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European bancassurance benchmark

24 pages
Milliman Research ReportPrepared by:Corinne LegrandAugust 2008European bancassurance benchmark European bancassurance benchmarkCorinne LegrandAugust 2008European bancassurance benchmarkCorinne LegrandAugust 2008Milliman Research ReportContentsEx ECutivE Su MMaRy 2Report objective 2Methodology and structure of the report 2Key findings 2BaCKg Round data on Eu Rop Ean BanC aSS u RanCE 4Bancassurance: a major distribution channel in Europe 4Bancassurance: still seen as a key development opportunity in the European insurance industry 5BanC aSS u RERS Can B ui Ld on an E xCLuS ivE di StR iBution n EtwoRK B ut th E pRoduC tivity of th E BRanCh n EtwoRK vaR iES widELy 6average productivity per branch varies significantly across countries 6f actors driving these differences 6post office productivity 8BanC aSS u RERS havE a CCESS to a C aptivE CL iEnt BaSE B ut th E aB iLity to CRoSS-SELL in Su RanCE p RoduC tS to th E Ban K’S CLiEntS vaR iES widELy 9penetration rates 9how are these penetration rates achieved? 9how can penetration rates be improved? 10aCqui Sition E xp En SES 13Commissions 13analysis by type of commissions 13non-commission acquisition expenses 14adM ini StRation E xp En SES 15administration expenses ratio 15Staff ratio 16MEthodoL ogy 17LiSt of C oM pani ES anaL ySEd in th E Su RvEy 19Milliman Research Reporte xe Cutive summaryReport objectiveThe key success factors for European bancassurers are usually measured ...
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Prepared by: Cre Ler
August 2008
Ere  bcssrce becmrk 
Contents ExECutivE Su MMaRy Rer bjece Mel  srcre  e rer Ke s BaCKgRound data on Eu RopEan BanCaSSuRanCE Bcssrce:  mjr srb cel  Ere Bcssrce: sll see s  ke eelme r  e Ere srce sr BanCaSSuRERS Can BuiLd on an ExCLuSivE diStRiBution nEtwoRK B ut thE pRoduCtivity of th E BRanCh n EtwoRK vaR iES widELy aere rc er brc res scl crss cres fcrs r ese ereces ps ce rc BanCaSSuRERS havE aCCESS to a CaptivE CLiEnt BaSE B ut thE aBiLity to CRoSS-SELL in SuRanCE pRoduCtS to thE BanK’S CLiEntS vaRiES widELy peer res h re ese eer res cee? h c eer res be mre? aCquiSition ExpEnSES Cmmsss alss b e  cmmsss n-cmmss cs eeses adMiniStRation ExpEnSES amsr eeses r S r MEthodoLogy LiSt of CoMpaniES anaLySEd in thE SuRvEy
2 2 2 2 4 4 5 6 6 6 8 9 9 9 10 13 13 13 14 15 15 16 17 19
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te bjece  s Mllm lss s  se   becmrk  cmmercl rc  eese leels crss le bcssrers  Ere.
