BANCASSURANCE IN EUROPE

BANCASSURANCE IN EUROPE

Also by Tobias C. Hoschka CROSS-BORDER ENTRY IN EUROPEAN RETAIL FINANCIAL SERVICES

Bancassurance in Europe Tobias C. Hoschka E. C. Research Fellow University ofoxford MSt. Martin's Press

Tobias C. Hoschka 1994 Softcover reprint ofthe hardcover 1st edition 1994 978-0-333-62814-0 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph ofthis publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London WI P 9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published in Great Britain 1994 by THE MACMILLAN PRESS LTO Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN 978-1-349-23457-8 ISBN 978-1-349-23455-4 (ebook) DOI 10.1007/978-1-349-23455-4 First published in the United States of America 1994 by Scholarly and Reference Division, ST. MARTIN'S PRESS, INC., 175 Fifth Avenue, New York, N.Y. 10010 ISBN 978-0-312-12278-2 Library of Congress Cataloging-in-Publication Data applied for

v Contents Acknowledgements List of Tables List of Figures viii ix xi. Introduction 1 Chapter One: Why do Banks enter Insurance? Industry- and Firm-level Incentives 1. Bancassurance: the regulatory environment 7 2. The state of the European banking industry 13 3. Entry of European banks into insurance: aggregate data 20 4. Incentives for banks to enter life insurance: industry-level factors 22 4.1. Demographic factors 22 4.2. Economic environment.. 27 4.3. Changing savings trends 30 4.4. Tax treatment of life insurance 32 4.5. Insurance penetration and saturation 34 4.6. Growth performance of the insurance industry 34 5. Incentives for banks to enter insurance: firm-level factors 37 5.1. Synergy effects: a definition 37 5.2. Economies of scale 38 5.3. Economies of scope 41 5.4. A comparison of synergy effects in life and general insurance 44 5.5. Limits to synergy effects and a possible organizational response 46 6. Conclusions 50 Chapter Two: How do Banks enter Insurance? Comparative Analysis of Entry Strategies 1. Entry strategies into insurance: an overview 56

vi 1.1. Strategic issues in financial services: the need for a modified approach 56 1.2. Elements of a strategic plan for a bank entering insurance 57 1.3. The chosen approach to the case studies 59 2. De novo entry: starting from scratch 61 2.1. TSB: setting a precedence in European bancassurance 62 2.2. Credit Agricole's Predica 66 2.3. Deutsche Bank's Lebensversicherung 70 2.4. Barclays Bank 74 2.5. Comparative summary of de novo entry case studies 77 3. Co-operative distribution alliances: linking distribution channels 78 3.1. BNP and UAP 79 3.2. Dresdner Bank and Allianz 82 3.3. Bank of Scotland and Standard Life 85 3.4. Comparative summary of case studies of distribution alliances 88 4. Joint ventures: sharing risks and profits 89 4.1. RBS and Scottish Equitable 89 4.2. Commerzbank and DBV 93 4.3. Midland Bank and Commercial Union 96 4.4. Comparative summary of case studies ofjoint ventures 99 5. Mergers and acquisitions: integrating banking and insurance organizations 100 5.1. Merger or majority acquisition 100 5.2. NMB Postbank and Nationale Nederlanden 100 5.3. Lloyds and Abbey Life 104 5.4. Rabobank and Interpolis ll0 5.5. Comparative summary of case studies of mergers and acquisitions 112 6. Key success factors for banks entering insurance: lessons from the case studies 113 6.1. Pros and cons of alternative entry vehicles: is there an optimal entry route? 113 6.1.1. De novo entry 114 6.1.2. Strategic distribution alliances and joint ventures 116 6.1.3. Mergers and acquisitions 120

vii 6.2. Customer segmentation and distribution approach to bancassurance 123 6.2.1. Recognising customer needs for successful segmentation 123 6.2.2. Distributional modes of integrating insurance services into the bank branch 125 6.3. Devising an effective incentive structure for bancassurance 127 6.3.1. Payment systems and incentives: a review of the literature 127 6.3.2. Incentive structures in the context of bancassurance 132 7. Conclusions 137 Bancassurance in Europe: Conclusions and Suggestions for Further Research 143 Bibliography 151 Index 171

viii Acknowledgements Undertaking research is never done without the help of others. I would therefore like to thank particularly Bimal Prodhan for many helpful comments and suggestions which have significantly improved this study. I am also very grateful to Ian Kessler and Keith Blois as well as Jacques Girin and Alain Jeunemaitre of the Centre de Recherche en Gestion at Ecole Polytechnique in Paris for hosting me as a visiting scholar and following my research with much interest. Finally, I would like to express my thanks to my editor at Macmillan, Giovanna Davitti, for her comments and assisitance which ensured the successful completion of this book. As part of the study, a range of personal interviews with firm officials was undertaken. These interviews informed both the general sections as well as forming the basis for the case studies. I am therefore very grateful to all those individuals who took the time to participate in the interviews and were helpful in the collection of data and information.

ix List of Tables Table 1.1: Regulations concerning distribution of insurance and banking products in the EC, Japan and the US 10 Table 1.2: Regulations concerning start-up and ownership of insurance products in the EC, Japan and the US 12 Table 1.3: Number of Branches in 8 EC countries from 1960 to 1990 18 Table 1.4: Entry activities of the largest 60 EC banks 20 Table 1.5: Tax treatment of life insurance in the EC 33 Table 2.1: Overview of case studies 61 Table 2.2: Contribution of TSB's insurance business to total profits from retail financial services 66 Table 2.3: Summary statistics for Deutsche Bank Lebensversicherung 74 Table 2.4: Profits ofbarclays FinancialServices Division from 1987 to 1992 77 Table 2.5: Summary table of de novo entry case studies; 78

x Table 2.6: Summary table of distribution alliances 88 Table 2.7: Summary table of joint ventures 99 Table 2.8: Analysis of profits after tax of Lloyds Abbey Life between 1988 and 1992 109 Table 2.9: Summarytable ofmergersand acquisitions 112

xi List of Figures Figure 1.1: Return on assets for commercial banks in the EC, Japan and the US from 1980 to 1990 16 Figure 1.2: Number of inhabitants per bank branch in 1989/90 17 Figure 1.3: Industry-level incentives for banks to enter life insurance 23 Figure 1.4: Population growth rates in the EC countries, Japan and the US from 1950 to 1990 24 Figure 1.5: Age structure of population in the EC between 1960 and 2020 25 Figure 1.6: GDP per capita in EC countries, Japan and the US in 1989 28 Figure 1.7: Inflation rates for EC countries, Japan and the US between 1985 and 1992 29 Figure 1.8: Gross savings rates of private households for 6 EC countries from 1970 to 1990 31 Figure 1.9: Analysis of monetary assets of private households in France from 1980 to 1990 32

xii Figure 1.10: Insurance penetration in EC economies, 35 Japan and US in 1991; Figure 1.11: Average premium growth rates in life and non-life insurance for EC economies, Japan and US from 1986 to 1991 36 Figure 1.12: Examples of organizational structures according to product lines or customer groups 49 Figure 2.1: Alternative entry vehicles for banks entering insurance 59 Figure 2.2: Development of Predica's profits before tax from 1988 to 1992 69 Figure 2.3: New annualised premiums of Black Horse Financial Services and Abbey Life from 1988 to 1992 108