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
Introduction
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.
Richard Reed Chris Read

Head of EMEIA Bancassurance Senior Manager, EMEIA Bancassurance
Bancassurance: a winning formula 1

Executive summary
European bancassurance market

The marketing of life and non-life insurance products to bank customers is a well
size and distribution landscape established business model for many European banks. Banks enjoy regular contact
with their customers and this provides a constant pipeline of sales opportunities,
►► The European insurance market either physically via branches or virtually via online banking, to cross-sell and up-
represents 36% of global
sell insurance based products and services to their customers.
insurance spend of €2,903
billion Gross Written Premium
The European insurance market clearly offers a huge source of potential revenue
in 2008.
for banks. However, our research shows that the banks’ appetite to derive revenue
►► The split in European Insurance from insurance sales and customers’ propensity to purchase insurance from banks
spend in 2008 of €1,059 billion
is inconsistent across Europe.
Gross Written Premium was 61%
life and 39% non-life.
A number of banks have recognized, particularly during the current financial
►► Bancassurance is a dominant crisis, the benefit of having insurance profit contributions coming into the group
distribution channel in a large that are non-credit based and continue to provide a substantial contribution when
number of European countries.
core banking products are down. Through our survey we observed a significant
►► Bancassurance penetration variance in bancassurance performance – with in excess of 20% of group profit
across Europe ranges between for some banks to under 5% for others. This is a clear reflection of the different
20 – 80% for life and 0 – 10% for
appetites and capabilities the leading bancassurers adopt and highlights the
non-life.
potential increase in profit insurance can bring to a bank with the right focus.
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 themes
A 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 results
Interviewees 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.

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.
Organization
Proposition Distribution Customer
Strategic Service Sales
Source
Management
� Bancassurance Inhouse and third Shared services Active internal Face-to-face, Predict future
understood and party product and external lead internet, direct, segment needs
important to bank provision Integrated low generation telephone -
cost model integrated Breakthrough
� Commitment and Medium Productivity focus solution propositions
tone set from the performance Single system
top End-to-end Face-to-face Simple triggers
Simple Straight through integration representatives
� Strong visible multi-channel processing for wealth and Active high volume,
leadership products agreed Offers visible business high quality lead
with bank generation
� Consistent focus - Incentives/rewards Focused sales
not just flavour of balanced with bank culture Cross-sell and
the month Proposition geared up-sell supported
for mass market by core banking
� Jointly agreed (’fit or out’) Strong compliance product incentives
targets and basis focus
Specific
development for Execution only
�
high-net-worth guided and full
Insurance individuals advice
representation
on the board Effective bundling
Source: Public data and annual reports

Increased regulatory focus
There is a broad consensus among our interviewees that regulation will continue
►► The UK Financial to increase for insurance and bancassurance across Europe. The participants feel
Services Authority’s that increased regulation and transparency is good for the customer and good for
model is likely to form
the industry, and is therefore desirable.
the basis for a tougher
regulatory stance across However, while recognizing that changes will ultimately be good for the
Europe. bancassurance sector, those surveyed say that regulation is adding complexity
to processes and therefore creating confusion for customers making purchasing
►► Bancassurers are better
decisions. One respondent said, ‘It is right to add more regulatory focus for
positioned to meet an
increased regulatory complex products, but not for simple commodity-style products’.
environment compared
There was a consistently held view that an ideal position would be where the
to other distribution
bancassurers, insurers and banks provided a service to customers that treated
channels.
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 sector

As 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 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 states
While regulatory approaches to bancassurance vary considerably across the EU,
we are witnessing changes in approach across a range of markets.
The UK
►►Two regulatory RDR
developments are The Retail Distribution Review will end commission based sales of
likely to change investment products, where advice is given to customers. Commission
the size and will be replaced by the introduction of fees. Revised definitions of
shape of the UK advice and increased qualification of standards for those that provide
bancassurance advice will also be introduced. Advisors that describe themselves as
market going independent will be required to meet new independence requirements
forward: The and increased levels of capital will need to be held within the advising
Retail Distribution business.
Review (RDR)
and rule changes Advisors will need to be qualified to a higher standard, resulting in extra
relating to the costs and advisor charging will make the costs of the advice (as opposed
sale of PPI. 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.
PPI
The 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.