Ere bcssrce becmrk Corinne Legrand August 2008
exeCutive summary Rer bjece The key success factors for European bancassurers are usually measured by commercial efficiency and low cost base. The objective of this Milliman analysis is to set up a benchmark of commercial productivity and expense levels across leading bancassurers in Europe. It focuses on bancassurance-dominated markets — France, Italy, Spain, and Portugal, and selected pure bancassurers in Belgium, Germany, and the United Kingdom. Our analysis provides essential information to:  bancassurers present in these markets, to help them assess their performance and understand how it can be improved  traditional insurers seeking to develop bancassurance distribution, to help them assess the performance, development potential, and value of possible bancassurance targets  insurers in developing bancassurance markets around the world, to help them assess development opportunities and set up performance benchmarks In this report, we present a summary of the results of the Milliman benchmark analysis and explain the main differences by country, by business model, and by business line. Mel  srcre  e rer For this report, we analysed publicly available financial and commercial data for a sample of 35 bancassurers across Europe. The list of companies is shown in the appendix. We then derived from this analysis a number of benchmark indicators:  productivity per branch  customer penetration  non-commission acquisition expenses as a percentage of new business Annual Premium Equivalent (APE)  entry commissions as a percentage of new business APE  administration expenses as a percentage of reserves Building on our in-depth knowledge of these bancassurance markets, we proceeded to an analysis of these benchmark indicators to explain the main differences by country, business model, and business line. Ke s  Bancassurance commercial productivity, measured as premiums per branch, varies largely across countries. The highest productivity levels are reached in mature life insurance markets in which life insurance products are tax advantaged compared to other forms of savings products, e.g. in France ( 2.5 million per branch on average) and Belgium ( 2.38 million). In countries such as Italy, where life insurance products do not benefit from a favourable tax treatment compared to other savings products, the commercial productivity depends largely on the level of priority assigned to life insurance business by the bank and can vary from one to ten. in mature life insurance markets can achieve penetration Reasonably successful bancassurers rates of 15% to 25% of the bank’s customer base by selling fairly standardised products to their mass-market customers and cross-selling life insurance risk products with loans and mortgages. Bancassurers can further increase their penetration rate up to 35% and more by expanding their life insurance product offerings to their affluent customers and by expanding 2
their insurance product range to new product lines, e.g. non-credit-related risk products and non-life insurance products.  Commissions represent between 82% and 94% of acquisition expenses. Average commissions-to-new-business APE ratios are around 35% in Italy, Spain, and Portugal, and significantly higher in France (47%). The level of non-commission acquisition expenses varies largely by country — from 1.9% of new business APE in Portugal to 7.7% in Italy. These differences can be driven by different compliance requirements across countries and by different structures of sales support implemented by companies.  The level of administration costs varies significantly across countries, from 0.08% of reserves in France to 0.23% in Germany. This ratio is largely dependent on the size of companies and can be as low as 0.04% for the largest bancassurers. The business model implemented — joint-venture or fully owned companies — has limited impact, reflecting the fact that the level of IT and administration integration between the bank and the insurance company is generally comparable under both models.
Ere bcssrce becmrk Corinne Legrand August 2008
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Mllm  Reserc Rer BaCkground data on european BanCassuran Ce Bcssrce:  mjr srb cel  Ere Bcssrce s  mjrBancassurance is a major distribution channel in Europe, accounting for over 60% of individual life srb cel  Ere,and Spain, and over 50% in Belgium. Bancassuranceinsurance premiums in France, Italy, Portugal, cc r er 60%is less developed in the United Kingdom and Germany.  l le srce remms  frce, il, prl,  S. Ce in main e uropean iexhiBit 1: BanCassuran ndividual life insuran Ce markets  250 80.00% 218.79 70.00% 200 60.00% 150 50.00% 125.9 40.00% 10030.00% 63.2760.37 20.00% 50 19.07 16.04 10.00% 8.60 0 0.00% United Kingdom France Italy Germany Spain Belgium Portugal Individual premiums (  market share (%)m) Bancassurance Srce: Mllm lss–2006  In France, Italy, Spain, Portugal, and Belgium, bancassurers operate under a fully integrated model in which:  Bancassurance companies are fully or partly owned by a bank. distribution agreement with their parent bank. Bancassurance companies have an exclusive  Bancassurance products are fully integrated in the bank’s product range and are sold by branch staff along with banking products. In Germany and the United Kingdom, bancassurance tends to be less integrated:  Fully owned bancassurance companies and joint ventures exist, but banks frequently operate through pure distribution agreements.  Distribution agreements are often on an exclusive basis in Germany, but in the United Kingdom multi-tied bancassurance distribution is developing.  Life insurance products are often not sold by branch staff directly, but are referred to insurance specialists. In Germany, this can be because insurance products tend to be more complex than in southern Europe. In the United Kingdom, this is due to the regulation under which investment products can be sold only by qualified financial advisers. Ere bcssrce becmrk4 Corinne Legrand August 2008
