EY Bancassurance Winning Formula July2010

Bancassurance: a winning formula

July 2010

Contents

Introduction 1 ►

Executive summary 2 ►

Increased regulatory focus 10 ►

Change of bancassurance models 16 ►

Capital challenge and risk appetite 22 ►

Growth of bancassurance 28 ►

Customers and bancassurance 32 ►

Conclusion 36 ►

Research methodology 38 ►

Appendix A: Market size and distribution landscape 40 ►

Appendix B: Definitions 44 ►

Key contacts 46 ►

Ernst & Young’s bancassurance team has been working with many of the leading banks, bank-owned insurers and insurers across Europe for the past 10 years. As a result, our team has developed a broad understanding and insight into the challenges facing bancassurers, with many clients expressing an interest in developing a greater understanding of how these different challenges will impact their businesses throughout Europe.

We recently conducted this European bancassurance survey of senior executives of major banking and insurance institutions across Europe including; Aviva, Axa, Aegon, Legal & General, HSBC, Santander, Barclays and Credit Agricole.

We found that the major decisions currently facing bancassurance providers are:

How to react to an increasingly changing regulatory environment ►

How to choose the best bancassurance model – from the extremes of ‘’pure ►distribution’’ to a ‘’manufacture and underwrite’’ approach

How to respond to changing risk appetite and capital requirements ►

How can banks compliantly meet demand for insurance to the banking ►customer base and maximise growth from their insurance operations?

In this report, we explore these challenges in the European bancassurance market, share the views of the senior executives we interviewed, and identify some of the critical success factors for the sector going forward.

We would like to take this opportunity to thank the individuals who took part in our research for their valuable time and input.

We hope that you find this report an interesting and thought provoking read and our EMEIA team would be very happy to discuss the findings further with you.

Introduction

Richard Reed Head of EMEIA Bancassurance

Chris Read Senior Manager, EMEIA Bancassurance

1Bancassurance: a winning formula

The marketing of life and non-life insurance products to bank customers is a well established business model for many European banks. Banks enjoy regular contact with their customers and this provides a constant pipeline of sales opportunities, either physically via branches or virtually via online banking, to cross-sell and up-sell insurance based products and services to their customers.

The European insurance market clearly offers a huge source of potential revenue for banks. However, our research shows that the banks’ appetite to derive revenue from insurance sales and customers’ propensity to purchase insurance from banks is inconsistent across Europe.

A number of banks have recognized, particularly during the current financial crisis, the benefit of having insurance profit contributions coming into the group that are non-credit based and continue to provide a substantial contribution when core banking products are down. Through our survey we observed a significant variance in bancassurance performance – with in excess of 20% of group profit for some banks to under 5% for others. This is a clear reflection of the different appetites and capabilities the leading bancassurers adopt and highlights the potential increase in profit insurance can bring to a bank with the right focus.

Executive summary

European bancassurance market size and distribution landscape

The European insurance market ►represents 36% of global insurance spend of €2,903 billion Gross Written Premium in 2008.

The split in European Insurance ►spend in 2008 of €1,059 billion Gross Written Premium was 61% life and 39% non-life.

Bancassurance is a dominant ►distribution channel in a large number of European countries.

Bancassurance penetration ►across Europe ranges between 20 – 80% for life and 0 – 10% for non-life.

Bright but challenging future for bancassurance

Increased regulatory focus - ► a short-term challenge, but potentially long-term source of competitive advantage.

Change of the bancassurance model ► - is underway.

Capital challenge and risk appetite - ► Basel III and Solvency II are causing many banks and insurers to critically reassess and change their models. Risk appetite among banks is adjusting in the wake of the crisis, and a desire for “no shocks” from insurance is bringing about a new closeness between the two.

Growth of bancassurance - ► significant growth for bancassurance in both mass and high net worth individuals and commercial is predicted.

Customers and bancassurance - ► there is an ever more demanding and complex customer base to consider.

2 Bancassurance: a winning formula


The following report is based on the findings of our survey of senior executives in the bancassurance, banking and insurance sectors, and our ongoing interactions in the European bancassurance market.

Key themesA number of key themes emerged from the discussions, which dominate plans for the future and will have a major impact on the development of the sector.

Increased regulatory focus ►There is a broad consensus that regulation will continue to increase for insurance and bancassurance across Europe.

Those interviewed mostly agreed that increased regulation and transparency is good for the customer and the industry, and should therefore be welcomed. Such changes will ultimately help in delivering a better service and enhanced value for the customer. While some participants felt that a good, transparent service is already provided to customers from bancassurers, others considered the industry had done a poor job, with overuse of jargon, a lack of transparency and, in some cases, unsuitable products and sales practices.

There was variation in responses on a country-by-country basis, with some markets characterized by a cooperative approach and treating customers fairly as a course of normal business, and other markets with too many examples of mis-selling.

Inevitably, those surveyed felt that the increased regulation will result in higher costs for the industry and for customers. It will also potentially increase complexity for the customer and front-end staff in the sales and service delivery of insurance through the banks. The right balance must be found between the industry and the regulator in order to achieve the advantages that regulation can bring while containing the costs and managing the complexity impacts. A view held by some was that the increased cost and complexity could result in lower customer take-up and thus an under-protected and under-invested customer.

Our interviewees confirm bancassurance is the lowest cost model to market. This, combined with the banks’ scale and resources, make it the best-positioned model to meet increased regulatory costs compared to other distribution channels. In some countries other distribution channels are forecast to reduce significantly, partly driven by the increased costs and capital requirements. This would leave a gap in the market that bancassurers will hope to expand into.

Change of bancassurance models – manufacture versus distribution ►We found there to be the most strongly-held views and the most divergence of opinion across interviewees about the best bancassurance model. Of course the “right” answer as to which model to deploy depends on where the bank is starting from and what its long-term bancassurance strategy is.

The choice for banks is essentially between manufacture, distribution and joint venture, or a hybrid of these. Some banks with similar scale and, on the face of it, similar ambitions for bancassurance have arrived at completely opposing conclusions. Some interviewees believe that banks will no longer manufacture life insurance going forward due to the capital strain and complexity placed on the bank in manufacturing these products, and that the trend will be to increasingly undertake general insurance manufacturing to access profit streams directly. Other interviewees hold completely the opposite view, saying that general insurance underwriting is not a market to enter and that life offers the best long-term platform.

The debate centers around how to provide the best service to customers: which model provides the best skills, knowledge and safety (risk and compliance) for delivering relevant insurance offerings to the bank’s customers? Combined with a decision on which model provides the best commercial model for the bancassurer, the question is whether it is preferable to take a risk and capital-free commission income and profit share, versus accessing the potential greater returns offered by certain core insurance products through the long-term underwriting returns by manufacturing. This will require making a return on capital employed (ROCE) that meets or exceeds the bank’s requirements and makes better competitive use of the bank’s capital when compared to other banking products.

With recent changes impacting the income and profit generated from core banking products, as well as capital availability and risk appetites, many banks are reassessing their models and there are already a number of major changes being made. Some banks have divested or are considering the sale or significant restructuring of their insurance businesses, driven by the capital challenges, risk appetite and best use of resources.

The majority of our interviewees felt that bancassurance will maintain and increase its market share going forward, and that the changes above are merely movements within the existing bancassurance model. The market now requires, more than ever, different approaches and capabilities from the insurers and the banks.


Capital challenge and risk appetite ►Basel III and Solvency II have the potential to cause significant capital pressure for banks that hold a greater than 20% share in a joint venture or that have an owned manufacturing model. This is significant for the industry and bancassurers are currently assessing the potential impacts. France, the Nordics and the UK represent the major focus for these changes.