France
►►There are two Changes to regulatory responsibilities
significant Since 11 January 2010, responsibility for ensuring that
changes that will promotional materials used when selling or advising on
have an impact insurance products are compliant with the terms and conditions
on the French of the product has fallen to the distributors. This requires new
bancassurance processes for both the distributor and the product provider as
sector, changes they define how the insurance company provides the necessary
to regulatory information to the intermediary, and for the intermediary as
responsibilities it defines its processes for agreeing on the information to be
and rules on used. From a bancassurance perspective, this change will place
product tying. additional operational and regulatory responsibilities on banks as
distributors and is likely to increase costs.
Product tying
Regulators 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.
Poland
In 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
►► Dynamics have changed optimum “supply” model to deal with the new pressures in the financial services
from squeezing insurer market. Banks have traditionally developed their insurance interests in a variety
margin to expanding
of ways, ranging from distribution-only to full insurance company ownership, and
market potential.
these strategies have been driven in the past by revenue and profit potential.
►► The crisis has led Today, our interviewees tell us that the impact of the financial crisis and a number
to a more risk of regulatory developments are leading banks to reassess their strategies, and
adverse approach to make complex decisions to position institutions for long-term bancassurance
bancassurance. advantage.
►► There is a potential Prior to the crisis, some saw manufacturing either via their own insurance
move away from the companies or through reinsurance vehicles as the preferred option to gain greater
manufacturing and access to additional revenue and profit potential. However, a combination of
joint venture model capital constraints, loss-making portfolios in some areas, a greater emphasis on
to distribution only. 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 models

The 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.

The core operating models deployed by banks across Europe for bancassurance
Bancassurance model Definition Risk profile

►►Distribution only Banks sell insurance products Banks take sales
to their retail and commercial regulatory risk, insurers
banking customers. Products are take all manufacturing
sourced from a third party insurer risks.
in exchange for a commission
payment and possible profit share.
►►Joint venture Banks sell insurance products Banks take sales

sourced from a company that is regulatory risk and both
often 50% owned by an insurance insurers and banks take
partner of choice and 50% owned manufacturing risks to
by the bank. the extent they are not
Typically insurers take reinsured.
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.
►►Fully owned Banks sell and underwrite Banks take both

insurance subsidiary insurance products, for example sales regulatory risk
of bank via a wholly-owned insurance and manufacturing/
company. underwriting risk.
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.

An integrated bancassurance model
The 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 in determining bancassurance operating models
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 Our research considered attitudes to both life and non-life, with a wide range of views
non-life 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.
►► Competitive Where banks operate the distribution-only model, banks are using capacity and products
advantage and supplied by large insurance providers, and this has led to a lack of differentiation in
differentiation 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 Description
►► Market entry We have seen situations where using a bank’s own insurance operation can be a market entry
strategies 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
►► Basel III and Solvency an alternative income stream to compensate for challenges in other areas of
II will have widespread their business. We focus in this section on the effects of capital shortage and
implications for
a few specific regulatory changes that may have far-reaching implications for
bancassurance.
bancassurance arrangements, namely Solvency II for insurers and Basel III for
►► Bank interviewees banks.
highlighted a need to
rebalance towards non-
capital and non-risk Impact of capital strain on bancassurance
bearing products. With capital scarce and pressure coming from governments in many countries
for banks to increase loan facilities to support the economic stimulus initiatives,
►► Insurers tend to take a decisions relating to the use of capital are getting even greater consideration. As
longer-term view on
solvency rules and capital adequacy requirements for banks and insurers evolve,
ROCE than banks.
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 offering

On 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.

Solvency II
Solvency 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
►►R
► ules-based approach to supervision ►► P
► rinciples-based approach to supervision
►►P
► rudent valuation of liabilities – lack of ►► M
► arket-consistent approach for valuing
transparency and consistency liabilities
►►F
► ormula-based solvency margin calculations ►► C
► apital requirements linked to risk profile
►►L
► imited connection to actual risks of business ►► C
► onvergence of economic capital and
regulatory capital

►►Lead supervisor for groups
►► M
► ajor focus on risk management
►► S
► ignificant disclosure requirements
►► C
► apital 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
►► Factors assisting the is that they expect bancassurance to grow as a distribution channel consistently
growth of bancassurers across Europe and the factors assisting the growth of bancassurance outweigh
outweigh the restricting
those restricting growth.
growth factors.
►► Banks and insurers

view bancassurance as Factors influencing the growth of bancassurance across Europe
a core element of the
customer proposition. Assisting growth Restricting growth
►► M
► arket coped well with worst financial ►► E
► urope life and non-life markets
►► There is a strong crisis since 1930s decrease first time since 1980s
desire by the market
to create an integrated ►► D
► espite the challenges facing the ►► W
► estern Europe life and non-life down,
bancassurance banking industry bancassurance is seen Central and Eastern Europe life and non-
model. as a key part of banking strategy life up (but slowed)
►► I► ncreased pressure on banking product ►► L

► ow growth for 2010, big variance by
sales means bancassurance revenues country
are increasingly important
►► B
► undled product sales fall
►► B
► ancassurance potential has still not
been achieved across Europe ►► C
► apital implications for investment in
bancassurance
►► C
► ustomers still have confidence in their
banks ►► I► ncreased regulation; increasing costs
and complexity
►► B
► anks are taking bancassurance very
seriously and aggressively developing ►► B
► anks focused on rebuilding core
their capability and channels to market business
►► U
► se of technology to supply insurance
products and customers propensity
to purchase insurance products using
technology
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.

