Bancassurance: The Lessons of Global Experience in Banking and Insurance Collaboration

Steven I Davis

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

The Author
Steven I Davis has spent his career in the banking and financial services sector as a senior executive, strategy consultant, author, analyst and teacher. He is a graduate (magna cum laude) of Amherst College and of the Harvard Business School. His 20-year career in international banking began at JPMorgan, where he managed a Paris-based research and M&A unit. For Bankers Trust Company, he ran a venture capital subsidiary in New York, and later the bank’s European businesses from a London headquarters. Subsequently he set up and managed for six years the Londonbased merchant banking subsidiary of First International Bancshares of Dallas, Texas. Since establishing Davis International Banking Consultants (DIBC) in 1980, he has managed several hundred strategy assignments for commercial and investment banks, global fund managers, insurers and other financial institutions. In 1993, he headed a DIBC team which advised the Norwegian Ministry of Finance on the restructuring of the country’s banking sector during the Nordic banking crisis. In addition, he and his colleagues have prepared over 60 research reports on the financial sector for publication by investment banks and other clients. Steven Davis is also the author of seven books on the banking sector (published by Macmillan in London). They include Excellence in Banking, Managing Change in the Excellent Banks, Leadership in Financial Services, Bank Mergers: Lessons for the Future, Investment Banking: Addressing the Management Issues and, most recently, Excellence in Banking – Revisited.

Currency conversions
This report contains a significant amount of historical financial information, and calculating currency conversions for every amount would make the publication unwieldy, while to impose an ‘average’ conversion rate could convey an incorrect impression in some cases. Historical conversions for all the currencies mentioned in this report can be found by logging on to OANDA, The Currency Site: www.oanda.com/convert/fxhistory

A word about Asia-Pacific...
We have used the term ‘Asia-Pacific’ to describe the countries in the Asian land mass as well as other countries in the Pacific Ocean such as Australia, Korea and Japan. Our sources, however, sometimes use the term ‘Asia’ to refer to what appears to be roughly the same area, and when using their data we employ the same term. Our intent is to cast our net as widely as possible in the region by using the term ‘Asia-Pacific’ without attempting to make an academic distinction.
© 2007 VRL KnowledgeBank Ltd No part of this report may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright holder. This report is designed to provide accurate information on the general subject matter covered. This report is provided with the understanding that the author and publisher shall have no liability for any errors, inaccuracies or omissions of this report and, by this report, the author and publisher are not engaged in rendering consulting advice or other professional services to the recipient with regard to any specific matter. In the event that consulting or other expert assistance is required with regard to any specific matter, the services of qualified professionals should be sought. Print production: Patersons (www.patersons.com) Product code: 7RB First published: London, June 2007 ISBN: 1-905457-63-4

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Contents

The Author........................................................................................................................ii Currency conversions ......................................................................................................ii A word about Asia-Pacific... ............................................................................................ii List of figures ..................................................................................................................vii List of tables ....................................................................................................................ix Executive summary ..........................................................................................................1 1. Introduction..................................................................................................................5 2. What drives bancassurance? ........................................................................................7 3. The alternative structural models..............................................................................11 Assurbanking: The insurers’ response ............................................................................16 4. The influence of regulation........................................................................................17 Permitted ownership and products ................................................................................17 Taxation............................................................................................................................18 Capital adequacy regulation............................................................................................18 Product sales regulation and customer protection ........................................................19 5. The bancassurance products......................................................................................21 Product categories............................................................................................................21 Key product trends ..........................................................................................................23 The trend toward simple products in many sectors ................................................23 Banks extend their insurance product range ..........................................................24 Merging of products into ones that favour banks ....................................................25 Banks appear to have a competitive advantage as product range evolves ..............25 Less progress in markets where advice is required ..................................................26 Innovation comes from incomer companies............................................................26 6. The bancassurance client – profile and trends..........................................................29 Client profile ....................................................................................................................29 Key trends in customer behaviour – and the response to these trends ........................32
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
The demand from the upscale customers for product choice in financial solutions has become even clearer........................................................................32 Mis-selling issues........................................................................................................32 The concept of the ‘trusted adviser’ has gained traction..........................................32 Prioritising the upscale segments ..............................................................................33 7. Competitive distribution channels............................................................................35 Profile of the alternative channels ..................................................................................35 Agency sales forces and insurance company employees ..........................................36 Brokers ........................................................................................................................36 Other non-bancassurance channels ..........................................................................37 Trends in distribution market shares..............................................................................40 Europe ........................................................................................................................40 Asia-Pacific ................................................................................................................44 The US ........................................................................................................................45 Multiple channel distribution and the insurers’ response to bank competition ..........46 8. The profit profile ........................................................................................................49 The relative cost of bank distribution ............................................................................49 Relative product and functional profitability ................................................................53 Bancassurance pricing ....................................................................................................55 Actual profitability data ..................................................................................................55 9. The key national markets ..........................................................................................57 Europe ..............................................................................................................................58 Market profile ............................................................................................................58 Concentration of bank and insurance ownership....................................................59 Relative integration of bancassurance manufacture and distribution ....................60 A simple, tax-favoured investment product ............................................................60 France..........................................................................................................................61 Italy ............................................................................................................................62 Spain ..........................................................................................................................64 Germany ....................................................................................................................65 The UK........................................................................................................................66 North America ................................................................................................................69 The US ........................................................................................................................69 Canada ........................................................................................................................71 Asia-Pacific ......................................................................................................................73 Market profile ............................................................................................................73 Japan ..........................................................................................................................74 China ..........................................................................................................................75 India ............................................................................................................................77 Malaysia ....................................................................................................................78 10. Case studies ..............................................................................................................79 Allianz ..............................................................................................................................80 Background ................................................................................................................80 Bancassurance strategy ..............................................................................................81 Evaluation of bancassurance strategy ......................................................................83 Aviva ................................................................................................................................83 Background ................................................................................................................83 Bancassurance strategy ..............................................................................................84 Evaluation of bancassurance strategy ......................................................................85

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CONTENTS
Citigroup ..........................................................................................................................86 Background ................................................................................................................86 Bancassurance strategy ..............................................................................................87 Evaluation of bancassurance strategy ......................................................................88 CNP Assurances ..............................................................................................................89 Background ................................................................................................................89 Bancassurance strategy ..............................................................................................90 Evaluation of bancassurance strategy ......................................................................91 Fortis ................................................................................................................................92 Background ................................................................................................................92 Bancassurance strategy ..............................................................................................93 Evaluation of bancassurance strategy ......................................................................94 Hartford Financial Services Group ................................................................................95 Background ................................................................................................................95 Bancassurance strategy ..............................................................................................96 Evaluation of bancassurance strategy ......................................................................96 HBOS................................................................................................................................97 Background ................................................................................................................97 Bancassurance strategy ..............................................................................................98 Evaluation of bancassurance strategy ......................................................................99 ING Group ....................................................................................................................100 Background ..............................................................................................................100 Bancassurance strategy ............................................................................................101 Evaluation of bancassurance strategy ....................................................................103 KBC ................................................................................................................................103 Background ..............................................................................................................103 Bancassurance strategy ............................................................................................105 Evaluation of bancassurance strategy ....................................................................106 Maybank ........................................................................................................................106 Background ..............................................................................................................106 Bancassurance strategy ............................................................................................107 Evaluation of bancassurance strategy ....................................................................108 UniCredit........................................................................................................................109 Background ..............................................................................................................109 Bancassurance strategy ............................................................................................110 Evaluation of bancassurance strategy ....................................................................110 Wells Fargo ....................................................................................................................111 Background ..............................................................................................................111 Bancassurance strategy ............................................................................................112 Evaluation of bancassurance strategy ....................................................................113 11. The lessons of global experience: Addressing the issues ......................................115 Ownership and control..................................................................................................115 Choice of national market ............................................................................................118 Channel strategy ............................................................................................................119 Product range and strategy............................................................................................120 Client segmentation and strategy ................................................................................121 Joint venture/alliance selection and management ......................................................122 Culture and people issues..............................................................................................124 Managing the sales process............................................................................................124 Performance metrics......................................................................................................125 The impact of regulation ..............................................................................................127

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
12. Summary and outlook............................................................................................129 Geography ......................................................................................................................129 Product ..........................................................................................................................131 Channel ..........................................................................................................................132 Structure of joint ventures and alliances ......................................................................133 Profitability ....................................................................................................................134 Client ..............................................................................................................................135 Regulation ......................................................................................................................135 Appendix: List of interviewees ....................................................................................137 Bibliography ................................................................................................................139

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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 ............................................14 Figure 3.2: Advantages and disadvantages of alternative distribution structures ........15 Figure 5.1: Relationship between product complexity and distribution channel ........24 Figure 5.2: European banks’ share of non-life insurance, 1998-2004 (%)....................25 Figure 6.1: The role of insurance products in the overall client relationship ..............30 Figure 7.1: Share of revenues by postal services associated with financial services, 2006 (%) ......................................................................................................40 Figure 7.2: The declining role of insurance company employees and agents in selected European life insurance markets, 1998-2004 (%) ......................................41 Figure 7.3: Number of tied agents in France, 1985-2003 ..............................................42 Figure 7.4: The evolution of the share of life insurance broking in selected European markets, 1998-2004 (%) ............................................................................43 Figure 7.5: Distribution of life insurance in Europe, 1990-2000 (%) ..........................43 Figure 7.6: US life insurance distribution is dominated by agents, 2006 (%) ..............45 Figure 7.7: US variable annuity sales dominated by independent financial planners, 2001-2005 (%) ............................................................................................46 Figure 8.1: Banks have higher productivity than traditional agents ............................50 Figure 8.2: New distribution channels are much lower-cost ........................................51 Figure 8.3: Bancassurance in Italy has succeeded because of a cost advantage ............52 Figure 8.4: Relative profitability of selected products....................................................54 Figure 8.5: Relative share of production and distribution costs of life and nonlife products (%) ........................................................................................................54 Figure 9.1: Evolution of three major regional life markets, 1985-2004 (%) ................58 Figure 9.2: Sales of life insurance by channel in France, 1990-2005 (%)......................61 Figure 9.3: Bank penetration of individual life products in Italy, 1998-2001(%) ........64 Figure 9.4: Evolution of life insurance and other investment products in Spain, 1993-2002 (€ 000s) ....................................................................................................65

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Figure 9.5: Relative size and growth of Asian insurance markets, 2005 (US$ m and %) ........................................................................................................................75 Figure 10.1: Allianz’s cross-selling in Germany..............................................................81 Figure 10.2: Rapid progress in Allianz’s key Asia-Pacific businesses (€ m)..................82 Figure 10.3: Comparative CNP bancassurance margins for France, Italy and Brazil, end-December 2005 and end-June 2006 (%) ................................................91 Figure 10.4: Bancassurance: A truly virtuous circle ......................................................99 Figure 10.5: ING is well positioned for growth markets..............................................101 Figure 10.6: Relative ING bancassurance growth in Asia-Pacific, 2002-2005 (%) ....102 Figure 10.7: Wells Fargo’s insurance network ..............................................................112

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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 ..............................59 Table 9.2: Life insurance distribution channels in major European countries, 2004 (%)......................................................................................................................60 Table 9.3: Top ten French life insurers, 2005 (€ bn) ......................................................62 Table 9.4: Evolution of Italian life insurance distribution channels, 2000-2005 (%) ..............................................................................................................................63 Table 9.5: UK life and pensions market by distribution channel, 1999-2004 (%) ......67 Table 9.6: Premium income from bank insurance sales, 2000-2005 (US$ bn and %) ........................................................................................................................70 Table 9.7: Comparison of European and Asia-Pacific bancassurance models..............74 Table 9.8: Major insurance players in Chinese market by premium, first five months of 2005 (CNY bn and %)..............................................................................76 Table 10.1: Bancassurance contribution to Aviva, 2006 (%) ........................................84 Table 10.2: US Bancassurance – top ten banks by insurance income, 2005 (US$ m and %) ..........................................................................................................88 Table 10.3: KBC market share by country and business, 2005 (%) ............................104 Table 11.1: Bancassurance divestitures by European banks and insurers, 1990-2006..................................................................................................................116 Table 11.2: Cultural differences between insurers and banks......................................117 Table 11.3: Three kinds of bancassurance sale ............................................................125

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Executive summary

Bancassurance – the sale of retail insurance products to a commercial bank’s client base – has evolved in different models since its origins in the European Union (EU) in the mid-1980s. The classic European model is an integrated one with common ownership or some form of exclusive commitment between the insurance provider and bank distributor. In the US, the model involves virtually total separation between bank distributor and insurance provider, while in emerging markets like Asia-Pacific, where foreign insurers compete for shelf space on domestic bank distribution platforms, yet a third structure is evolving. The different models used drive profitability, product design and the operational challenge. While comparable profit data across a range of bancassurers are fragmentary at best, it would appear that the integrated European model not only combines both the substantial manufacturing and distribution margin in insurance products but also offers significant operational economies in both the back and front office. The available data thus indicate a relatively impressive return on equity and client penetration for experienced, integrated European bancassurers, like Fortis in its home markets and Aviva in markets where it has integrated with a local bank distributor. In the US, despite early indications that bancassurance might achieve market penetration levels in life insurance comparable to the one-third it has in Europe, US banks struggle to achieve a market share of 1-2% and essentially offer a third-party insurance product to complete their financial product range. In contrast, in the booming markets of Asia-Pacific, incremental market shares for the bank channel are rapidly approaching European levels. A common strategy of the leading bancassurers is to be present, as appropriate, in all the major insurance distribution channels – company employee/agency, bancassurance and independent brokers. It is widely assumed that, as insurance markets evolve, there will be a natural trend from agents to banks to brokers as the market becomes more sophisticated and willing to pay for advice and choice. The challenge for the future of bancassurance in this regard is the
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION growing use of direct channels, which undermines the traditional bank advantage of physical proximity. National markets differ not only in fiscal treatment of insurance but also in structure, the role of banks, customer preference and a host of other variables. The survey conducted for this report thus found a totally pragmatic approach to product selection based on these variables. The core product grouping in Europe has been the life and related long-term investment products, but banks there have become increasingly aware of the high margins available on non-life and other products sold in connection with a loan or even independently of the lending function. At the same time, across the world, lower-cost and simpler tax-advantaged investment products such as mutual funds, guaranteed bank deposits and annuities are playing a dominant role in the product offering. Life insurance is understandably a more expensive product because of the regulatory and medical process involved, but it is also that much more difficult for a bank platform’s staff to sell in competition with their other responsibilities. In many markets, the natural trend has been from a basic non-life, term life or investment product to a more advice-based, comprehensive approach to overall financial needs. In many markets such as the US and UK, banks find it difficult to compete with independent brokers and advisers who have the customer relationship, financial incentive and expertise to offer a range of long-term investment products. In terms of client segmentation, bank distribution is a natural choice for massmarket clients looking for simple, low-cost products made available from a trusted financial intermediary. As the client becomes more demanding in terms of product choice and experience-based advice, however, the broker or financial adviser channel becomes increasingly competitive. For an insurer without a related bank distribution network, the challenge is to find a major bank prepared to offer access to its retail client base on acceptable terms, and hopefully on an exclusive basis, which permits alignment at the marketing level and in the back office. In Europe, insurers like Aviva and Fortis have been able to knit mutually satisfactory, long-term alliances which have so far stood the test of time. But this has been achieved only at the expense of allocating skilled specialist personnel, investing heavily in marketing and information technology (IT) systems, and being flexible enough to adapt to changing circumstances. Overshadowing even the most successful such joint ventures is the threat of break-up, either because of external events such as a merger or at the behest of the bank that wishes to provide its own products or change insurance provider. This is a particular issue in markets like India and China, where banks have been reluctant to offer exclusive access to their client bases and could take advantage of the insurer’s reliance on their client base. In retrospect, given the lack of durability of joint ventures in other businesses, the record of bancassurance alliances has been exceptionally good to date, with few publicised breakups of major alliances.
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EXECUTIVE SUMMARY Bancassurance also involves addressing the cultural divide between banks, which take an institutional approach to selling, and insurance, where selling is done by highly motivated individuals. Blending these cultures has been a challenge in all markets, whatever the ownership relationship. In addition, the relatively lower returns on insurance underwriting has probably been a factor in the US banks’ reluctance in invest large amounts of capital in manufacturing the insurance product. In Europe, the wave of bancassurance deals before the stock market peak of 2000 has left in its wake a number of transactions which have since been undone or regretted.

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Chapter 1

Introduction

In the consolidating world of financial services, with mergers across the sector combining with a broadening of the product array, the concept of bancassurance has assumed a central role in the strategy of a growing number of financial institutions. In this report, ‘bancassurance’ is defined, quite simply, as the marketing of retail insurance products to a commercial bank’s client base. As is discussed in Chapter 3, this may or may not involve equity ownership or control as part of the business model. The related concept of ‘assurbank’ – the sale of retail banking products to an insurer’s clients – is summarised briefly in Chapter 2 as the response by insurers to the banking challenge. The fundamental objective of this report is to analyse the lessons of actual practice in the markets where bancassurance has become well developed as an operational concept. An earlier study by VRL KnowledgeBank, Bancassurance in the 21st century, provides considerable background on the structural environment for the concept across the world. This study focuses on the major markets – the EU, Asia-Pacific and North America – where bancassurance has achieved the most significant development and therefore the basis for examining these lessons of experience. Quite simply, the goal has been to synthesise this experience for the benefit of academics, consultants, students and, of course, for present and future practitioners. Given this approach, the methodology has been, first, to gather the relevant data in the public domain: industry statistics, consultant studies and material in the trade press. More importantly, the author has relied heavily on off-the-record, in-depth conversations with leading practitioners in the financial services sector. This key input is reflected in the case studies incorporated in Chapter 10 as well as the report’s findings and conclusions in the following chapters. At this point, it is necessary to acknowledge that the publicly available database for bancassurance, in particular the key metrics of margins and profitability, is

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION woefully weak, with the result that observations are often based on verbal indications from the author’s sources. In addition, data may be relatively stale. The author has thus indicated such instances with the phrase ‘latest available data’. Following these introductory comments, the body of this report begins with Chapter 2 and an analysis of the key drivers of bancassurance. Chapter 3 then describes the various possible structural models, ranging from an integrated financial conglomerate to an arm’s length distribution joint venture without any equity links. The critical role of regulation in its various forms is discussed in Chapter 4 – specifically the key aspects of taxation, controls on product range and diversification, efforts to control mis-selling and the use of capital. Chapter 5 addresses the role of product range, specifically the distinction between life/investment and protection products and how the banks’ product ranges have evolved over time. Chapter 6 discusses the major client segments of interest to bancassurers, specifically the mass-market and affluent segments, and the various segmentation approaches used by the banks. Since the issue of distribution is central to the rationale for bancassurance, Chapter 7 is devoted to the role of alternative distribution channels, not only the traditional agency and employee sales forces but also, in particular, the growing importance of independent financial advisers (IFAs). The limited publicly available insights into bancassurance profitability are summarised in Chapter 8. In Chapter 9, the report examines in more detail how these key variables have played out in a number of major bancassurance markets: the EU, where today’s model evolved in the 1980s; North America, where a different model has developed in the US since the regulatory barriers were lifted in 1999; and AsiaPacific, where the concept is vigorously evolving on the back of traditional bank distribution. As mentioned above, the earlier VRL KnowledgeBank study provides insights into a much wider range of national markets. The analysis of the lessons of experience begins in Chapter 10 with the examination of 12 case studies which demonstrate the successful execution of bancassurance strategies under different circumstances. In each case, the report profiles the institution’s retail strategy, examines its bancassurance approach and provides observations on its outlook for the future. Next, in Chapter 11 the findings of these case studies and the author’s series of interviews are analysed to examine how bancassurers have addressed issues of strategy, structure and execution. The report focuses in particular on the problems of managing different cultures and practices in the banking and insurance worlds. It also provides some conclusions on the lessons of best practice based on the interviews and an analysis of the database. Finally, a view of the future of bancassurance is summarised in Chapter 12.

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Chapter 2

What drives bancassurance?

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

Figure 2.1: The insurance industry has been growing faster than the world economy for the last ten years (%)
Annual premium income growth (%) Annual premium income growth

Life premiums Life CAGR: +5.1% CAGR:

World nominal GDP World nominal GDP CAGR: +4.2% CAGR: +4,2%

Non-life Non-life premiums premiums CAGR: +4.9% CAGR: +4.9%

1995 1995

1996 1996

1997 1997

1998 1998

1999 1999

2000 2000

2001 2001

2002 2002

2003 2003

2004 2004

2005 2005

Source: Datastream, Swiss Re, AXA

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

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

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION • Regulation both assists and hinders bancassurance. Each national market has its own framework which regulates what products can be sold, who can sell these products, the relative taxation on each and the rules governing ownership of banks and insurers. Chapter 9 analyses in more detail how today’s bancassurance has evolved across the world’s major markets.

To summarise briefly, bancassurance has flowered in European markets like France and Italy in large part because of liberal regulations on ownership, product range and mis-selling, along with a level taxation playing field which gave banks the ability to leverage their distribution strengths. In contrast, in a handful of markets like Canada, banks have been effectively prevented from owning an insurer or marketing their products. In between are markets like the US, where a level competitive playing field was only introduced in 1999, and the UK, where strict regulations against mis-selling on long-term products work to the advantage of brokers that can provide the necessary advice.

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Chapter 3

The alternative structural models

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

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Table 3.1: Benefits to banks and insurers of alternative bancassurance structures
Benefits to banks Distribution agreements

Joint ventures

Integrated operations

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

✔ ✔

✔ ✔ ✔ ✔

✔ ✔ ✔ ✔

Benefits to insurers

Distribution agreements
✔ ✔

Joint ventures
✔ ✔ ✔ ✔

Integrated operations
✔ ✔ ✔ ✔ ✔ ✔

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

✔ ✔

A host of factors drives the choice of the appropriate structure. To start with, each national market has its own profile – for example, the relative size and structure of the banking and insurance sectors as well as different regulatory and tax environments. Equally important is management’s strategy: is the bancassurance unit an integral part of the retail strategy and the client relationship, or is insurance just another product to be sold as part of the overall array? The decision to invest equity in the business is a function of both strategy and the relative returns from the bank and insurance businesses. In most markets, the return on equity on the insurance business as calculated using bank accounting practice (as opposed to embedded value) has been lower than that of the banking business, which has driven many banks to focus on the distribution, rather than manufacturing margin. Finally, different views can be taken at different points in time on the value of operational integration. Thus, in the Benelux markets, several of today’s major bancassurance players began life as pure financial conglomerates but later integrated their operational units. Credit Suisse declined to integrate Winterthur after acquiring the insurer, then integrated it, and finally sold it to AXA. In the other direction, Allianz in Germany initially did not integrate its Dresdner Bank
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THE ALTERNATIVE STRUCTURAL MODELS retail business, but, as part of its ‘3+One’ strategy, has aligned the Dresdner unit as a major distribution element of its core insurance business. Both internal and external factors drive such changes. Thus merger and acquisition (M&A) activity may jeopardise a joint venture or distribution agreement as one partner is faced with an unacceptable new partner, or management may decide to buy out the partner to capture its equity return. The captive, or integrated approach, has been consistently adopted in markets like France and Spain where a dominant bank manages its insurance business as a fully integrated element of its retail distribution function. Thus, Banco Bilbao Vizcaya Argentaria (BBVA Seguros), Santander Central Hispano (SCH), Société Générale (Sogecap), Crédit Agricole (Predica) and others treat the insurance function as a subset of the retail banking division. In contrast, the joint venture approach has been widely adopted in Italy and other markets. Thus 50-50 ownership characterises Ecureuil Vie (CNP Assurances – CNP is an acronym for Caisse Nationale de Prévoyance – and Caisse d’Épargne) in France, BNL Vita (the insurer Unipol and BNL – Banca Nazionale del Lavoro – in Italy), CAIFOR (Caixa and Fortis) in Spain, and the venture between Royal Bank of Scotland (RBS) and Aviva in the UK. Finally, the pure partnership without any equity ownership is based entirely on an exclusive or non-exclusive agreement to sell the insurer’s products. This category includes the partnership between Legal & General and Barclays in the UK, AMB (Aachener und Münchener Beteiligungs-Aktiengesellschaft) and Generali in Germany, and CNP and La Poste in France. In markets like Asia-Pacific, where foreign ownership in a local insurer is prohibited, a partnership may be the only structural alternative. Interestingly, a 1997 study by McKinsey & Co set out three likely bancassurance partnership models as the most likely result of the forthcoming deregulation which occurred in 1999 in the US. In reality, as discussed in Chapter 9, the banks have almost exclusively simply acquired brokers, eschewing both product manufacture as well as the joint venture approach. What distinguishes many of these structures is how they vary over time as the perceived needs of their owners and M&A in the sector evolve. Many bancassurers, for example, decide over time that their vocation lies in product distribution rather than manufacture. This decision is perhaps also influenced by the relative profitability of the manufacturing activity. Thus, many Scandinavian banks, having acquired composite insurers during the 1990s, retained the life business but sold the non-life activity and bought back the non-life product from the buyer under a partnership arrangement. In the US, the iconic Citibank/Travelers merger, which was viewed in 2000 as a pathfinding venture in the recently deregulated US market, was undone when Citibank management decided that ownership of neither the life nor non-life business was critical to the group’s strategy. A case study in Chapter 10 explores this evolution in more detail.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION Finally, in the UK many banks adopted the integrated approach to ownership and management as they entered the bancassurance market in the 1990s, but most eventually collapsed these de novo ventures in favour of joint ventures or partnerships. A survey by Finaccord in 2003 found that the exclusive distribution agreement was by far the most common structural model, followed by wholly owned captives. A 2002 study by McKinsey & Co of possible models focuses on four critical dimensions: the product choice (life or life and non-life), number of channels (a single integrated one or multiple product-focused channels), product source (in-house or outsourced) and ownership (greenfield or acquisition as opposed to simple distribution agreement). Figure 3.1 sets out these options together with the choices made by a number of EU bancassurers in the early years of the 21st century.