A core choice is whether to take a risk free and capital free distribution income or to take a risk-bearing and capital-intensive manufacturing model.

The financial crisis has meant capital is more constrained and banks have to make some tough decisions on how to make best use of this more scarce resource to use it for banking or insurance – which choice is optimal for the business? This has been escalated by the potential increased cost of capital for insurance aspects of bancassurers brought about by Basel III, and Solvency II.

For some the Basel III capital impacts coupled with other market changes will drive them from owned or joint venture structures to a new distribution and profit share arrangement.

Growth of bancassurance ►The crisis has created an impetus for bancassurance. There is a consistent and strongly held view, among our interviewees, that bancassurance is set for significant growth. This is mainly because the banks’ core non-insurance products are under pressure and there is an increased focus on the sale of insurance products which generally have a low penetration to the banks’ customer base.

Some interviewees put it more strongly, saying that a few years ago banks had no real need to push bancassurance sales, because business was easy and insurance was a “nice-to-have”. As income from the banks’ retail operations has diminished, banks need insurance revenues more than ever, and there is spare capacity in the branches and operations due to the reduced sales volume of core products such as loans and mortgages. This is driving the banks to recognize that insurance is under-penetrated and can achieve relatively easy growth. In addition, customers acknowledge the value of protecting themselves and their assets in the crisis, and there is increased awareness of the need for insurance protection, set against their ability to invest and spend on it being diminished by the crisis.

One could speculate that once the banks see income and profits from core banking products recover, the importance of insurance will again fall back and, while remaining important, will not command the focus referred to above. The view of our interviewees, however, was that this current focus on the sales and returns of bancassurance will stay beyond the crisis.


Historically, the focus of bancassurance has been on life insurance to personal customers. This will continue, but many of our respondents saw the majority of growth coming from an increased focus on business customers, increased wealth management and increased general insurance.

Customers and bancassurance ►Bancassurance has been built on the principle that banks can utilise banking relationships to offer a wider range of products to their customers. Few have taken the opportunity to incentivise customers with preferential terms on core banking products, preferring instead to compete head-to-head with traditional insurance distributors.

Our interviewees say that in many cases banks are bad at cross-selling insurance products, rarely making it clear to customers what they have on offer. Our survey found the need to spend more time demonstrating the value for money that they can deliver, and to make better use of customer information to target insurance cross-sales.

Customer trust in their providers is a key factor when it comes to cross-selling insurance products. Generally our interviewees did not feel that the financial crisis had impacted on this, and if anything the majority thought that they were in a stronger position as customers recognize the value of greater protection.

However, from another Ernst & Young report, “Understanding customer behavior in retail banking”, published in January 2010, it is clear that the customers surveyed thought that the crisis had negatively affected their faith in the industry. With this in mind bancassurers will need to ensure that they respond to customer needs and adopt a “back to basics” approach to providing insurance.


Critical success factors in driving optimal bancassurance resultsInterviewees identified the below areas as making a real difference to their results:

Top level commitment ►Top level sponsorship in the bank is a necessary condition for success with 85% of interviewees rating this as their number one priority. This needs to cascade through the organization to the customers.

Insurance on the board ►A number of interviewees cite a strong insurance representative on the board as a key driver for success. There was a notable difference in terms of performance, priority and understanding between those that have this representation and those who don’t.

Jointly agreed targets ►79% of interviewees agree this is important. Jointly agreed targets with the bank and insurance operations seems an obvious factor but challenges to be aware of include:

A perceived inequitable allocation of costs to the insurance ►business.

An uneven recognition of the value that insurance sales add to ►the bank versus bank product sales typically favouring core bank products.

One party wanting volume, the other wanting margin driving an ►unhelpful dynamic.

Simple multi-channel solution ►65% of interviewees agree on the need for products and processes that all bank staff can manage together with straight through processing and multi-channel access is crucial. This allows the bancassurer to have a large sales force for the simple products and a more specialised sales force for more complex advised solutions.

New money and retained money ►Insurance money must bring incremental revenue to the bank and optimize how it complements the core banking products. It must also help minimize leakage of funds from the bank to competitors.


�

�

�

�

�

�

OrganizationStrategicManagement

PropositionSource Service Sales Distribution Customer

Bancassuranceunderstood and important to bank

Commitment andtone set from the top

Strong visible leadership

Consistent focus -not just flavour of the month

Jointly agreed targets and basis

Insurance representation on the board

Inhouse and thirdparty productprovision

Mediumperformance

Simple multi-channel products agreed with bank

Proposition geared for mass market (’fit or out’)

Specific development for high-net-worth individuals

Effective bundling

Shared services

Integrated low cost model

Single system

Straight throughprocessing

Active internal and external lead generation

Productivity focus

End-to-end integration

Offers visible

Incentives/rewards balanced with bank

Strong compliance focus

Execution only guided and full advice

Face-to-face, internet, direct, telephone - integrated solution

Face-to-face representatives for wealth and business

Focused sales culture

Predict futuresegment needs

Breakthrough propositions

Simple triggers

Active high volume, high quality lead generation

Cross-sell and up-sell supported by core banking product incentives

Detailed critical success factors for optimal bancassurance results

This table condenses the various constituent parts of an effective bancassurance offer. The yellow boxes highlight the areas where particular differentiation can be achieved.

Source: Public data and annual reports


Increased regulatory focus

There is a broad consensus among our interviewees that regulation will continue to increase for insurance and bancassurance across Europe. The participants feel that increased regulation and transparency is good for the customer and good for the industry, and is therefore desirable.

However, while recognizing that changes will ultimately be good for the bancassurance sector, those surveyed say that regulation is adding complexity to processes and therefore creating confusion for customers making purchasing decisions. One respondent said, ‘It is right to add more regulatory focus for complex products, but not for simple commodity-style products’.

There was a consistently held view that an ideal position would be where the bancassurers, insurers and banks provided a service to customers that treated them fairly and that risk was managed to minimize the need for extensive regulation. Practically, however, it is recognized that there have been examples that hit the extremes of “high” and “low” in both of these areas and hence there is a need for increased regulation.

Bancassurance is considered by our interviewees to be the lowest cost channel and this, combined with the banks’ scale and resources, makes it best positioned to meet any increased regulatory costs compared to other distribution channels. In some countries other distribution channels are forecast to reduce in number significantly, partly driven by the increased costs and capital requirements as a result of regulation. This would leave a gap in the market that bancassurers would aim to expand into.

Regulatory developments in the bancassurance sectorAs well as an overall increase in regulation that impacts all insurance channels (bancassurance, agents and direct), there are a number of planned rule changes that mostly impact bancassurers.

At a European level there are two main potential developments that will affect the bancassurance model specifically: rules on product tying and on Packaged Retail Investment Products (PRIPs). These are analyzed in more detail below.

Product tying * ►A major competitive advantage for bancassurers has always been their ability to bundle insurance with the banking product at point of sale, making it simple for the banks to sell and easy and convenient for the customer to buy. This remains the case but a recent and significant increase in intervention by the regulators in certain countries to protect customers’ interests by divorcing the sale of insurance from the core banking product sales could have an impact. * see appendix B for definitions

The UK Financial ►Services Authority’s model is likely to form the basis for a tougher regulatory stance across Europe.

Bancassurers are better ►positioned to meet an increased regulatory environment compared to other distribution channels.



The European Commission (Directorates General Single Market) is consulting on a study carried out by the Centre for European Policy Studies entitled, “Tying and Other Potentially Unfair Commercial Practices in the Retail Financial Services Sector”. The study, published in November 2009, found that tying and product bundling is widespread within the European Union and that banking products are the primary gateway for cross-selling practices. The study suggests that tying is an anti-competitive behavior and as a result the ability of some customers to shop around within and between member states is compromised. In addition, the Commission is concerned that there may be a negative impact on product pricing and consumer confidence as a result of this practice in financial services.

