UK and Germany where it will benefit from productsimplification. Providing a tax incentive along with simple products like ISAsand personal pensions in the UK and Riester-type products in Germany shouldenable banks to approach bancassurance’s one-third market share of the overallEU life market. Elsewhere in Europe, gains will be driven by a broader bancas-surance product range, more efficient processes and the increasing bargainingpower of the bank distribution system.

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In the US market, it is difficult to see banks extending their current modestmarket 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 mutualfunds. As long as bank management eschews underwriting risks and does notachieve integration economies, profits from life and other insurance productsare unlikely to justify the investment in systems and training to win marketshare 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 ofthe cultural mismatch and different client/product segments targeted by banksand 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 ofa range of basic financial products, the banks’ cost advantage over agencies, theexpertise 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 indeveloped Europe. In those markets without vertical integration, such as Indiaand 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 relativelyunsaturated markets of CEE and Asia-Pacific. Yet the outlook for profits is lessexciting in view of the relative lack of structural integration, price competitionin the struggle for market share, and the substantial set-up costs of recruitmentand training of scarce talent, installation of modern IT systems and applyingWestern standards of corporate governance. While bancassurance market sharemay not approach the one-third of the total life market in the developed EUmarkets, the absolute potential size of markets like China and India make themdifficult for a bancassurance competitor to ignore.

Perhaps the most frustrating market for bancassurers will be the US. Despitethe major investment by banks in insurance brokerages and earlier hype on thepotential for the bank channel, there is substantial evidence that the major USbanks like Wells Fargo and Citibank see bancassurance largely as a means ofbroadening their existing customer relationships rather than a source of signifi-cant profit growth. The interviews revealed the frustrations of obtaining ‘shelfspace’ for insurance in the retail network, the relative lack of bank top manage-ment commitment to the product and the universal problem of co-ordinatingthe efforts of bankers and brokers.


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PRODUCT

As in recent years, the principal drivers of future product growth will beswelling personal wealth and an ageing population, which will be felt largely inhigher sales of life and other investment products. While traditional life insur-ance will remain a significant factor in many countries, its dominance will bethreatened by cheaper, simpler investment products such as annuities, mutualfunds, guaranteed bank deposits and alternative investments. On the otherhand, banks’ efforts to simplify the life product may bear fruit in markets likethe 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 willbenefit 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 perhapsover time US banks will overcome their reluctance to underwrite. On the otherhand, regulatory concern over mis-selling may limit the penetration of some ofthese products in consumer-conscious markets like the US and UK.

Overall, banks outside the US will continue to expand their insurance productrange as they become more comfortable with the risks, as well as benefit fromcustomer 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 marginor lose the business.

In summary, in most bancassurance markets the European trend of separatinginvestment from protection products will continue. The traditional life productblending a significant death benefit/protection with an investment feature is amature one in markets like the US and EU, with likely annual volume growth inthe single figures. Equally important will be the trend for clients to buy theirlife/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 lifepolicy but something akin to the tax-advantaged variable annuity as it is knownin the US and Japan, usually based on a mutual fund. Such a product, whichdoes 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 toincrease sales of traditional life products as they attempt to win share of thewallets of their increasingly affluent clients. Absent a major simplification of thelife product, however, it is difficult to see banks overcoming the traditional bar-riers of product complexity and regulatory process. As will be discussed below,

SUMMARY AND OUTLOOK

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however, recent product simplification measures in life markets like the UK andGermany may assist the banks in their efforts.

CHANNEL

The next few years will see a continuation of the correlation between channeldominance and growing wealth and client sophistication. Thus the independentagent channel is gathering pace in the booming Asia-Pacific markets like Chinato satisfy the growing desire for product choice and service, while in Old Europebrokers 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 willrespond by weeding out unproductive salesmen, focusing on upscale clients,cutting costs and offering other long-term investment products such as mutualfunds 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 inchannel preference. On the other hand, this will involve more investment innew channels, as well as the problems of multichannel management.

One of the major unknowns in the minds of the interviewees is the outlook forcustomer channel preference and the possible undermining of the traditionalbank distribution system. Banks in many markets such as Scandinavia arealready concerned about the difficulty of sustaining client relationships in aworld 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 channelscould 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 notappear 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 theirbrokers’ relationships. The US thus remains the classical broker market wherethe vast majority of bank clients look to their local insurance broker or agentfor insurance solutions. It is difficult to envisage a significant improvement inthe bancassurance market share for core insurance products, although banksshould continue to be a major provider of essentially investment products suchas annuities.

A similar mismatch seems to have taken place in markets like Europe wherebanks have actively promoted assurbanking – offering insurance clients bank-ing services via an acquisition or de novo bank. The great majority of insurance


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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 whetherbank-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 necessaryincentives 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 beenachieved by the partners in corporate governance and allocation of financialrisks and rewards. Yet the overall record of such alliances indicates that this is adynamic relationship which can be altered by the consolidation of the financialsector, 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 hithertosuccessful bancassurance joint ventures. In the view of several interviewees, theclassic joint venture may well be viewed in retrospect as an intermediate stage ofperhaps five to seven years before full consolidation and integration takes place.Should a bank/insurance alliance break up, the likely survivor – in Europe atleast – will be the banking partner in view of its control of the distributionchannel. One of the drivers of such a change could be the classic cultural gapbetween banks and insurers.