Figure 3.1: Four dimensions of the bancassurance model

Productfocused channel

Single integrated channel Distribution

Life

Product range Life and P&C

The ‘right’ bancassurance model?

In-house production (Life, P&C) Production Sourced production (Life)

Ownership structure

Distribution agreement
Source: McKinsey & Co

M&A greenfield

Chapter 11 provides the report’s findings and conclusions on the choice of structure. At this point, it is clear that there is no ideal structure either in terms of ownership or operational integration. A host of variables in each market must be evaluated, including: • the relative profitability of manufacturing the insurance product. As mentioned above, many banks feel that the equity returns from ownership are unattractive in comparison with investment in the banking business;
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THE ALTERNATIVE STRUCTURAL MODELS • the relative profitability of the distribution margin. In Italy, for example, splitting the overall sales margin with the product provider seems to produce an acceptable return for the bank partner; the difficulty in managing an integrated banking and insurance business. In Chapter 11, the report discusses in detail the problems of integrating such critical dimensions as management culture, compensation and different distribution channels; and management strategy and culture. Many banks insist on wholly owned or captive operations, while few others are comfortable with a number of alliances or joint ventures.

In summary, Figure 3.2 (from a Sigma study) presents the advantages and disadvantages of four alternative structures: the integrated financial services group, joint venture, strategic alliance and distribution agreement.

Figure 3.2: Advantages and disadvantages of alternative distribution structures

Distribution agreement

Strategic alliances

Joint ventures

Financial services groups

Degree of integration
Banks distribute life insurance products (standalone or bundled with bank products) in return for fee income No or little sharing of customer databases Limited investments A higher degree of integration in product development, service provisions and channel management Possible sharing of customer databases Requires investments in IT and sales personnel Clear mutual ownership of products and customers Sharing of customer databases Requires strong and long-term commitments from both sides Operations and systems can be fully integrated A high capability to leverage on banks’ existing customers and other service provisions One-stop financial services Potential for fully integrated products
Source: Swiss Re

As will be discussed in more detail in Chapter 9, the bancassurance model has taken different shape in the major markets reviewed in this study. In Europe, arguably the home of the concept, the financial services landscape was transformed in the late 1990s by about 20 mergers of banks and insurers to create a bancassurance conglomerate. Usually led by an acquiring bank, these transactions 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.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION On the other hand, in the US, the long-awaited passage of deregulatory legislation in 1999 has led essentially to bank acquisitions of insurance brokers rather than the partnerships or financial conglomerates widely predicted. Banks have thus preferred simply to buy in both the product and the sales force rather than invest in the business itself. Finally, in the key Asia-Pacific markets, regulation in the form of prohibition of bank ownership of insurers, plus the dominance in many markets of family owned insurers and the relative immaturity of the banks’ distribution and selling mechanism, has led to a number of alliances between local banks and experienced foreign insurance partners rather than extensive ownership ties.

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

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Chapter 4

The influence of regulation

Financial services is a closely regulated sector, and regulation is a critical driver of the profile and outcome of bancassurance in markets across the world. Regulation in its various forms impacts bancassurance in several principal dimensions.

PERMITTED OWNERSHIP AND PRODUCTS
The ownership of insurance companies, as well as that between banks and insurers, has shaped bancassurance in the key markets under review. At one extreme is the European Union, whose liberal financial services directives place no barriers on ownership links between banks and insurers, nor prohibitions in principle of foreign vs. domestic ownership. Until 1999 and the passage of the Gramm-Leach-Bliley legislation, banks in the US were largely unable to acquire insurers. The result of this deregulation has been a wave of bank acquisitions of insurance brokers, in contrast to Europe where banks have largely acquired insurance underwriters. Chapter 9 analyses these developments in more detail. At the other extreme are many Asia-Pacific and other markets, where regulations prohibit or seriously limit the ownership of domestic insurers by banks. Others limit foreign ownership of an insurer or bank, and several countries place major barriers to the sale of insurance products by banks. Thus, in South Korea, insurers have resisted the entry of bancassurance proposed for 2007. In many markets, the politically sensitive price of auto insurance is controlled. In Japan, South Korea and the Philippines, there are severe restrictions on the insurance products banks can sell. Canada prohibits banks from selling most insurance products to their retail clients. Chapter 9 of this report discusses in more detail the bancassurance profile created by these regulations in the markets under review.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION The global trend in permitted ownership and product profiles is in the direction of the European model, as banks in particular lobby for a greater presence in the insurance sector, and liberalising governments lower traditional barriers designed to protect existing franchises. In Sweden in the 1990s, for example, the tax privileges on private pensions, hitherto the monopoly of the life insurers, were extended to products sold by banks.

TAXATION
Different tax regimes have shaped the structure of bancassurance as well as product profile across the markets under review. Given the social and economic importance of encouraging long-term savings as discussed in Chapter 2, tax regimes in many countries have traditionally favoured the life insurance product over other forms of savings such as bank deposits or securities. Such a tax preference usually takes place at one or more phases of the duration of the life product: tax deductibility of the premiums paid, tax-free roll-up of income received from the investment, and taxation on maturity or payout. Whatever the format, the global trend has been toward levelling the taxation playing field by providing the same or similar tax treatment to a number of long-term investment products as well as life insurance. Thus, long-term bank deposits, mutual funds, annuities and other long-term investments in many countries now have the same tax status as life insurance. Thus, in the 1980s, the French and other so-called bancassurance markets in Europe were built around the similar tax treatment of life insurance and longterm bank deposits. Most recently, for example, in 2005 the German insurance market has been transformed by the withdrawal of tax benefits on the maturity of an endowment policy.

CAPITAL ADEQUACY REGULATION
One of the unique features of most national financial services sectors is the separate regulation of banks and insurers. The Financial Services Authority (FSA) in the UK, for example, is a rare example of one regulator setting rules which apply consistently to both banks and insurers. As political barriers to the merger of different regulatory agencies are removed, however, other jurisdictions have adopted the FSA’s structure. One consequence of these differential regulatory regimes has been the opportunity of a bank or insurer to avoid the full capital weighting of a given risk by placing it in the more lenient jurisdiction. As a recent study by Standard & Poor’s points out, “insurance capital needs are not represented in regulatory capital”. For banks, this possibility has been effectively eliminated by Basel I and the proposed Basel II, which oblige banks to take the full capital weighting in their insurance operations.
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THE INFLUENCE OF REGULATION The intent of the proposed Solvency II in the EU is to do the same for insurers, thus effectively eliminating regulatory arbitrage. Until such arbitrage is eliminated, however, an integrated bancassurer may have the opportunity of making a lower capital charge by utilising the more lenient jurisdiction. The extent of this arbitrage cannot be quantified, but conversations with interviewees indicate that it has been widely used.

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

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Chapter 5

The bancassurance products

Bancassurance products – those sold to a bank retail client base – have evolved over time as a response to local market conditions, global trends and the banks’ growing experience with insurance-related products. This chapter analyses the different categories of these products and how they have evolved.

PRODUCT CATEGORIES
The core bancassurance product is life insurance: a composite product providing both protection in the event of death and some form of long-term investment return. Known in different markets as whole life or universal life, it has traditionally been the core product of insurers across the globe in both mature and emerging markets. As such a composite or complex product, it requires advice (which implies the cost of a trained sales force) and often a regulatory and underwriting process which adds to the cost. In addition, because of the presence of multiple risks – of death as well as investment return – it is arguably more expensive than individual products such as term life or a pure investment instrument sold separately. In markets like the US and Japan, the fixed or variable annuity, which pays out over a period of time, is regarded as an insurance product because of the death benefit that is usually included. Most observers, however, view it as an investment product as it does not usually involve an intensive fact-find or medical examination. The report discusses below how the life product in bancassurance markets like France has been replaced by investment products with perhaps an insurance wrapper, as well as term life as a standalone product. In more traditional markets like Germany, the life product has remained essentially unchanged until quite recently, whereas in developing markets like Asia-Pacific, it remains the core long-term investment product.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION While the life product is the benchmark for most statistical analysis of bancassurance, it represents only a fraction of the total tax-advantaged long-term investments which are actively sold by banks. In Chapter 11, the actual evolution of the banks’ product mix is analysed. The second category is comprised of those related to traditional banking products such as mortgages and personal loans. For decades, banks have profited from these relationships to sell so-called credit or creditor life insurance – essentially protecting the borrower (and the bank) against the inability to repay a loan in the event of death or disability. In many markets, well over half of these retail loans are sold by banks with such protection attached – a cause of concern from regulators about tied sales. UK banks are estimated to provide roughly one-third of the buildings and contents insurance on their home loans. In recent years, PPI has become the focus of regulatory attention because of the effective cost of the insurance compared to the possible benefits. Finally, banks have successfully sold simple non-life products independent of bank services, including buildings and contents, automobile, travel and pet insurance. Often carrying substantial margins, these require little advice and can be sold online, by direct mail or by generalist bank staff. Life and other long-term investment products as well as those sold in connection with bank loans have understandably attracted most of the strategic attention of bank distributors. In contrast, pure protection products such as auto and home loans have been seen by many banks as low priority: perhaps involving unacceptable underwriting risks, few synergies with other bank products, being subject to regulated tariffs, and perhaps (most difficult of all) conflicting with the bank’s brand. For years, for example, banks worried over the conflicts which might occur in the event of a loss claim, when a valuable client would leave the bank in anger over a disputed insurance claim. The net result of these constraints is the modest market share of bancassurance in non-life products. Despite the increasing contribution of credit life and other products cross-sold against bank loans, non-life in Europe, for example, represents 10% or less of the major national markets. In undeveloped insurance markets like Central and Eastern Europe (CEE) and Asia-Pacific, non-life insurance is often the market entry offering of an insurer like Allianz to establish the concept of insuring against risk. More profitable investment products in line with the bancassurer’s strategy of meeting retirement needs follow. But for many bancassurers, non-life remains simply another financial product designed to increase share of wallet and customer loyalty. A pathfinding strategy for non-life products was launched in 1990 by Crédit Agricole, the largest French retail bank. As a decentralised co-operative with an extremely loyal customer base, Crédit Agricole had pioneered, with Crédit Mutuel, bancassurance in the life sector in the mid-1980s – through its subsidiary Predica – to become the second-largest life provider in France today.

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THE BANCASSURANCE PRODUCTS The launch of the group’s non-life subsidiary, Pacifica, in 1990 addressed the issues of concern to bancassurers that hesitated to invest heavily in non-life products. In particular, potential conflict with bank clients over insurance claims was addressed by a totally separate online channel for such claims which avoided any involvement with the client’s bank branch. Branch staff are motivated by the payment of a substantial portion of the gross profits from the relevant client policies. Management described the strategic concept as one combining the advantages of RBS’s Direct Line service with the convenience of a physical branch network. Today Pacifica ranks among the top ten non-life companies in France, with the goal of becoming one of the top five. The great bulk of sales are made to Crédit Agricole banking clients via individual voluntary agreements with each of the group’s 41 regional banks, representing a branch network of over 7,000 units. A full range of individual non-life products is offered – auto, household, private health care, legal protection, personal accident and a range of specialty vehicles. By 2006, Pacifica had 5.3 million policies outstanding and dealt with 3 million claims. Perhaps most importantly, the company has been consistently profitable since its start-up years, in contrast to the MSI (mutuels sans intermediaires) which dominate the French non-life market. In evaluating the attractiveness of all these products, the analyst is hampered by the lack of transparency regarding production and distribution margins as well as overall profitability. The report returns to this issue in Chapter 8 on the profitability of bancassurance. In addition, there are indications that product profitability varies widely from market to market. Thus, term insurance is seen as a low-margin, commodity product in the US while, in Europe, banks often regard it as one of their most attractive offerings.

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

The trend toward simple products in many sectors
Bancassurance today, both in name and heritage, reflects the discovery by banks in France in the 1980s that their simple, long-term, tax-favoured bank deposit was an attractive alternative to the traditional, more complex life insurance offering of the insurance sector. As will be discussed in more detail in Chapter 8, this simple, low-cost (because it is sold by semi-trained bank staff and not burdened by the margin on death benefits) investment appealed to savers looking for a long-term, low-cost, tax-favoured investment for their retirement. The result has been a marginalisation of the traditional life product as well as the
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION term life alternative, not only in France but also Italy, Spain and other EU markets. In France, for example, life insurance is seen as a ‘bank’ product, and term insurance volume has shrunk to a few percentage points of the overall sector. In other markets as well, the traditional insurance product has been simplified by the regulatory authorities to encourage long-term savings. Thus in recent years in Germany and the UK, where the traditional life product (in the form of endowment insurance) remains the dominant offering, the authorities have introduced low-cost, simple, tax-advantaged products such as the so-called Sandler products in the UK and Riester products in Germany. These not only offer much lower margins to the product manufacturer but, arguably, less need for the advice which is the mainstay of the traditional life sales forces – both negatives from the standpoint of the traditional insurers. Figure 5.1, taken from Davis International Banking Consultants (DIBC) research undertaken for Saloman Brothers, shows that banks are well placed to win a share of these simpler products.

Figure 5.1: Relationship between product complexity and distribution channel

Complex products, eg group life/pension plans, estate planning

Specialist advisors

Demanding products or demanding customers

Mobile sales force Increasing product complexity and level of service

Ordinary insurance products, eg unit-linked products

Bank staff (with one to two weeks of training)

Simple products, eg credit insurance, term insurance

Bank staff/tellers (with minimal training)

Source: DIBC, Saloman Brothers

Banks extend their insurance product range
In bancassurance countries like France, banks have moved from selling the long-term life product (essentially a term deposit with a life wrapper) to marketing simple term life and non-life products. The universal discovery of the banking community has been that simple retail products not requiring specialist advice can be sold effectively to a bank client base via direct mail, the internet and the branch system. In markets like Spain, the banks now sell life and nonlife products outside their branch system to non-bank clients. Figure 5.2 demonstrates how European banks have gained share in many nonlife markets since 1998. Having won a dominant share of the life business in markets like France and Portugal, banks have begun to build share – admittedly from a low base – in the non-life sector with auto, health care, travel, and buildings and contents insurance.
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THE BANCASSURANCE PRODUCTS
Figure 5.2: European banks’ share of non-life insurance*, 1998-2004 (%)
16% 14% Share of non-life insurance (%) 12% 10% 8% 6% 4% 2% 0% 1998 2004 10.0% 9.0% 7.0% 5.7% 4.1% 2.8% 5.7% 4.8% 11.0% UK France Portugal Belgium Austria 15.0%

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

Banks appear to have a competitive advantage as product range evolves
Equity and derivative-related products have won market share in the long-term savings sector in recent decades, and banks would appear to have led this product innovation. For example, historically the core life insurance product was based on an insurer guaranteeing a fixed income return based on its pooled investment fund. In contrast, today’s most popular long-term retail investment product is a bank-guaranteed deposit or annuity with an option on the equity markets.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION In addition, there is evidence that the traditional life sales forces have had difficulty in mastering to these new products.

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

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

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THE BANCASSURANCE PRODUCTS universally chosen the capital guaranteed product with an equity kicker, and the banks have also ridden this lucrative wave by providing their guarantees along with their perceived expertise. As emerging markets such as Asia-Pacific evolve, the same product trends seem to be gathering pace.

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Chapter 6

The bancassurance client – profile and trends

At the centre of bancassurance, of course, is the retail client. This chapter examines, to the extent of the available data, his/her profile as well as the trends in client demand over the past few decades.

CLIENT PROFILE
The starting point in the analysis of the client profile is segmentation: arraying the client base according to agreed and relevant criteria such as wealth/income, channel preference, stage in life-cycle, etc. This is particularly difficult for the traditional insurance company, in large part because of the barrier often represented by an independent broker or agent that effectively owns the client relationship, but also because of the relative – to banks – infrequency of contact. Banks all too often struggle to take a disciplined approach to priority segments, despite their advantages of contact and visibility. Figure 6.1 (on the following page) profiles the role of the client relationship in a bancassurance context. Thus banks benefit from more day-to-day contact, but the average product life span – and therefore ‘stickiness’ – may be longer for the insurer. A 2006 report by Capgemini found that 71% of insurance customers never or rarely (once a year) interact with their financial insurance distributor, while consumers interact their banks more than 200 times annually.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Figure 6.1: The role of insurance products in the overall client relationship
20 Life Accident 15 Average product life span Personal liability household Savings account

10 Savings plan

DDA

5

Car insurance

0 0 5 10 Low Frequency of (personal) contacts per year
Source: Citibank, Salomon Brothers

15

20

25

30

35

40 High

45

50

While there are many approaches to the segmentation issue, most banks and market observers break down retail clients by size of investible wealth. A common typology in the bancassurance world is the following: • up to roughly €50,000-100,000: mass market. Such a client can contribute to bank profits if provided with automated service and basic products; • €100,000-1 million: mass affluent and affluent, depending on the particular institution. These clients can be offered a higher level of service, including access to a call centre for advice as well as basic investment products; and • over €1 million: high net worth. These desirable clients can be offered a designated client adviser and an upscale service level. In addition, many banks also segment their retail clients on the basis of common needs and interests – the so-called affinity segmentation. Thus, members of a profession (such as doctors) or an interest group (such as a labour union) can be offered a package of eight to ten products at an advantageous price and tailored to their needs. A bancassurance offering might well be part of such a package. In the context of bancassurance, the mass-market or mass-affluent segments are well suited to the typical bancassurance product: standard long-term investments such as life insurance and bank deposits, mortgage loans with protection in the form of credit life, and standard non-life products. The typical branch salesperson with perhaps several weeks of training, supported with product
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THE BANCASSURANCE CLIENT – PROFILE AND TRENDS brochures, should be able to offer the necessary level of service and advice regardless of the client’s level of wealth. Problems arise, however, when a certain level of expert advice is required. The typical branch salesperson has to be familiar with perhaps several hundred different products, and the bancassurance array must also compete with the interruptions and pressure of other daily priorities. The choice of alternative pension products, gathering data for regulatory purposes in a fact-find and an understanding of the securities markets all call for both the time and expertise away from the daily routine of the bank branch. Most banks address this problem by using specialist bank staff, or experts from a partner insurance company (who are assigned to provide support for insurance and other investment products to a number of branches). The theory is that a branch generalist, confronted by a problem requiring specialist advice, makes an appointment with the relevant specialist. In practice, however, the handover is often difficult to make, and the client goes elsewhere or does not pursue the dialogue. For the affluent or high net worth individual with access to advice from an existing relationship, such as a private banking adviser or broker, the solution is to call on that broker or financial adviser, who has the expertise, the time and, possibly, the solution to the client’s problem. Thus in the UK and Germany, these clients tend to rely for advice on IFAs or so-called structured sales forces, rather than engage in a dialogue with bank branch personnel. A particular problem is the possible mismatch between bank and insurance clients. One of the major issues faced by US banks that have bought an independent broker is that bancassurance cross-selling is constrained by the difference in wealth and sophistication between their clients and those of the acquired broker. Another approach to segmentation and cross-selling in bancassurance is to measure product penetration for key client segments. In the case study on KBC in Chapter 10, the report discusses this bancassurer’s segmentation on the basis of the number of banking and insurance products sold to a given priority client. Bancassurance leaders such as Fortis and Crédit Agricole achieve life insurance client penetration rates of 25-35%, a target to which many others aspire. In the realm of credit life sold in connection with a credit product, penetration rates with retail borrowers can easily exceed 80%. Limited data exist in the public domain on the relative size of bancassurance client segments, but a consultant study provided by one of the interviewees in a major EU market indicates that the mass market is only a fraction of the absolute size of both affluent and high net worth markets. Thus, banks dominate the mass market with 94% of its household financial assets, but have a much smaller share of the other two markets.

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

KEY TRENDS IN CUSTOMER BEHAVIOUR – AND THE RESPONSE TO THESE TRENDS
On the basis of the limited statistical evidence on bancassurance customer behaviour, the following trends – and responses to the trends – stand out.

The demand from the upscale customers for product choice in financial solutions has become even clearer
The swelling wave of demand for open architecture has swept over the bancassurance world as well as the fund management business. In their search for performance, such clients demand a choice of bancassurance solutions as well as straightforward investment alternatives. Brokers in markets like the UK and Germany sustain their client relationships through their perceived independence in an open architecture context – even though they support themselves largely from the sale of products they recommend. In the UK, the former polarisation has now been replaced by association with a limited number of product providers – a happy solution for brokers previously either tied to one provider or obliged to understand the offerings of all the providers in the market.

Mis-selling issues
The repeated examples of mis-selling – selling a product that is not appropriate for the client or not sold in a transparent fashion – has led regulators in markets like the US and UK to demand greater transparency and regulation of selling practices. Bancassurance products – in particular endowment mortgages and PPI – have figured prominently on the list of such problems. In the UK, the FSA has given top priority to what it terms “treating customers fairly” by demanding that UK-based financial institutions embed best practice in selling practices, transparency and product selection.

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

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THE BANCASSURANCE CLIENT – PROFILE AND TRENDS

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

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Chapter 7

Competitive distribution channels

Bancassurance distribution cannot be evaluated in a vacuum. This chapter first examines the alternative channels with which bancassurance competes to determine the relative advantages and disadvantages of each major channel. The report then reviews how bancassurance has fared against these channels in the three major regional markets in the report survey. Finally, it reviews the issues involved in multichannel distribution and the competitive response by insurers to bank distribution In practice, the choice of channels in a given market is driven by the complex interaction of a number of variables: regulation and taxation, product profile and complexity, the brand strength of major providers and the local culture. As discussed below, both banks and insurers make use of multiple channels in a given market as well as use different channels for different markets. One of the key issues for bancassurers is the relative importance of the distribution function versus product manufacture. As their business model evolves, the relative priority of the two functions often changes, and bancassurers often term themselves ‘product providers’ or ‘distributors’. Relative product profitability, capital requirements, client needs, the strength of the distribution network and the availability of alternative providers are variables in this strategic choice. Chapter 11 of this report discusses the decision of banks in the US and Europe to divest themselves of both life and non-life manufacture in favour of buying back the product.

PROFILE OF THE ALTERNATIVE CHANNELS
This chapter begins with a summary of the competitive strengths and weaknesses of the principal alternative channels.