The EC’s main concerns are focused on tying and pure bundling. The study found that the approaches taken to tying and bundling vary between member states, with 12 member states having implemented specific regulations. Belgium, France and Slovakia have implemented outright bans on tying, for example, although the report suggests that the practical impact of these bans has been limited because bundling tends to replace tying and has practically the same effect on consumers.

The Commission is consulting on the findings of the study to assess how the negative aspects of tying and bundling can be avoided and whether legislation at a European level is necessary.

Any change to the legislation is likely to have far-reaching implications for bancassurance models across the European Union, although at this stage the consultation is seeking solutions as opposed to making proposals. The Commission is seeking to improve fairness for consumers and competition among providers, and asked for responses by April 2010. Following the closure of the consultation, the Commission is now developing its position on the issues and has not ruled out further discussions with stakeholders. It is not clear what the pace of any change will be, and bearing in mind the disparate state of current regulation it is unlikely that any proposals that result will be quick to implement.

Participants’ views on the intervention varied significantly by jurisdiction, with some contributors saying there is no regulatory pressure regarding bundling taking place, and others complaining that regulatory intervention is high and adding cost and complexity to certain products.

In the UK this is particularly prevalent, with the sale of payment protection insurance (PPI) alongside the provision of consumer loans now outlawed. Recent regulatory changes requiring a 24-hour period before PPI can be offered. The same trend can be seen in France and Germany, though it is less apparent in Spain and Portugal where bundling is more common.


PRIPs Directive ►The Commission is also continuing with its work on PRIPs. The aim here is to make the retail investment market more consistent, where the regulatory landscape has developed in a manner that has resulted in inconsistent sales process rules between investment funds, retail structured products and insurance-based investment products. The Commission has committed to a revised horizontal approach to the standards (i.e. consistent regulatory treatment for broadly substitutable products), which will require legislative change. The focus of the changes is on pre-contract disclosure and the rules on selling practices. The new standards being proposed for all types of packaged investment products are likely to mirror the standards in place for investment types currently caught by the Markets in Financial Instruments Directive (MiFID) rules.

Broadly speaking, this means that the impact of PRIPs should be to introduce similar, more proscriptive sales practice standards for non-MiFID investments, such as insurance-based investments and structured products, in line with those that already exist for MiFID investments such as collective investment schemes.

The Commission has said it will be consulting on changes in 2010. Firms that have already changed their sales practices to be MiFID-compliant, regardless of the type of investment products being sold, are likely to find that any changes to sales processes will have a minimal impact. Broadly speaking, this situation applies in the UK because, at the time MiFID was implemented, the Financial Services Authority amended most of the relevant conduct of business rules to apply to all types of regulated packaged investment products, whether they were affected by MiFID or not. However, firms in other EU countries that have not implemented similar changes to non-MiFID businesses will have to implement a series of sales process changes covering issues such as conflicts, inducements, appropriateness and suitability.

Example developments within nation statesWhile regulatory approaches to bancassurance vary considerably across the EU, we are witnessing changes in approach across a range of markets.

The UKTwo regulatory ►developments are likely to change the size and shape of the UK bancassurance market going forward: The Retail Distribution Review (RDR) and rule changes relating to the sale of PPI.

RDRThe Retail Distribution Review will end commission based sales of investment products, where advice is given to customers. Commission will be replaced by the introduction of fees. Revised definitions of advice and increased qualification of standards for those that provide advice will also be introduced. Advisors that describe themselves as independent will be required to meet new independence requirements and increased levels of capital will need to be held within the advising business.

Advisors will need to be qualified to a higher standard, resulting in extra costs and advisor charging will make the costs of the advice (as opposed to the product) much more obvious to customers. A high turnover of advisors has long been a weakness of the bancassurance model, particularly when competing with the strength of independent financial advisors (IFAs) in developing long-term relationships with customers. Arguably bancassurers have the greater propensity to absorb these increased costs compared to IFAs as they are recognised for their low cost model. If banks are prepared to make the required investment and retain the advisors this may present a challenge to the survival of a wide number of IFAs.

Ultimately, it is felt that the RDR will bring greater professionalism and unbiased advice to the investment arena with improved customer outcome with a clear understanding of what the customers are paying for.

PPIThe UK Competition Commission’s (CC) review of the sale of PPI will also result in changes to the bancassurance model. The CC’s proposals are designed to bring about greater competition within the PPI market and to encourage product providers to make the design and pricing of their products more transparent.

To introduce greater competition, the CC has proposed banning the sale of PPI at the point of sale of the core credit product, which is a significant step further than the EU Commission, which is only considering a ban on tied sales.

The regulatory change is being closely watched by bancassurers across Europe, as it will result in the introduction of a new style of protection solution by banks. It is likely that new payment protection offerings will enter the market, to capitalize on the changes proposed and the withdrawal of providors. New entrants will seek to take advantage of the fact that, in the future, providors will need to provide an annual statement to policy holders, which will mean more opportunities for policy holders to review and renew. their cover.


FranceThere are two ►significant changes that will have an impact on the French bancassurance sector, changes to regulatory responsibilities and rules on product tying.

Changes to regulatory responsibilitiesSince 11 January 2010, responsibility for ensuring that promotional materials used when selling or advising on insurance products are compliant with the terms and conditions of the product has fallen to the distributors. This requires new processes for both the distributor and the product provider as they define how the insurance company provides the necessary information to the intermediary, and for the intermediary as it defines its processes for agreeing on the information to be used. From a bancassurance perspective, this change will place additional operational and regulatory responsibilities on banks as distributors and is likely to increase costs.

Product tyingRegulators in France are also bringing an end to the current entitlement that French banks have to tie mortgage business to the sale of insurance products. This tie has been seen as unfair by consumer associations and other insurance intermediaries, particularly as it was an exemption from the general ban on tied sales that already existed in France. The French government has now decided that this exemption should come to an end and a draft Act is being discussed. New rules are due to come into force in the summer of 2010.

PolandIn Poland the Polish Banking Association has announced proposals around good practice in the bancassurance sector following allegations of poor customer treatment. The guidance relates to both the sale and the servicing of bancassurance products. The Polish regulator is intending to monitor compliance with the proposals and has indicated that it will introduce tougher Conduct of Business regulations if the guidance is not being followed and improvements to customer treatment are not realised.


The days of lighter regulatory regime for bancassurance are coming to an end. At a member state and European level, regulators are increasing their expectations around the way in which banks treat their customers, both in terms of pre-sale disclosure and scrutiny of potentially unfair or anti-competitive sales practices.

A tougher regulatory regime will increase the operational and revenue challenges for bancassurers and force them to change the way in which they operate. However, our survey suggests that banks believe they are in a better position to adapt to the trend towards higher regulatory standards than other distribution channels.


Change of bancassurance models

We found that the current focus among many of the interviewees is defining the optimum “supply” model to deal with the new pressures in the financial services market. Banks have traditionally developed their insurance interests in a variety of ways, ranging from distribution-only to full insurance company ownership, and these strategies have been driven in the past by revenue and profit potential.

Today, our interviewees tell us that the impact of the financial crisis and a number of regulatory developments are leading banks to reassess their strategies, and make complex decisions to position institutions for long-term bancassurance advantage.

Prior to the crisis, some saw manufacturing either via their own insurance companies or through reinsurance vehicles as the preferred option to gain greater access to additional revenue and profit potential. However, a combination of capital constraints, loss-making portfolios in some areas, a greater emphasis on risk management and a more risk-averse mentality has led many in the industry to reassess their insurance strategies.

