Colm Fagan, Managing Director, Life Strategies Presented to the Cologne Re International Seminar, 15 November 1995

Good afternoon ladies and gentlemen. At the outset, I feel that an apology is in order for my inability to speak to you in the language of our host nation for this conference. Rest assured however that I do not propose to make my presentation in Irish, the native language of my own country! Let us agree on English as a reasonable compromise. Lothar Butz tells me that I am the only consultant who has been invited to speak at this seminar. In deciding to limit consultant participation, Lothar must believe in the adage that a consultant is someone who can tell you a thousand ways to make love but knows no women. I shall refrain from commenting on my knowledge either of women or of ways to make love! I suspect that the real reason Lothar asked me to speak here today is because of my seven years' experience at Director level in a leading bancassurer and my 25 plus years' experience in this industry, as a technical actuary, a pension consultant, and as a life company executive. I hope to share with you some of the lessons I have learned in that time. Because of my actuarial background (we all have our crosses to bear in life!), you may be expecting a technical, numerical presentation. You will be relieved to hear that I intend to keep statistics to a minimum. I propose instead to focus on some of the key strategic issues facing the bancassurance industry at this critical stage in its development.

Structure of presentation
My presentation is in two parts. The first part provides an overview of the standard bancassurance distribution model and analyses its strengths and weaknesses. The second part examines bancassurers' attempts to diversify their distribution channels and comments briefly on the factors that will separate winners from losers in future. Winners make it happen; losers let it happen. In the time available it will only be possible to touch on some of the key issues. I hope however to leave you with something of value, something that you can take back with you and that will help to improve your own organisation's performance.

In summary, the conclusion from the first part of my presentation is that the standard distribution model for bancassurance in the UK and Ireland proved very successful in the early stages. It enabled banks and building societies to generate early profits. Much of that early success lacked durability, however, and most companies are now reassessing their entire strategies for this business. Success sprang initially from unlocking the distribution potential of bank branches. It came from the realisation that two very distinct activities are involved in the sale of a life assurance or pensions policy. One is the initial identification of potential clients. The second is actually sitting down in front of the client and completing the sale. Typically in the life assurance industry, one person is asked to do both jobs. One of the industry's axioms is that a salesman spends 80% of his time prospecting and only 20% selling.

Formula for early success The initial success formula was almost embarrassingly simple.for a time at least. Ark Life's ability to generate a statutory surplus so soon illustrates the capital efficiency of the product design. Simple. Lifetime's main bancassurance competitor in the Irish market. I estimate that up to 60% of total expense margins in the first 10 years for a block of business sold through traditional channels are earmarked for distribution costs. combined with average prices and efficient distribution. The products were primarily unit-linked under which the customer rather than the insurer bears the investment risk. It is easy to understand bank employees' disillusionment when we remember that some of them spent half of their working lives defending paltry interest rates on the grounds that "But your money is safe with us". Salespersons' earnings in bancassurance are above the industry average . all was not well. generated pre-tax profits of &163. AIB's Ark Life. It is unheard of for life assurance companies to spew out capital so soon after their launch. Some branch staff and customers became disenchanted with the front-end charges and investment volatility of unitlinked products.for the simple reason that. two years after its launch. Standard Life and Prudential. was only formed in 1991. capturing 1. Another portend of difficult times ahead was the occasional outbreak of hostilities between salaried bankers and their insurance colleagues who depended on sales bonuses for a high proportion of their total income. This allowed the insurance and pensions consultant to concentrate on selling. anyway.10. The bancassurers did not try to offer better value products than others available on the market . led inevitably to low entry costs and early profits. they had to face the unpalatable fact that customers' capital was not sacrosanct.2% respectively. started only in 1993. people would not recognise a better value product even if it stood up and danced a jig for them! So. Even more impressive was the fact that. reached number 14 in the list of the UK's top 20 insurers (as measured by new business) within 12 months of its launch. in the same year. the company generated statutory surplus of &163. involving low risk (to the insurer). Storm clouds gather But behind the success stories. It published embedded value profits of &163. the top two players.17 million on share capital of just &pound. By way of comparison.5 million in 1993.4 million. Needless to say. had market shares of 9. A distributor capable of achieving the levels of efficiency described above can make serious money. because of the complexity of life insurance product designs in Britain and Ireland. the company of which I was Finance and Corporate Development Director.7 million in 1989. Now. Bancassurers sold much the same products as everyone else. NatWest Life. This separation of prospecting and sales roles led to productivity levels for bancassurance consultants up to four or five times the norm for the life assurance industry. the bank felt that it rather than the individual sales person was entitled to the rewards from the superior productivity. Their money was not safe.4% and 8. And the theory proved true in practice . industry-standard products. Bank of Ireland's Lifetime Assurance.but not that much above it! Those additional margins to the bank can be significant.9% of the market. . Bankers were not expected to understand the life assurance industry: they simply had to identify customers with potential needs for the industry's products. isn't it? So the theory goes.Bancassurers' initial success rested primarily on giving branch employees of the bank responsibility for generating quality referrals.