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

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

Brokers
Brokers – essentially firms or individuals selling a wide range of insurance products – have experienced mixed results in the major markets in the face of bancassurance. Remunerated largely by commissions which appear to be little changed over the years, brokers are highly motivated individuals who generally have earned the trust of their clients and are widely perceived to ‘own’ the client relationship. In contrast, insurance carriers have suffered from the lack of direct relationships with their client base and the information that proceeds from this relationship. Brokers understandably thus go to great lengths to protect their client relationships. As indicated above, they have benefited from the universal trend toward choice, in particular when advice is needed because of product complexity or regulatory requirements. In so-called ‘broker’ markets like the UK and the Netherlands,

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COMPETITIVE DISTRIBUTION CHANNELS the perceived independence of the broker has been a major competitive advantage – despite the fact that he is usually remunerated by the product provider. In the US, access to these client relationships has been an important objective in the hundreds of broker acquisitions by US banks. The Wells Fargo case study in Chapter 10 highlights the value of broker relationships. In several European markets, a number of large brokerage firms focusing on investment products have won market share on the basis of their relationships with upscale clients, perceived independence and the ability to provide financial advice across a wide range of products. Life insurance is only one of the products offered, and the broker is perceived to be able to offer the most appropriate long-term investment solution for his client. Case studies of success in this segment are St. James’s Place Capital in the UK, Acta in Norway, Deutsche Vermögensberatung (DVAG) and Allgemeiner Wirtschaftsdienst (AWD) in Germany, and Fideuram in Italy. The model for many of these brokerages involves extensive training, a focus on selected client segments, significant upside earnings potential and a rigorous selection of sales personnel. In markets like Germany, they are known as structured sales forces – a pyramidal organisation in which the superior levels of the pyramid receive a share of the commission of the lower levels, thus providing extra leverage and rewards to the upper echelons. In Italy, such sales forces are known as promotori finanziarie. Usually owned by financial institutions, they are also used to tap the more affluent client segments. Such a model enables the brokerage to attract the most highly motivated and well-connected sales personnel, often providing levels of commission earnings which banks are unwilling or unable to offer within their pay scales. A major challenge for the management of brokers is, on the one hand, to retain the brokerage’s top talent in the face of competitive offers and provide new products for them to sell, while on the other to manage the model in a disciplined fashion to prevent mis-selling.

Other non-bancassurance channels
The internet and other direct channels have become an attractive channel for the sale of simple non-life products such as auto and home insurance. The role model for such direct marketing is Direct Line, now owned by RBS, which in the 1990s won a dominant market share in the UK auto insurance sector by offering superior service as well as competitive pricing. On the other hand, life insurance has not been a particularly successful product for this channel due to the perceived need for advice and an offline medical examination. Direct banks have become a significant provider of life, health and property and casualty (P&C) products. Table 7.1 lists 15 direct banks in the Canadian and UK
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Table 7.1: Profits and product offerings for direct banks in Canada and the UK, 2003
Current a/c Savings a/c Loans Credit cards Mortgages Mutual funds Life Health P&C Pensions Brokerage services

38
✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ 49.9 16.5 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔

Direct bank

Launched

Profit/ (loss)1 (£ m)

1997

173.0

1989 1995

✔ ✔

1997 1997 1998 1998 1997 2000 1996 1998 2000

23.0 22.0 4.6 31.0 profit2 (15.0) (30.0) (34.0) (53.0)

Tesco Personal Finance First Direct Scottish Widows Bank The One Account Sainsbury’s Bank Standard Life Direct Line Rescue ING Direct Canada Cahoot Goldfish Egg Intelligent Finance Financial President’s Choice ING Direct UK Citizens Bank of Canada

1998 2003 1997

(104.0) loss2 loss2

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

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

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Source: Financial Services Distribution

COMPETITIVE DISTRIBUTION CHANNELS markets, of which six sell life, four health and nine P&C offerings in addition to deposit and lending products. A global study of the insurance sector by consultants Capgemini in 2006 concluded that the internet is a major threat to other distribution channels such as bancassurance. While overall only 20% of the customers surveyed cite the internet as their primary channel for buying insurance, in the UK the preference in the life sector is a remarkable 46% and for non-life 30%. In contrast, in the US only 12-13% of those surveyed prefer this channel for life and non-life purchases. While national preferences clearly differ, the trend towards direct selling seems clear. Post offices, which are often lumped together with bank branches for statistical purposes, have been successful in several instances in marketing simple insurance products despite the widespread view that the sector’s potential for crossselling has not been fully exploited. A particular case study of success is the Italian Post Office which, under the leadership of the current CEO of Banca Intesa, won a remarkable 10% of the Italian life sector in a few years. Other success stories include La Poste in France, Deutsche Post and the Irish An Post. The current privatisation of Japan Post, the country’s largest financial institution, is thus of great strategic interest. Figure 7.1 (on the following page) provides an indication of the role played by financial services in a number of European markets. Italy leads the league with an impressive 42% of total post office revenues. A number of vehicles are used by post offices to leverage their vast distribution networks: directly owned banks (Deutsche Postbank), joint ventures with banks (An Post in Ireland) and white-labelling of third-party products (Poste Italiane). In 2006, Japan’s largest bank was formed with the break-up of the country’s post office: Yucho Bank will have 233 branches and operate through the nation’s 24,000 post offices.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Figure 7.1: Share of revenues by postal services associated with financial services, 2006 (%)
100% 90% 80% Share of revenues (%) 70% 60% 50% 40% 30% 20% 10% 0% Italy Hungary Poland France Switzerland Germany Belgium Financial services
Source: Financial Services Distribution, La Poste

91% 75% 77% 80% 83%

72% 58% 42% 28%

25%

23%

20%

17% 9%

Mail and other services

Supermarkets and other retailers offer the bancassurer the advantage of strong brands and large customer bases. In the UK, Tesco and Sainsbury have been successful in selling simple, low-cost auto and homeowners insurance via their direct banking arms. Other success stories are the supermarket chain Pic ‘n Pay (in South Africa) and Corte Ingles (in Spain), while Virgin has had success with basic investment products.

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

Europe
While retail banks in many European markets had traditionally sold life and non-life products as agents, today’s bancassurance model originated in Europe in the mid-1980s in France. Bancassurance now accounts for an estimated onethird of the overall European retail life insurance market and perhaps 5-10% of the non-life sector. Europe is often characterised as having two distinct models – the bank-dominated countries like France and Spain, where banks control at least half of the life market, and the broker model, which dominates in the UK and the Netherlands. The database on Germany is sparse, but it would appear that all three channels – traditional agents and employees, brokers and banks – have significant shares of the market.

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COMPETITIVE DISTRIBUTION CHANNELS Until the early 1980s, agents and company employees accounted for roughly 6080% of the typical national market. Figure 7.2 depicts the decline of combined agency and employee distribution in selected European markets since 1998, a date when significant attrition had already taken place in these countries.

Figure 7.2: The declining role of insurance company employees and agents in selected European life insurance markets, 1998-2004 (%)
50% 45% 40% Total new life sales (%) 35% 30% 25% 20% 15% 10% 5% 0% France
Source: CEA – latest available data

44.0%

31.2% 27.0% 23.0%

33.3%

24.8%

1998 2004

Italy

Austria

More specifically, there has been massive attrition of agents and company salesmen in markets like France, which have been particularly impacted by bancassurance. Figure 7.3 plots the 42% fall in the number of tied agents in France over the period from 1985 to 2003.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Figure 7.3: Number of tied agents in France, 1985-2003
25,000 22,600 20,000 16,280 No. of tied agents 15,050 15,000 16,780 15,700 14,450 10,000 13,540 13,590 13,200

5,000

0 1985 1996 1997 1998 1999 2000 2001 2002 2003
Source: DIBC – latest available data

One question remains: what has been the fate of the thousands of company employees and agents displaced by bancassurance? This report was unable to find any reliable data, but interviewees believe that many, if not most, of them converted to brokerage status by broadening their range of carriers or joined bancassurers as specialist salesmen. Overall, the brokerage community has sustained, if not increased, its life insurance share in many European markets where data are available. Figure 7.4 shows how this share has increased in markets like the UK, France and Austria since 1998, while declining in Belgium.

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COMPETITIVE DISTRIBUTION CHANNELS
Figure 7.4: The evolution of the share of life insurance broking in selected European markets, 1998-2004 (%)
70% Total life insurance sold by channel (%) 60% 50% 40% 30% 20% 10% 0% France
Source: CEA – latest available data

66.2% 63.1%

35.4% 27.2% 17.2% 15.6% 8.0% 10.0%

1998 2004

UK

Austria

Belgium

In summary, a Euronet survey for the European market as a whole indicates that the share of brokerage distribution in the life sector has increased marginally over the years between 1990 and 2000. In contrast, bank distribution has soared from roughly 10% to 30% of the total retail market. Figure 7.5 depicts this erosion of traditional life distribution channels.

Figure 7.5: Distribution of life insurance in Europe, 1990-2000 (%)
70% 61% Distribution of life insurance sold (%) 60% 50% 40% 30% 20% 10% 0% Tied Agents
Source: Euronet – latest available data

39% 29% 31% 30% 1990 2000

10%

IFAs

Banks

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION In broad terms, the European distribution model has moved from proprietary distribution, with an exclusive link between insurer and policyholder, to a second stage of tied distribution, and now to a third-party model with multiple, independent relationships between the customer, provider and distributor. In contrast to the US and Asia-Pacific model, most bancassurance relationships are exclusive – either between a captive insurer and the stockholding bank, or a joint venture between independent provider and distributor with some degree of exclusivity for the relevant market. Subsequent chapters of this report will explore the pros and cons of exclusivity and distributor by multiple bank channels.

Asia-Pacific
The rapidly evolving Asia-Pacific region has recently witnessed significant bancassurance inroads into the traditional employee/agency domination of many national markets. A study by Swiss Re in 2002, summarised in Table 7.2 (below), confirms that such channels were the main sales conduit with at least 75% of life sales at the end of the last century. Yet the bancassurance channel was not allowed then in key markets like South Korea and the Philippines, and in recent years it has probably increased from a low base in Japan, India and other countries. The more than 20% penetration at that time in major Chinese cities, as well as 15-20% in the more mature Hong Kong and Singapore markets, is some indication of the potential as bank distribution takes hold.

Table 7.2: Life insurance premiums by distribution channels for individual AsiaPacific markets
Year Career agency and direct sales force
China Hong Kong India Indonesia Japan Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam
Source: Swiss Re

Brokers marketing

Direct Bancassurance

Others

2000 1998 1998 1998 1998 1998 -

main channel main channel main channel main channel main channel 86% 75% 77% main channel 93% 97% main channel

insignificant insignificant effectively prohibited about 1% insignificant 0.6% 1.8% insignificant < 1% 4.4% < 0.5% small

insignificant < 1% insignificant insignificant < 1% 2% 1% < 0.5% insignificant 1% insignificant 0%

> 20% in major cities 15.1% < 5% negligible < 1% 6% not allowed 26% not allowed 1% 2% < 1%

4% 3% 1% 2% -

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COMPETITIVE DISTRIBUTION CHANNELS In Asia-Pacific, as indicated in Table 7.2, the brokerage sector to date has remained a marginal player in the face of the traditional company and agency sales forces and the growing strength of the bancassurance competitors. For domestic and foreign newcomers to the Asia-Pacific insurance market, bank distribution is a much cheaper and faster means of building market share than recruiting, training and positioning an agency sales force. On the other hand, given the difficulty in obtaining exclusive sales arrangements with local banks, some newcomers have established their own greenfield sales forces.

The US
Insurance distribution in the US is widely regarded as dominated by agents – both independent and tied to an insurance provider. Figure 7.6 (below) provides the market share data for 2006, when independent agents captured 54% of the life market against 35% for tied agents. Banks for that period accounted for only 2% of the total.

Figure 7.6: US life insurance distribution is dominated by agents, 2006 (%)
Others 9% Banks 2%

Tied agent 35%

Independent agent 54%

Source: LIMRA International

Traditionally, individual buyers of insurance have relied on their local agent for their insurance needs. This close personal relationship has survived the arrival of banks as distributors; it would appear that bank ownership of insurance brokers has not altered that relationship. In the important variable annuity sector, however, banks have won a 17% market share. For this key investment product, their principal competitor is the independent financial planner, whose market share has increased to 41% in 2005 against only 28% in 2001. Figure 7.7 profiles this evolution.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Figure 7.7: US variable annuity sales dominated by independent financial planners, 2001-2005 (%)
100% 90% Share of variable annuity market (%) 80% 38% 70% 60% 50% 40% 30% 20% 30% 10% 0% 2001 2002 2003 2004 2005 30% 39% 27% 27%
(3.2%) CAGR 2001-2005

39% 28% 29% 17% 12% 13% 17%

41%

+10.1%

Planners Banks Brokers 17%
+10.0%

Source: VARDS, AXA – latest available data

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

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COMPETITIVE DISTRIBUTION CHANNELS The ideal strategic solution for multiple channel bancassurers is to match products and clients with channels. Thus, low-cost, simple products like auto and homeowners in non-life, and simple investment products in the life arena, could be sold most efficiently via direct channels. At the other end of the product spectrum, complex products requiring advice are usually the province of brokers or specialists operating in the bank branch network. This product/channel interface is overlaid with the client dimension: upscale clients should be offered a higher service level across the relationship. In the developed bancassurance model in Europe, banks with multiple channels have generally managed the bank and other channels separately in each national market. Different compensation structures, cultures and channel economics lie behind the separation. Yet banks like KBC, as described in the case study in Chapter 10, have made significant efforts to bring the two sales forces together both in physical and organisational terms. Another solution is to reorganise the two channels on the basis of strategic priority. Thus when two Swedish banks acquired major life and pension providers, each transferred sales staff from the acquired insurer to bolster their retail branch network’s marketing capability. In addition, most major European bancassurers have taken a pragmatic approach to channel selection in different markets. Thus, global competitors like ING Group use brokers in the home market, bank distribution in AsiaPacific and its own force of agents in CEE. For insurers confronted with bank competition and determined to remain independent, the response has been almost universal: employ all possible channels to meet the challenge. Chapter 3 summarised how some banks have set up or acquired small banks so as to be able to offer standard banking products to their insurance clients. For those insurers not prepared to invest in the banking business, alliances with existing retail banking networks as well as the usual array of employee, agency and broker channels are exploited. The case studies in Chapter 10 examine how bancassurers like Aviva, CNP and Fortis have successfully built profitable bank distribution in a variety of markets.

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Chapter 8

The profit profile

Having examined the key dimensions of bancassurance, the report turns now to the database on bancassurance profitability to address a number of issues. Is bancassurance a cheaper channel than the alternatives? How does its profitability compare with the pure banking and insurance retail businesses? Which bancassurance products are more profitable than others? And finally, if bancassurance is as relatively inexpensive as most observers believe, is this profitability reflected in pricing to benefit the client or, on the contrary, simply absorbed into the bancassurer’s profits? Sadly, the database provides relatively few answers to these fundamental questions. While the profitability of banking products and institutions is relatively transparent, comparable numbers in the insurance sector are rarely available, and the bancassurance sector seems to follow the example set by the insurers. The database in this chapter thus consists largely of consultant studies, presumably based on the consultants’ research, and the data published by a handful of trade associations and leading bancassurers. Comparability is made even more difficult by the use of embedded value accounting in Europe and other markets, with comparable data on a bank accounting basis rarely available. This chapter first examines the key issue of the relative cost of the bancassurance channel. The available data on relative product and functional profitability are summarised next, followed by insights into bancassurance pricing. Finally, the report provides some indications of overall profitability. Most of this data are based on experience in the relatively mature European market, whose database is relatively well established, as opposed to the US and Asia-Pacific sectors.

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

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

Figure 8.1: Banks have higher productivity than traditional agents

10 No. of cases 10

3 No. of appointments 5

1 No. of closes 2.5

Salaried agents with warm leads from bank branches
Conversion rate Traditional insurance agent: 10% Salaried agent with warm leads from bank branches: 25%

Traditional insurance agent

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, estimated at 33% of annual premium equivalent (APE) against 42% for independent agents and 78% for a direct sales force, has been a major driver for the bank channel in that market. Another consultant study by McKinsey & Co, shown in
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THE PROFIT PROFILE Figure 8.2 (below), fixes the cost of bank distribution at 60% of the first year premium against 152% for career agents, and is undercut only by direct selling.

Figure 8.2: New distribution channels are much lower-cost
Percentage of first-year premiums (%)
Career 152%

Independent brokers

116%

Worksite

65%

Bank*

60%

Direct**

20%

Online

10%

* Ordinary life acquisition cost ** UK experience Source: McKinsey & Co (Submissions to the Canadian government task force, 2003 – latest available data)

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

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Figure 8.3: Bancassurance in Italy has succeeded because of a cost advantage
Cost ratio by channel (C$ bn)

19.9

5.4

14.5

3.0

8.8

14.5 11.5

3.0 5.8

Agents

Financial services Commissions General expenses

Banks

New life business* (C$ bn and %)
100% = C$1.3bn
4.1 17.7 52.9

100% = C$2.8bn

76.2

10.4

35.7

1990

1995

* First-year premiums + increases of single premiums for banks; first-year premiums + 1/10 of single premium for other channels. Source: Associazione nazional fra le imprese assicuratrici (ANIA), Isvap, Il Giornale delle Assicurazioni, McKinsey & Co – no subsequent data available

More recently, research in the UK in 2002 by the consulting firm Mercer Oliver Wyman for ABI (the Association of British Insurers) found that bancassurance was the lowest cost of the principal delivery channels for regulated, long-term investment products of any of the major channels. Thus, taking into consideration the time per sale, including time for unsuccessful leads, a bancassurance sale required only 6.8 hours against 13 hours for an independent adviser and 11 hours for a direct sales force.

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THE PROFIT PROFILE In summary, it would appear from the evidence of these studies and the interviews conducted for this report that banks may benefit from an overall potential cost advantage of perhaps 5-10% of premium income against the agency sales force. While there is thus significant evidence of the cost advantages of bancassurance, the author’s insurance sources raise a number of questions regarding the validity of the data provided above. They acknowledge the advantages of a loyal client base that is open to offers from its bank, but these sources point out that much depends on the product chosen and the bank’s accounting policies. Much more effort is required to sell a product requiring advice, such as a personal pension, which happens to be the mainstay of the broker and agency channels. In contrast, ‘tick-the-box’ cross-sales of credit life or a pure investment product, which are the province of the banks, require much less time and skill. And while the marginal cost of a bank branch sale may be nominal, if the training, systems and other overhead costs of bancassurance are fully charged, any cost advantage may disappear.

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

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Figure 8.4: Relative profitability of selected products
Spreads (basis points)

Fixed annuities

75-100

Wholelife

50-60

Variable annuities

30-50

Universal life

25

Variable life

20

Term

5

Source: McKinsey & Co (Submissions to the Canadian government task force, 2003 – latest available data)

As indicated above, the relative ease with which a bank sales force can cross-sell an insurance product can be a major competitive advantage. Thus, term life may, in some markets, be a low-margin product, but a bank providing creditor life in connection with a new consumer loan may actually have a zero incremental selling cost. As Figure 8.5 indicates, the distribution margin on both life and non-life insurance can be substantial. Thus a bancassurer with an efficient sales and service process can achieve substantial margins on products which are associated with a loan or other banking service. The discussion of mis-selling in Chapter 4 pointed out that combined bank selling and profit margins on PPI could exceed 50% in the UK.

Figure 8.5: Relative share of production and distribution costs of life and non-life products (%)
Life insurance
Distribution

Life insurance

P&C insurance
Distribution

P&C insurance

35% 65%

48%

52%
Production

Production

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

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BANCASSURANCE PRICING
Whatever cost advantages bancassurers may have, there is little evidence today of their products selling at a discount to that of their traditional insurance peers. A survey in 2005 by DIBC in Europe found that several pioneers in the late 1980s and early 1990s did indeed offer a price advantage under the insurers’ life offerings. In Germany, for example, Deutsche Bank’s new captive life company, Deutsche Leben, amortised the commission element of the policy over the life of the policy, thus both increasing the funds available for investment and lowering the cost to the client in the early years. In Sweden, PK Banken’s (now Nordea) pioneering captive Livea did not charge the traditional 3% sales load on its flexible, low-cost pension product designed for the mass market. And in France, Crédit Agricole’s life captive Predica initially charged a sales fee of only 3% for its single premium life product against one of 18-22% for its life rivals. In the current European market, however, this research uncovered no significant difference in pricing between bancassurers and traditional life carriers. There is in effect a market price for each national market and product regardless of provider. Whether this reflects the traditional insurers lowering their prices to meet bancassurance competition, or the latter raising theirs under the former’s price umbrella, is impossible to determine. What is clear, however, is that bancassurers in Europe are expanding their product array with an emphasis on the higher-margin life and non-life products. In addition, banks in markets like Spain are selling such products to third-party, non-bank clients based on their lower manufacturing costs and strong brand name. At the same time, margins on the traditional tax-advantaged pure investment products are being eroded by competition. Protection products, especially those sold in connection with a bank loan, have a high strategic priority for most European banks.

ACTUAL PROFITABILITY DATA
As indicated above, even in the mature European market the database on actual bancassurance profitability – as opposed to consultants’ estimates – is quite meagre. On the other hand, several leading bancassurers – not surprisingly, perhaps, those with a good story to tell! – have not only revealed current key profit numbers in their investor reporting but also compared them with distribution alternatives. Table 8.1 (on the following page) provides data from two such bancassurance leaders which are profiled in Chapter 10 – Fortis (in its Belgian home market) and Aviva (for its global business) – during the period 2005-2006. Margins (on an embedded value basis) are substantially higher for the bancassurance
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION channel for both groups. More importantly, the internal rate of return (IRR) for Fortis’ bancassurance channel in Belgium, at 20%, is roughly double that of broker distribution.

Table 8.1: Recent bancassurance profitability comparisons – Fortis and Aviva (%)
Fortis Belgium (2005 data) Bancassurance (formerly Fortis Bank Insurance)
Margin (VANB/PVNBP*) IRR 4.16% 20.20%

Broker channel (formerly Fortis AG)

1.82% 9.80%

Aviva (2006 data) Bancassurance
Margin 2.70%

Non-bancassurance
1.50%

* value added by new business divided by present value of new business premiums. Source: company data

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

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Chapter 9

The key national markets

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

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Figure 9.1: Evolution of three major regional life markets, 1985-2004 (%)
1985 2004

Others, 4.1%

Europe, 25.9% North America, 36.0%

Others, 4.4% Europe, 36.9%

North America, 50.3%

Asia-Pacific, 19.6%

Asia-Pacific, 22.7%

Note: Europe includes CEE. Data may not sum due to rounding Source: Swiss Re – latest available data

Over this 20-year period since the effective birth of the bancassurance phenomenon, both Europe and Asia-Pacific have won share of the life market at the expense of the US, which has fallen from 50% to 36% of the total. As discussed below, bancassurance has taken different forms in each of these three markets, and the report will focus on the lessons of this development for the future. In terms of bancassurance penetration, however, the profile is a different one. Bancassurance is estimated by various sources to account for perhaps 35% of the European market, 12% of Asia-Pacific, and only 1-2% of US life insurance sales. The preference of this report has thus been to provide an in-depth analysis of what it regards as significant national markets rather than attempt to cover all. For readers interested in such broader coverage, VRL KnowledgeBank’s earlier study, Bancassurance in the 21st century, should be useful. The report begins with Europe, where bancassurance first evolved.

EUROPE

Market profile
The European bancassurance model is characterised by relative concentration of bank and insurance ownership, integration of product manufacture and distribution, and a bancassurance product that is a tax-favoured, simple investment product which is increasingly sold via bank branches.

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

Table 9.1: Leading European bank-insurance mergers,1980-2006
Dominant banks
KBC (Kredietbank & CERA) Dexia Rabobank SNS SEB Handelsbanken Danske Bank Nordea (Unidanmark) Nordea (CBK) Sparebanken NOR DnB Credit Suisse Deutsche Bank Lloyds Bank Lloyds TSB Abbey National Halifax

Insurance partners
ABB DVV Insurance Interpolis Reaal Trygg-Hansa SPP Danica Tryg Baltica Vesta Gjensidige Vital Winterthur Deutscher Herold Abbey Life Scottish Widows Scottish Mutual Scottish Provident Clerical Medical

Country
Belgium Belgium Netherlands Netherlands Sweden Sweden Denmark Denmark Norway Norway Norway Switzerland Germany UK UK UK UK UK

Dominant insurers
Fortis (Groupe AG) Fortis (Amev) ING (Nationale-Nederlanden) Sampo Swiss Life Allianz AMB GAN AXA (UAP) AXA Irish Life
Source: DIBC

Bank partners
ASLK-CGER Generale Bank VSB NMB Postbank Leonia Banca del Gottardo Dresdner Bank BfG CIC Banque Worms Banque Directe Irish Permanent

Country
Belgium Belgium Netherlands Netherlands Finland Switzerland Germany Germany France France France Ireland

As a result, as indicated below in the discussion of individual markets, in a typical developed European market a significant number of leaders in the life sector are bancassurers – groups with both a banking and insurance activity.