Some participants expressed a view that the dynamics between banks and insurers have changed over recent years, moving from banks trying to squeeze insurer margin to a joint approach to expand the potential market for both parties. This change in attitude may lead some insurers to support this distribution channel more actively going forward, particularly as this is a very effective way for insurers to achieve scale in a key target growth market.

Today’s bancassurance modelsThe traditional bancassurance models are manufacturer, joint venture or distribution-only. Each presents a different capital, risk and profit profile. A bank’s availability of capital, its risk appetite, and the importance of bancassurance as an overall contributor to profit, will influence the decision on the right operating model for the organization.

Many of our interviewees currently operate a manufacture or joint venture model, with a low-cost focus aimed at generating high volumes and high margin. We found that there is an increasing trend for bancassurers to move away from manufacturing certain insurance products, but they do not want to lose revenues and profit potential. This has led to a greater interest in the joint venture model and increased emphasis on reinsurance as an element of a bancassurer’s infrastructure and a component of any joint venture arrangement. The benefit of significantly reducing risk, while retaining greater potential for profit, is driving many bancassurers to consider the implications of joint ventures and reinsurance.

Our results also show a preference for the joint venture model among banks, which recognize that insurance is a complicated specialty and one where their preference for short-term gains and quick results is better served by avoiding the long-term capital commitments of a manufacturing approach.

Dynamics have changed ►from squeezing insurer margin to expanding market potential.

The crisis has led ►to a more risk adverse approach to bancassurance.

There is a potential ►move away from the manufacturing and joint venture model to distribution only.


The core operating models deployed by banks across Europe for bancassurance

Bancassurance model Definition Risk profile

Distribution only ► Banks sell insurance products to their retail and commercial banking customers. Products are sourced from a third party insurer in exchange for a commission payment and possible profit share.

Banks take sales regulatory risk, insurers take all manufacturing risks.

Joint venture ► Banks sell insurance products sourced from a company that is often 50% owned by an insurance partner of choice and 50% owned by the bank.

Typically insurers take responsibility for controlling and managing risk. Banks are responsible for distribution, and both take their proportionate share of revenue and profit or loss.

The ownership percentage can vary and other more complex structures can be put in place to allow for different service companies, offshore and onshore companies, and captives.

Banks take sales regulatory risk and both insurers and banks take manufacturing risks to the extent they are not reinsured.

Fully owned ►insurance subsidiary of bank

Banks sell and underwrite insurance products, for example via a wholly-owned insurance company.

There are also arrangements where third party insurers are used to provide fronting capacity, with agreed ceding levels to a bank-owned reinsurance vehicle, where the bank only acts as a reinsurer.

Banks take both sales regulatory risk and manufacturing/underwriting risk.


An integrated bancassurance modelThe most effective and efficient bancassurance model sees leaders expressing a strong desire to maximise the effectiveness of bancassurance sales and improve the efficiency of the bancassurance model. Cross-selling, growing the share of customer wallet, increasing customer value and product extension are all aspirations for the bancassurance industry, and many believe a more integrated model will help achieve these goals, along with greater efficiency.

Many of those questioned point out that banks already offer the lowest cost model for accessing insurance clients, because it is only a marginal cost to the existing bank operating model and has scale. The Mediterranean bancassurance proposition, which sees banks offering simple bundled products with a high-volume, high-margin process is favored by many over an Anglo Saxon offering that is impacted by high levels of regulation and complex product offerings.


Key factors Description

Risk appetite ► Arguably, before the credit crisis, the main focus for banks was on top-line revenue with assumed profitability aligned to the revenue stream. Now, with more emphasis on risk management and greater appreciation of the nature of insurance risk, decisions are being made based on risk appetite and whether the banks want to drive non-risk-bearing income only, risk-bearing income, or a combination of both.

Insurance and banking businesses are, of course, fundamentally about taking on and managing risk but they involve different types of risk. Non-life insurance is mainly about short and long-term underwriting risk, whereas life insurance tends to be a combination of underwriting and long-term market risks. In general, banks can have limited appetite for these insurance risks.

The level of power any bank has to influence the level of risk they are taking on in an underwriting entity may be limited, because usually the expertise for running the business lies with the insurance partner.

Insurers entering into partnerships with banks need to be aware of extra risks arising from these arrangements when compared to direct distribution, such as credit risk from the banks if the bank collects the premiums. Upside profits are also usually limited through profit share arrangements.

In addition, the structure of any partnership arrangement will affect the capital amounts needed to be employed by the insurer and bank. The final Solvency II rules for insurance groups, and the extent to which diversification benefits can be achieved in different group structures, will be particularly relevant here.

Life ► versus non-life

Our research considered attitudes to both life and non-life, with a wide range of views expressed regarding the classes of business banks should manufacture or distribute.

At one end of the range it was felt that a bank should manufacture and distribute non-life and solely distribute life. On the other hand, we also found examples where the opposite view of manufacturing and distributing life and only distributing non-life products prevailed.

The extent of exposure to market risk depends on the type of products the bank is intending to write and the assets that the insurance entity is proposing to hold to back the liabilities. The longer-term non-life risks associated with long-tail business (such as motor liability) and certain life insurance products (such as fixed annuities) will have larger elements of credit risk.

While there is no consensus on any “best” option, this does illustrate the differences in types of risk between classes of business and the attitudes to those risks, and the common theme was that insurance is regarded as a specialty for which banks need to have the right capabilities in place.

Compe ► titive advantage and differentiation

Where banks operate the distribution-only model, banks are using capacity and products supplied by large insurance providers, and this has led to a lack of differentiation in products on offer from competing banks. This has encouraged banks to manufacture products themselves or provide additional benefits to obtain clear competitive advantage and sustainable differentiation.

Key factors in determining bancassurance operating models


Key factors Description

Mar ► ket entry strategies

We have seen situations where using a bank’s own insurance operation can be a market entry strategy if no local or international insurance provider has the ability to support the required product in the region. In the case of non-life business, typical net retention levels will be kept low and an insurance company used to front and support the local operation with a reinsurer providing the majority of the capacity. This is an option being utilized where the bank is looking to provide a consistent global insurance proposition to certain customer groups.

Profitability ► Another area that was discussed during the research was profitability on the capital employed by the various insurance models within the banks. One question raised was, ‘Is capital a scarce resource or, provided the business meets the required hurdle rate, will the bank support it?’.

Manufacturing some lines of insurance is a capital-intensive business and it can be hard to achieve target returns on equity (ROE) (e.g. in non-life business it can be difficult to achieve more than 12%-14% ROE, whereas ROE’s of 18%-20% are regularly achieved in the banking and asset management sectors). A number of companies cited returns on capital as a primary reason for their decision on which model to adopt and on whether they should have an insurance entity or not.

The return differential is largely attributable to the high distribution and administrative costs associated with insurance, as well as significant levels of capital required of insurers by rating agencies and regulators. Insurance can also involve much longer-term underwriting and asset/liability management risk than banking in addition to the large ongoing capital investments needed to achieve a successful insurance business. Our research demonstrates that insurers have a long-term view while banks often take a more short-term view. We observed a wide spectrum of opinions on the attractiveness of insurance business – in some cases it was becoming of greater importance, contributing in excess of 20% of group profits and ROCE that outperformed the banking operations. Others in the market are reported to be looking to divest their insurance businesses, because the capital strain meant that they should focus on their core banking capabilities and insurance was not providing the required level of ROCE to support sustained investment.