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 ►►Central ►►Western ►►Anglo-Saxon
Europe Europe Europe
Country Lithuania Poland Austria UK
Croatia Czech Republic Benelux Germany
Bulgaria Slovakia France
Turkey Slovenia Italy
Ireland
Portugal
Spain
Product and Simple low Simple low Simple low cost Full life and
Proposition cost life cost life and life and non-life non-life
personal lines 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 growth
Our 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 entrants
An 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
►► Customers are calling operations is customer appetite and demand, which has been significantly
for a renewed focus on impacted recently by the credit crisis that has swept Europe and the globe.
service delivery, one to
one relationships and
clear advice.
Meeting customer demand
►► There are significant Historically, bancassurers have relied on either own-branded products or a
differences in limited number of third-party suppliers to provide their customers with a range
the perception of of bancassurance products. This has typically maximized profit but led to a
bancassurance across weak overall bancassurance proposition. The increased customer pressure for
Europe.
greater choice, and the growing regulatory focus on treating customers fairly,
►► Banks are generally combating anti-competitive behavior and increasing choice, has led bancassurers
poor at cross-selling to reconsider whether it is best to be a pure vertically integrated provider, a hybrid
insurance products. 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.

Maximizing customer contact
Quicker, 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 trust

Customer 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 Europe

Across 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 behavior

There 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.

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.
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
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 ►► CNP
►► AG Insurance ►► Credit Agricole
►► Aviva ►► Fortis Insurance
►► Axa ►► HSBC
►► Barclays ►► Legal & General
►► BNP Paribas ►► 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.

Appendix A: Market size and
distribution landscape
A detailed breakdown of the Overall European insurance market – life and non-life – individuals and
bancassurance market is corporate
incorporated in the data which
►► 2008 €1,059 billion Gross Written Premium has decreased from €1,182 billion
follows. The research shows
in 2007.
characteristics of the European
market and compares this to the ►► This decrease has mainly driven by the life segment, with particular influence
rest of the world where possible. from France and the UK and the impact of the global financial crisis.
Chart 1: Total European premiums - 2000-2008
1200 15%
Total Premiums (€bn)
900 0%
Normal growth
600 -15%
300 -30%
0 -45%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: CEA European Insurance in Figures Report 2009 – European Insurance and Reinsurance
Chart 2: Breakdown of total European premiums - 2008
Life
39% 61%
Non-life
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.

Chart 3: Worldwide premiums - 2000-2008
4500
Worldwide Premiums ($bn)
4000
3500
3000
2500
2000
1500
1000
500
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Europe Asia North America Rest of the world

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

100
90
80
Penetration (%)
70
60
50
40
30
20
10
0
ria
Cr ia
tia
ce
d
ly
ds
ia
ain
ey
m
ga
an
ni
i
lan
ur
lan
Ita
ar
ak
en
iu
do
lan
an
rk
oa
st
rtu
ua
Sp
bo
rm
lg
lg
ov
ov
Ire
Po
ng
Tu
Au
Fr
er
th
Be
Bu
Po
Ge
Sl
Sl
Ki
th
Li
xe
d
Ne
Lu
ite
Un
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

Chart 5: Bancassurance penetration - non-life - 2009
12
10
ia
ia
ey
ria
ia
tia
ce
d
ly
ds
Tu in
m
ga
an
ni
lan
ur
lan
Ita
ak
en
ar
do
iu
lan
an
rk
oa
st
rtu
ua
Sp
bo
rm
lg
lg
ov
ov
Ire
Po
ng
Au
Fr
Cr
er
th
Be
Bu
Po
Ge
Sl
Sl
Ki
th
Li
xe
d
Ne
Lu
ite
Un
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.

Chart 6: Bancassurance penetration rates - life - outside Europe
60
50
40
30
20
10
0
Australia Brazil Canada Chile China Malaysia Mexico Taiwan US
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

20
18
16
14
12
10
8
6
4
0
Australia Brazil Canada Chile China Malaysia Mexico Taiwan
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.