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

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

Table 9.2: Life insurance distribution channels in major European countries, 2004 (%)
Country Banks* Agents (tied/ multi-tied) Brokers/ IFAs Insurance company employees
15% 9% N/A 13% 26% 28%

Other

Spain France UK Germany Italy Netherlands Sweden

69% 62% 18% 25% 68% 19% 45%

15% 8% 4% 34% 19% 55% -

6% 10% 61% 32% 1% 19%

9% 5% 8% N/A 8%

Note: * Including other networks such as post offices Figures may not sum due to rounding Source: CEA, Bankhall, Tillinghast, DIBC – latest available data

Thus, roughly two-thirds of retail life distribution in Spain, France and Italy is accounted for by bank distribution. While the banks’ share is less than 25% in the UK and Germany, recent developments, which will be discussed below, indicate the likelihood of future market share gains in these two markets.

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France
The spiritual home of bancassurance, France is the largest bancassurance market in Europe and the second most important life insurance sector in the EU. In the early 1980s, two French mutual banks – Crédit Mutuel and Crédit Agricole – realised that their tax-favoured term bank deposit was an attractive alternative to the traditional high-cost whole life policy. Thus began a major shift – often involving a transfer from custody accounts already held in the banks – to what is known today as épargne assurance, which is the dominant life product today in France. Essentially a bank deposit with a modest life wrapper, this permitted banks to market a wider range of equity-linked term insurance products also benefiting from a tax preference. At the same time, the traditional whole life product has been marginalised to a few percent of total life sales. The result has been an increase in life market share for bank distribution from 39% in 1990 to the current level of about 62%. As indicated by Figure 9.2, this latter share has remained roughly unchanged since 1999, an indication of the success of other channels in preventing further attrition.

Figure 9.2: Sales of life insurance by channel in France, 1990-2005 (%)
100% 90% Sales of retail life insurance (%) 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 Banks Agents 1995 Brokers 1996 1997 1998 1999 2000 2001 2002 2005* Insurance company employees Direct channels All others 39 56 59 61 59 60 61 60 61 62 11 18 28 19 7 12 4 6 6 17 7 11 6 16 7 10 6 17 8 10 5 17 9 9 6 16 9 8 6 17 9 8 6 16 9 8 38

* Change in data presentation as all non-bank channels are combined Source: Fédération Française des Sociétés d'Assurances (FFSA)

The league table of French life companies provided in Table 9.3 reflects this transformation. Of the top six life insurers, three are banks (Crédit Agricole, BNP Paribas and Société Générale) and the largest (CNP) is heavily dependent on bank distribution.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Table 9.3: Top ten French life insurers, 2005 (€ bn)
Insurer Premium income (€ bn)
21.4 18.8 13.2 9.6 9.0 7.7 6.2 5.9 5.8 5.2

CNP Assurances Crédit Agricole AXA Generali France BNP Paribas Société Générale AGF ACM Groupama Aviva France
Source: FFSA

The substantial benefit of deductibility from income tax of premiums paid was removed in the 1990s in favour of exemption from inheritance tax. On the other hand, newer products such as the plan d'épargne retraite populaire (PERP) have the reverse benefit: premium deductibility but taxation on maturity. In the late 1990s, the banks moved aggressively into selling protection or credit life products as part of retail lending packages. Thus between 1998 and 2002, the banks increased their share of the term life market from 4.5% to 5.1% at the expense of the traditional insurers. An overwhelming 93% of life premium income for the banks in 2002 was derived from pure savings/investment products. France’s largest life insurer, CNP, markets life insurance largely through savings bank and postal offices, while the sales of the three major banks are made primarily through their own branch networks. In recent years, both banks and insurers have targeted upscale clients with dedicated teams of financial advisers. In addition, a recent trend has been the appearance of independent financial adviser networks along the lines of the IFAs in the UK. These networks emphasise their independence by offering multiple brands and a wide range of investment and protection products.

Italy
Having imported the French model, often through distribution agreements with French bancassurers, banks began to sell life insurance only in 1990. As Table 9.4 (on the following page) shows, since then the share of banks has increased steadily to roughly 59-60% in recent years.

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Table 9.4: Evolution of Italian life insurance distribution channels, 2000-2005 (%)
Channels 2000
Banks Agents Direct sales Financial advisers Brokers 54.1 27.0 8.6 9.4 0.9

2001
61.2 17.9 8.8 11.2 0.9

Market share (%) 2002 2003
56.3 19.6 8.9 14.3 0.9 58.9 18.3 10.9 11.2 0.7

2004
58.6 18.6 12.6 9.5 0.7

2005
60.7 18.2 12.4 7.6 1.1

Note: Figures may not sum due to rounding. Source: ANIA

Unlike the case in France where the banks have manufactured their own investment products, the Italian pattern is one of joint ventures with domestic or foreign insurers with whom the roughly 7% sales load is split. The core life, or investment, product, was originally tax-favoured, but this relative advantage has been continually reduced in recent years as Italy moves towards tax-favoured personal pensions. The banks profited from the equity boom of the 1990s to leverage their equity expertise through the unit-linked product. Since the equity market peaked in 2000, they have been able to sell alternative investment products, in particular the guaranteed capital note with an option on equity indices, which provides a most attractive margin to the banks. The result is that the life product is widely regarded as only one of a number of such long-term investment vehicles whose appeal depends on current tax or other advantages. Figure 9.3 (on the following page) provides one of the rare data sources in Europe on distribution channels by individual product. It shows how banks have dominated the unit-linked and capitalisation sectors during a recent period with their similarity to bank products, in contrast to the much smaller share of the health care and individual pension product sectors, which are dominated by agents.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION
Figure 9.3: Bank penetration of individual life products in Italy, 1998-2001 (%)
€19.4m
100% 90% 80% 70% Penteration (%) 60% 50% 40% 30% 20% 10% 0% Whole life Unit-linked Long-term Capitalisation health care Banks
Source: ANIA – no comparable subsequent data available

€23.6m

€0.01m

€3.2m

€0.1m

N/A

Pension funds

Individual pensions

Agents

Other

Spain
The Spanish banking sector, led by the two dominant players BBVA and SCH, has won a roughly 60% share of the life market, a proportion which has remained roughly constant since the mid-1990s. Banks have benefited in Spain from particularly high levels of client trust, with only marginal penetration by the brokerage community. Of the top four life insurance providers, three (the Caixa savings bank group, BBVA and SCH) are banks, and the fourth, Mapfre, has a joint distribution venture with the Caja Madrid. Insurance agents are primarily active in the non-life sector, where they hold a roughly 50% market share against perhaps 22% in life products. Since the initial entry via the tax-advantaged single premium life product in the early 1990s, the life product has been grouped by the banks along with mutual funds and personal pensions as one part of the generic category of ‘customer funds’. Individual segments of this category are a function of tax and other features. Thus, one major bank, whose core expertise is in mutual funds, only promotes life insurance if it can offer clear advantages over that equivalent mutual fund product. A study by Morgan Consulting profiles the evolution of these three core investment products over the years between 1993 and 2002. Thus, life insurance has shown a steady increase, while the much larger mutual fund sector peaked in 1999. Figure 9.4 plots this evolution.

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Figure 9.4: Evolution of life insurance and other investment products in Spain, 1993-2002 (€ 000s)
250,000

200,000 Product sales (€ 000s)

150,000

100,000

50,000

0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Mutual funds
Source: Morgan Consulting

Life insurance

Pension funds

As in Italy, the recent boom in the Spanish mortgage sector has focused attention on the high margins in credit life. For example, BBVA has long sold pure protection in the form of term life as a standalone product as well as to brokers as an element in the pension packages they market to group policies. Another bank, which only sells 5% of the credit life policies to its mortgage clients, plans to increase this ratio to 80%. Interviews conducted for this report indicate that margins on credit life in Spain exceed 50% after commissions. On the other hand, the tax advantages once associated with the single premium life policies have been removed, and the pure life product is seen as a commission generator with perhaps a 1% annual yield.

Germany
Of all the major EU insurance markets, Germany has seen the least change in product and distribution channels over the past few decades. While no official figures on product breakdown or distribution channel are available, the core endowment product still represents an estimated half to two-thirds of the total. The figure of 25% from bank distribution shown in Table 9.2 compares with one of 19% in 2002, albeit from a different source. Until a change in tax regulation that became effective in January, 2005, this combined protection and investment product offered substantial tax benefits (to those holding the product for a minimum of 12 years) in the form of limited premium deductibility, tax-free roll-up and tax-free distribution. Under
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION pressure from the banking sector as well as other factors, the remaining taxdeductibility benefits have been removed, while the critical tax-free status of payouts has been substantially reduced in an effort to create a more level tax playing field for long-term investments. The primary product innovation in recent years has been the introduction of the so-called Riester private pension. Designed as a tax-advantaged (in the form of premium deductibility) pure investment vehicle for a mass market, in the early years it failed to meet its volume targets. In 2005, however, volume reached an impressive 1.1 million policies as problems such as limited payout options, the small size of permitted funds and extremely complex paperwork were successfully addressed. On the distribution front, all of these products are marketed by the major banks as well as the traditional tied agents and so-called structured sales forces (broker networks). Among the banks, by far most impressive performance has been shown by the retail unit of Citigroup. As the leading bank provider of credit life products, Citi has achieved productivity levels estimated at eight times those of its peers by marketing a line of simple products sold by bank staff with training and support supplied by an alliance with HDI, a domestic insurer. The domestic banks have struggled since the early 1990s with problems of union restrictions on incentive compensation, a lack of selling culture, the problems of selling a different brand and a lack of co-ordination with the insurance partners that provide the product. Most recently, the market leader Allianz, with a 20% market share in life, has invested heavily in its subsidiary Dresdner Bank’s insurance capabilities by assigning an Allianz specialist to each bank branch to provide support in selling complex products. These efforts are profiled in the case study on Allianz in the next chapter. The combination of success in marketing the simple Riester products and the loss of tax privileges on the traditional whole life product have offered interesting selling opportunities for bank distribution, and analysts note with interest the decline in sales of traditional life insurers in 2005.

The UK
British banks have adopted a variety of business models over the past few decades to address the issue of life and non-life distribution. Two of the top ten UK life carriers are integrated bancassurers – HBOS and Lloyds TSB – while others (such as RBS) have followed the joint venture or distribution alliance route. In recent years, bancassurance has won market share. Table 9.5 indicates that its share over the 1999-2004 period has risen steadily from 9.1% of the life and pension market to 17.5%.

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Table 9.5: UK life and pensions market by distribution channel, 1999-2004 (%)
1999 2000 2001 2002 2003 2004 Change 1999-2004
10.1 (19.1) 3.7 (0.6) 2.8 3.1 0.1

Financial adviser Direct salesforce Bancassurance Tied agent Direct Others Total

54.1 28.8 9.1 4.9 2.5 0.7 100.0

58.9 21.5 10.0 4.6 3.3 1.8 100.0

64.2 13.0 12.1 4.8 3.5 2.3 100.0

63.3 11.4 13.4 4.5 4.0 3.3 100.0

64.1 9.7 12.8 4.3 5.3 3.8 100.0

61.4 8.7 17.5 4.1 4.6 3.8 100.0

Note: Splits based on annual premium equivalent figures. Figures may not sum due to rounding. Source: Bankhall – latest available data

Independent IFA brokers remain the dominant channel, however, with over 60% of the life/pension market. The major factor in limiting bank penetration of the UK life market has been product complexity and the associated need for regulatory oversight. Protection and investment have been combined in most products traditionally sold by the life sector, such as whole life, endowment and unit-linked. A complex regulatory mechanism designed to protect the client has not only polarised – until recently – the distribution function (between own-brand and multiple offerings) but also required extensive fact-finds for so-called regulated products (usually with a protection as well as an investment element). Banks selling such products may thus be obliged to manage two separate sales forces operating from the branch network: one selling unregulated products – essentially bank-like liquidity and medium-term savings products – and the other offering regulated products like personal pensions, unit-linked and endowments. Banks understandably find it a challenge to manage these two sales forces with different compensation and other variables, while still offering the client a seamless service and a comprehensive range of long-term investment products. On the other hand, as in France and other bancassurance markets, the banks have been quite successful in selling simple, tax-advantaged investment products like individual savings accounts (ISAs). According to trade association data, they are the largest single distribution channel of ISAs with 32% of the market. The advent of ‘A Day’ in April 2006 may, however, be a landmark in the context of the battle for market share. Until then, with up to eight different tax regimes applied to the personal pension product, extensive advice – usually provided by IFAs – has usually been required to make the sale. Henceforward, however, there will be only one tax and regulatory regime, and many observers predict market share loss for the IFAs and gains for the banks.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION Such product complexity has been a key selling point for the banks’ major competitors. These IFAs also benefit from the perception of offering ‘independent’ advice, although they rely primarily on commissions paid by the product provider. While little data on customer profiles are publicly available, it is widely assumed that the typical IFA client is wealthier – and thus willing to pay commissions – than the banks’ perceived mass-market client base. The significant compensation available from providing advice-based products has enabled IFAs to attract some of the most effective and highly motivated marketing talent in the retail financial sector, in contrast to the banks, who are often restrained in their compensation and other structures by bank-wide policies. Having recently convinced the FSA that they should be able to retain the title ‘independent’ while offering products from only a limited array of suppliers, IFAs may face a challenge to their dominance under the new unified pension regulations. A major regulatory issue in the UK is that of mis-selling, or “treating customers fairly” in the terminology of the FSA. The FSA has undertaken a broad study of retail insurance distribution in view of the high level of product churn (cancellation before maturity), evidence that the client does not have an adequate understanding of the risks involved in some policies and the constraints on marketing relatively low-cost investment products to fill the retirement savings gap. In a seminal presentation in 2006 to a gathering of senior executives in the UK life and pension sector, Callum McCarthy, chairman of the FSA, concluded that the UK has a “system which serves neither the producer of the services nor the consumer of the services. It is doubtful whether it serves the intermediary either.” He criticised the focus on business volume rather than quality, pointing to a “merry-go-round”, or churn, with a substantial volume of ‘new’ business being in effect transferred from other providers. Behind this concern lies evidence that, despite commission levels and costs which have been criticised by regulators, individual IFA firms as well as life companies are under profit pressure, while clients continue to display dissatisfaction over the value of products. A subsequent report in late 2006 by the consultant Capgemini on global insurance focuses on the churn rate – the measure of customer attrition – in particular in non-life. Capgemini found that nearly 40% of non-life customers have switched providers in the last five years, with the UK figure rising to 63%. The churn in life is lower at 10%, if only because the process of cancelling a life policy is more onerous than a non-life one. The interview with the FSA indicated that the authority bases much of its analysis on the data received on customer complaints. Some indication of the cost of mis-selling to providers is given by the FSA’s estimate at year-end 2006 that the total compensation bill for mortgage endowment mis-selling alone is approaching £3 billion. A review of compensation procedures at 52 firms responsible for more than 90% of this key bancassurance product uncovered evidence of poor complaints procedures at 22 of them. In addition, the regulatory spotlight has
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THE KEY NATIONAL MARKETS focused on so-called precipice bonds (in which the principal repayment can fall sharply with market declines) and PPI insurance. The latter, which is seen to offer the banks high margins in comparison with the benefits available, will be the subject of a regulatory report during 2007. This level of regulatory concern, which could seriously impact the profitability of some popular and high-margin bancassurance products, must be viewed in the context of perceived low profitability of both insurance providers and the IFA firms that sell the bulk of them. While the UK is thus the focus of regulatory attention on bancassurance, it is quite possible that this attention will spread to other markets.

NORTH AMERICA
This report first examines the key US market, followed by a profile of the unique Canadian bancassurance structure.

The US
The success of bancassurance in Europe gave added impetus to the long-awaited deregulation of the US financial structure in 1999 through the passage of the Gramm-Leach-Bliley (GLB) legislation. Until then, the Glass-Steagall Act had blocked ownership ties between banks, insurers and securities firms, as well as the sale of most insurance products through most bank channels. During the 1990s, however, banks had gradually won the right first to sell, and later to manufacture, annuities and life insurance. On the other hand, the banks’ strategic focus has traditionally been on selling investment products such as mutual funds. The passage of the GLB landmark legislation, in the view of many analysts, was predicted to transform the banking and insurance sectors. Consultant studies opined on the right combination of mergers and alliances along the lines established in Europe. And the passage of the GLB legislation coincided with the merger between two leaders in their respective sectors – Citigroup and Travelers – with the CEO being Sandy Weill, who had a track record of success in both the insurance and banking businesses. The case study on Citigroup in Chapter 10 discusses the outcome of this merger. Bancassurance was widely viewed as a ‘win-win’ prospect. Banks would earn valuable fee income and broaden the base of their client relationships, while insurers would gain an attractive distribution channel. Seven years later, however, the view on bancassurance is a muted one. On the one hand, M&A activity has been significant – but not in the form predicted by consultants. Banks have essentially bought insurance brokers rather than product providers. Thus by the end of 2003, banks owned 25% of the top
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION 40 insurance brokers, with BB&T (as Branch Banking and Trust has been known since 1913) in North Carolina alone having acquired 56 of them between 1995 and 2006. A total of 1,395 bank holding companies, including some of the industry leaders like Citigroup and Wells Fargo, sell insurance. Eleven of the top 100 US banks now earn more than 10% of their non-interest income from insurance sales. A few insurers such as Met Life and State Farm have acquired small banks as the basis for assurbank activity – selling banking products to an insurance client base. Impressive growth figures for incremental insurance sales are reported by the American Bankers Insurance Association (ABIA), with US$80 billion in bancassurance revenues indicated for 2005. Major insurers such as Nationwide, MetLife and Hartford are the major product suppliers to the banks. On the other hand, as indicated above, the banks’ estimated current life insurance market share is a modest 2%, in contrast to the 10-20% predicted in forecasts by leading consulting firms. Insurance contributes only 6.6% of the noninterest income of US banks that sell insurance. And growth is tapering off, as indicated by Table 9.6. Whereas annual bancassurance premium growth in the 2000-2002 period exceeded 20%, it dropped to 2.6% in 2005. Cross-sell revenues represent only 5-8% of the bank-owned brokers’ revenue streams, while less than 1% of the retail clients of these banks had acquired insurance from their bank. The average income from life and health insurance marketing in 2004 was a modest US$2.33 per bank customer household. Finally, the pathfinding Citigroup/Travelers merger has been undone with the sale of both the life and non-life businesses.

Table 9.6: Premium income from bank insurance sales, 2000-2005 (US$ bn and %)
2000
Annuities Commercial lines2 Personal property/casualty Credit insurance Individual life/health3 Total Annual growth 31.0 5.4 3.7 2.7 2.1 44.9 23.4%

2001
37.1 8.9 4.1 2.8 2.3 55.2 22.9%

2002
47.7 11.5 5.0 2.5 2.8 69.5 25.9%

2003
51.6 14.2 6.3 2.4 3.6 78.1 12.4%

20051
41.9 24.3 7.7 2.1 4.1 80.1 2.6%

Note: 1. 2005 estimated. No data available for 2004. 2. Includes commercial property/casualty and group benefits premium. 3. Excludes accidental death and dismemberment. No adjustment is made for non-recurring premiums. Source: American Bankers Insurance Association

As indicated by Table 9.6, the dominant product sold by US bancassurers is the annuity offering, with 42% of the total in 2005. In the US, this is a tax-advantaged investment instrument that is not dissimilar to the classic European
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THE KEY NATIONAL MARKETS product sold successfully in France and other markets, and therefore well suited to marketing by a generalist bank sales force. Another 24% is represented by the rapidly growing figure of commercial lines, sold essentially to the banks’ small and medium-sized enterprise (SME) commercial clients. In 2005, only 4% constituted individual life and health products. In retrospect, it has become clear that banks have been unwilling to invest significant amounts of capital in the insurance sector. Both the perceived volatility of insurance risk and lower return on equity for underwriters have been cited. Instead, banks have preferred to buy distribution in the form of the insurance agencies whose client relationships dominate the US retail brokerage scene. Bancassurance in the US is thus essentially a distribution business, with banks manufacturing none of the fixed annuities and life insurance they sell, and playing only a minor role in the manufacture of their mutual funds and variable annuities. Their providers are the insurers themselves as well as third-party marketers (TPMs), independent firms that now sell a range of insurance and investment products, mostly to community banks. Within the bank branch networks, the key marketing role is played by platform reps – essentially generalist salespeople who are licensed to sell annuities and life products. They are supported by financial consultants or in-house stockbrokers who sell a wider range of mutual funds, annuities, securities and life insurance. In addition, referrals can be made to the agents of third-party providers as well as in-house wholesalers/coaches. Chapter 11 discusses the findings from the author’s interview series on the obstacles to bancassurance growth in the US and its likely evolution.

Canada
While the tide of deregulation has swept over virtually the entire bancassurance world, Canada remains the only major developed national market in which banks are legally unable to sell most life and non-life products to their retail clients. This has provoked a major debate between the leading banks, which are anxious to leverage their retail client base, and insurers, which have to date been able to defend against changes in these regulation. Yet the Royal Bank of Canada, the country’s leading financial institution and one of the top ten banks in North America, has persisted in a unique and successful bancassurance strategy within the guidelines established by Canada’s Banking Act. Since 1992, banks in Canada have been able to enter the life insurance business as well as acquire life companies legally. Yet the country’s Banking Act, which was last reviewed in 2006, prohibits banks from selling life, home and motor insurance to the clients of their retail network. Banks are also prohibited from using their client lists to target market these insurance products.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION Over this period, the debate has raged between the two protagonists. The insurance sector argues that banks have priority access to credit and other information on their retail clients, on the basis of which they would unfairly cherry-pick the best insurance prospects. Pointing to the depredations in traditional agency distribution which occurred in the EU bancassurance countries, insurers claim that such erosion of its sales force would weaken an otherwise healthy insurance sector. More importantly, it is suggested that the potential for tied insurance sales from deregulation could lead to the kind of mis-selling which has occurred in the US and the UK. The banks counter these arguments with those used by bancassurers across the world. As relatively low-cost insurance providers, banks could offer their clients lower prices. With their massive nationwide retail networks, banks can tap client segments – especially the less well-off or those in rural areas, which are not well serviced by insurance agents and brokers. And finally bancassurers, as in the US, would offer a choice of insurance products to their clients. Determined to become the undisputed leader in Canadian financial services despite this prohibition against insurance cross-selling, Royal Bank of Canada (RBC) has used other channels to become one of the top ten life insurers in the country. Utilising primarily the brokerage channel, RBC sells through 17,000 independent life and health insurance brokers in Canada and a direct sales force of roughly 650 salesmen, as well as the online channel. Its insurance subsidiary, RBC Insurance, is the leader in credit life in Canada with 28% of the market as well as being the number one in travel and living benefits insurance. It has become the leader in new individual life policies and was the first insurer to sell auto insurance online. In the non-life arena, the company sells a comprehensive range of personal home, travel and auto insurance Rather than buy a domestic insurer as the country’s insurance sector has consolidated, RBC has acquired the Canadian subsidiaries of several US life companies, including Unum and Mutual of Omaha. Canada’s largest bank-owned insurer, RBC Insurance now sells to around 5 million insurance clients, which compares with the group’s banking client base of some 13 million. In financial terms, RBC Insurance stands out as a growth element in the group; in 2005 it generated revenues of C$ 3.3 billion, 15% higher than the 2004 figure. Outside Canada, insurance products are sold in the US by a broker force as well as the sales force of its US regional commercial bank, Centura. Most recently, the group has launched a pilot policy of opening insurance branches next to existing units of its vast Canadian network of over 1,100 branches. The outcome of the long-running debate over removing the prohibition of cross-selling to bank clients is uncertain. Ranged against the banks are not only insurers but also insurance agents who are concerned about their future. Most recently, a survey undertaken in 2006 on behalf of the Financial Advisors
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THE KEY NATIONAL MARKETS Association of Canada (Advocis), found that most Canadians are wary of the removal of these restrictions. A total of 78% of those surveyed said they do not support expanding banks’ powers. Also, 91% of those interviewed feel that the banks have enough, or more than enough, information about them. And on the question of product choice, the survey concluded that “more than six out of ten Canadians believe that removing protections will lead to less choice”.