Capital ► Some interviewees felt that capital requirements could have a major impact on the bancassurance models. The manufacture and joint venture models risk a significant capital impact on the bank holding partners as a result of Basel III and Solvency II. The banks’ ability to treat insurance capital as part of their overall capital could be affected. One participant says, ‘I believe that banks will no longer have life manufacturing vehicles going forward, driven by the impact of Basel III and Solvency II capital requirements. Increasingly there will be a shift towards non-life manufacturing to access profit streams.’

Those organizations that hold less than a 20% share in the insurance business will avoid the additional cost to the business. This could trigger a major structural change in bancassurance joint venture structures with a more capital efficient model being 80% insurer owned / 20% bank owned or indeed a move away from ownership and joint ventures to formal distribution deals, with one respondent saying, ‘All banks are re-examining their insurance businesses with some looking to sell parts, reduce joint ventures and move to distribution-only’.

A number of those surveyed say that they are undertaking projects to assess the operating models and product offerings for bancassurance going forward, with one chief executive seeing the implications of Solvency II as an opportunity in light of the institution’s existing risk-based capital model and well-capitalized position.


Capital challenge and risk appetite

There is a widely held belief that banks will look to bancassurance to produce an alternative income stream to compensate for challenges in other areas of their business. We focus in this section on the effects of capital shortage and a few specific regulatory changes that may have far-reaching implications for bancassurance arrangements, namely Solvency II for insurers and Basel III for banks.

Impact of capital strain on bancassuranceWith capital scarce and pressure coming from governments in many countries for banks to increase loan facilities to support the economic stimulus initiatives, decisions relating to the use of capital are getting even greater consideration. As solvency rules and capital adequacy requirements for banks and insurers evolve, banks need to consider both the capital structure of their insurance operations and the products they offer.

Our respondents tell us that, with less capacity to lend, banks are increasingly looking to insurance as an alternative source of income. As a result, spare capacity in branches is refocusing to sell insurance in place of mortgages and loans, and within insurance, non-life is being developed as a product line where historically life has dominated. There is also increased marketing of insurance products to high net worth individuals and small to medium size enterprises.

There was clear evidence that insurance is becoming a higher priority within the banks, so the decision is whether to solely distribute with lesser capital requirements or adopt a joint venture or manufacturing model with far greater capital implications.

Impact on bancassurance product offeringOn the face of it, it may be tempting to think that a lower-risk banking product like a prudent mortgage book should have a similar capital requirement to a lower-risk insurance product such as a savings bond. In fact, the exact nature of the products and the corporate structure through which the group operates will have a significant impact on the level of capital required and the profit signature that their products will produce.

“New business strain” is further impacting decisions regarding the nature of bancassurance products sold. A number of products require significant capital to fund, with annuities particularly hard hit under Solvency II, for example. Consideration also needs to be given to the capital required to fund initial acquisition costs, like commission, and sales and marketing. Bancassurers are considering how capital-intensive products are, whether or not they should continue to be sold, and what operating model is most suitable.

Basel III and Solvency ►II will have widespread implications for bancassurance.

Bank interviewees ►highlighted a need to rebalance towards non-capital and non-risk bearing products.

Insurers tend to take a ►longer-term view on ROCE than banks.


Solvency IISolvency II for insurers will introduce consistent measurements of capital requirements that directly reflect the underlying risks of the business, these will be implemented in December 2012. In some countries this is a less radical shift than it is in others - although still highly significant - as a regulatory economic capital basis is already in place (for example Individual Capital Assessment in the UK and the Swiss Solvency Test). For others, this is a much more fundamental change. For a bank owning insurance interests (and for the insurers themselves) there are a number of important points raised by Solvency II.

Some banks’ insurance companies may only write a relatively small number of types of insurance business (e.g. concentrating on life protection business associated with mortgages and personal lines of non-life insurance). This may leave them at a disadvantage compared to broader insurers who are able to obtain higher risk diversification benefits in their regulatory capital calculations. The bank as a whole will not be able to recognize any additional risk diversification benefits arising from its insurance interests.

The general implications for insurers are relevant to the insurance subsidiaries themselves as well as part of the overall considerations for the group. For example, where a group includes a number of insurance entities, making sure that the corporate structure is aligned to secure maximum capital efficiency under Solvency II rules, and reviewing reinsurance arrangements as well as product design and pricing, will be important.

Key changes

Solvency I Solvency II

►Rules-based approach to supervision ►►Prudent valuation of liabilities – lack of ►transparency and consistency

►Formula-based solvency margin calculations ►►Limited connection to actual risks of business ►

► Principles-based approach to supervision ►► Market-consistent approach for valuing ►liabilities

► Capital requirements linked to risk profile ►► Convergence of economic capital and ►regulatory capital

Lead supervisor for groups ►► Major focus on risk management ►► Significant disclosure requirements ►► Capital add-ons for deficiencies ►


In general, insurers within a banking group will have to comply on a solo basis with the Solvency II capital regime including the Solvency Capital Requirement and the own funds and capital tiering rules. For example, the individual insurance entity as well as the top level insurance holding company will have to meet Solvency II requirements.

Clearly the impact of this will depend on the types of business written by the insurers and the final form of the Solvency II rules. In general, the risk-based capital approach will see heavier capital requirements for products with guarantees (in particular fixed annuities), although there may be a much more limited or positive effect on other classes of business (e.g. life protection). There are still some significant issues in the draft rules that could affect other classes of business for some companies. The careful use of appropriate reinsurance or other risk mitigation techniques will have a direct impact on capital requirements.

In the case of insurers owning banks, aside from the general Solvency II points mentioned above, there is still a lack of clarity on the capital treatment of banking subsidiaries within insurance groups (from Committee of European Insurance and Occupational Pensions Supervisors Final Level 2 Advice on Assessment of Group Solvency, formerly CP60), in particular the extent to which surplus own funds in the subsidiary can be recognized in the group solvency calculation, and the extent to which diversification benefits can be obtained.


Basel III In December 2009, the Basel Committee for Banking Supervision issued a consultative paper on proposed changes to the prudential regime for international banks (and within the European context to all banks), which are due to be implemented by 2012. Whilst the transition dates may evolve, the proposals are likely to be implemented largely in their current form, with far less available time to implement compared to Solvency II. The new rules, together with their calibration, are due to be confirmed by the end of 2010, and are designed to strengthen capital and liquidity requirements and promote a more resilient banking sector.

There will be widespread implications for the banking industry, causing banks to consider, for instance, how they undertake specific activities. This includes considerations regarding their insurance activities.

Basel III - Key proposals

These include:

Raising the quality, consistency and transparency of the capital base (in ►particular ensuring that core Tier 1 capital is predominantly common shares and retained earnings).

Deductions from capital being predominately taken from core Tier 1 ►capital.

Introducing new key solvency ratios, including a ratio based upon core ►Tier 1 capital (this prioritized the holding of core Tier 1 capital).

Strengthening the risk coverage of the capital framework, requiring ►banks to meet more onerous requirements, including increased market and credit risk requirements as well as allowances for countercyclical buffers.

Introducing a leverage ratio as a supplementary measure to the Basel ►II risk-based framework constraining the amount of on and off balance sheet exposures a bank may hold in relation to its core Tier 1 capital.

Introducing a series of measures to promote the build-up of capital ►buffers in good times that can be drawn on in periods of stress.

Introducing a global minimum liquidity standard for internationally ►active banks, requiring them to hold additional liquid assets.


Overall the proposals will require banks to hold significant amounts of additional core Tier 1 capital in the form of equity and reserves, at a time when it may well become more difficult to undertake the raising of capital, and coinciding with possible depletion of reserves and an increase in the cost of capital.

For banks with insurance subsidiaries this raises particular issues, as the higher book value of the investment in the insurance subsidiary and the capital requirement arising in the subsidiary would be largely deducted from core Tier 1 capital.