A host of UK bancassurers and "buildsocieturers" suffered the indignity of being fined and/or being publicly reprimanded by industry regulators for poor sales practices. The root-and-branch review now under way in many organisations involves a reassessment of reward systems for sales people. As I'm sure you know. . As a consequence. its profits fell by 48% and its sales force was cut by 20%. The last item on my list of issues threatening the heady rise of the bancassurers is the collapse of the mortgage market. Remuneration systems are an important medium for communicating these new messages. surprise . second was the reduction in average case size and third was a reduction in the proportion of new mortgages written on an endowment basis: the endowment proportion of new mortgages fell from 84% in 1988 to circa 50% at the present time.surprise. I believe that the critical illness (also known as dread disease) market has similar potential to explode in future. for reasons that I am happy to explore in discussion. creating a clear distinction between retail banking services on the one hand and life and pensions on the other hand. used to rely) on this market for the bulk of their business. Parenthetically. Lloyds and TSB have now agreed to merge. The UK debacle on pension opt-outs and transfers affected bancassurers less than it affected mainstream insurers. the two main Irish bancassurers have been to the fore in advising caution in the use of endowment policies to repay mortgages. the Irish Government did not make the same mistakes as its UK counterpart in opening up the personal pensions market. There is a general recognition that over-reliance on commission has sent the wrong signals in the past . Around this time last year TSB started implementing a radical plan to bring its retail businesses closer together. The same cannot be said of mortgage endowments which can rarely be justified on the grounds of best advice.re-engineering of internal processes. that volume counts for more than quality. In the six months to April 1995.A third problem lurking beneath the seemingly smooth surface of bancassurance . in their heyday. It's a case of back to the drawing board as banks and building societies reassess their strategies for the life and pensions business. Two other items on my list of issues being covered by strategic reviews are product strategy and . more than 80% of UK mortgages were written on a endowment basis. moved in the opposite direction. Many were also obliged to take their sales forces off the road for retraining. Yet. In the six months to June 1995.about the need for quality and the need to create long-term relationships with customers. Lloyds. meanwhile. Companies are now trying to send different messages . Back to the drawing board All in all. The storm breaks The negative influences I have just outlined are now starting to manifest themselves in companies' published results. NatWest Life's sales fell by 29%. Most UK bancassurers rely (or more correctly. TSB admitted that its life and pensions operation was "in freefall" as sales plummeted 60%. these are difficult times for bancassurers.and of the life assurance industry in general . Bancassurers write an inordinately high proportion of this business. Irish bancassurers have been spared the worst of these problems. Also. they are selling only tiny volumes of this product.namely.was the legacy of past mis-selling. It will be fascinating to see what direction the merged organisation takes in respect of its life assurance and pensions operations. Thankfully. Unfortunately. The collapse in the mortgage market caused a triple whammy: first was the volume reduction.