ASIA-PACIFIC

Market profile
The bancassurance model in the emerging markets of Asia-Pacific, such as China, Japan, India and Malaysia, can be summarised as follows: • Agency distribution is the starting point for life and non-life distribution, but bancassurance is rapidly winning market share. Brokers are not yet a major influence. As late as 2001, Sigma estimated the share of agency distribution at an overwhelming 96% of the total, with bancassurance a miniscule 2%. Across Asia-Pacific, it was estimated then that only 5-10% buy insurance from their bank. By 2004, however, a more recent Sigma report on China and India noted that over 20% of new premiums in these markets were generated by the bank channel. For domestic and foreign insurers aiming to build market share, the bank channel is both cheaper and quicker than building an agency sales force. • The bank channel benefits from mass-market, unsophisticated clients prepared to buy a range of financial products from their local bank. Partnerships with these local banks are thus at a premium, with foreign and domestic insurers competing to obtain multiple distribution arrangements. Sales are made by agents of the bank or insurer based in individual branches. Most products in growing markets like India and China are essentially simple deposit-like instruments easily sold by bank branch staff. • Foreign insurance partners introduce new products and marketing technology. With both local banks and insurers using traditional, simple products and relatively primitive banking networks, foreign banks and insurers can make a major strategic contribution to bancassurance alliances. On the other hand, such banks – like their peers in the developed markets – are finding it difficult to sell more complex protection products. • Markets are progressively deregulating in terms of bank/insurance ownership, possible products offered, and product pricing. A few banks like Southern Bank and Maybank in Malaysia and OCBC in Singapore have acquired insurers. Local regulators have used barriers to entry to regulate the flow of new competitors. Foreign bank entry to retail markets has been strictly limited, so that foreign insurers are leading the bancassurance movement.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION Table 9.7 from the Sigma study offers a useful detailed comparison of the AsiaPacific and European bancassurance models.

Table 9.7: Comparison of European and Asia-Pacific bancassurance models
Europe
Regulation Market growth Liberalised Mature markets but pension reforms could spur growth in the life insurance sector Highly integrated models • Tax concessions for life insurance premiums paid • Squeeze on bank margins

Asia
Ranging to liberalised to forbidden High growth potential

Bancassurance model Tax drivers

Products

Mainly life insurance products to maximise tax benefits Mixed channels Domestic banks and insurers

Distribution Major players

Mostly distribution alliances and joint ventures • Squeeze on bank margins • Insurers' growing cost pressure and desire to expand distribution capability • Financial deregulation • Foreign companies use bancassurance to enter Asian market Mainly life insurance products linked to bank services and, increasingly, products geared towards managed savings Mainly bank branches Foreign companies are playing an important role

Source: Swiss Re

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

Japan
As shown in Figure 9.5, Japan is not only Asia-Pacific’s dominant insurance market but also the largest in the world, with an impressive 30% of household financial assets and over US$16 billion in premium income. It is also the world’s most saturated market, with an estimated 90% of Japanese households holding a life policy. This remarkable result is the product of the meagre gains from bank deposits in a zero rate environment, disillusionment with stock market performance, simple life products and a distribution structure based on thousands of part-time housewives selling door-to-door.

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THE KEY NATIONAL MARKETS
Figure 9.5: Relative size and growth of Asian insurance markets, 2005 (US$ m and %)
18,000 16,000 New business premiums (US$ m) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
a an or e M al ay si a Th ai la nd In do ne si a Ph ilip pi ne s Ja pa n Ko re Ko ng In d Si ng ap Ta i C Vi et na m ia hi na w

25

20

10

5

0

Source: Prudential, Life Insurance International

Into this unsophisticated market over the past decade have burst product innovation, foreign suppliers, and the bancassurance channel. Bank sales, which in 2000 were estimated by Sigma to represent less than 1% of total distribution, are now believed to have achieved 25% penetration. US insurers such as AFLAC and AIG have won an estimated 15% of the life market. AIG now distributes through 95% of the country’s banks, while AFLAC derives 75% of its earnings from the Japanese market. The case study in Chapter 10 on Hartford describes how a US insurer has pioneered the variable annuity sector in Japan. Deregulation is proceeding, with full deregulation of prices and products planned for 2007. In 2005, insurers were permitted to sell single premium life and endowment policies. An estimated 3,000 bank branches now sell the popular variable annuity product, which moves with the ebb and flow of stock market performance. Bancassurance has already taken its toll of the agency and employee sales force. The number of agency employees has fallen from 440,000 in 1990 to 260,000 in 2004.

China
Dominated by three state-owned insurers with an estimated 90% of the life market, China is another giant moving into bancassurance from the dominant agency model. China Life alone, with its 11,000 branches and 1.8 million employees, accounts for an estimated 49% of the total life market, while its joint venture with Generali of Italy also dominates the segment of foreign life insurers in the country.
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H

on g

Growth (%)

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION For foreign banks and insurers anxious to penetrate the Chinese bancassurance sector, a joint venture or alliance with a Chinese bank or insurer is effectively the sole means of entry. Only 233 foreign bank branches existed in the country at the beginning of 2006, representing perhaps 2% of total banking assets. Government regulations strictly limit the entry of new players, the ownership share held by foreign institutions (currently 25%), and the number, as well as the location, of their branches. With only an estimated 4% of its 1.3 billion inhabitants holding an insurance policy, and projections indicating that the country will move from 11th to fourth place in relative ranking in the insurance world, China is a natural target for foreign banks and insurers hoping to build bank distribution and introduce new products. The Chinese middle class – defined as those with an annual income equivalent to US$7,400 – is expected to increase from 50 million currently to 600 million by 2010. An estimated 25-33% of current life premiums are now generated by bank branches, against only 1% at the turn of the century. Of particular interest to bancassurers, however, is the roughly 25% share of major urban markets in China estimated by that time by Sigma. Table 9.8, taken from a recent report by KPMG, profiles the market shares of domestic insurers and joint ventures with foreign insurance partners. The latter had an estimated combined market share of 8.4% at the beginning of 2006.

Table 9.8: Major insurance players in Chinese market by premium, first five months of 2005 (CNY bn and %)
Premium (CNY bn)
National insurance players 79.1 24.4 17.2 7.5 6.1 2.3 1.2 0.2 138.0

Market share (%)

China Life Insurance Ping An Life Insurance Pacific Insurance New China Life Insurance Taikang Life Insurance Taiping Life Insurance Shengming Life Insurance Others National total

48.7 15.0 10.6 4.6 3.8 1.4 0.7 0.1 84.9

Foreign capital and Sino joint ventures General China Life 20.2 AIA (American International Assurance) 2.4 Aviva-Cofco Life 0.4 CITIC-Prudential Life 0.3 Pacific-Aetna Life 0.3 Manulife-Sinochem Life 0.3 Others 0.6 Overall total 162.5
Source: KPMG, Reuters and Life Insurance International

12.4 1.5 0.2 0.2 0.2 0.2 0.4 100.0

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THE KEY NATIONAL MARKETS In recent years, the four leading state banks, as well as major insurers, have established joint ventures with foreign minority partners, one of whose strategic goals is often to tap the bancassurance market. These state banks are also taking stakes in domestic insurers, thereby creating a complex web of interests. Thus, Allianz at the beginning of 2006 established a bancassurance joint venture with Industrial and Commercial Bank of China (ICBC), one of the four major state-owned banks, in which it has taken a 2.5% equity stake. Allianz’ global bancassurance strategy is described in the case study in Chapter 10. Through its 20% investment in Ping An, the country’s second-largest insurer, HSBC has been opening offices in markets like Shanghai. Fortis, with a 25% holding in Taiping, sells roughly half of its policies through ICBC. AIG is the only foreign insurer with a licence permitting it to own 100% of a Chinese carrier. Investment in the Chinese market by foreign banks and insurers is widely assumed to have a very long-term payoff. Dozens of new licenses have been issued by the authorities to domestic and foreign players, and the major constraints placed on equity ownership and the ability to open new offices will severely limit their profit potential. The major local banks with their thousands of branches clearly have a dominant role in these joint ventures, and the investment needed for the foreign partners’ systems, marketing, product development and staff training. is substantial. And looming in the background is the Postal Savings and Remittance Bureau of China Post, the fifth-largest financial institution in the country with the largest network of all – 36,000 branches – and anxious to develop its financial services business.

India
Since 1999, with the end of the monopoly of life insurance sales by the former state-owned banks, the private-sector banks have led the bancassurance revolution in India. Deregulation also permitted the entry of foreign banks and insurers into the retail life market as well as authorised foreign minority investments in domestic institutions. The result is an increase in life insurance penetration to 2.4%, as India’s middleincome households start to buy life insurance. Premium income soared 41% in fiscal 2006, and market sources predict that the overall insurance market will increase five-fold to US$60 billion equivalent by 2010. Deregulation is proceeding, with price controls being removed on life insurance. As in other emerging markets, banks are a relatively inexpensive channel which benefits from the confidence of retail savers in their local bank and the resulting willingness to buy more financial products from that provider. The standard formula is an alliance with a foreign bank or insurer such as Allianz, AIG, Sun Life AMP or Standard Life. Virtually all domestic insurers now have at least one foreign partner. Aviva alone, as is discussed in a case study in this report, has
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION over 30 such partnerships with Indian banks. Typically a bancassurance agent is placed in the relevant bank branch. The largest joint venture insurer, Bajaj Allianz, thus has alliances with seven major rural banks. The proportion of new sales of life insurance through banks has thus soared to 30-40% of the market. The foreign joint venture segment increased its share of the life market to 28.6% in fiscal 2006 – double the figure of 2004. At the same time there has been an explosion in the population of life agents, which now is estimated at 482,000 across the country. Little activity, however, has yet taken place in the development of the brokerage channel. For the private-sector banks the leading product, with an estimated 83% of the market, is the ULIP, a unit-linked investment product with tax advantages. Given the investment required to build a profitable insurance business, however, profits from the new joint ventures are slim. The only one to report a profit in 2006 was State Bank of India’s joint venture with Cardif, which was set up in 2001.

Malaysia
A mid-sized insurance market by global standards, Malaysia is one of the few booming Asia-Pacific markets which have permitted foreign banks to build their retail business and therefore enter the bancassurance market with integrated 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 without the constraints of a joint venture or alliance. And banking is a profitable business in Malaysia: the return on equity (ROE) for the LIFBs in 2005 was in the range of 18-25%. With a savings rate of 43% and 7% GDP growth, Malaysia is an attractive bancassurance market. Insurance penetration has risen from 31% in 2000 to 39% in 2005, compared to 80% in neighbouring Singapore. Bancassurance in 2003 represented 38% of new premium income for the sector, rising to over 50% in 2004. Agency sales are still the leading distribution channel with an estimated 56% of the total. The case study of Maybank, the country’s leading bank, profiles its success in bancassurance in company with its joint venture partner, Fortis. Maybank and Fortis have recently acquired control of MNI, a local insurer.

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Chapter 10

Case studies

The 12 case studies in this chapter have been selected on the basis of the overall interview series to provide a profile of best practice in bancassurance across the major world markets. Peer recommendations thus played a major role in this selection process, although every effort was made to include those banks and insurers whose statistical performance indicated a successful strategy. In fact, one of the case study institutions had actually carried out its own survey of best practice in bancassurance, and by luck or judgment in almost all the institutions on its list are included in this chapter! In addition, a reasonable geographic balance was sought across the three major bancassurance regions: the US, Europe and Asia-Pacific. In many cases, such as ING, Fortis and Allianz, major EU financial institutions have led the assault on the fast-growing Asia-Pacific region. A balance was also achieved between pure insurers like Hartford, CNP Assurances and Aviva, which have successfully leveraged bank distribution at home and abroad; highly integrated EU groups like KBC; and commercial banks like Wells Fargo, Citigroup, Unicredit and HBOS, which are pioneering insurance distribution in their home markets. Outside the home market of Europe (where bancassurance originated), in AsiaPacific, Maybank – the leading domestic bancassurer in Malaysia – was selected. In the US, where the bancassurance model differs sharply from that in other regions, the choice was Wells Fargo (which is using brokerage acquisitions to build its bancassurance strategy), Citigroup (as the largest bancassurer )and the insurer Hartford (as a major product provider to banks). In no way should this selection of case studies be regarded as a league table of success in bancassurance. It does, however, illustrate a range of successful strategic approaches to the common challenge of maximising the insurance penetration of a bank client base. And it includes most of the candidates mentioned as success stories by interviewees.

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

ALLIANZ

Background
Germany’s dominant insurer with roughly 20% of the national market, Allianz is midway through a comprehensive change programme called ‘3+One’, which is designed to protect and enhance its capital base, improve profitability and reduce complexity. More specifically, it aims to convert its subsidiary Dresdner Bank, the fourthlargest German bank with 5% of the German retail market, into a profitable bancassurer as well as reduce costs, revise inefficient and complex capital structures, divest itself of non-strategic investments, build its life insurance business in growth markets and improve cross-selling across the group. Good progress has been made in turning around the former loss-making Dresdner Bank, which has achieved a reasonable ROE of 12% in 2006. On a broader scale, since the first half of 2003, the group’s shareholders’ equity has risen 53%, operating profits have soared 154% to €5.5 billion, and risk capital has been reduced by 6%. The product and geographic profile of the group, however, has not changed fundamentally in the past few years. A total of 91% of revenues are still derived from insurance, with life/pensions accounting for somewhat over half of this, and the balance is comprised of revenues from asset management and banking. The German home market accounts for 32% of revenues, with another 41% derived from Europe (excluding the CEE) and 20% from North America. Allianz’ two major growth markets, Asia-Pacific and ‘New Europe’ (the CEE), generate only 3% and 4%, respectively, of the total. In this context, the group’s bancassurance strategy is critical to its overall growth programme. Allianz enjoyed a record year in 2006 based on preliminary figures as operating profit jumped 30% to €10.4 billion, net income soared 60%, and earnings per share (EPS) rose 52% to €17.1 billion. Return on risk-adjusted capital (RORAC) for the group reached 21.3% with the key life/health segment producing RORAC of 19.9%. Allianz’ largest operating unit, life/health, boosted operating income by 22% to €2.6 billion against a target of €2.1 billion. RORAC in the German life/health market reached a remarkable 37%, while banking income doubled as Dresdner Bank continued its recovery. The small but strategically important New Europe region achieved a satisfactory 22% RORAC.

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CASE STUDIES

Bancassurance strategy
Allianz’ overall bancassurance strategy is built around two core challenges: in the home market, to convert Dresdner Bank into an efficient vehicle for selling insurance products to Dresdner Bank retail clients; and outside Germany, to exploit growth markets like the CEE and Asia-Pacific. In the German market, it would appear that the group’s assurbank strategy of selling banking products to insurance clients has been quite successful. In 2005, Allianz’ tied agents exceeded their target of 300,000 new clients by 20%, with revenue of €100 per client. In bancassurance, where Dresdner Bank had been selling Allianz products for decades prior to the assumption of control, new business growth has been impressive since 2001, albeit from a low base. Thus, Dresdner branches in 2005 accounted for 4.6% of Allianz’ new P&C business and 12.3% of its new life business in Germany. Figure 10.1 profiles this German cross-selling achievement.

Figure 10.1: Allianz’s cross-selling in Germany
Product Channel Share of new business 2005 CAGR new business 2001-2005

Property and casualty (P&C)

Dresdner Bank branches

98.4%

Life and health (L&H)

Dresdner Bank branches 26.5%

Mutual funds

Allianz agents

19.5%

Note: P&C: new and incremental premiums. L&H: value of new business; Mutual funds: net inflows. High volatility dependent on bank production. Share in 2004 was 29.7%. Source: Allianz

In CEE, which Allianz has identified as a top strategic priority, by 2004 the group had 15,000 agents and sold through 650 bank branches. Strategically, Allianz prefers to open in the CEE with non-life and then develop a life/pension capability. Tied agents are a critical dimension of the strategy. In Hungary, where Allianz has sold insurance for 20 years, the group has recently opened a retail banking subsidiary. Having moved into the key Russian market in 1990, which Allianz brackets in strategic importance with India and China, Allianz teamed up with the Sistema group to create Rosno Life. In Hungary, the company has the second-largest branch network in the financial sector. Another key ingredient of the CEE strategy is the alliance with UniCredit, the Italian banking group, which seems to have survived UniCredit’s acquisition of
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION HypoVereinsbank (HVB) in Germany. The two groups together bought Bulbank in Bulgaria and also have bancassurance ties in Poland, the Czech Republic and Croatia. Allianz’ Asia-Pacific strategy has been built around alliances in India and China. In the latter, the group has two partnerships: a joint venture (now branded Allianz China Life) with Citic Trust and Investment, and the more recent partnership with the major state bank ICBC that was mentioned above. Figure 10.2 (below) profiles the progress made to date in these key markets.

Figure 10.2: Rapid progress in Allianz’s key Asia-Pacific businesses (€ m)
China – ICBC drives life sales
(GPW in € m)

India1 – strong growth
(GPW in € m)

494
22

304 220 134 185 96

43
2004 2005 8M 2006

2004

2005

8M 2006

2004

2005

8M 2006

1. Joint ventures with Bajaj. Allianz stake in both joint ventures currently 26%. Source: Allianz

Allianz measures performance on three bases: absolute volumes sold, the net profitability to Allianz of the unit/vehicle, and relative performance in terms of market penetration compared with the vehicle’s overall market share. Thus for the latter metric, Dresdner Bank has only 4% of the German retail banking market but an impressive 13% of Allianz’ German sales. The choice of entry into a new market is a function of the availability of strong distribution partners with a major market position. Thus in Italy and several CEE countries, the tie-up with a strong banking partner like UniCredit is critical. In other markets, like India and China, a more opportunistic solution is called for – hence the large number of different banking partners in India, none of which has a major market share. On balance, Allianz has been most successful in agency markets like Germany and greenfield ones such as the CEE, where it can build an agency capability. In the US, a broker market where it has no major distribution partner, Allianz has achieved relatively low market penetration. In most of its bancassurance ventures, Allianz trains the bank selling staff and provides sales support. Actually placing Allianz agents in the bank branches is not appropriate because of the possible conflict between independent agents and bank staff in competing for the client relationship. In the case of Dresdner,
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CASE STUDIES where it can steer the selling function as 100% owner, Allianz has committed – and paid for – several hundred of its specialists to train and support Dresdner selling staff.

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

AVIVA

Background
Formed from the merger of Commercial Union and Norwich Union and now the largest UK insurer, Aviva has transformed itself in a few years from a UK composite insurer into a highly profitable, global, multichannel distributor of life and non-life products. Low-margin or unprofitable business lines or country operations have been exited, while heavy investment has been made in the life sector. The result has been a 13% ROE in 2006, which compares favourably with its insurance peers. The UK, where Aviva has an 11% life market share, now represents only 44% of the total new life and pensions business contribution, with Continental Europe 49% and the rest of the world 7%. International earnings now exceed domestic profits on an EEV (European embedded value) basis. Aviva’s restructured US operation is now a leader in the rapidly growing equity index sector, while heavy investment is being made in the booming Asia-Pacific market. One of the defining elements of Aviva’s global strategy is its multichannel distribution approach across the network. Bancassurance, which is discussed below,

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION accounted in the first half of 2006 for 26% of the group’s long-term insurance sales, but a distribution balance has been achieved with financial advisers at 44%, direct sales for 26% and partnerships the remaining 4%. New business margins (after capital, tax and minority interest) on bancassurance were 2.7% in 2006, easily exceeding the 1.4% for other distribution channels. Table 10.1 summarises the importance of bancassurance to Aviva.

Table 10.1: Bancassurance contribution to Aviva, 2006 (%)
2006
New business contribution as percentage of total: Bancassurance Non-bancassurance channels New business margin: Bancassurance Non-bancassurance channels

32% 68% 2.7% 1.4%

Note: New business contribution is ratio of new business contribution to present value of new business premiums. New business margin is ratio of new business contribution to present value of new business premiums, expressed as a percentage. Source: Company data

Aviva’s 2006 operating profit on an International Financial Reporting Standards (IFRS) basis increased 46% (compared with 12% on European embedded value – or EEV) to generate an impressive 44% IFRS earnings per share growth to 86.9p (£0.869). ROE was 13.1%. Driving this growth was a 21% increment in the core business segment of longterm savings. In contrast, operating profit from general insurance increased only 10%. International business accounted for 56% of group sales and 61% of new business contribution, with Italy representing 22% of sales and Asia-Pacific results almost doubling. The group is now present in 20 countries with almost 20 million clients. The bancassurance channel accounted for 22% of sales of longterm savings products. Sales growth in the EU was 37% against 11% in the CEE. Management anticipates 2007 growth in long-term savings will at least equal the anticipated 5-10% increase in the overall UK market.

Bancassurance strategy
Aviva’s bancassurance strategy is marked by its high margins, successful penetration of growth markets, balanced distribution channels and partnerships with banks in virtually all of its national markets.

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CASE STUDIES The group as a whole has over 50 bancassurance partners and bank distribution agreements, which range from exclusive relationships with major banks to nonexclusive distribution deals with much smaller entities. Major bank partners include RBS in the home UK market, Crédit du Nord in France, UniCredit and several regional and co-operative banks in Italy, Allied Irish Banks in Ireland, ABN Amro in the Netherlands, and five regional savings banks in Spain. In many cases, Aviva has invested capital in the partnership to ensure its success. In addition, Aviva has wholly owned life companies abroad, such as Delta Lloyd in the Netherlands. Its multichannel distribution strategy has propelled Aviva into the top tier of major continental European life markets. In Spain it is the bancassurance market leader with about 10% of the market, while Aviva is Italy’s seventh-largest life insurer with a new business market share of 7.4%. Spain (with 23%) and Italy (with 34%) together contributed over half of the value of new bancassurance business in 2006 , followed by the UK (with 13%) and France (11%). Management attributes its success in bank partnerships to a focus on local client needs and alignment of interests with its partner. Possible issues such as channel conflict are addressed up front, with the result that few, if any, partnerships have had to be undone. Perhaps more remarkable are the bancassurance margins achieved outside the UK. The overall new business margin for that channel in 2006 of 4.8% compares with only 3.8% in the UK against an outstanding 9.8% in Spain and 4.3% in France. In the dynamic but fiercely competitive Asia-Pacific market, Aviva operates with its multichannel strategy in the mature Singapore and Hong Kong markets in partnership with DBS Bank. In the growth market of China, where it is targeting a 10% market share by 2010 in its market area, Aviva is the fifth-largest joint venture operation with offices in 15 major cities, while in India it has over 30 bank alliances in a market which used to be dominated by agencies. The company plans to have ten licences in Asia-Pacific markets by 2010. One key objective, especially in the mature markets of Singapore and Hong Kong, is to provide unique product offerings both to the IFA and bank channels.

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

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

CITIGROUP

Background
The world’s largest banking institution, Citigroup played a seminal role in the liberalisation of the US bancassurance market with its decision to acquire the Travelers Group prior to the passage of the GBL legislation in 1999. Market observers assumed that, once legislation permitting bank ownership of insurers (and vice versa) had passed, Citi would replicate the integrated European bancassurance model by selling Travelers’ life and non-life products through its US branch network as well as its brokerage and other retail networks. The presence of Sandy Weill, former head of Travelers, as CEO of Citi, reinforced this assumption.
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CASE STUDIES These expectations were destroyed when Citi sold first Travelers’ P&C business (to St. Paul Insurance) in 2002, and its life business (to Metropolitan Life) in 2005. While no official rationale for this apparent reversal of strategy has been given, interviews conducted for this report identified a number of possible justifications. Given the lower ROEs achieved in similar insurance businesses compared to Citigroup’s demanding ROE targets, it is quite possible that lower insurance returns helped drive the decision. Another argument could well be the regulatory pressure against tie-in sales, which proved a costly problem for Citi’s acquisition of Associates First Capital Corporation in the early 2000s. A related issue is the widespread focus of US banks as distributor of retail financial products as opposed to a manufacturer. Thus, in addition to bancassurance, Citi sold its fund management businesses in the early 2000s to the broker Legg Mason, in exchange for bolstering its brokerage distribution capacity. In 2006, Citi reported an increase of only 1% in pre-tax income on the back of a 7% rise in operating income from continuing operations, while ROE fell to 18.8% from 22.3% in 2005. EPS from continuing operations increased 11% to US$4.21 per share. Citigroup’s core US consumer business provided revenue growth of only 2% in contrast to the double-digit results from corporate/international and wealth management. The US consumer business now represents only 35% of total consumer revenues, as priority is being placed on international growth (despite a management priority being given to the US consumer in 2007). Priority is also being given to introducing Smith Barney brokers into Citi branches in the US to boost sales of life and other investment products.