In the fast-moving emerging markets of Asia-Pacific, with their dominance ofmultiple alliances with insurance providers, this threat of structural change isparticularly real. The interviews indicate a serious concern over the future oftoday’s pairings. In China in particular, several interviewees expressed the viewthat integrated Chinese bancassurers would come to dominate not only theChinese market but also others in the region.

To summarise, the greatest leverage in bancassurance can be achieved by thefully integrated model, yet this model poses by far the greatest managementchallenge. As indicated in Chapter 11, the extent of operational integration inbancassurance is almost unique in the world of joint ventures, and the trackrecord of such alliances in general is that most terminate by liquidation or splitbetween the partners. Given the substantial financial, brand and managementeffort invested in bancassurance alliances, the downside for the partners – inparticular the insurance provider – is substantial.

SUMMARY AND OUTLOOK

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PROFITABILITY

Divergent trends in bancassurance profitability make profit forecasting particu-larly difficult – in part at least because of the paucity of published data.

On the one hand, the underlying volume trends are positive, with bancassurerscontinuing to win market share in markets like Asia-Pacific and Europe on theback of further life penetration, the broadening of the product line and possibleintegration measures. In the US, however, additional penetration of the lifemarket is unlikely, and the volatility of the core annuity product plus relianceon a pure distribution profit will limit profit gains.

Profit margins will be driven by increased competition, the addition of highermargin 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 theirinsurance 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 thesales of high-margin tied products like PPI, the impact on bancassuranceproviders will be substantial.

In Asia-Pacific, the predominance in several markets of multiple distributionalliances is likely to lead to a shake-out in which either a single provider isselected by major banks or the bank itself takes the manufacturing margin in-house. In addition, price competition in key markets like China, plus the needto invest heavily in infrastructure, recruiting and training staff and compliance,will continue to place heavy pressure on profit margins. Finally, profitability inthese booming markets is unlikely to reach European levels due to the lack ofintegration 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 thegreatest 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 themost profitable and thus the strategic target of many bancassurers. Another keyprofit driver will be scale – driving down unit costs by volume increases.

The European experience shows how product pricing can deteriorate withgreater competition and product commoditisation. Thus, pricing of the core‘life/investment’ product in markets like Italy, Spain and France has been drivento a profit margin of 1% or less, in contrast to more generous margins on lifeand non-life products sold in conjunction with loans.


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CLIENT

A major issue for the future of bancassurance is the extent to which banks canmarket insurance and other products requiring advice, such as life insuranceand 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 clientsegment, but the attractions of the much larger aggregate wealth of the moreaffluent segments are compelling.

The answer to this question in turn poses another: that of brand strength. Inbrief, would a bank client – in particular a relatively sophisticated one whodemands choice and performance – go to his bank for advice? Banks across theglobe have invested heavily in building their brand, yet placing a value on thatbrand is an imperfect science.

In a recent report on cross-selling (Cross-selling in retail banking: Meeting therevenue growth challenge, VRL KnowledgeBank, December 2006), the authorfound some evidence of brand strength, in particular the generic category of‘savings, investment and protection’ used in an intensive survey for Citigroupcovering some 30,000 customers of 34 major EU banks in life insurance. Thisvalidates 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 atypical UK or German retail client would tend to go to his broker or IFA foradvice on long-term investments such as life insurance, whereas in France orSweden his bank is the likely port of call.

Certainly in the US, the evidence from the interviews is that the US market issimilar to the UK in the sense that a stockbroker, financial adviser or insuranceagent 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 theinterviews that the banks’ brand strength generally compares favourably withthat 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 permittinglocal financial institutions to build their competitive strength and the desire tointroduce 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

SUMMARY AND OUTLOOK

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banks will continue to dominate the distribution of insurance products in mostgrowth markets.

In terms of the issue of customer protection, the UK will be the focus of mostregulatory attention. A forthcoming report in 2007 by the UK authorities on thecost/benefit of such high-margin products as PPI may well be a bancassurancelandmark. An adverse (to the banks) judgment could well have a significantimpact on retail bank profitability.

To date, outside the US and UK, there have been few visible signs of regulatoryconcerns over the possible mis-selling of bancassurance products. Yet the publicposture of the FSA in the UK, supported by research by consultants such asCapgemini, would appear to confirm that there is a global issue linking a lack ofcustomer sophistication with the high margins and selling practices of distribu-tion channels including bancassurance. In early 2007, US regulators inMinnesota 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 Dealerslists “dishonest annuity sales practices” as one of the top ten threats to USinvestors.


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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 Chapter11.

BANCASSURERS

Allianz/DresdnerAvivaAXABanco Bilbao Vizcaya Argentaria (BBVA)Bank of ChinaCitibankCNP AssurancesFortisHartford Financial Services GroupHBOSING GroupKBCMaybankNordeaSantander Central Hispano (SCH)Svenska HandelsbankenUniCreditWells Fargo

CONSULTANTS AND OTHERS

Council on Financial CompetitionDeutsche Vermögensberatung (DVAG)

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Financial Services Authority (FSA)Kenneth Kehrer AssociatesMercer Oliver WymanNovantasRenaissance Fund Advisors


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