Bancassurance in Asia/Pacific

Douglas A. Jaffe Associate Director Financial Insights Asia/Pacific 30th August, 2006 Bancassurance in Asia/Pacific Embracing Alternative Distribution Channels

Bancassurance in Asia/Pacific • Drivers of Bancassurance Strategies • The Lay of the Land in Asia • Challenges • Future Outlook • Questions 2

Opportunity to Diversify Banking Revenues 1 A Viable Distribution Channel for Insurers 2 Mounting Client Sophistication 3 Relaxation of Regulatory Restrictions 4 Drivers of Bancassurance Strategies 3

Drivers of Bancassurance Strategies • For Banks - Opportunity to Diversify Revenues • Profitability Concerns • Margin pressure, credit risk, slowing economic growth, cost, etc. • Need for alternative revenue streams • Bancassurance • Commissions from insurance sales augment fee-based income • Increase diversification and reduce earnings volatility • Leverage banks' customer bases, branding and reputation • Generate cross-sell opportunities • Provide integrated financial services to cater to customers’ entire financing requirements • Increase customer retention 4

Drivers of Bancassurance Strategies • For Insurers – A Viable Distribution Channel • Traditional Agency Model Problems • High start-up/fixed costs, poaching of quality agents, concentration of power by a few leaders, and under-serving of middle-tier consumers • Bancassurance • Allow insurers access to banks’ customer network to distribute mass-market products • Fosters collaboration in new products for targeted client segments such as the HNWIs • Can bolster public confidence, especially if the insurer is a foreign and untested new-comer 5

Banking Banking Products Products SME Banking: SME Banking: Mortgage Mortgage Auto Auto Personal Personal Credit cards Credit cards Cash Cash Loans Loans Loans Loans Loans Loans Insurance Insurance Management Management Products Products Credit Shield Credit Shield Personal Auto Personal Auto Personal Credit Credit Life Credit Life Mortgage Life Mortgage Life Lost Card Lost Card Insurance Insurance Insurance Insurance Programs Programs Programs Programs Programs Programs Cross selling opportunities Drivers of Bancassurance Strategies • Sample Synergies From Bundling Bank and Insurance Products 6

Drivers of Bancassurance Strategies • Increasing Client Sophistication • Customer Requirements • Lack of government-sponsored pension schemes • Increasingly affluent and sophisticated populations are showing a preference for investment-type products • Response • Providers must develop better product distribution platforms capable of delivering superior, individualized yet cost-effective services • Savvy insurers are looking to cooperate with banks on product customization to better suit clients’ needs and broaden distribution reach 7

Drivers of Bancassurance Strategies • Relaxation of Regulatory Restrictions • Until recently, bancassurance was not widely adopted in Asia due to restrictive regulations • Regulators are dismantling barriers between banking and insurance products • Recent liberalization in countries like South Korea and Japan • Vietnam • No restrictions on the level of foreign ownership • Problems still exist • Bureaucracy, corruption, lack of clarity on legal and contractual issues, infrastructure headaches, etc. 8

Drivers of Bancassurance Strategies Snapshot of the Regulatory Environment in Asia 9

Breakdown of Life Premium Income in Taiwan, 2005 Insurance brokers/agents 4.0% Bancassurance 37.5% or US$6.3bn Insurance salespersons 58.5% Total first-year life premium income = US$16.8 billion Lay of the Land in Asia/Pacific • In Europe, 1/3 of life insurance products are distributed via banks • In Asia/Pacific, banks account for 13% of life and 6% of non-life insurance premiums • In Taiwan, 38% of insurance distribution was done through banks in 2005 and is growing • In Malaysia, bancassurance accounted for 51% of new premiums in 2004 11

Lay of the Land in Asia/Pacific Foreign Insurers Dominate Tie-ups • Regulatory changes are luring global insurers to partner with local banks in Asia • Leverage domestic banks’ distribution capacities and branding to compete with incumbent insurers and their large agency networks • Market share of bancassurance deals by foreign insurers stands at 80% as compared to 20% for domestic insurers Prudential UK – Has established strategic alliances with key banks like Standard Chartered, Bank of China, ICICI Bank, and Agribank. AXA - Has 12 bancassurance relationships in Japan, and has partnered with Indonesia’s Bank Mandiri to launch AXA Mandiri Financial Services. Has plans to enter India. 12