Bancassurance strategy
Whatever the rationale, in its home US market Citi’s bancassurance strategy is a relatively small part of its overall retail distribution group, which accounts for 32% of the revenues of Citi’s consumer banking function. Its core products are term and whole life insurance, and it offers a range of third-party products, including those of MetLife under a ten-year contract agreed as part of the purchase of the Travelers life business. As is shown in Table 10.2 (on the following page), Citi leads its US banking peers with an impressive 7% of the total life products sold by banks.

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Table 10.2: US Bancassurance – top ten banks by insurance income, 20051 (US$ m and %)
Income (US$ m)
Citigroup Wells Fargo HSBC North America Countrywide Financial JPMorgan Chase BB&T Wachovia Bank of America MBNA Greater Bay Bancorp
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

% of total2
7.1 2.8 2.2 2.2 2.0 1.6 0.9 0.6 0.6 0.4

3,312 1,215 986 970 874 714 397 258 256 155

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

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

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

CNP ASSURANCES

Background
France’s leading insurer with 18% of the domestic life market and 2005 global premium income of €26.5 billion and 22 million customers worldwide, CNP Assurances has successfully exported its model of strategic bancassurance alliances to supplement its own direct international operations. Currently 14% of revenues and over 10% of CNP’s profits are derived outside France. In its home market, CNP distributes through three key channels with over 20,000 points of sale: the postal system (La Banque Postale), the savings bank network (caisses d’épargne) and the CNP Tresor financial adviser network, which it has acquired from the French government. A total of 74% of CNP’s equity is owned by these French distribution partners, with the balance held by investors. Long-term distribution contracts set out the financial relationships between CNP and the respective distribution partner. Outside the bancassurance channel, CNP sells through independent financial advisers and asset managers; in 2005 it acquired from Dexia a vehicle accessing this segment. Products for the retail market include the usual array of insurance savings (épargne assurance) with a high component of unit-linked sales and pensions, as well as protection/credit life products. During the first half of 2006, the postal network accounted for 43% of total French premium income, with the savings banks contributing 53%. The key unit-linked product accounted for 27% of total group savings and pension premiums during that period. Over 90% of sales in Italy and Brazil were unit-linked as opposed to 17% in France. In France, CNP holds a leading 37% share of the loan insurance (credit life) market. Preliminary figures for 2006 indicate another successful year for CNP with a 19.5% pro-forma increase in global life premium income. Adjusted for income

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION transfers under the Fourgous amendment, CNP increased its market share in France. More specifically, after this adjustment CNP’s new premium income in the home market in the key savings/investment product rose 8.2%. In CNP’s specialty of credit life, premium income rose 14% globally, with an impressive 30% growth outside France. Outside France, on a like-for-like basis, premium income increased 12.5%. In the key Italian market, where the Capitalia acquisition made a major contribution, pro-forma earnings (including Capitalia for both 2005 and 2006) rose 10% against an actual decline for the overall Italian market.

Bancassurance strategy
Both at home and abroad, CNP’s bancassurance strategy is keyed to joint decisions on products, reliance on the banking partner to manage the distribution process with support from CNP, and with administration largely handled by CNP. The overseas network consists of bancassurance alliances in Brazil and Italy plus wholly owned operations in Portugal, Spain, Argentina and a newly formed Chinese unit, which was opened in 2006 with the Chinese Post Office. In 2005, CNP acquired 58% of Capitalia’s Fineco insurance subsidiary, which markets to the clients of Italy’s fourth-largest bank with 5 million clients. Also in Italy, CNP’s branch offers protection products to the San Paulo/IMI banking group. In Brazil, CNP owns 52% of a joint venture with the second-largest Brazilian bank, Caixa Economica Federal, and holds 8% of the market. CNP’s Portuguese subsidiary ranks ninth in non-life and 19th in life. The attractiveness of non-French sales is shown by Figure 10.3 (on the following page), which plots the higher margins available in Brazil and Italy. During the first half of 2006, these higher margins actually increased as opposed to the modest decline in France, where the distribution partners were give a higher share of revenues.

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Figure 10.3: Comparative CNP bancassurance margins for France, Italy and Brazil, end-December 2005 and end-June 2006 (%)
Margin rate: NB/APE 20% 20.1% 12.6% 9.8% 9.7% 8.3%

10.5% 11%

31/12/05 30/06/06

31/12/05 30/06/06

31/12/05 30/06/06

31/12/05 30/06/06

France
Note: NB: new business APE: annual premium equivalent Source: CNP Assurances

Italy

Brazil

Total

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

Evaluation of bancassurance strategy
In its global network, CNP will continue to offer both P&C as well as savings products depending on market demand. Thus, in France demand for P&C products is expected to grow, while savings/investment will continue to dominate. In
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION Portugal, P&C will be the dominant offering, while both savings and P&C will be in demand in Brazil. Offering health support faculties in France is also a growth market, while home insurance may also be a growth area. Management is prepared to expand beyond its traditional bancassurance channel depending on market conditions. Having bought a broker network channel in France, for example, CNP sees this relatively new channel continue to expand. In Italy, bancassurance is supplemented by sales through Capitalia’s professional adviser force. While CNP has achieved significant market generation in only a limited number of markets outside its home market, it seems to have developed a durable joint venture strategy. China would appear to be a difficult market for CNP given its scale, the different operating model in that market, and the investment needed to change behaviours as well as build an infrastructure. On balance, CNP is well positioned across distribution channels as well as product ranges.

FORTIS

Background
Formed in the 1990s from banking and insurance mergers in Belgium and the Netherlands, Fortis derives roughly 80% of its profits from the relatively mature Benelux region, with a growing share from bancassurance investments in AsiaPacific and elsewhere in Europe. It is the dominant insurer in Belgium with 22% of the life and 14% of the non-life markets, as well as the market leader in banking with 31% of the savings deposit market. In the Netherlands, Fortis is the fourth-largest bank, with 5% of the market, and the third-largest insurer with 13% of the life sector. The group is managed under six divisions, three in the banking sector (retail, commercial and private/merchant banking) and three in insurance (Belgium Insurance, Netherlands Insurance and International Insurance). During the first half of 2006, banking profits represented a dominant 75% of the total net profits. Management has recently taken measures to increase integration of the banking and insurance elements of its predecessor institutions. Under a new CEO, Jean-Paul Votron, management has targeted an increase in non-Benelux earnings to 30% of the total as well as double-digit annual organic earnings growth. Fortis has exited the highly competitive US market with the recent sale of its affiliate Assurant. Fortis is relying on its non-Benelux bancassurance strategy to meet a major portion of its commitment to double-digit annual earnings growth. This business is the major component of the business line of ‘International Insurance’,
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CASE STUDIES which grew 57% in 2005, achieved an above-average 35% risk-adjusted return on risk-adjusted capital (RARORAC), and increased its share of group net profit from 4% to 6% of the total. International Insurance net income is projected to grow at an above-average 15-20% in the period from 2005 to 2009. Fortis’ outstanding 2006 financial performance, which surpassed the target for the year 2009, has triggered a more aggressive goal for the period ending 2011. Led by a 29% growth in banking earnings, group net earnings in 2006 rose 24% before divestitures to €4.35 billion. Insurance growth was led by life insurance with 25% expansion in embedded value against non-life growth of only 5%. The new business margin increased from 2.9% to 3.3%, while insurance RARORAC rose from 30% to 35% in 2006. RARORAC at group level reached 24% against a hurdle rate of 15%. Of strategic importance was the increase in earnings outside Belgium from 18% to 21% against a long-term goal of 30%. Non-Benelux net income soared 50% to €9 billion.

Bancassurance strategy
Building on its core integrated bancassurance model developed in Belgium, Fortis has embarked on a global strategy based on multiple distribution channels and the goal of operational control, if not actual integration. Each new market – from the CEE to the Iberian peninsula to emerging Asia-Pacific – is different, and the group has adapted its model to the local environment. While Fortis sells through all the major distribution channels in its home Benelux market, abroad it has relied primarily on joint ventures/equity interests with leading banks in Portugal (Millenniumbcp), Spain (La Caixa), Malaysia (Maybank), Thailand (Kasikorn Bank) and China (with its Thai joint venture). Fortis’ bancassurance vehicles are thus one of the largest life insurers in Portugal with 19% of the market, the largest bancassurer in Spain (Vida Caixa), and the leader for new life business in Malaysia (see case study on Maybank). In China and Thailand, it ranks sixth in life insurance. Typically, Fortis holds a large stake in these affiliates, ranging up to 51% in Portugal and 60% in Spain. The Iberian model could well be a useful template for expansion in the CEE. Driving this bancassurance strategy is the group’s heritage in integrating banking and insurance, but more specifically its origins in the former ASLK-CGER (Algemene Spaar- en Lijfrentekas-Caisse Générale d’Épargne et de Retraite), a Belgian savings bank which has become a global role model of successful bancassurance by fully integrating the front and back offices in operational terms. In Belgium, Fortis’ penetration of its active bank client base in life insurance has reached a remarkable 34%, a level which has almost been achieved in Spain. In product terms, priority is given to life insurance, with non-life sold on a selected basis. In its home market of Belgium, the retail client base of 3.5 million

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION is segmented into three categories – private, personal and mass-market – on the basis of available investment funds. Market penetration in bancassurance is measured both by sales to individual segments as well as specific products. Abroad, priority is given to identifying a major banking partner with substantial retail distribution strength, and a joint business plan is worked out with such partners to take full advantage of the client base and local market conditions. In practice, it is understood that it has been difficult to export the integrated Belgian model, and Fortis has had to work within the framework of the local partner’s strategy. Thus, in China, the model tends to be one of a pure distribution alliance with the bank selling insurance products, whereas in other markets Fortis has an equity stake in the partner or joint venture. Invariably, the key issue is that of the scarce resource of experienced and talented people able to direct and manage this new activity.

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

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HARTFORD FINANCIAL SERVICES GROUP

Background
One of the largest multiline insurers in the US with shareholders’ equity at end2005 of US$15 billion, Hartford is active in both the life and non-life sectors. Its product specialty is the variable annuity, where it is one of the market leaders in the US as well as the largest provider in Japan. In property and casualty insurance, the group ranks 11th in the US. Variable annuities represented roughly two-thirds of the US$191 billion in assets under management at year-end 2005, followed by mutual funds with US$30 billion. After an extended period of leadership in the key US variable annuity market, in 2005 Hartford was pushed into second position by MetLife. Its massive volume in the product enables the group to produce variable annuities at roughly half the cost of the market average. In financial terms, core earnings have grown at a 13% compound annual rate over the period 2001-2005. Hartford targets a return on equity in the range of 13-15% as well as a double-digit annual increase in book value per share. In 2000, Hartford pioneered the development of the variable annuity sector in Japan, a market which is particularly attractive given the ageing Japanese population 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 individuals aged over 60 years old, in the form of cash and bank deposits. In Japan, Hartford currently has the leading market share in that product of 29% and US$30 billion equivalent in managed assets. Over the period 2002-2006, Hartford’s annual compound growth in that key product was an impressive 170%. In 2005, Hartford entered the UK market with its variable annuity product, thus positioning itself in three of the major retirement services markets – the US, Japan and Europe. International now represents 12% of the group’s life insurance income. The year 2006 was a highly successful one for Hartford in financial terms. Core EPS rose 24% to US$9.07, while core earnings in the key segment of life insurance soared 34% to US$1.6 billion. ROE remained steady at 16.1% – somewhat above the 15% long-term target. Hartford’s mutual fund assets under management soared an impressive 33% during the year. In Hartford’s specialty business of variable annuities, the company is making major efforts to regain its number one position in the US, where total industry variable annuity sales increased 18% as the number of individuals reaching retirement age continues to mount. In Japan, increased competition in the core variable annuity product has depressed Hartford’s sales and funds under management. As of September 2006,
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION the company remained the leading variable annuity provider in the country, but major marketing and product development efforts have been required to sustain its position. In the UK, efforts to build variable annuity distribution through IFA networks continued.

Bancassurance strategy
As a major provider of life products, Hartford espouses a multichannel distribution strategy through banks, broker dealers, financial planners, life professional sales outlets, other insurers’ agents and the affiliated property and casualty agent channel. Hartford also owns Planco, a wholesaler of retail investment products sold through broker-dealers and banks by some 200 agents. In this context, banks play a major role as variable annuities are the principal insurance product bought by their retail clients. In the US, the group is the largest supplier of the product to banks. In Japan, for example, in the first quarter of 2006 Hartford was the leading issuer of variable annuities, with 24% of sales by the top ten issuers. Building the bancassurance channel in the US and Japan was a pioneering effort involving extensive product design, marketing what was an innovative concept to banks in both countries, and negotiating the necessary changes in regulation in Japan to permit banks to offer what was then a product which had not been authorised for bank sale. In both markets, Hartford management convinced banks that disintermediation – losing a deposit but gaining a revenue stream from the annuity – was a constructive idea with a positive impact on capital requirements and earnings. The result has been a distribution channel which, it is understood, now accounts for about 40% of Hartford’s retail insurance sales in the US. It has involved building a distribution sales force uniquely serving the banking sector. In terms of economics, the interviews conducted for this report indicate that revenues to Hartford are comprised of a share of the fees on the mutual fund which underpins the variable annuity product, as well as about a 1% per annum charge for the mortality risk and operating expenses which, as indicated above, are significantly lower than those of many peers because of Hartford’s massive volume. The full distribution fee of perhaps 5-7% is earned by the bank distributor, as Hartford is purely a product provider.

Evaluation of bancassurance strategy
Hartford’s pioneering role in developing the bank distribution channel for variable annuities in the US and Japan has made a unique contribution to its overall strategy.
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CASE STUDIES This effort has understandably sparked competitive efforts by its peers in both markets. As indicated above, in 2005 Met Life displaced Hartford at the top of the life distribution league tables, and in Japan the group has lost market share in variable annuities to competitors. In both markets, it would appear that the typical bank now offers a number of competing products. It is difficult to evaluate the likely success of Hartford in its latest effort to build variable annuity distribution in a new market. In the UK, where the company has commenced its efforts to build distribution through banks and brokers, Hartford faces a highly sophisticated market with a variety of competitors for the annuity product. Analysts will watch its progress with great interest.

HBOS

Background
Formed from the merger in 2001 of the leading UK retail mortgage provider Halifax and successful SME/corporate bank Bank of Scotland, HBOS has largely outperformed its UK peers in most measures of growth and market penetration. Its ROE of 20% in 2006, as well as 81% earnings growth over the 20022005 period, reflects its success in the twin strategic goals of maximising revenue growth and steadily reducing the cost base. HBOS’s unique business model incorporates multiple brands across its business lines as well as a multiple channel approach in the key business line of Insurance and Investment products, in which its bancassurance business is incorporated. In the retail sector, for example, HBOS makes use not only of the Halifax brand but also that of Clerical Medical, esure and its wealth management arm, St. James’s Place Capital. Building on its UK retail client base of 22 million, a leading 21% market share in the core retail mortgage product and 16% of UK savings deposits, HBOS has been a price leader while at the same time achieving its ROE target of 20%. Abroad, overseas earnings from retail and other businesses in Australia and Ireland account for 14% of the total. In 2006, HBOS’s underlying pre-tax earnings rose 14% to £5.7 billion to boost per share results by 16% above the 2005 level. ROE increased slightly to 20.8%. UK earnings benefited from 10% loan growth, a stable net interest margin and a declining cost:income ratio. In the key investment sector, HBOS became the largest UK provider of new investment products as pre-tax income in the sector rose 18%. The new business margin on an APE basis increased to 27% against 24% in the previous year. Sales of insurance via the bank channel increased 12% against over 40% via IFAs.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION Management targets a UK market share in key retail products in the region of 15-20%; its share of auto and household insurance as well as investments is now in single digits. Expansion in Ireland and Australia continues, with total international pre-tax earnings up from 12% to 14% of the group figure in 2006.

Bancassurance strategy
HBOS is the UK leader in bancassurance, well ahead of Lloyds TSB with its Scottish Widows subsidiary, with a 29% annual compound growth in premium income over the 2001-2005 period. At the same time, sales productivity has increased at a 23% annual clip. Bancassurance margins (new business contribution as a percentage of annual premium equivalent) of 26% in the first half of 2006 were double that of sales through IFAs. The generic business line Insurance and Investment includes a full range of life and non-life products as well as other long-term investments such as pensions, mutual funds and investment bonds. In 2004, HBOS was the largest UK player in the field of investment products with a 12% market share, and it is the industry leader in the core tax-advantaged ISA savings product. Insurance products are sold through the Halifax branch network with over 1,000 advisers as well as through IFAs via its Clerical Medical brand. Its market share in the highly profitable credit life product (sold in conjunction with retail mortgages) is an impressive 20%. Overall sales of insurance products have increased at a compound annual rate of growth of 17% during the past five years. HBOS has a reputation in the UK market of being highly successful particularly in marketing simple insurance products to a mass-market client base. Figure 10.4 (on the following page) portrays the virtuous circle of success in both revenue generation and cost reduction.

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

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

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION An interesting dimension of HBOS’ overall distribution strategy is its controlling ownership in St. James’s Place Capital, a highly regarded distribution force of professionals selling investment and protection products to upscale UK clients. No efforts have been made to co-ordinate the sales of the branch channel with this IFA arm, and the track record of doing so in other banks has not been particularly successful. On the other hand, in markets like Italy, bankowned financial adviser sales forces have successfully tapped the bank client base, an opportunity which might be considered in the future. Another opportunity might be exploitation of the client base of HBOS’ Australian bank, which also markets bancassurance products but does not appear to have benefited from the group’s experience in the UK.

ING GROUP

Background
The leading financial institution in the relatively mature Benelux market, ING Group has built its overall growth strategy around three key businesses: direct banking globally (with ING Direct), life insurance and retirement services in the US, and life insurance in emerging markets, in particular Asia-Pacific. Its core product groups are banking, life insurance and asset management, with major geographic units in Europe, the US and Asia-Pacific. One of the first major bank-insurance mergers, ING was formed in 1991 from the merger of the leading Dutch insurer, Nationale-Nederlanden, and NMB Postbank Group. It is now one of the top ten European financial institutions by market capitalisation. In 2005, its operating ROE was 26.6%. Operating profit in that year was split 55-45 between banking and insurance. From its origins, the group has adopted a multichannel distribution strategy. In the developed markets such as the US, Canada and Western Europe outside the Benelux area, its key channel is ING Direct plus its retirement savings network in the US. In CEE, the group has generally entered the market with a greenfield operation and built distribution through its own sales force of tied agents, with other channels such as bancassurance developing later. In Asia-Pacific, as discussed below, a combination of greenfield insurance, joint ventures and alliances is the chosen distribution strategy. The Insurance Europe division represents 22% of group pre-tax profits, largely in the mature Dutch market, where it sells through the ING bank branch network, the Postbank direct channel and the RVS broker network. In the US, which represents 17% of 2005 group earnings, ING figures among the top five providers of life insurance and retirement services.

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CASE STUDIES ING’s EPS in 2006 increased 6.7% to €3.57 per share with ROE at 23.5%, as banking profit rose marginally against a pre-tax increase in insurance earnings of 24%. Growth slowed in ING Direct as management built the mortgage book but attempted to balance growth with profitability. A major growth engine was a 14% increase in new sales of life insurance in the developing markets, which generated a rise of 32% in pre-tax underlying profits for that sector. Outstanding results were achieved, particularly in Asia-Pacific, where underlying pre-tax income from insurance soared 39% despite a decline in Japan due to competitive pressures. Overall, the underlying profit from both life and non-life grew 23% over the 2005 level.

Bancassurance strategy
Given the relatively limited growth prospects of the Dutch financial services market, ING has focused its bancassurance strategy around selling life insurance in the developing markets in the CEE and Asia-Pacific. The IRR of this business line reached 19% for the first nine months of 2006. While pre-tax income in the second quarter of 2006 from the Insurance Asia-Pacific group was only 6% of group pre-tax income, the value of new business was an impressive 48% of the group’s life insurance total. In Asia-Pacific, ING is the second-largest foreign life insurer; while in Asia (excluding Japan) it is also the third-largest foreign retail asset manager. The group regards itself as being well positioned for the massive growth expected in emerging Asia-Pacific. Figure 10.5 (below), based on Sigma data, reflects, the split between ING’s mature current markets and those rapidly growing ones with outstanding growth potential.

Figure 10.5: ING is well positioned for growth markets
Greenfield / Future
16% China 14% 12% Inforce Premium 10% Growth 8% Rate CAGR 6% 2006 - 2015 4% 2% 0% 0% 2% 4% 6% 8% 10% 12% Inforce Premium as % of GDP
= Insurance Density is the average per capita spend for Life Insurance premiums, base = Euro 1,000 India Thailand Malaysia

• ING is strong in the current big markets • Well placed in the future big markets • ING is steadily increasing its regional market share

Mature / Current

Hong Kong Australia Korea Taiwan Japan

Source: ING Group

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION In these targeted markets, ING has relied on a mix of bank acquisitions and alliances as well as greenfield operations based on building an agency network. Thus in Poland, the acquisition of Bank Slaski was complemented by a greenfield agency network, whereas in Australia ING has become the fourth-largest life and asset management provider by its acquisition of a 51% share in ANZ Bank’s fund management and life business. ING also owns 19.9% of Bank of Beijing in China. Other alliances include joint ventures with Kookmin Bank in Korea, where it is the fourth-largest provider of life and savings products, China Merchants Securities Ltd in China, and Rajan Raheja Group in India. Over the period 2002-2005, the value of new business rose at a compound annual rate of 14% in the Asia-Pacific region, with underlying profit increasing 17% per annum. Growth in Asia-Pacific bancassurance has been particularly impressive: in 2005, sales (APE) soared 106% against those of tied agents (37%) and independent agents (65%). As indicated by Figure 10.6, the share of ING’s bancassurance has risen in all markets except Malaysia and Hong Kong over the period 2002-2005.

Figure 10.6: Relative ING bancassurance growth in Asia-Pacific, 2002-2005 (%)
45

Bancassurance as percentage of total sales (%)

40 35 30 25 20 15 10 5 0
M al ay si a Ko ng

2002

2003

2004

2005

Ja pa n

Th ai la nd

Ta iw an

C hi na

In di a

Source: ING Group

ING’s Asia-Pacific strategy is keyed to the selection of markets and positioning within those markets. Having selected target markets on the basis of such variables as growth potential, the challenge is to position the group against its rivals. With over 100 banking alliances in the Asia-Pacific region, alliance management is a critical success factor. ING’s goal is to offer a total solution concept, rather than become simply a product provider at a price. Thus, contributions such as IT support, training, compliance and product development are critical dimensions of the relationship. Management accepts that this is a dynamic relationship with some change being inevitable; thus, the number of alliances with Chinese banks has been cut back due to such issues as compliance and pricing.
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CASE STUDIES Despite ING’s significant minority interest in Vyasa Bank in India, management believes action must be taken to increase the ING profile in that country. The goal for ING is engagement with the alliance partner, and the challenges vary with the partnership, often requiring an equity stake to firm up the relationship. Flexibility is often required. For example, ING’s relationship with Korea’s largest bank, Kookmin Bank, which has a 20% stake in the bancassurance joint venture, was threatened when the Korean authorities required Kookmin to give up exclusivity in selling insurance. ING was prepared to support the new venture bearing the Kookmin brand, even though it arguably competes with its own joint venture. Success in the joint ventures is measured by the traditional metrics of APE, IRR and the value of new business. Over time, however, management will be employing more sophisticated measures such as cross-selling and the extent of client penetration.