The main competitive advantages of bancassurance are often seen as: high business volumes by cross-selling simple products to the bank’s the capacity to achieve captive customer base  the marginal cost of distribution through an existing branch network  the operational cost efficiency of a close integration of systems and processes between the bank and the insurance company This report gives a view on these performance indicators and how they can vary by country and by business model. Bcssrce: sll see s  ke eelme r  e Ere srce sr Bancassurance has generated a significant volume of mergers and acquisitions (M&A) activity in Europe in 2007 and the first months of 2008. Both traditional insurers and bancassurers have developed their bancassurance activity by acquiring 50% stakes in bancassurance companies previously 100% owned by banks. By acquiring bancassurance ventures, traditional insurers gain access to well-established distribution networks and customer bases, allowing them to gain market share quickly. Traditional insurers tend to expand into bancassurance for one of two reasons:  to diversifiy their distribution strategy and gain market share in the countries where they are already present (This was the case with AXA with the acquisition of 50% of Montepaschi Vita in Italy in 2007, and Zurich Financial Services’ acquisition in Spain of 50% of Caixa Sabadell’s life insurance subsidiary, CaixaSabadell Vida, in 2008.)  to expand internationally (This was the case with Groupama with the acquisition of 100% of OTP Garancia in Hungary in 2007.) Well-established bancassurers were also active in the M&A drive to develop internationally by exporting their successful business model abroad. Credit Agricole, for example, acquired 50% and management control of the life and non-life bancassurance subsidiaries of the Espirito Santo Group in Portugal in 2006. For the valuation of these bancassurance deals, understanding the development potential of the bancassurance company is key. The ability to benchmark the company’s productivity per branch and bank customer-base penetration against successful competitors is an element with which to assess a global growth potential. Benchmarking the bancassurance business mix and profitability by business line against competitors is also essential for the definition of the business plan.
Ere bcssrce becmrk Corinne Legrand August 2008
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BanCassurers Can Build on an exClusive distri Bution network But the produ Ctivity of the BranCh network varies widely aere rc er brc res scl crss cres In the typical southern Europe bancassurance models, bancassurance companies are owned (fully or partly) by a bank and have an exclusive distribution agreement with their parent bank. Bancassurance companies thus have access to an established branch network and to a captive customer base. The life insurance premiums per branch ratio is a good indicator of the commercial performance of the branch network. Milliman analysis shows that this indicator varies widely across countries.
fcrs r ese ereces The first factor explaining these differences is the general level of development of life insurance markets and banking sectors in these countries. In Spain, for example, the life insurance market is relatively underdeveloped compared to other European markets. At the same time, Spain has one of the highest bank-branch densities in Europe. exhiBit 3: life i nsuranCe d ensity and d ensity of Bank Bran Ch n etworks in fran Ce and spain Country life insuranCe density Bank Bran Ch density (num Ber of  (premiums per Capita in $us) B ranChes per 1,000 inhaB itants) * spain 651.0 0.97 franCe 2,922.5 0.43 * ecl s ce Srce: Sm Sss Re, Be e f rce,  Bc e Esñ–2006 
exhiBit 2: average life i nsuranCe premiums per Bran Ch * ( m) 3,00 2,51 2,502,38 2,00 1,50 1,00 0 500,45 , 0,32 0,00 France Belgium Italy Portugal Spain Germany * ecl s ce srb Srce: Mllm lss–2006 r f rce, Belm, il, S,  germ; 2007 r p rl
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i S, r emle, e le srce mrke s relel ereele cmre  er Ere mrkes. a e sme me, S s e  e es bk-brc eses  Ere.
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A second factor driving these differences is the nature of life insurance business. In France and Belgium, individual life insurance products are basically tax-advantaged medium-term savings products, benefiting from tax exemption on interest and capital gains when policies are held for a minimum duration. This means that life insurance products are by nature very similar to the investment and savings products sold by banks and hence fairly easy for bank advisers to sell. Furthermore, the tax advantages mean that bank advisers can encourage their clients to shift their money from other savings products to life insurance products. In France, for example, the 2006 market growth was strongly driven by substantial transfers from Plans Epargne Logement (PEL), which are regulated savings products that allow savings for property acquisition under favourable conditions. On 1 January 2006, the interest earned on PEL in force for over 10 or 12 years became subject to income tax. As a consequence, a large number of PEL holders transferred their PEL to life insurance policies. It is estimated that 11 billion were transferred from PEL to life insurance products in 2006, generating a 9% life insurance market growth (out of a total 17% market growth in 2006). These transfers benefited mainly the bancassurance distributors because banks were able to target the PEL holders in their customer base. The situation in Italy is different because life insurance does not benefit from any tax advantages over other forms of saving products. The life insurance volumes produced by banks are therefore very dependent on the commercial priorities defined by each bank. This results in large differences in the commercial performance of banks. As shown in the graph below, the commercial performance of banks varies much more in Italy — from 0.45 million to 4.32 million per branch per year — than in France, Spain, or Portugal.