Lay of the Land in Asia/Pacific 13

Bank JV Vehicle Insurer Financial Services Group Lay of the Land in Asia/Pacific • Distribution Agreements most popular • Limited sharing of proprietary customer databases by banks • Opportunities for insurers to expand their distribution capabilities • Joint Ventures popular in some markets • Markets where foreign insurers can participate only in collaboration with a domestic partner (India) • Integrated Financial Services Group • Cost and operational efficiencies, but more complex to manage • Model selection related to cultural and regulatory factors 14

Challenges Channel Conflict and Cannibalization • Branches and agency networks offering the same products • Solutions? • Create parallel products but a duplication of efforts • Banks focus only on plain vanilla insurance products • Low-returns and potentially eats into deposit products • Bancassurance can generate additional organic growth • It is estimated that 1/3 of new bancassurance premiums are from 1st time customers • Bancassurers can uncover market segments otherwise untapped by traditional channels 16

Challenges • Banks lack experience • Senior-level commitment, customer insight, marketing, product development, integrating/co-branding with banking products, etc. • Cultural gap • Insurers – proactive sales culture and incentivized compensation • Banks – demand-oriented environment as salaried employees. • Without well-structured commissions/re-training, staff would resist change, be unable to tailor products and may mis-sell. • Customer ownership • Banks own the customer and can switch providers • Insurers sweeten offerings  higher risk • Different regulatory structures and pressures 17

Future Outlook • Strengths • Large branch networks reaching rural areas • Asia has a number of high-growth, emerging insurance markets • Favorable regulatory regimes favor bancassurance development • Growing middle class and increasing awareness of the need for coverage • In many markets, banks are state-owned entities with substantial influence • Weaknesses • Bank staff not adequately trained to distribute insurance offerings • Some market are mature with penetration rates at the saturation point • Legacy infrastructure systems and weak customer database • Family-owned structure of insurers • Banks are rationalizing their distribution networks 19

Future Outlook • Opportunities • Alternative source of income as interest margins shrink • Foreign players or new entrants can leverage off bank branches • Further relaxation of regulations governing bancassurance • WTO accession in China and Malaysia’s financial sector master plan that allows for more consolidation of insurance/non-insurance players • Threats • Unsophisticated customers • Channel conflict - strong competition from existing (agents, car dealers, etc.) and other emerging channels such as the Internet • Policy risk from uncertain regulatory intentions • High country investment risk could deter foreign participation • Rising level of income disparity and rural poverty 20

Future Outlook Growth of the Internet and e-Insurance • Online insurance on the radar of providers in Asia/Pacific • There are advantages • Cost efficiencies, wider penetration into previously unreachable segments, and heightened visibility for carriers • Conflicts may arise • How will the agents' traditional function evolve to complement these direct channel strategies? • Technical requirements • Extensible architecture, legacy application integration, and a fail-proof, secure-rich environment. • Improve web functionality and marketing of those products that integrate well with offline channels 21

Future Outlook – Europe Experience Non-Life Online Insurance as a % of Total Premium Revenues 22

Future Outlook – Korea Experience Premiums and Market Share of Online Auto Insurance to the Total Auto Insurance Market 23

Future Outlook • Final Thoughts Bancassurance will grow in popularity. Agents will remain the principal distribution channel, but mounting cost pressures and requirement for more refined customer segmentation will promote bancassurance. Institutions will leverage bancassurance to tap deeper into consumer wallets. Relatively lower inherent risk of establishing a presence is encouraging insurers to explore new geographies. Foreign insurers are contending for exclusive deals with larger-tiered Asian banks. Insurers are keeping at the forefront of product innovation by utilizing banks’ customer networks and reach to understand and influence customers' buying patterns. 24

Douglas A. Jaffe Associate Director Financial Insights Asia/Pacific djaffe@financial-insights.com 65-6228-7719 Questions?Thank You!

Bancassurance in Asia/Pacific