though. Yet we always recognise that we do face competition. unfortunately.warts and all. The main argument in favour of bancassurers doing business with brokers is that. Bancassurers which ignore the broker channel completely are freed from this constraint. while the life assurance company loses the distribution margins on such business. some down-market brokers do not add value to the customer relationship and are little more than providers of referrals to consultants employed by the life assurance companies. This applies even more forcibly as the barriers between different sectors of the financial services industry start to crumble.or Deutsch Mark . I hasten to add!) decided to expand the range of distribution channels in order to achieve manufacturing economies. Competition is the very life-blood of capitalism. and a reengineering consultant? The optimist says the glass is half-full. where we enjoy an effective monopoly despite our small size. Bancassurers too need to keep their competitive skills honed.are (and will remain) major distributors of life assurance and pension products in both Britain and Ireland. A major strategic difficulty facing a life assurance company distributing through brokers is that the obligation to pay standard industry commission rates acts as a constraint on product development. even in our most specialist consulting areas.re-engineering is too often a euphemism for crude cost-cutting. that the hoped-for savings never materialised because of the high cost of trying to satisfy the varied support requirements of the different distributors. competing for the same pound . At the other end of the spectrum. a remoteness from the real market-place that is unhealthy for an organisation. We are now at the end of the first part of my presentation which provided an overview of the standard bancassurance distribution model . Half a loaf is better than no bread. consort with the enemy.including the captive distribution arm. Also.of consumers' savings. I propose to look briefly at the results of bancassurers' experiments with other distribution channels. as it were. Many senior people in business and the professions seek advice from high quality brokers in relation to their pension and insurance needs. At the same time. the pessimist says it's half-empty while the re-engineering consultant says you have half a glass too much. that I keep telling my colleagues in Life Strategies that our objective is to find market niches that we can dominate. They found. PART II .EXPERIMENTS WITH OTHER DISTRIBUTION CHANNELS In the second part of my talk. Brokers are a diverse group. I must admit. Talking of reengineering. channel conflict meant that it was difficult to get the full support of any of their distribution channels . Contrasting experiences with brokers I know a small bancassurance operation where the Directors (not acting on my advice. It seems incongruous therefore for a bank-owned life assurance company to. . The result was an overall decline in sales volumes without a corresponding reduction in costs. Distributing through brokers Independent financial advisors . That helps to keep us sharp. it still captures the manufacturing margins. over-reliance on a single captive distribution channel creates a certain insularity. what's the difference between an optimist. The most coherent strategy for a bancassurer is to fight with might and main to capture both distribution and manufacturing margins. Bancassurers simply cannot ignore them when planning strategy.brokers . The countervailing argument is that the bank and the broker are both in the retail financial services business. a pessimist.

There is a higher risk that the consumer will misunderstand the product. d) Compliance issues also loom large in respect of sales by branch staff. regulators are demanding that consumers receive appropriate advice when buying long-term financial products. to refer customers to the life and pensions specialist. Abbey National seems to have succeeded where the other company failed. There is evidence. One bancassurer's stated objective is to use branch staff to distribute straightforward products and to confine life and pensions specialists to sales requiring high-level technical input. This reinforces the need to limit sales through this channel to simple products. If you think knowledge is expensive. where appropriate. try finding out the cost of ignorance! The solution to the cost problem is often to nominate one or two people in each branch who receive the necessary training to enable them to deal with relatively straightforward insurance products. In passing. Branch staff must be trained to identify those needs and. c) Logic dictates that the branch reward (almost invariably notional rather than in hard cash) for a direct sale should be higher than for one involving a life and pensions consultant. for example. In fact. that Lloyds will retain the TSB brand for certain customer groups and products following the merger of the two organisations.and all of tomorrow discussing how to structure profit incentive schemes at branch level.One of my fellow speakers here today is Ian Gilmour of Abbey National Group. f) Finally under this heading. Examples of some implementation issues are as follows: a) Allocation of responsibility for sales management is of vital importance. We could spend the rest of the day discussing this single issue. . It is often only in the course of conversation with a customer that more in-depth needs emerge. though. it will mean shedding a high proportion of existing sales staff. The resulting training requirements for branch staff could prove expensive. many of whom do not have the basic skills needed to progress to the new roles envisaged for them. the strategy of confining the life and pensions specialist to higher value-added sales implies fewer and more highly trained consultants. In effect. b) One problem which definitely exists but which is difficult to quantify in practice is the risk of missing value-adding sales opportunities by excluding specialist insurance consultants from apparently simple sales transactions. the question of who manages the sales function permeates all discussions on bancassurance. e) Increasingly. Direct distribution by branch staff Having looked at broker distribution. An important contributor to their apparent success has been the creation of two very distinct retail brands . without the intervention of a specialist life and pensions consultant.Abbey National for bancassurance and Scottish Mutual for broker-distributed products. This is one such issue. we could spend the rest of today . Once again. we now turn our attention to the vexed question of distribution of life assurance products by branch banking employees. The simple point I want to make is that it is devilishly difficult to get the right answer on some issues of reward allocation. I believe that branding is an area of great potential in the financial services business. Implementation issues The interim verdict is that the strategy has achieved some successes but it needs careful ongoing implementation. The attractions of this strategy are obvious: it reduces the bancassurer's distribution costs still further.

