Is there still some money in Bancassurance ?

1. Is there still some money in Bancassurance ? Guy RoelandtCEO Dexia Insurance Belgium International Insurance Society Annual Seminar – June 07, 2010

2. Bancassurance is amongst the most important channels in insurance distribution Over the last two decades, bancassurance has become a key distribution channel in many insurance markets. Its prevalence is most pronounced in Southern Europe, but its use has also spread to other regions, in particular emerging markets. The ability to offer one-stop financial services and tap into otherwise difficult to reach client segments has induced many insurance practitioners to explore the possibility of selling through bank branches. But were they successful?

3. Defining Bancassurance Bancassurance refers generally to the provision of insurance services by banks. Bancassurance is sometimes defined as “a strategy adopted by banks or insurance companies aiming to operate in the financial market in a more or less integrated manner”. This definition highlights the inter-linkage of different financial services, as well as the distribution of these products. Other definitions emphasise the degree of integration between banking and insurance, as some observers argue that true bancassurance requires a fairly high degree of integration between the two sectors. Other more stringent definitions state that the insurance products must be specifically designed for distribution through bancassurance channels.

4. Alternative entry vehicles for bank entering insurance Distribution alliance= co-operation agreement, concer-ning distribution area possibly supported by mutual shareholding Joint venture= jointly owned separate legal entity underwriting insurance Increasecaptureofadded value BUTIncrease in Complexity Level of integration Merger/acquisition= combination and integration of two separate corporation either though merger or control acquisition Full integration De novo entry= greenfield entry with own underwriting of insurance *Hotchka 1994 – team analysis

5. Are the conditions for successful parenting also the conditions for successful bancassurance? Three conditions for successful parenting: Parenting opportunities – There must be improvement opportunities that the business management cannot realize by itself, but that a suitable “parent” can. Distinctive parenting characteristics – the parent must possess skills that help to realize its targeted opportunities unusually well Avoid misfit with the critical success factor of the business – The parent must avoid simultaneously destroying significant value in other respects * “Global Parenting, in Globalization:The External Pressures” - M. Alexander. - Kirkbride, P., John Wiley & Sons 2001

6. The Ashridge portfolio@display Low Extent of misfit between the parent’scharacteristicsand the characteristics of thebusiness High High Low Extent of the fit between parent’s characteristicsand parenting opportunities in the business * “Global Parenting, in Globalization:The External Pressures” - M. Alexander. - Kirkbride, P., John Wiley & Sons 2001

7. Bancassurance the Dexia way 1970 distribution agreement with Ethias 1995 Join Venture with Ethias - Life (Megalife) - Non-life (Mega) 2000 Acquisition 1 (Elvia) and merger with the Life Joint Venture 2001 Acquisition 2 (DVV) 2004 Merger Elvia & DVV 1985 Distribution with “La Luxembourgoise” 1992 Separate entity for “Bil Vie” for life only 2001 Acquisition of Arcolux 2003 Merger of all entities 2008 Small acquisition – de novo turnaround Deniz Emiklilik In Belgium In Luxembourg In Turkey

8. Governance in Bancassurance: Boosting Revenues – Containing risks • Risk ≠ Risk • Leverage and systemic risk • Long term and buffers

9. Governance in Bancassurance: Boosting Revenues – Containing risks 1. Risk ≠ Risk - 2. Leverages and systemic risk - 3. LT and buffers • Why did insurers fare better during the 2008/2009 crisis? • Insurers do not rely on wholesale market funding for liquidity. They fund themselves through premiums, with long-term capital to support risk-taking positions. Their asset bases, which are substantial compared to their cash-flows, mostly comprise highly marketable securities. Whilst insurers do invest in some illiquid or higher-risk securities, their strong tradition of enterprise risk management (which strengthened after the previous 2001-2003 equity crisis) and highly regulated balance sheets both serve to limit the proportion of assets at risk. • Thus, during the crisis this natural long-liquidity position allowed insurers to be largely unaffected by the liquidity crunch, and insurers' investment activities, which are guided by the need to match liabilities, would have enabled them to survive even a prolonged and turbulent market downturn.

10. Governance in Bancassurance: Boosting Revenues – Containing risks 1. Risk ≠ Risk - 2. Leverages and systemic risk - 3. LT and buffers • Systemic Risk • The Geneva Association have sought to consider each of the main activities of insurers, applying FSB’s criteria to determine whether or not they are systematically relevant. They have concluded that typical insurance activities do not pose any systemic risk and only two non-core activities have the potential to be systemically relevant: • derivatives trading on non-insurance balance sheets, including CDS trading • The mis-management of short-term funding raised using commercial paper or securities lending (leading to liquidity) Other activities may, of course, emerge in the insurance industry that create significant risks. In the meantime, however, we must ask whether the regulations in major financial services jurisdictions are well designed to mitigate the potential systemic risk of the systemically relevant activities so far identified, or whether they must be supplemented with new measures or a more stringent monitoring.

11. Governance in Bancassurance: Boosting Revenues – Containing risks 1. Risk ≠ Risk - 2. Leverages and systemic risk - 3. LT and buffers • Cash Flow generation – LT - Buffers • Composition of Free Cash Flow yield for European insurers – the majority of cash is generated by the life Value of in Force (VIF) business unwind, FY09E. • The dependability of insurers’ cash-flows from large back books of reliable institutional and retail customers allowed them to continue to make net investments in securities at a time when banks were forced to sell securities * “Systemic risk in Insurance - ” Special Report of the Geneva Association systemic Risk working group – March 2010

12. Bancassurance Products Protector Life Savings – tax incentivised Assimilated Investment products with garantees Unit linked products Home – Family Car ... Credit related LIFE NON-LIFE

13. Bancassurance Critical Success Factors • Regulatory opportunity • Product complexity: keep it simple • Cost advantage - Price • Integration - Brand - Banking products - IT systems - Incentive systems - Marketing space • Tax advantage • Extension product offering

14. Belgium – Bancassurance “par excellence” – Financial conglomerates Life (individual) GPW (in 1.000.000 EUR)

15. Belgium – Bancassurance “par excellence” – Financial conglomerates Non Life GPW (in 1.000.000 EUR)

16. Belgium – Bancassurance – The sequel Fortis : Split up – Cross shareholding – Still going Strong AXA : Je t’aime moi non plus KBC : Fully integrated – European size reduction DEXIA : After 2009 hick-up – still going strong ING : European sell-off

17. Bancassurance – The counterarguments • Clash of cultures • Other risk – Other governance • Supervisory structures • High integration cost • Back to the core? • Appreciated by the investors?

18. Bancassurance – Conclusion • Pick the right solution for your capabilities • There is some money on the table (according to some) • The last cents are very costly

19. Library • “Bancassurance: Emerging trends, opportunities & challenges” Sigma n°5/2007 • “Monde changeant des assurances” – B. De GryseLarcier 2007 • “La bancassurance en mouvement” – B. De Gryse Larcier 2005 • “Creating the future with all finance and financial conglomerates” – L. Van den Berghe & K.VerweireKluwer 1998 • “ING Direct: Rebel in the Banking Industry” - L. Van den Berghe & K.VerweireVLGMS-0603-C – Case study • “Unstoppable” – C. ZookHarvard business Press 2007 • “Global Parenting, in Globalization:The External Pressures” - M. Alexander. Kirkbride, P., John Wiley & Sons 2001