Also, the impact of this is more pronounced in certain countries where the deduction is currently taken from total capital rather than core Tier 1 capital, enabling a portion of the deduction to be taken from Tier 2 capital. While the total deducted remains unchanged this approach has an adverse impact on core Tier 1 capital, restricting the amount available to support other areas of the business. This has particular implications for banks based in the UK, France, Ireland and Nordic countries.

The proposed changes under Basel III will have significant implications for banks, raising particular issues concerning the amount of core Tier 1 capital required to support their businesses. As a consequence, banks are increasingly scrutinizing and reviewing the employment of core Tier 1 capital.

This is a potentially important consideration for banks entering into insurance joint ventures or owning insurance businesses, and is likely to lead to banks reassessing their insurance assets as part of their Basel III impact assessments.


Available options for bancassurers

Divest insurance operations ►

Due to the capital constraints and restrictions on the use of product tying, banks may take the opportunity to reassess the option of divesting their insurance operations. This could include re-evaluating insurance subsidiaries that remain only for historical reasons or are no longer profitable. In recent years the market value of many insurance subsidiaries has been below embedded value, so some banks may have retained insurance operations that they might otherwise have disposed of. Depending on carrying volume, the sale of an insurance subsidiary would raise immediate tier 1 capital and liquidity for the bank, and would also avoid the necessity of complying with the upcoming Solvency II requirements.

Enhance group capital structure and risk management ►Banks that choose to retain their insurance subsidiaries will be under pressure to look for ways to maximise the value of these operations. Greater emphasis on tier 1 capital from both Basel III and Solvency II requirements will also put added pressure on bancassurers to make more efficient use of group capital in an attempt to achieve higher returns.

Bancassurers could take the opportunity to leverage some of the improvements in their insurer’s risk and capital management frameworks – such as the use of approved internal models and enhanced enterprise risk management under Solvency II – to deliver reduced capital requirements from improved risk management controls across the group. Other advantages that could be leveraged include the streamlining of group reporting, and the potential to develop more efficient organizational structures. These developments could have the potential to lower both the cost of capital and the administrative costs across the group.

Product rationalization ►Finally, as noted above, banks may choose to switch from manufacturing to less capital-intensive distribution models. In addition, the greater alignment of risk and capital at a business level may lead to some insurance lines becoming unprofitable. This may in turn see banks focusing on the insurance products that generate the greater returns on capital, and/or provide the most opportunities for cross-selling of banking and insurance products.


Growth of bancassurance

A common theme discussed by both banks and insurers participating in the survey is that they expect bancassurance to grow as a distribution channel consistently across Europe and the factors assisting the growth of bancassurance outweigh those restricting growth.

Factors influencing the growth of bancassurance across Europe

Assisting growth Restricting growth

► Market coped well with worst financial ►crisis since 1930s

► Despite the challenges facing the ►banking industry bancassurance is seen as a key part of banking strategy

► Increased pressure on banking product ►sales means bancassurance revenues are increasingly important

► Bancassurance potential has still not ►been achieved across Europe

► Customers still have confidence in their ►banks

► Banks are taking bancassurance very ►seriously and aggressively developing their capability and channels to market

► Use of technology to supply insurance ►products and customers propensity to purchase insurance products using technology

► Europe life and non-life markets ►decrease first time since 1980s

► Western Europe life and non-life down, ►Central and Eastern Europe life and non-life up (but slowed)

► Low growth for 2010, big variance by ►country

► Bundled product sales fall ►

► Capital implications for investment in ►bancassurance

► Increased regulation; increasing costs ►and complexity

► Banks focused on rebuilding core ►business

Our interviewees tell us overwhelmingly that their strategies are led by the banks and their customer strategies in each territory. It remains the case for most of those surveyed that the bank business generates the growth, while the insurance business provides product.

A challenge is that the banking divisions have tended to operate independently of the insurance division, even where they are both owned by the bank. There is an increasing desire to create a more integrated bank and insurance model with insurance becoming of greater importance to the banking personnel. Historically, the insurance teams have wrestled to raise the profile of insurance within the bank, but we have observed a willingness by the bank personnel to embrace insurance as they seek opportunities to replace revenue from the diminished credit based banking products revenue stream.

Factors assisting the ►growth of bancassurers outweigh the restricting growth factors.

Banks and insurers ►view bancassurance as a core element of the customer proposition.

There is a strong ►desire by the market to create an integrated bancassurance model.


Markets and propositions offered across Europe

The research identified that banks and insurers typically categorized the various markets into four key regions.

Emerging Developing Mature

Eastern ►Europe

Central ►Europe

Western ►Europe

Anglo-Saxon ►

Country Lithuania Croatia Bulgaria Turkey

Poland Czech Republic Slovakia Slovenia

Austria Benelux France Italy Ireland Portugal Spain

UK Germany

Product and Proposition

Simple low cost life

Simple low cost life and personal lines

Simple low cost life and non-life

Full life and non-life offering

Bancassurance success is arguably linked to the maturity of the market. The success as a distribution model differs across Europe but the target customer base, along with the products and services offered and the products being promoted, becomes similar when comparing different regions in Europe.

Mature, established markets are highly competitive with a wide range of products and services available. Typically in emerging or developing markets there is less competition and fewer number of products and services.

The penetration of bancassurance is strongest in Western Europe, however we have separated UK and Germany into an “Anglo-Saxon” region as a more complex market exists and bancassurance occupies a much less prominent position.

As the market becomes more mature a greater level of advised bancassurance sales versus non-advised sales is evident. This is particularly true in the UK and Germany.


Technology supporting growthOur interviewees agree that internet banking, though part of most bancassurers’ current propositions, represents the greatest growth opportunity going forward. Those that invest and innovate in internet and mobile solutions will gain a competitive advantage in an already low-cost operating model beyond their branch networks.

In addition, rather than seeing other online players as a threat, there is a strong belief that the banks are better able to deploy online to best effect as part of their multi-channel offering.

Some of our interviewees tell us that technology is the key challenge for bancassurers as they move to improve smooth and straightforward processing and to focus on front-end sales and increased productivity.

There was limited evidence that the banks excel in this area but one in particular, was able to demonstrate a leading position in terms of an integrated proposition with well packaged banking and insurance services that met clearly identified customer segment needs, simply described in a manner that all customers and staff can understand, and there was an excellent integrated technology solution that allowed for easy access of all customer banking and insurance details. This was available in the call center, in the branch, mobile sales force and online allowing for a truly integrated customer experience and successful customer sales and service model.


New market entrantsAn area that should not be ignored by bancassurers is the emergence of other non-traditional insurance sale and distribution models. Retailers, for example, are looking to grow their banking and insurance presences and have the capabilities to compete with bancassurers. Their strengths include trusted brands, established customer bases, regular customer contact, strong customer data and insight, and a desire to drive profit and growth via financial services. Some retailers are already demonstrating that they are able to use their expertise to take market share from weaker financial services competitors.

However, most of the interviewees do not see retailers such as Tesco, Virgin and Carrefour as a threat, pointing out that such operators tend to target low-value customers with simple products and do so with varying degrees of success. But while new entrants are not seen as a concern, our participants feel that the banks should be making better use of the data they hold to increase market share.

Our interviewees tell us that they see this as a key priority for their businesses going forward, and many report that their organizations are looking into ways to make better use of customer data to target sales. Some are working with partners to develop tools, and others are investing heavily in customer relationship management systems to cross-sell and up-sell.

A key issue here is obtaining customer consent for the use of data, but where this can be achieved, our survey found that customers increasingly want their banks to provide simple life and non-life products, and are looking for products that perform well. Banks recognize a need to target these customers with adequate information on products that will suit their requirements.