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

KBC

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

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION KBC’s retail product portfolio is characterised by strength in two key sectors: life insurance and fund management. The bank is the Belgian leader in mutual funds with a third of the market as well as a majority of the capital-guaranteed, indexed products sold in Belgium. In life insurance the group has a leading market share of 22% in its home market. During the first half of 2006, overall return on equity soared to an impressive 25% from 18% in 2005, with the Belgian businesses producing an even higher ROE of 36%. In 2005, the bank carried out a major reorganisation to create common bancassurance management structures for the home market as well as CEE units. A key strategy has been to build market share in the CEE, where profit growth in insurance is projected to increase at an annual rate of 25-35% in contrast to 1015% in banking in the home market and CEE. The group’s long-term market share target in CEE banking and insurance is 10%. Table 10.3 (below) profiles KBC’s current market shares for banking and insurance by geographic market.

Table 10.3: KBC market share by country and business, 2005 (%)
Banking business
Belgium Hungary Poland Czech Republic Slovakia Slovenia
Source: KBC Group, European Banker

Life assurance business
22 4 2 9 4 8

Non-life insurance business
9 4 11 4 4 N/A

22 11 4 21 7 42

In the CEE, the group’s strategy has been to make early acquisitions of both major banking and insurance groups in the larger accession countries. Thus, in the Czech Republic, its CSOB subsidiary is the second-largest hank with 21% of the market; in Hungary K & H Bank has become the second bank with 11%, and in the much larger Polish market Kredyt Bank is now the eighth-largest banking institution. Unfortunately, in Slovenia its affiliate, Nova Ljubljanska Banka with a dominant 42% market share, is no longer a strategic holding because of a disagreement with the majority interest owned by the government. Overall, however, the group has some 10 million CEE clients and 1,200 bank branches. KBC reported steady earnings progress in 2006 with underlying net income rising 11% to €2.5 billion and underlying ROE of 18% despite pressure on retail lending margins in the home market. Net interest margins fell slightly, but 1314% increases were reported for the key metrics of loans, assets under management and life volumes.

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

Bancassurance strategy
KBC’s bancassurance strategy is built around an integrated approach with a single retail function marketing both banking and insurance products. This has generated some of the highest cross-sell ratios in European banking; a study in 2002 by Citigroup placed KBC at the top of 34 major European banks in the number of products per retail client – an impressive 3.6. Unlike some of its peers who retain an organisational split between banking and insurance, KBC has made major efforts to ensure collaboration among its marketing channels with extensive measurement of client/product penetration and financial incentives to cross-sell banking and insurance products. Thus, 40% of the bank’s Belgian customer base buys at least one banking and one insurance product, while 16% of the total are viewed as ‘stable’ bancassurance clients with at least three banking and three insurance products. Cross-sell ratios of mortgage loans, home insurance and death cover insurance in Belgium approximate 80%. As indicated by Table 10.3, the group’s strategic challenge is to export its bancassurance concept to the CEE. The target market share of 10% overall implies a major boost in insurance penetration. Another strategic objective is to boost KBC’s share of non-life insurance across the group. In 2006, management expects to achieve a 10% share of non-life in the home market. With sustained pressure on margins in the core home mortgage product, the contribution made by related insurance offerings like credit life is critical. Product priorities in Belgium are driven largely by tax regulations. Thus the choice of life or mutual fund is a function of which can best incorporate fiscal advantages. In terms of client priorities, KBC segmentation is underpinned by a distinction between ‘stable’ and ‘unstable’ clients, which are further broken down into bank, insurance and bancassurance clients. As indicated above, the key segment of stable bancassurance clients is an impressive 16% of the total retail base. An important dimension of the bancassurance strategy is the distribution leadership centre, which brings together product specialists, the distribution channels, and marketing experts to propagate best distribution practices across the

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION group. One such Belgian best practice is the creation of three ‘needs platforms’ – savings and investments, SME, and payments/consumer finance/retail insurance – to break down the traditional product silos of a banking/insurance structure. A particular issue has been to encourage the group’s roughly 600 independent exclusive insurance agents to co-operate with the branch-based bankers. In organisational terms, the problem has been to resolve the classic issue of ‘who owns the client?’ and to motivate both bankers and insurance agents to sell to the same client. Management’s response has been to assign the particular client as a ‘stable’ one to the intermediary who first sells three distinct non-life insurance products to the client; he then receives all recurring credits for that client, while new sales credits go to the salesman who made them.

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

MAYBANK

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

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CASE STUDIES The bank has faced strong competition from the three major foreign-owned banks in the country – Citi, HSBC and Standard Chartered. In response, management has transformed its branch network, culture and systems to achieve a single view of its clients. As will be discussed below, in 1994 Maybank pioneered the concept of bancassurance in Malaysia. It was also a leader in establishing a dedicated sales/service force for wealth management, selling a range of in-house products including life insurance. Maybank has also played a leadership role in Malaysia’s burgeoning takaful, or Islamic banking market, which is growing at an annual rate of 15-20%. The results have been excellent. One of the few Asia-Pacific banks to publish its cross-selling performance, in 2004 Maybank achieved an impressive 4.83 products per client in its upscale client segment and 3.61 in the middle category – results which compare favourably with the cross-sell leaders in the US and Europe. Overall, profits have increased steadily in recent years and provided a highly competitive 17% ROE in fiscal 2006. Net earnings for the six months ended December 2006 increased slightly by 4.4% over the prior year period as a result of higher margins, an increased contribution from international operations and the initial contribution from the acquisition of Malaysia National Insurance (MNI). ROE increased slightly to 16.8%. Results from the insurance and takaful unit more than doubled over the prior year level in the first half of the current year. Management reiterated its strategic focus on increasing international earnings, the contribution from non-banking businesses, and non-interest income.

Bancassurance strategy
Challenging the Malaysian life insurance sector with its reliance on agency distribution, since 1994 Maybank has pioneered the bancassurance concept in its home market. Malaysia’s high life penetration ratio of 37%, combined with the absence of government pension provision for the private sector, make the life market a particularly attractive one. While relatively small in the group’s overall profits with 6% of total pre-tax earnings for insurance and takaful, the contribution of this combined category soared over 80% in absolute terms in fiscal 2006. In 2001, Maybank allied itself with Fortis, the Belgo-Dutch bancassurer, as part of Fortis’ bid to win market share in Asia-Pacific. Fortis has a 30% share in the bancassurance joint venture. In 2005, both partners combined to take a controlling 74% stake in the Malaysian insurer MNI Holdings to gain access to MNI’s distribution capability with thousands of agents in the agency, corporate and government channels.

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION The arrival of Fortis in 2001 was a seminal event in Maybank’s retail evolution as seconded Fortis professionals addressed both the bank’s overall retail strategy, as well as bancassurance in particular. Essentially, Maybank’s bancassurance model is based on the original Fortis structure used in Belgium – effectively total integration of the insurance activity with the retail business in both the front (client-facing) and back offices. Maybank’s aggressive bancassurance strategy won it the second position in the sales of new life policies in Malaysia in 2005, while in non-life it boasts the highest margins. Bancassurance performance is measured by total volume of products sold (both life and non-life) as well as customer penetration. Currently roughly 14% of banking clients have an insurance policy, a figure which is projected to increase to perhaps 20% by 2009. The core life product is a simple single premium policy with an investment linkage. The bank’s strategy is to move clients from such products to the generic category of long-term investment and advice with mutual funds, guaranteed investments and similar products. The client base is segmented into the core categories of mass market, mass affluent, affluent and high net worth. Typically mass-market clients start with non-life products, with wealthier clients offered a financial planning package. The major issues encountered in building the bancassurance business have been development of the product range and improving the competence of the sales professionals. Significant effort has also been made to incentivise this sales force, with the introduction of a bonus plan which enables salesmen to earn up to twice their salary.

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

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CASE STUDIES

UNICREDIT

Background
Formed in 1998 from the merger of a number of Italian commercial and savings banks, UniCredit’s cross-border acquisition of Germany’s HVB created one of Europe’s top ten banks by market capitalisation, with strength in one of Europe’s wealthiest regions as well as the rapidly growing CEE. More specifically, the merged bank is Italy’s second-largest with 11% of the lending market, Germany’s second-largest with 5% of the lending market, and Austria’s largest with 19% of loans. In the CEE, the group is one of the largest banking entities. In all, the group has some 7,000 branches in 21 countries across Europe. Having created one of Italy’s most profitable banks, UniCredit’s highly regarded management team has been making a major effort since 2005 to turn around loss-making retail entities in Germany and Austria. This has been done by applying UniCredit’s management disciplines of a focus on customer satisfaction; the use of financial incentives to cross-sell in the branch network; strict customer segmentation between mass market, affluent and other groups; centralising service functions; and a focus on attractive customer segments. The group has also applied its strict functional approach to the organisation of the merged entity. All retail businesses report to the head of retail, Roberto Nicastro, with geographic retail units using the same management guidelines. The insurance function, UniCredit Assicura, is one of three specialist retail networks. UniCredit’s retail strategy is built around a combination of hard and soft dimensions. The former include market share targets for important products, which are measured against national benchmarks as well as specific client segments. The soft dimension includes a focus on customer satisfaction, which is regularly measured by external surveys, and assumes that there is a causal relationship between staff satisfaction, client satisfaction, and market share results. In 2006, the group reported outstanding results across the board, reflecting organic growth as well as some of the results from reshaping the HVB acquisitions. EPS soared 60% to €53 on the back of an increase in operating results on a like-for-like basis of 24.5%. ROE jumped to 16.7% against only 10.7 for 2005. All divisions reported excellent growth, with retail earnings jumping 33.5% and the contribution from CEE rising 30.7%. Impressively, the cost-income ratio fell to 56.5% against 61.7% as productivity improvements were made in Germany and Austria. Of particular interest for this case study, the amount of fees for placing insurance rose an impressive 27%.

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Bancassurance strategy
The group’s bancassurance strategy is based on distribution through its branch network, alliances with insurance providers and a product range driven by local – essentially fiscal – factors. In Italy, separate alliances with Aviva and Allianz dominate the distribution strategy, as UniCredit has traditionally looked to partners for product manufacture. A typical Italian branch will sell only products from one partner. Such alliances generally are based on a split of the selling commission of perhaps 7%, with the distributor receiving 70% of the sales margin. The insurance product line is driven by relative fiscal advantage: currently the absence of such advantage in Italy leads to focus on the unit-linked product. Significant growth, however, is taking place in credit life insurance, with a cross-sell ratio against consumer loans well above the group’s overall relatively modest insurance penetration rate. Company data indicate such a penetration rate in the mass-market segment in Italy for the key life product of about 5%, which compares with mortgages of 12% and asset management of 16%. In the German market, client penetration of HVB’s 2.4 million mass-market client base is even lower at 3% for recurring premium life insurance. A key offering is the low-cost Riester product under the post-2005 fiscal regime. In the strategic growth target of the CEE, the Polish bancassurance sector stands out as UniCredit’s major bancassurance market. No major insurance partnerships exist there, in contrast to the two in Italy. Credit life offers significant growth potential in the CEE.

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

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CASE STUDIES

WELLS FARGO

Background
The product of a merger of equals in 1998 between San Francisco-based Wells Fargo and Norwest Corporation in Minneapolis, Wells Fargo has grown organically and by the acquisition of smaller banks to become the fourth-largest US bank with retail distribution strength in the West as well as several nationwide businesses. Management is committed to a broadly based financial services strategy and compound annual growth targets exceeding 10% in sales and EPS. Over the five year period ending in 2005, revenues have grown at a rate of 13%, while earnings have increased at 14% annually. ROE in recent years has approximated to 19-20%. Wells has become a global role model of a sales and service culture-driven bank which has sustained above average results. More specifically, the bank is a global icon of successful cross-selling of retail products, while maintaining high customer and staff satisfaction ratings. Its well-advertised metric of sales per retail client has increased steadily in recent years to the impressive figure of five products, 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 insurance outlets across the 50 US states. The group ranks among the top three in 16 of the 23 Western states constituting its core market area. In addition, Wells is the largest home mortgage originator and second in mortgage servicing in the US. In 2006, Wells continued on track for its strategic goals of double-digit revenue and earnings growth, with a 12% EPS increase in the fourth quarter and fiveyear annual compound EPS increase of 21%. Average core deposits and product sales rose by 11% and 19%, respectively. Equally important was progress in broadening the business base and improving cross-sell and productivity ratios. The benchmark figure of core sales per banker edged up from 4.9 to 5.0. In the small business sector, Wells is now the largest competitor in the US, with loans to SMEs growing by 18%. In the private-banking business, which is a high priority for Wells, earnings rose 14%. The number of households buying at least eight products rose from 17% to 20% of the total, while the proportion of wholesale clients buying more than six Wells products also set a record.

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Bancassurance strategy
Wells’ bancassurance strategy is driven by its management’s view that the bank should be present for its priority client segments for all five major financial needs: transaction services, savings, short term and long-term credit, and protection. Bancassurance thus targets protection services, essentially non-life products, although investment needs are met by the sale of annuity products. Roughly US$1 billion in brokerage revenues is currently earned from insurance products, including annuities. To deliver this strategy, Wells sees itself as a product provider rather than a manufacturer, and in this context is committed to offering choice to its priority segments such as SME and mid-scale corporates, professionals and real estate developers. It has thus built by acquisition an impressive network of insurance brokers across the US. Under the Wells Fargo Insurance Services (formerly Acordia) brand, this network now constitutes the largest bank-owned network and the fifth-largest overall in the US. Figure 10.7 profiles this national network of over 150 offices and 4,500 insurance agents. During the first half of 2006,Wells ranked second in the US only to Citigroup in the sales of insurance products to its banking clients, with a 15% share of insurance revenues earned by bancassurers.

Figure 10.7: Wells Fargo’s insurance network

• No. 1 bank-owned insurance agency in the US. • No. 5 insurance broker in the world. • Places US$10.1 billion in annual risk premiums. • Over 150 locations across the US; 4,500 insurance agents. • 23 new agencies acquired in the last five years. Source: Wells Fargo & Co

As an icon of cross-selling success in the US, Wells’ strategy for the insurance sector is based on cross-selling of insurance products through referrals from the bank branch channel to the Wells Fargo Insurance Services brokerage network. Bank platform staff thus receive credit for referring possible insurance business
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CASE STUDIES to a broker. It is estimated that perhaps 15-20% of group’s insurance revenues are thus introduced by the bank channel. In contrast, unlike other bancassurers, Wells does not expect insurance brokers, who traditionally view themselves as professionals who evaluate insurance risk and recommend coverage, and not as salesmen for bank products. Management acknowledges the cultural gap between the two sales forces, but believes that, over time, the relationship value of the referrals to its insurance brokers will be recognised by both sides of the organisation. Another critical dimension of the bancassurance strategy is choice – essentially open architecture. In the future Wells model, call-centre specialists will provide a bank customer with a range of product solutions as well as a ‘recommended’ one.

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

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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 interviews and case studies, examined in the light of the evidence from Chapters 1-9. They are addressed in terms of the ten key issues which underpin bancassurer strategies: • ownership and control; • choice of national market; • channel strategy; • product range and strategy; • client segmentation and strategy; • joint venture/alliance selection and management; • culture and people issues; • managing the sales process; • performance metrics; and • the impact of regulation.

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

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION First, the projected cost and revenue synergies rarely exceeded 5% per annum, even by the merging entities’ own calculations before the transaction. Such synergies, if achieved, must be set against the human and financial cost of such major corporate actions. Second, perhaps one-third of the transactions cited above in Table 9.1 were subsequently reversed at least in part. Banks sold off the acquired non-life operations and/or exited the manufacture of life products, while insurers divested themselves of problem banks. Most recently, the insurer Sampo sold off its banking interests (which had only been acquired a few years earlier) to Danske Bank, while Credit Suisse finally disposed of Winterthur to AXA – having previously reversed, in 1997, a decision to “buy the milk, not the cow”, in the words of Lukas Mühlemann, the former CEO of the bank. Third, many of these decisions to exit the insurance business were made as a result of the subsequent collapse of the equity markets in 2001-2003, which severely undermined the capital base of insurers in markets like Switzerland, the UK and Germany and obliged new bank stockholders like Lloyds TSB and Credit Suisse to make substantial provisions for capital impairment. The net result is summarised in Table 11.1, which lists total or partial divestitures of insurers by 11 banks during the past decade as well as five sales of banks by insurers.

Table 11.1: Bancassurance divestitures by European banks and insurers, 19902006
Banks sell insurers (in whole or part) Bank Insurer
SEB Danske Bank Nordea Credit Suisse Deutsche Bank Barclays Alliance & Leicester RBS ABN Amro BBVA SCH
Source: DIBC

Insurer
Sampo Swiss Life AMB AXA/UAP GAN

Insurers sell banks Bank
Sampo Bank (ex-Leonia) Banco del Gottardo Bank für Gemeinwirtschaft Banque Worms CIC

Trygg Hansa non-life Danica non-life Tryg Baltica Vesta non-life Winterthur Deutscher Herold In-house life subsidiary In-house life subsidiary In-house life subsidiary In-house life subsidiary Aurora Polar Plus Ultra Vitalicio

Overshadowing these decisions – as well as possibly the outcome of the landmark US merger in 2002 between Citibank and Travelers in the US – has been the issue of different cultures. While banking and insurance are both providers of financial products, insurers are known for their proactive, sales-oriented individual marketers, whereas bankers are more institutionally oriented,
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THE LESSONS OF GLOBAL EXPERIENCE: ADDRESSING THE ISSUES salaried employees. Table 11.2, taken from a Deutsche Bank report in the early 1990s, neatly summarises these cultural differences.

Table 11.2: Cultural differences between insurers and banks
Banks
Sale by the institution Branch offices are expensive Daily and personal management Reactive Short, frequent client contacts Good information on clients Fixed working hours Salaried employees Problem solvers Standardised sales approach Positive image
Source: Deutsche Bank, Salomon Brothers

Insurers
Sale by individual Intermediary earns his own money Management by production Proactive Long, infrequent client contacts Little information on clients Flexible working hours Commission-based employees Product sellers Individual sales approach Doubtful image

This report discusses below how these cultural differences are still present in bancassurance mergers of a decade ago as well as a major factor in the success or failure of recent joint ventures and alliances. Thus the wave of optimism which created the integrated bancassurer in the late 1990s has receded and even been reversed in many cases. Whatever the argument against financial integration – the perceived equity risk, possible lower ROEs in the insurance sector or cultural differences which hamper the smooth running of the enterprise – many banks prefer a retail strategy of product distributor rather than manufacturer. In the US, for example, banks have uniformly determined not to become insurance underwriters, and a leader like Wells Fargo advertises its strategy of offering insurance choice to its banking clients. In the EU, the financially integrated Spanish and French bancassurers contrast sharply with the current preference in the UK for alliances with insurers like Aviva. On the other hand, as discussed below, operational integration is cited as a critical 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 independent product provider, the ability to control execution of a bancassurance strategy is a vital factor. This is a major issue for foreign partners in markets like India and China where the leading banks have flexed their muscles by insisting on non-exclusive distribution clauses. Perhaps the most interesting case study of this issue is Allianz’ success in turning its subsidiary Dresdner Bank into a more effective bancassurer. Throughout the 1990s, Dresdner as an independent entity was unable to ‘punch its weight’ – achieve insurance penetration consonant with its share of the retail market –

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION even though it sold excellent brands, such as that of Allianz. Whatever the costs of acquiring and turning around the bank in recent years, Allianz now can effectively direct bancassurance execution in Dresdner via its total financial control. On the basis of the interview series, it is clear those acquisitions of a bank (by an insurer) and an insurer (by a bank) have failed for a variety of reasons. A key issue is channel conflict. The culture, economics and client base of a mass-market bank are significantly different from those of an insurance underwriting or brokerage business. Some bancassurers like KBC and Fortis have been relatively successful in managing this conflict, but others, like many EU bank acquirers and Citigroup, have decided to divest the manufacture of the insurance product and buy it in from third parties to broaden their product range. In theory, adding a new distribution channel and client base are attractive to a bank, but in practice they must often be managed separately. As many US banks have probably found in acquiring insurance brokers, banking products do not offer the absolute and relative commissions demanded by brokers, while the brokers’ advice is difficult to provide to a mass-market bank clientele. Conversely, insurers attracted to assurbanking by extending their product range to basic banking services have found it difficult to win the core banking business of their insurance clients. Even attracting several hundred thousand banking clients has not provided the ROE needed to justify the investment. Anther factor limiting the attractiveness of buying an insurer has been the relatively low and volatile returns of insurance underwriting compared to the double-digit and consistent ROEs of most successful banks. As discussed above, the global equity crash of 2001 following a string of insurance acquisitions may have been pure coincidence, but it has soured the appetite of bank investors and management alike. However, operational integration, as discussed below, can be essential to the success of a bancassurance business – whether achieved by ownership or arm’s length agreement though a joint venture.

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

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THE LESSONS OF GLOBAL EXPERIENCE: ADDRESSING THE ISSUES In contrast, the US with its split between product manufacture and distribution has not been an attractive bancassurance market even for veteran bancassurers like Fortis. Interviews revealed that a major driver of market choice is the availability of the ideal banking partner for those insurers seeking to enter a new market. Such a partner would have a large retail market share and good brand, as well as the willingness to commit to an exclusive alliance in which management is essentially shared between the bank and insurer. Thus Allianz not only has such an alliance in Italy with UniCredit but has also benefited in the CEE from UniCredit’s penetration of that market. In contrast, interviewees indicted that, failing such an ideal partner, a more ‘opportunistic’ or risky approach would be to joint venture with a smaller bank or one not prepared to integrate on an exclusive basis. In the booming Chinese and Indian markets, a host of foreign insurers have thus accepted such a strategy as the best possible in an otherwise attractive market.

CHANNEL STRATEGY
The virtues of the bank channel are well known: access to the mass of retail clients, low-cost distribution of simple products and strong client loyalty in many markets. Yet successful bancassurers as different as Hartford, ING, Maybank and CNP Assurances all are committed to a comprehensive approach to channel management. Thus in Asia-Pacific, Malaysia’s leading bancassurer has acquired a traditional agency-based insurer, while in France CNP Assurances has entered (by acquisition) the servicing of the growing independent broker sector. Interviewees pointed to the wide national differences in the value of a bank distribution channel. In markets like Spain, where bank networks are dense and client loyalty strong, a bank channel can add more value than a market like the UK, where it is less dense and clients go elsewhere for important financial products and advice. While a commitment to multichannel distribution can be an expensive one, the need to anticipate future changes in channel usage is clearly on the minds of bancassurer management. Thus the potential growth of internet, or direct, banking is a significant threat to the sale of insurance products through the bank branch network. Research has highlighted the enduring differences of each channel. Thus, brokers thrive when complex products with correspondingly high commissions are sold, usually to a relatively affluent client base. Banks are successful in selling simple offerings to a mass-market client base, which either resemble banking products or are sold in connection with them. Shifts between channels occur when, as recently in the case of the UK and Germany, a formerly complex product is simplified, or tax/regulatory changes permit the banks to sell a product
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION which has the same advantages as its insurance equivalent. Conversely, brokers benefit when a more demanding client base insists on choice and independent advice. When a product such as auto insurance or term life is commoditised, direct channels, such as the internet or supermarkets, win market share. As discussed above, many US banks made heavy investments in the brokerage sector which may have proved disappointing because of these enduring differences in channel character.

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

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THE LESSONS OF GLOBAL EXPERIENCE: ADDRESSING THE ISSUES interviewees is the classic explanation: life insurance has to be sold, with the implication that bank platform and support staff cannot do the job as effectively as agents or brokers. By its nature, the individual life product is an expensive one, and clients have shown their preference for a lower-cost, simpler solution. The US experience reinforces the lessons of product simplification learned in the 1990s in Europe. Products designed by insurers there for their client base for years failed to sell well to a bank client base. The answer was the integrated bancassurer like Crédit Agricole or Fortis, where insurance products were designed by bankers with their clients in mind. Simple products may not have the ‘bells and whistles’ designed by insurers – as well as the margins that go with a complex product – but they can be sold by a generalist sales force. Simplicity may mean front-office and back-office integration, such as common sales processes and IT systems which use existing client data and move money from a current account to pay a premium. In the US environment, where banks are essentially processing a third-party product, this is not a simple task. The dominant product theme from interviews with successful bancassurers has been ‘make the product easy to sell’. Thus straightforward investment products such as the variable annuity, usually tied to an equity index, have been the standard-bearer for most bancassurers as opposed to the traditional life product which combines protection and investment, often with a complex array of variations to attract a particular client segment. More recently, banks have discovered the attractions of selling life and non-life products in connection with a bank loan. The combination of generous selling commissions plus, in many cases, all or a major portion of the manufacturing margin provides a substantial share of the revenues of many retail banks in the EU.