Other distribution options Looking at other distribution options. Up to very recently. As in all such situations. who once remarked that every complex problem has a simple solution . In relation to broker distribution. . It covered two main areas under the overall heading of distribution strategies in bancassurance. I looked first at the strengths and weaknesses of the standard distribution model.as many do . business accounts. It would be wrong however to get too carried away with the belief that advances in technology will solve all bancassurers' problems. it would be a mistake to claim . it also means that products can become ridiculously complicated. information to knowledge. the faster processing power of computers is now allowing medium-sized institutions to access the technology needed to link information on checking accounts. no single answer will suffice in all circumstances. My conclusion was that the standard model was effective initially in capturing distribution margins but that it is now badly in need of renewal. This applies to life assurance as much as it does to washing machines or bars of soap. including all forms of direct distribution. Equally though. Concluding comments I am now coming to the end of my talk. that sales techniques which dispense with face-toface contact are doomed to failure. In this regard.that selling life insurance and pensions is an "eyeball to eyeball" business. The quality of the initial data is of crucial importance. They will not. Also. That enables them to glean much more information so much so in fact that regulators and other players in the financial services industry are constantly on the lookout for abuses of that information. only the very largest institutions had access to that technology. knowledge to empathy. etc. I also looked briefly at how bancassurers can meet the challenge of harnessing information sources in a profitable manner.and dangerous new world. it is no good having information if you do not use it to increase your knowledge and your understanding of customers' needs. Here I see enormous strides being made in recent years in the quality of Customer Information Files. Obviously. The second part of my talk looked at experiments with other distribution channels. clearing banks start off with a clear edge over building societies in their ownership of the primary checking account relationship. The bad news for our continental colleagues is that the EU Commission's decision to opt for the normative regime when setting the rules for the Single Market means that similarly complicated products are now becoming available in countries which traditionally operated under the material supervisory regime. Product complexity in life assurance is a major obstacle to direct sales techniques. I concluded that ownership of the primary checking account relationship will be one factor (among many) that will separate the winners from the losers in this exciting . George Bernard Shaw. I concluded that separate branding was desirable and may even be essential. Unfortunately. It was a fellow Irishman. This is particularly true in Britain and Ireland which have traditionally been subject to a normative supervisory regime. in a value-adding manner.which is invariably wrong! Factors affecting ability to sell remotely The critical factors affecting a company's ability to sell its goods and services without the involvement of an intermediary are the complexity of the product and the strength and attractiveness of the customer proposition. The normative regime favours product innovation. credit cards. and empathy to profit. loan accounts. the key strategic challenge is to convert data to information. My advice to Directors and senior management of companies in such countries is to be very careful of the extent to which you embrace these socalled "sophisticated" products.