Is bancassurance nearing the end?

The recent economic crisis has, indeed, profoundly shaken some European conglomerates while others were driven out of business.

According to a survey published recently by Standard and Poor's, there are no more sizable stakeholders on the market nor are there many incentives for the establishment of new entities between banks and insurance. Are we witnessing a return to the pure models?

The reasons behind the decline of bank insurance

The crisis, a test of soundness

In Europe, insurers have been relatively spared by the recent financial crisis, and very few companies were bailed out by public authorities. However, it was not so for bank insurers.

Severely affected by the subprime crisis, some groups were on the brink of collapse. They were required to rebuild their shareholder's equity and to restabilise their balance sheets so as to avoid an imminent bankruptcy. They, therefore, resorted to :

• capital increase
• sale of assets
• public aid

Structural and regulatory reasons

Apart from the financial turmoil, the downfall of bank insurance is accounted for by structural and regulatory reasons. Among the arguments mentioned, we note the following:

• problems of integration within the group. Neither the investors nor the manager did really adopt the double culture.
• pressure from the European Commission on big groups which stand as a systemic risk for the market.
• the refocusing strategies: the authorities in charge of control and competition require that asset sales and refocus on baseline trade, in return for public aid.
• regulatory evolutions which contribute to the return of the pure models. Therefore, the passage to the Basel II standards in 2012 requires a higher basic shareholder's equity for banks which own an insurance subsidiary.

The series of restructurings

Sustaining heavy losses, some European bank insurers have requested the intervention of governments. To revitalize the financial markets, the authorities have then required a restructuring of the conglomerates and of their activities.

Other equally restrictive measures were taken in order to minimize the exposure of bank insurers to risks and to toxic assets. The main measures regard:

• the split-up of the groups into several subsidiaries: retail banks, wealth management, merchant banks and insurance: Bank insurers have been called upon to separate out banking activities from operations related to insurance
• the refocus of the groups on their trade of origin
• the nationalization and the intervention of public authorities to purchase some toxic assets
• scaling down groups through the sale of their subsidiaries

The groups hardest hit by the crisis were obligated to cede all or part of their insurance activities. That is the case of:

• Fortis, which lost 70% of its value between January 1, 2007 and August 31, 2008, was dismantled after having lost 28 billion EUR (39 billion USD) by the end of 2008. The bank insurer disengaged from the most of its banking and insurance operations. In May 2009, it had to sell Fortis Banque (Belgium's number one bank) to French BNP Paribas.
• The Belgian KBC saw its size fall by 25% and was compelled to give up its insurance subsidiary Fidea as well as other assets. From now and up to 2013, KBC will have to cede 39 billion EUR (55 billion USD) of assets and pay back 7 billion EUR (9.9 billion USD) of public loans.
• ING has been split up into two entities. From now and up to 2013, the group will have to sell its insurance operations, its real estate credit operations in the Netherlands and its American online bank. ING has already raised its capital by 7.5 billion EUR (10.7 billion USD) in order to be able to repay half of the public aid which amounts to 10 billion EUR (14.2 billion USD).
• The Royal Bank of Scotland, which was severely hit by the crisis, has been nationalized up to 84% of its capital. Benefiting from a governmental plan against toxic assets, the bank received 25.5 billion GBP (42 billion USD) from the State. The Royal Bank of Scotland plans on disengaging from its insurance operations with RBS Insurance.
• Lloyds Banking Group has proceeded to the increase of its capital by 13.5 billion GBP (21.9 billion USD) in a move designed to escape a governmental plan of protection from toxic assets. By doing so, the group avoids a second intervention by the British State which already detains 43% of its capital. The group's life insurance subsidiary, Scottish Widows, could soon be put for sale.

In fact, European bank insurers, the Dutch and the Belgian in particular sank into the crisis because of their excessively risky moves which were designed to make up for the reduced size of their domestic markets.

Bank insurance, a strategic asset

According to some analysts, this business model remains a strategic asset of the banking sector and a winning model in terms of distribution. For banks:

• the activity of life and non life insurance stands as a cushion in the operating result. It generates liquidity which the bank needs.
• insurance premiums and results are increasingly weighing down the balance sheets of banking establishments.
• life insurance accounts for a substantial market share whereas non life insurance is constantly progressing in European countries.
• the insurance development opportunities are important. An underwriter has to 6 to 7 times more contacts in a banking agency than in an insurance company.
• the bank and insurance combination make it possible to reduce management and distribution costs.