Appendix B: Definitions
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

Contacts
Amaury De La Boullerie Manuel Martinez

Tour Egée, 11 Avenue de l’arche Plaza Pablo Ruiz Picasso
Paris, 92037 Torre Picasso, Madrid
France 28020, Spain
Tel: +33 1 46 93 65 80 Tel: +34 915 727 298

Email: amaury.de.la.bouillerie@fr.ey.com Email: manuel.martinezpedraza@es.ey.com
Andreas Freiling Nicola Panarelli

Mergenthalerallee 3-5 Via Wittgens, 6
Eschborn / Frankfurt (Main) Milano, 20123
65760, Germany Italy
Tel: +49 (0) 6196 9961 2587 Tel: +39 (0) 2722 12344
Email: andreas.freiling@de.ey.com Email: nicola.panarelli@it.ey.com
Iwona Kozera Chris Read

Rondo ONZ 1 1 More London Place
Warszawa London
00124, Poland SE1 2AF
Tel: +48 225 577 491 Tel: +44 (0) 20 7951 6805
Email: iwona.kozera@pl.ey.com Email: cread1@uk.ey.com
Richard Reed
1 More London Place
London
SE1 2AF
Tel: +44 (0) 20 7951 7459

Email: rreed1@uk.ey.com

Neil Rolfe
Tax
1 More London Place
London, SE1 2AF
Tel: +44 (0) 20 7951 9605

Email: nrolfe@uk.ey.com
Steve Southall
Regulation
1 More London Place
London, SE1 2AF
Tel: +44 (0) 20 7951 1004

Email: ssouthall@uk.ey.com
Russell Hughes
Capital (Life)
1 More London Place
London, SE1 2AF
Tel: +44 (0) 20 7951 2141

Email: rhughes1@uk.ey.com
Sima Ruparelia
Capital (Non-life)
1 More London Place
London, SE1 2AF
Tel: +44 (0) 20 7951 5282

Email: sruparelia@uk.ey.com

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Bancassurance:

►►Increased regulatory focus 10

►►Change of bancassurance models 16

►►Capital challenge and risk appetite 22

►►Customers and bancassurance 32

►►Appendix A: Market size and distribution landscape 40

We recently conducted this European bancassurance survey of senior executives

►► How to react to an increasingly changing regulatory environment

Richard Reed Chris Read

Bancassurance: a winning formula 1

European bancassurance market

Bright but challenging future for bancassurance

2 Bancassurance: a winning formula

►►Increased regulatory focus

Those interviewed mostly agreed that increased regulation and transparency is

There was variation in responses on a country-by-country basis, with some

Bancassurance: a winning formula 3

4 Bancassurance: a winning formula

Bancassurance: a winning formula 5

►► Customers and bancassurance

Customer trust in their providers is a key factor when it comes to cross-selling

6 Bancassurance: a winning formula

Bancassurance: a winning formula 7

Source: Public data and annual reports

8 Bancassurance: a winning formula

Bancassurance is considered by our interviewees to be the lowest cost channel

Regulatory developments in the bancassurance sector

10 Bancassurance: a winning formula

Any change to the legislation is likely to have far-reaching implications for

Participants’ views on the intervention varied significantly by jurisdiction, with

In the UK this is particularly prevalent, with the sale of payment protection

Bancassurance: a winning formula 11

12 Bancassurance: a winning formula

Bancassurance: a winning formula 13

14 Bancassurance: a winning formula

Bancassurance: a winning formula 15

Today’s bancassurance models

16 Bancassurance: a winning formula

Bancassurance model Definition Risk profile

►►Joint venture Banks sell insurance products Banks take sales

►►Fully owned Banks sell and underwrite Banks take both

Bancassurance: a winning formula 17

18 Bancassurance: a winning formula

20 Bancassurance: a winning formula

Bancassurance: a winning formula 21

Impact on bancassurance product offering

“New business strain” is further impacting decisions regarding the nature of

22 Bancassurance: a winning formula

Bancassurance: a winning formula 23

24 Bancassurance: a winning formula

Basel III - Key proposals

Bancassurance: a winning formula 25

26 Bancassurance: a winning formula

Bancassurance: a winning formula 27

►► Banks and insurers

►► I► ncreased pressure on banking product ►► L

A challenge is that the banking divisions have tended to operate independently

28 Bancassurance: a winning formula

Emerging Developing Mature

Bancassurance success is arguably linked to the maturity of the market. The

The penetration of bancassurance is strongest in Western Europe, however we

As the market becomes more mature a greater level of advised bancassurance