CLIENT SEGMENTATION AND STRATEGY
Interviews confirmed the core assumption that banks’ priority for insurance products is the mass market which relies on banks to provide most if not all basic financial products. The banks interviewed usually segment their clients along traditional lines by investible wealth or income into mass market (up to perhaps US$100,000 in investible funds), mass affluent and affluent (up to US$1 million) and high net worth (over US$1 million). Some of the more experienced bancassurers like Fortis drill down further into sub-segments and product categories, but perhaps the most interesting metric is penetration of individual segments with insurance products. In its home market of Belgium, where it has built its bancassurance business over more than 100 years, Fortis has achieved penetration ratios of over 30% dependent on the segment and product involved – ratios to which its competitors aspire. Its rival KBC takes pride in the fact that 16% of its total retail client base has a ‘stable’ bancassurance relationship with at least three banking and three insurance products.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION Given the growth and profit potential of an increasingly wealthy and ageing population, selling wealth management and retirement products to upscale segments is a strategic target of many bancassurers. Here they must confront the traditional competition of agents and brokers with the financial incentives and time to build relationships of trust with the client. In the US, a traditional ‘broker’ market, persuading the client to buy these products from a bank is an uphill struggle. In Europe, where the client may place more trust in his bank for such products, banks have the added advantage of association with teams of IFAs (in the UK) or financial advisers (in Italy). Yet the interview conducted with HBOS, which owns one of the best known of such IFA firms – St. James’s Place Capital – confirms that there is little cross-selling or referral within the group. One can only assume that client ownership is a major obstacle to such cross-selling even within the same group. A major segmentation issue for bancassurers is to identify and service effectively the segment of its retail population which desires a relationship and is prepared to pay for it. For the typical bank platform salesman, taking the time to build such a relationship means less effort in selling easier-to-sell products as well as the proliferation of administrative tasks typical in a large bank. Many of the complaints by insurers about bankers who are not willing or able to sell stem from this dilemma. The data from Mercer Oliver Wyman’s research into the cost of selling a regulated investment product in a market like the UK, as well as the wide variance in sales productivity across European banks, highlight the need to segment the client base and focus sales efforts on clients likely to buy the product. As a bank’s mass-market client base grows in wealth and sophistication, the long-term challenge will be to move upmarket to meet the need for advice and choice. The research mentioned in Chapter 6 shows how the affluent segment represents a multiple of the wealth of the mass market in a typical developed country.

JOINT VENTURE/ALLIANCE SELECTION AND MANAGEMENT
For a bancassurer without its own retail bank network in a target market, the selection and management of a joint venture or distribution alliance partner is a critical success factor. Not only must any national differences be managed, but also the cultural bank-insurance divide has to be addressed. At the same time, the insurance partner has a clear preference for controlling, if not actually managing, the bancassurance venture, which poses a clear issue of meshing the partners’ respective strategies and objectives. Faced with these challenges, the clear preference of the foreign insurance partner is a retail bank with a substantial market share and willingness to establish an exclusive distribution relationship. If this is not possible, what is known as an
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THE LESSONS OF GLOBAL EXPERIENCE: ADDRESSING THE ISSUES opportunistic strategy is adopted – essentially agreements with smaller banks which may not be exclusive. In attractive markets such as India and China, the latter approach has been chosen by interviewees as the best possible strategy in the circumstances. Having identified the appropriate local partner, the challenge is to strike a financial arrangement which ensures mutual commitment yet meets each party’s financial and control objectives. Some insurance partners such as CNP and Fortis insist that each party has a significant financial interest in the success of the project. Agreement must be reached on the split of the sales and manufacturing revenues, as well as the possibly substantial cost of installing the appropriate IT systems, training, product development, compliance and process controls. As in any joint venture, the insurance partner is vulnerable to changes in strategy by the banking partner; thus for example the introduction of a competitive investment product may well undermine the success of the insurance offering. The research did not uncover any useful benchmark metrics for these critical decisions. Interviewees were generally reluctant to discuss specifics except possibly the split of sales commissions. In Italy, for example, traditionally a 7% sales commission has been split roughly half to each partner, while CNP Assurances speaks of a range of 40-60% earned by the local partner. What is clear, however, is that best practice requires flexibility, the willingness to commit funds, and engagement – essentially building relationships of trust and confidence at all levels between the partners. It was pointed out that each joint venture/alliance is different, and each governance structure must adapt to local circumstances. Overshadowing such alliances is the historical record of joint ventures in other sectors either failing because of business reasons or one partner insisting on buying out the other. Given the extensive financial and reputational investment made by bancassurers such as ING, Fortis and Aviva in these ventures, such a possible failure or break-up must be a real concern. Access to a bank client base is an extraordinarily valuable bancassurance commodity, and one can assume that the banking partner is in a position to take advantage of this leverage. Bancassurance alliances or joint ventures represent a particularly unique challenge compared to that of a traditional product supplier who sells to a distributor’s clients. This report’s interviews emphasised the vital need for ‘end-to-end’ or seamless front-end and back-end linkages. Thus the sales process ideally should not involve an awkward hand-off between employees of the two partners, while at the back end a bank’s database and payments mechanism ideally should be used for the insurance transaction. Shared decision-making between the two partners up and down the organisation is thus a critical success factor. Given these challenges, the track record to date of durability in bancassurance joint ventures and alliances is impressive. While ING and others with over 50100 such international agreements and alliances admit that some work better

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION than others, there have been few recorded instances of a break-up of a major bancassurance venture in which both parties have invested. In the following chapter, the outlook for such ventures is examined.

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

MANAGING THE SALES PROCESS
Typically bancassurers rely on platform staff – generalist bankers with limited insurance training and a host of other products to sell – to do the bulk of insurance selling. They are generally supported by financial advisers qualified to sell insurance as well as a range of other investment products such as mutual funds, annuities, guaranteed deposits and alternative investments. In the background may be an insurance specialist provided by the insurance partner for training and support in complex situations. While this structure may be ideal in concept, in practice bancassurers often succumb to a one-size-fits-all approach which does not match client needs with the appropriate selling skills and profit potential. In one of the few consultant studies which addresses the unique challenges of bancassurance (entitled Sales
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THE LESSONS OF GLOBAL EXPERIENCE: ADDRESSING THE ISSUES success in European bancassurance), Mercer Oliver Wyman identifies three generic types of bancassurance sale: the annex (the product sold as a result of another sale, such as a loan); transactional (“this is a good product for you”) and relationship (“let us look after you”). The latter is the most demanding in terms of time and effort, while the first category may well be the most profitable. Table 11.3 profiles the challenge.

Table 11.3: Three kinds of bancassurance sale
Annex
Customer proposition Typical products “You will need one of these as well.” • Creditor insurance • Home insurance • Mortgage life protection Medium Small High (price insensitivity) Low

Transactional
“This is good product for you.” • Tax-advantaged mutual funds • Savings plans • Standalone motor insurance Large Premium Small (commoditisation) Medium

Relationship
”Let us look after you.” • Retirement plannings • Risk protection • Inheritance planning

Transaction volume Premium size Margin Marginal sales cost
Source: Mercer Oliver Wyman

Small Large Medium (service premium) High

Mercer’s research attributes the wide range of bancassurance sales per salesman in Europe to inefficiencies in systems integration and sales training. Thus in the highly profitable credit life product, mortgage penetration rates range from 5060% for successful banks to 20-30% for laggards. In the UK, HBOS is a leader in selling annex products, making use of single application forms and using a single database. In its research in Germany, Mercer found that best-performing bancassurers sold more than 60 policies per bank clerk annually, while the majority sold fewer than 20. As indicated above, banks have struggled to get the model right for relationship sales, often spending considerable amounts of time building relationships with the wrong customers or employing the wrong model for the right ones. A separate issue in the sales process is mis-selling in markets like the UK and US with strong consumer protection cultures. After focusing on endowment insurance and precipice bonds, the UK’s FSA will be emphasising PPI in its enforcement programme.

PERFORMANCE METRICS
The limitations of insurance disclosure sadly extend to the bancassurance domain. As indicated by the case study material, the available data usually focuses on growth indicators such as premium volumes and market share.
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION Many leading bancassurers provide an indication of margins (value of new business as a percentage of business written) and pre-tax margins. On occasion, bancassurers may provide an indication of changes in the terms of long-term distribution agreements. Returns on invested capital are rarely provided, and the use of both EEV and standard bank accounting data complicates the analyst’s tasks. In summary, no publicly available bancassurance profitability comparisons across a wide range of competitors could be found. As indicated above, only a handful of these firms make useful metrics available, and these can rarely be compared to those of competitor institutions. The lack of comparable performance data across the bancassurance world can also be explained in part by differences in structure, maturity and scope of the various entities. The interviewees pointed out that, quite apart from the dimensions of degree of integration and product range, bancassurers differ in their cost and revenue allocations as well as age and sophistication of technology systems. Cost and revenue allocations are driven in part by negotiations between bancassurance partners and may or may not reflect actual profit and loss (P&L) items. Bancassurer technology may be new and efficient or old and fully amortised. In brief, until bancassurers – in particular, joint ventures – are driven by the incentive to disclose realistic profit results under the scrutiny of the markets, it is unlikely that analysts will benefit from a significant increase in disclosure. Probably the most useful bancassurance performance data is relative: comparison with domestic margins and relative growth compared to other distribution channels. As indicted above, overseas margins tend to be higher than domestic ones, while the bancassurance channel appears to be growing faster than others. The external analyst can thus only guess at the underlying profit performance and its drivers. Assuming the sales commission is split roughly 50-50 between the insurance and banking partners in a joint venture, the key variables are the efficiency of the sales process, investment in IT systems and training, and compliance. In theory, having a modern, central national processing unit, as Aviva does for its key EU markets, should be a competitive advantage. Product pricing varies widely across national markets, and the interviewees were reluctant to generalise on this key variable. But in the case of annex products, like credit life sold in connection with retail loans, it is reasonably certain that the combined sales commission and manufacturing margin can exceed 50% in many markets. Having a capitalised joint venture has the advantage of aligning the partners’ interests but the disadvantage of sharing the profits. A pure distribution arrangement may involve less capital investment but perhaps function less efficiently. One does have the impression, as the HBOS case study points out, of a virtuous circle in which successful sales drive down unit costs, which permit product pricing to generate yet more sales.
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THE LESSONS OF GLOBAL EXPERIENCE: ADDRESSING THE ISSUES One of the most obvious – but difficult to quantify – differentiators is the profitability of integrated bancassurers against those essentially earning the distribution margin. As indicated in Chapter 8, the manufacturing and selling margins for life insurance are not dissimilar. Thus a successful integrated bancassurer like Fortis in its home market captures both margins as well, presumably, as benefiting from integrating both the sales and processing functions. In contrast, a US bank essentially selling third-party insurance products earns only a selling margin and does not capture the advantages of integration. The outside analyst cannot quantify this differential, yet it must account for much of the reluctance of US banks to commit resources to bancassurance. On balance, the outside analyst must rely on aggregate numbers for the bancassurance and/or international function. To date, for the leaders described in Chapter 10, these numbers have largely been impressive in terms of relative growth and profitability. With specific reference to profits in the bancassurance realm reported for 2006, the twin segments of bank distribution and international expansion are significant growth engines for most of the sample of 12 case studies. Thus the bank distribution channel in general is providing good growth for HBOS, while bancassurance outside the home market is a dynamic profit generator for Aviva, Hartford, CNP, Allianz, ING and KBC. Another feature of many of the case studies is the outstanding profit growth in 2006 for several insurers like Allianz, Fortis, CNP and Hartford as they successfully address major strategic issues. In contrast, more modest earnings growth in the region of 10% continues for institutions like Wells Fargo, KBC and Maybank. Interestingly, only the two US-based banks – Citi and Wells Fargo – do not feature bancassurance in their initial 2006 analyst briefings. Finally, there is increasing mention of competition in the bancassurance world. More specifically, both ING and Hartford speak of margin pressure in the important Japanese market. On a broader scale, Citi’s core US consumer business overall is clearly passing through a difficult period.

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

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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION including life insurance, pension funds, mutual funds, variable annuities and long-term bank deposits. As the highly regulated emerging markets in Asia-Pacific and the CEE evolve, the same liberalising trends are visible: a broader product range is allowed, new distribution channels are permitted, and entry to the long-term savings market is broadened. Most of these deregulatory measures benefit newcomers to the insurance market: foreign banks and insurers, new product innovations, and liberalised ownership rules. The case studies of US and European bancassurers reflect a longterm commitment to these markets which could not be justified without the assumption of further deregulation. Regulation also plays a large part in the design of insurance products. Thus in a market like Belgium, every effort is made to design a product – whether designated ‘insurance’ or not – to benefit from favourable tax treatment. On the other hand, in the US and UK regulatory agencies have raised serious issues of transparency and the fair treatment of insurance buyers. In markets like the UK, it is clear that the level of understanding of financial products in general, and complex insurance products in particular, is low. Combined with the banks’ ability in practice to tie the sale of life and non-life to core banking products such as retail loans, and the high overall margins often available on these products, there is a high level of regulatory concern over such cross-selling efforts. The interviews indicate that management is well aware of these concerns, and their enthusiasm for the bancassurance business is somewhat attenuated 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 distribution channel. A typical projection for the next decade of life products as a whole is that of AXA, which forecasts growth of 5% per annum in gross written premiums over the period 2005-2012, with a 3% estimate for P&C – not far from the growth rates experienced during the last decade. More specifically, the report evaluates the prospects in terms of the following key dimensions: • geography; • product; • channel; • structure of joint ventures and alliances; • profitability; • client; and • regulation.

GEOGRAPHY
In broad terms, bancassurance in the three key geographies – the US, Europe and Asia-Pacific – is likely to continue along the same lines developed in the past few years. In the developed markets of Europe, bancassurance will continue to gain ground, particularly in the UK and Germany where it will benefit from product simplification. Providing a tax incentive along with simple products like ISAs and personal pensions in the UK and Riester-type products in Germany should enable banks to approach bancassurance’s one-third market share of the overall EU life market. Elsewhere in Europe, gains will be driven by a broader bancassurance product range, more efficient processes and the increasing bargaining power of the bank distribution system.

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

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SUMMARY AND OUTLOOK

PRODUCT
As in recent years, the principal drivers of future product growth will be swelling personal wealth and an ageing population, which will be felt largely in higher sales of life and other investment products. While traditional life insurance will remain a significant factor in many countries, its dominance will be threatened by cheaper, simpler investment products such as annuities, mutual funds, guaranteed bank deposits and alternative investments. On the other hand, banks’ efforts to simplify the life product may bear fruit in markets like the UK and US. Over time, the life product will increasingly be subsumed in the generic category of ‘long-term investment’ product as it has in Europe. The composite investment and protection product such as whole life and endowment will lose market share to pure tax-advantaged investment products, while those seeking protection will tend to buy term life. Credit and non-life products such as auto, PPI, health and homeowners will benefit from the banks’ increasing recognition of the attractive margins available as well as their brand value. European banks have been prepared to manufacture some of these products to win the manufacturing margin, and perhaps over time US banks will overcome their reluctance to underwrite. On the other hand, regulatory concern over mis-selling may limit the penetration of some of these products in consumer-conscious markets like the US and UK. Overall, banks outside the US will continue to expand their insurance product range as they become more comfortable with the risks, as well as benefit from customer good will. The losers in this competitive dynamic will be the traditional insurance suppliers who may be obliged to give up more of their margin or lose the business. In summary, in most bancassurance markets the European trend of separating investment from protection products will continue. The traditional life product blending a significant death benefit/protection with an investment feature is a mature one in markets like the US and EU, with likely annual volume growth in the single figures. Equally important will be the trend for clients to buy their life/investment and protection products separately. Certainly in the bancassurance channel, the trend is clear. In markets like Japan, the US and EU, the standard life/investment product for bancassurers is not the complex traditional life policy but something akin to the tax-advantaged variable annuity as it is known in the US and Japan, usually based on a mutual fund. Such a product, which does not require a medical examination or a complex sale process with extensive regulation, can easily be sold by bank branch staff. The interviews revealed a widespread commitment by bancassurance leaders to increase sales of traditional life products as they attempt to win share of the wallets of their increasingly affluent clients. Absent a major simplification of the life product, however, it is difficult to see banks overcoming the traditional barriers of product complexity and regulatory process. As will be discussed below,
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION however, recent product simplification measures in life markets like the UK and Germany may assist the banks in their efforts.

CHANNEL
The next few years will see a continuation of the correlation between channel dominance and growing wealth and client sophistication. Thus the independent agent channel is gathering pace in the booming Asia-Pacific markets like China to satisfy the growing desire for product choice and service, while in Old Europe brokers in bancassurance markets like France are winning business. On the other hand, the traditional agency/employee channel will be under pressure to adapt to the bancassurance and brokerage threat. Successful insurers will respond by weeding out unproductive salesmen, focusing on upscale clients, cutting costs and offering other long-term investment products such as mutual funds and alternative investments. As described in the previous chapter, the leading bancassurers with their commitment to multichannel distribution are well positioned to meet any shift in channel preference. On the other hand, this will involve more investment in new channels, as well as the problems of multichannel management. One of the major unknowns in the minds of the interviewees is the outlook for customer channel preference and the possible undermining of the traditional bank distribution system. Banks in many markets such as Scandinavia are already concerned about the difficulty of sustaining client relationships in a world where the customer simply does not visit the branch. As discussed above, internet and other direct channels are already active in marketing simple life and non-life products. As more products like auto and buildings/contents insurance become easier to buy online, all three major channels could well lose market share. The issue of channel mismatch – not matching the client base with the appropriate products and skills – is particularly relevant in the case of the US market. The widespread and costly acquisition of broker networks there does not appear to have significantly boosted the banks’ efforts to cross-sell retail insurance to their existing client base or add new banking clients on the back of their brokers’ relationships. The US thus remains the classical broker market where the vast majority of bank clients look to their local insurance broker or agent for insurance solutions. It is difficult to envisage a significant improvement in the bancassurance market share for core insurance products, although banks should continue to be a major provider of essentially investment products such as annuities. A similar mismatch seems to have taken place in markets like Europe where banks have actively promoted assurbanking – offering insurance clients banking services via an acquisition or de novo bank. The great majority of insurance

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SUMMARY AND OUTLOOK clients prefer to retain their current bank relationship for the core bank products of deposits and loans. One of the interesting challenges for the bancassurance channel will be whether bank-owned brokerage affiliates, as exist in Italy or HBOS in the UK, can successfully market to a retail bank client base. To date, the evidence is not particularly positive, but arguably a determined management can apply the necessary incentives to sell across the organisation.

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

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PROFITABILITY
Divergent trends in bancassurance profitability make profit forecasting particularly difficult – in part at least because of the paucity of published data. On the one hand, the underlying volume trends are positive, with bancassurers continuing to win market share in markets like Asia-Pacific and Europe on the back of further life penetration, the broadening of the product line and possible integration measures. In the US, however, additional penetration of the life market is unlikely, and the volatility of the core annuity product plus reliance on a pure distribution profit will limit profit gains. Profit margins will be driven by increased competition, the addition of higher margin products like credit life, and economies of integration. In this respect, the evolution of the European market might be instructive for less mature markets like CEE and Asia-Pacific. Bank distributors in Europe have pressured their insurance partners for a higher share of the distribution margin, while insourcing of products by banks has also increased the profit pressure on insurers. On balance, the profit winners have been the bank distributors. Should regulation in markets such as the UK and US succeed in limiting the sales of high-margin tied products like PPI, the impact on bancassurance providers will be substantial. In Asia-Pacific, the predominance in several markets of multiple distribution alliances is likely to lead to a shake-out in which either a single provider is selected by major banks or the bank itself takes the manufacturing margin inhouse. In addition, price competition in key markets like China, plus the need to invest heavily in infrastructure, recruiting and training staff and compliance, will continue to place heavy pressure on profit margins. Finally, profitability in these booming markets is unlikely to reach European levels due to the lack of integration economies and synergies. The fully integrated model – incorporating both the manufacturing and distribution margin, as well as front- and back-office synergies – will thus offer the greatest profit potential. Profitability will also be driven by product pricing, which can differ substantially from market to market. Yet the classical life product, incorporating a sales charge of at least 3% in most markets, is one of the most profitable and thus the strategic target of many bancassurers. Another key profit driver will be scale – driving down unit costs by volume increases. The European experience shows how product pricing can deteriorate with greater competition and product commoditisation. Thus, pricing of the core ‘life/investment’ product in markets like Italy, Spain and France has been driven to a profit margin of 1% or less, in contrast to more generous margins on life and non-life products sold in conjunction with loans.

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SUMMARY AND OUTLOOK

CLIENT
A major issue for the future of bancassurance is the extent to which banks can market insurance and other products requiring advice, such as life insurance and other long-term investments, to their affluent and other upscale client segments. To date, they have been most effective in their core mass-market client segment, but the attractions of the much larger aggregate wealth of the more affluent segments are compelling. The answer to this question in turn poses another: that of brand strength. In brief, would a bank client – in particular a relatively sophisticated one who demands choice and performance – go to his bank for advice? Banks across the globe have invested heavily in building their brand, yet placing a value on that brand is an imperfect science. In a recent report on cross-selling (Cross-selling in retail banking: Meeting the revenue growth challenge, VRL KnowledgeBank, December 2006), the author found some evidence of brand strength, in particular the generic category of ‘savings, investment and protection’ used in an intensive survey for Citigroup covering some 30,000 customers of 34 major EU banks in life insurance. This validates the conventional wisdom that customer loyalty – and therefore crossselling – is stronger in markets like Scandinavia, France and the Benelux countries, and weaker in the UK and Germany. The interviews conducted for this report would support this evidence. Thus a typical UK or German retail client would tend to go to his broker or IFA for advice on long-term investments such as life insurance, whereas in France or Sweden his bank is the likely port of call. Certainly in the US, the evidence from the interviews is that the US market is similar to the UK in the sense that a stockbroker, financial adviser or insurance agent is viewed as a more likely source of good financial advice than a commercial bank. In the emerging markets of Asia-Pacific and the CEE, it would appear from the interviews that the banks’ brand strength generally compares favourably with that of an insurance agent. The challenge for the future, in these dynamic markets as well as more developed ones, is for banks to retain or improve this reputation for financial advice.

REGULATION
The deregulation process in the highly protected emerging markets of AsiaPacific is continuing as local regulators strike a balance between permitting local financial institutions to build their competitive strength and the desire to introduce new products and service standards from Western banks and insurers. Unlike the case with the CEE markets, where foreign ownership now characterises the banking sector, it would appear that locally owned Asia-Pacific
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION banks will continue to dominate the distribution of insurance products in most growth markets. In terms of the issue of customer protection, the UK will be the focus of most regulatory attention. A forthcoming report in 2007 by the UK authorities on the cost/benefit of such high-margin products as PPI may well be a bancassurance landmark. An adverse (to the banks) judgment could well have a significant impact on retail bank profitability. To date, outside the US and UK, there have been few visible signs of regulatory concerns over the possible mis-selling of bancassurance products. Yet the public posture of the FSA in the UK, supported by research by consultants such as Capgemini, would appear to confirm that there is a global issue linking a lack of customer sophistication with the high margins and selling practices of distribution channels including bancassurance. In early 2007, US regulators in Minnesota filed the latest in a series of US lawsuits against insurers for mis-selling a range of annuities, while the National Association of Securities Dealers lists “dishonest annuity sales practices” as one of the top ten threats to US investors.

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Appendix: List of interviewees

A number of financial services organisations were interviewed in the preparation of this report, whose comments, insights and opinions appear in Chapter 11.

BANCASSURERS
Allianz/Dresdner Aviva AXA Banco Bilbao Vizcaya Argentaria (BBVA) Bank of China Citibank CNP Assurances Fortis Hartford Financial Services Group HBOS ING Group KBC Maybank Nordea Santander Central Hispano (SCH) Svenska Handelsbanken UniCredit Wells Fargo

CONSULTANTS AND OTHERS
Council on Financial Competition Deutsche Vermögensberatung (DVAG)
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BANCASSURANCE: THE LESSONS OF GLOBAL EXPERIENCE IN BANKING AND INSURANCE COLLABORATION Financial Services Authority (FSA) Kenneth Kehrer Associates Mercer Oliver Wyman Novantas Renaissance Fund Advisors

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