Customers and bancassurance

A key issue for banks assessing the way forward for their bancassurance operations is customer appetite and demand, which has been significantly impacted recently by the credit crisis that has swept Europe and the globe.

Meeting customer demandHistorically, bancassurers have relied on either own-branded products or a limited number of third-party suppliers to provide their customers with a range of bancassurance products. This has typically maximized profit but led to a weak overall bancassurance proposition. The increased customer pressure for greater choice, and the growing regulatory focus on treating customers fairly, combating anti-competitive behavior and increasing choice, has led bancassurers to reconsider whether it is best to be a pure vertically integrated provider, a hybrid supplier or solely a distributor of third party products.

It is still apparent in many cases that banks are bad at cross-selling insurance products, rarely making it clear to customers what they have on offer. Our survey found banks need to spend more time demonstrating the value for money that they can deliver, and make better use of customer information to target insurance cross-sales.

This view prevails despite the fact that banks have access to three key data streams about their customers: they know their incomes, their outlays, and their ages. By carefully segmenting their customer bases along these lines, they can improve insurance sales. From a banks’ perspective, often the banking senior team will not understand insurance and the full potential it can offer to their customers and their business. There remains not a divide between bank and the insurance division, but a sub-optimal understanding and way of working together to maximise overall benefit.

Customers are calling ►for a renewed focus on service delivery, one to one relationships and clear advice.

There are significant ►differences in the perception of bancassurance across Europe.

Banks are generally ►poor at cross-selling insurance products.


Maximizing customer contactQuicker, easier and safer services are the critical elements of the bancassurance sales process. Banks only have a short “window of opportunity” in which to identify and sell insurance during their customer contact, and so they are looking to minimize product sale time to maximize this opportunity. We are seeing a greater focus on the “point-of-sale” and the opportunity cost of selling certain products versus others. There is also clear evidence that if the point-of-sale opportunity is lost, any downstream sale is dramatically diminished.

Interviewees give a variety of answers, with some banks focusing on banking rather than insurance products at the point of sale, and others looking to improve training on more sophisticated products so as to target those at point of sale. A number of those questioned highlight the post-sale interaction as the key area for improvement, so as to aid customer retention.

The research highlighted the finite time that is allocated to the sale of insurance products as part of each interaction with a banking customer. Typically, 5%-8% of the duration of a customer interaction is assigned to an insurance sale and is only secondary to the core banking product.

Often the insurance element of the interaction is passed to an insurance team within the bank or to a third party provider. This is driven by the limited time and insurance experience of the banking personnel.

It was evident that lack of priority given to insurance during the bank customer contact impacts the insurance enquiries derived from each customer interaction. As banks give greater attention to this area, the opportunity to maximise the customer interaction points will significantly increase.

The issue of trustCustomer trust is clearly a crucial element when it comes to assessing the ability of banks to cross-sell insurance products to existing customers. Our interviewees doubt the impact the financial crisis has had on this, with many reporting no evidence of a change in customer attitudes, and saying instead that the crisis has driven customers to recognise the value of greater protection.


One of our interviewees says, ‘I believe trust is a red herring – lots of people are talking about it but there is very little evidence of a change’. Nevertheless, a number of those we interviewed consider that large international institutions are losing the faith of some customers, who are instead turning to local banks that are deemed closer to their communities and as a result more trustworthy. Other interviewees’ talk of a “flight to quality” favoring more established players that emerged from the crisis with, in the customers’ eyes greater strength than other banks. They see this as an opportunity to retain and gain increased customer numbers.

Those interviewed that have witnessed some negativity maintain that it has not resulted in a decline in sales, and anticipate that the banking sector will bounce back from the crisis quickly.

Customer attitudes across EuropeAcross Europe there are already significant differences in customer attitudes to bancassurance. For example, in Germany, banks are not seen as the logical providers of insurance financial advice, whereas in Spain banks remain at the center of financial transactions and are still generally held in high regard.

An emerging trend across Europe arising from the research is that bank customers are diversifying their portfolios away from a single banking provider. An increasing number are choosing to source products from at least two banks, resulting in greater competition, not only for banking products but also for insurance share of the wallet.

Overall the majority of interviewees have not witnessed material shifts in customers changing their behavior to become less reliant on banks. Some say that high-net-worth individuals are diversifying their portfolios across more suppliers, and others report less reliance by customers on bank advisors, with a preference for self-direction. The consensus, however, is that the bancassurance model remains an attractive one for bank customers despite the credit crisis.

Understanding customer behaviorThere is some evidence that the outlook is more complex than the responses of our bancassurance participants who report no significant change in customer trust levels. In January 2010 Ernst & Young published a report called “Understanding customer behavior in retail banking”, based on a survey of more than 6,100 bank customers across six European countries. The research, conducted in 2009 in the wake of the unprecedented turmoil that hit the European banking market the year before, asked respondents about their relationships with their banks.


Our customer survey also found:

Fewer than one in five Europeans now hold more than one account with their main ►bank, and a quarter hold more than two accounts with a second provider

More than 10% of Europeans currently plan to change their main bank ►

Service quality, price and personal relationships are the most important criteria for ►customers when they choose a bank

A third of customers consider a personal relationship with their bank advisor to be ►highly important when choosing a bank

More than half (54%) agree they would join a loyalty programme if their bank offered ►one

What became clear was that the credit crisis has indeed had a profound and lasting impact on the way customers interact with the banks that serve them. Gone are the days when banks were among the most trusted and respected institutions on the high street – trust has fallen dramatically. Across Europe, some 45% of customers say the crisis has had a negative, or very negative, impact on their faith in the industry.

Customers are calling for a renewed focus on service delivery, one-to-one relationships and clear advice. Banks should therefore consider the following issues in responding to customer demand for bancassurance:

A sophisticated understanding of the bank’s customer base is vital, so that the ►right insurance products can be targeted towards the right consumers. Banks must identify and target resources towards key accounts.

To prevent customer attrition, banks should consider developing “product ►bundles” for clients, so that there are benefits in purchasing a number of products from one provider as opposed to shopping around. In this way, bancassurance can enhance the customer relationship.

Banks should invest in and expand Customer Retention Units to take a more ►holistic approach to customer concerns across product areas. If customers purchase both banking and insurance products from the institution, this information should be central to the ongoing service relationship and a joined-up offering should be given.

Customers are demanding improved access to personal advisers – this does not ►mean banks must invest in more branches, but that they should improve access and communications using remote channels, and increase customer awareness of these offerings. Enhancing personal relationships can in turn enhance cross-selling opportunities.


Conclusion

Our research confirms that the developing regulatory landscape poses challenges to the existing bancassurance model. Overall, we expect the significant regulatory capital developments, particularly in the post-credit-crisis environment, to result in a considerable reassessment of banks’ interests in insurers and vice versa.

The need for capital has meant that banks have had to consider more carefully what risks they are going to take on and therefore how best to deploy their capital. This has, in some cases, led to banks reconsidering their strategies with regards to insurance. This has also given insurers greater opportunities to take advantage of the changing bank strategies to obtain new partnership distribution arrangements with banks or to acquire part of an existing subsidiary.

In our opinion insurers will remain keen to secure access to bank distribution channels; and distribution-only arrangements may be increasingly attractive to banks, and insurance manufacturing less so.

At the very least we believe all organization will be undertaking a review of their current arrangements and strategies in light of the regulatory changes, and considering whether their ownership structures and their commercial and reinsurance arrangements are still appropriate to their circumstances.

Against the backdrop of regulatory change, capital challenges and the need to adopt the appropriate model for distribution it is also imperative to consider an ever more demanding and complex customer base.