exhiBit 4: life i nsuranCe premiums per Bran Ch for sample Ban Cassurers in fran Ce, italy. s pain, and p ortugal ( m) 5,00 4,50 4,00 3,50 3,00 2,50 France Italy 2,00 1,50 1,00 Spain 0,50 0,00 France Italy Spain Portugal Srce: Mllm lss–2006 r f rce, il,  S; 2007 r p rl
The performance of Italian banks can also vary significantly year on year. In recent years, the commercial priorities of banks and in particular their focus — or lack of focus — on bancassurance may have been affected in a major way by M&A and restructuring activities. An example of this is a bancassurer involved in restructuring the ownership of its bancassurance operation in 2006, which saw the commercial performance per branch drop from 0.93 million per branch in 2005 to 0.58 million in 2006.
Ere bcssrce becmrk Corinne Legrand August 2008
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Mllm  Reserc Rer
Ere bcssrce becmrk Corinne Legrand August 2008
ps ce rc Finally, it is worth making a comment on post offices, which are more and more involved in the distribution of financial and life insurance products. Poste Vita ranked third in the Italian bancassurance market in 2006 and became the leading Italian bancassurer in 2007. La Banque Postale ranks second in the French bancassurance market behind Credit Agricole. These distributors can build on extremely large branch networks but with a fairly low number of bank advisers per branch and a less captive and often less wealthy customer base. As a result, the productivity of post office branches is lower than the average productivity of retail banks and savings banks.
exhiBit 5: life i nsuranCe premiums per Bran Ch for p ost offiCes in fran Ce and italy Country numBer of Bran Ches life i nsuranCe premiums per Bran Ch ( m) franCe 17,000 0.71 italy 11,800 0.51 Srce: Mllm lss–2006 
BanCassurers have aCCess to a Captive Client Base But the aBility to Cross-sell insuran Ce produCts to the Bank’s Clients varies widely
peer res Two ratios can be used to measure bancassurance penetration. The first indicator is the percentage of the bank’s clients that holds a life insurance policy with its bancassurance company. The second indicator is the ratio between the number of life insurance policies and the number of bank customers. For mature bancassurers focusing primarily on selling standardised savings and risk products to the bank’s mass-market customers, the first ratio is typically in the 15%–25% range and the second, in the 20%–30% range. These represent good levels of penetration for bancassurers that take a typical commercial approach in selling standardised and fairly simple products to the bank’s mass-market customers.
exhiBit 6: average Ban Cassuran Ce penetration in fran Ce and italy 40,00% 37,15% 35,00% 32,98% 30,00% 25,00% 20,00% 15,00% 10,00% 5,00% 0,00% Fr a nc e Ita ly Bancassurance clients / Bank clients Bancassurance policies / Bank clients Srce: Mllm lss-2006 
h re ese eer res cee? European bancassurers typically target two types of customers:  the bank’s mass-market customers, with an offer of fairly simple life savings and pension products  the bank’s customers taking loans and mortgages with an offer of credit-related risk products h eer res c be cee b rm smle le srce ss rcs me  mss-mrke csmers. Successful bancassurers have initially developed fairly standardised savings products aimed at their mass-market customers. For the branch staff of banks who were not life insurance specialists and were given only fairly limited life insurance training, products had to be simple to sell. And they had to be easy to understand for clients because only limited advice could be provided by the branch staff.
Ere bcssrce becmrk Corinne Legrand August 2008
Mllm  Reserc Rer
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