Research methodology

The primary research took place over a six-month period, from October 2009 to April 2010, and was managed throughout by Ernst & Young’s bancassurance team.

The research was primarily focused on structured face-to-face interviews with senior executives from banks and general insurers actively involved with bancassurance across EMEIA.

We interviewed over 20 institutions including:

Aegon ►

AG Insurance ►

Aviva ►

Axa ►

Barclays ►

BNP Paribas ►

CNP ►

Credit Agricole ►

Fortis Insurance ►

HSBC ►

Legal & General ►

Santander ►

We also received valuable insight from our Regulatory, Risk, Actuarial and Tax teams across EMEIA that has allowed us to expand the research findings to include more detailed commentary regarding the key themes.


39Bancassurance: a winning formula 39

Appendix A: Market size and distribution landscape

Overall European insurance market – life and non-life – individuals and corporate

2008 €1,059 billion Gross Written Premium has decreased from €1,182 billion ►in 2007.

This decrease has mainly driven by the life segment, with particular influence ►from France and the UK and the impact of the global financial crisis.

Chart 1: Total European premiums - 2000-2008

Source: CEA European Insurance in Figures Report 2009 – European Insurance and Reinsurance

Chart 2: Breakdown of total European premiums - 2008

Source: CEA European Insurance in Figures Report 2009 – European Insurance and Reinsurance

Life is the dominant segment commanding 61% of the overall European ►Insurance Market - €645 billion Gross Written Premium.

Non-life represents 39% of the market with €413 billion and is largely driven by ►property, motor and accident and health classes.

0

300

600

900

1200

2000 2001 2002 2003 2004 2005 2006 2007 2008

Tota

l Pre

miu

ms

(€bn

)

Nor

mal

gro

wth

15%

0%

-15%

-30%

-45%

39% 61%Life

Non-life

A detailed breakdown of the bancassurance market is incorporated in the data which follows. The research shows characteristics of the European market and compares this to the rest of the world where possible.


Chart 3: Worldwide premiums - 2000-2008

Source: Swiss Re Sigma

Notes: “Europe” covers western, central and eastern Europe and therefore includes Russia and Ukraine (which together account for less than 1% of global premiums)

Chart shown in USD rather than Euros

Chart 4: Bancassurance penetration - life - 2009

Source: CEA Insurance Distribution Channels in Europe – March 2010 Federation

Notes: For Luxembourg, the data relates to new business UK figures based on new business sales only Bancassurance sales are included within each of the other categories and cannot be separately identified

4500

4000

3500

3000

2500

2000

1500

1000

500

02000 2001 2002 2003 2004 2005 2006 2007 2008

Europe Asia North America Rest of the world

Wor

ldw

ide

Prem

ium

s ($

bn)

0

10

20

30

40

50

60

70

80

90

100

Austri

aBelg

iumBulg

aria

Germ

any

Spain

Fran

ce

Croat

ia

Irelan

dIta

lyLit

huan

iaLu

xem

bour

gNet

herla

nds

Polan

dPo

rtuga

l

Slov

enia

Turk

ey

United

King

dom

Slov

akia

Pene

trat

ion

(%)


Chart 5: Bancassurance penetration - non-life - 2009

Source: CEA Insurance Distribution Channels in Europe – March 2010 Federation

Bancassurance distribution of non-life products represents less than 10% in all ►European countries.

There is an increasing trend of insurance sales via this channel, along with the ►direct channel.

Bancassurance as a distribution channel is consistently stronger in life rather ►than non-life. Brokers and agents remain the dominant force in the non-life segment.

Bancassurance sales of life products are less significant in UK and Germany. ►As these are two major life markets in Europe the overall penetration of bancassurance sales of life products is skewed.

Low distribution costs and insurance products that complement banking ►activities are seen as the two main drivers of bancassurance sales.

Historically the non-life bancassurance segment has been largely driven by ►Personal Lines. We have seen increased interest in commercial lines with many respondents citing this as a growth area over the next three years.

0

2

4

6

8

10

Austri

aBelg

iumBulg

aria

Germ

any

Spain

Fran

ce

Croat

ia

Irelan

dIta

lyLit

huan

iaLu

xem

bour

gNet

herla

nds

Polan

dPo

rtuga

l

Slov

enia

Turk

ey

United

King

dom

Slov

akia

12


Chart 6: Bancassurance penetration rates - life - outside Europe

Source: Swiss Re (based on insurance regulator, insurance association, AXCO, Limra, CEA Federation Report and Swiss Re estimates)

Chart 7: Bancassurance penetration rates - non-life - outside Europe

Source: Swiss Re (based on insurance regulator, insurance association, AXCO, Limra, CEA Federation Report and Swiss Re estimates)

Note: US data not available

We can observe a similar life and non-life pattern when bancassurance as a ►distribution channel is considered in context of global distribution trends.

Life remains the dominant product offering via the bancassurance channel. ►

Australia Brazil Canada Chile China Malaysia Mexico Taiwan US

0

10

20

30

40

50

60

Australia Brazil Canada Chile China Malaysia Mexico Taiwan

0

2

4

10

12

14

20

6

8

16

18

43Bancassurance: a winning formula 43

Below are the definitions of the main sales practices identified in the Centre for European Policy Studies’ research report on “Tying and other potentially unfair commercial practices in the retail financial services sector”:

Tying ► Two or more products sold in a package and at least one of them is not sold separately (e.g. you can’t take out a loan without also buying associated insurance)

Pure bundling ► Similar to tying, but none of the packaged components is available separately

Mixed bundling ► Two or more products sold together in a package, although each can also be purchased separately (the price of the bundled packaged may be cheaper than buying the products separately)

Conditional sales practices ►i) Service is subject to customer taking specified action (e.g. paying ►salary into current account)

ii) Conditional rebates (e.g. no credit card fee if cardholder spends ►more than a given amount each year)

Bancassurance ► Bancassurance is the selling of insurance products via banks

Life, non-life and banking products ►Life – Investment, Pension, Protection ►Non-life – Personal Lines, small to medium size and Commercial ►Bank – Savings, Loans ►

Appendix B: Definitions


Amaury De La Boullerie Tour Egée, 11 Avenue de l’arche Paris, 92037 France

Tel: +33 1 46 93 65 80 Email: [email protected]

Andreas Freiling Mergenthalerallee 3-5 Eschborn / Frankfurt (Main) 65760, Germany

Tel: +49 (0) 6196 9961 2587 Email: [email protected]

Contacts

Iwona Kozera Rondo ONZ 1 Warszawa 00124, Poland

Tel: +48 225 577 491 Email: [email protected]

Nicola Panarelli Via Wittgens, 6 Milano, 20123 Italy

Tel: +39 (0) 2722 12344 Email: [email protected]

Chris Read 1 More London Place London SE1 2AF


Richard Reed 1 More London Place London SE1 2AF


Manuel Martinez Plaza Pablo Ruiz Picasso Torre Picasso, Madrid 28020, Spain

Tel: +34 915 727 298 Email: [email protected]


Neil RolfeTax1 More London Place London, SE1 2AF


Steve SouthallRegulation1 More London Place London, SE1 2AF


Russell HughesCapital (Life)1 More London Place London, SE1 2AF


Sima RupareliaCapital (Non-life)1 More London Place London, SE1 2AF



Ernst & Young

Assurance | Tax | Transactions | Advisory

In line with Ernst & Young’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content.

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

100996.indd (UK) 06/10. Creative Services Group.

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

© 2010 EYGM Limited. All Rights Reserved.

EYG no. EK0045

EY Bancassurance Winning Formula July2010

Documents

Transcript of EY Bancassurance Winning Formula July2010