Bancassurance in Europe: Part 1

The growth of bancassurance has been one of the most significant movements across the European financial services industry over the last three decades. Powerful forces of competition and consolidation are evident in the reconstruction of the conventional barriers between the supply and demand of financial products and services. The developments towards the homogenised bancassurance phenomenon have been determined by changes across a broad spectrum of regulatory, political, economic, behavioural and cultural characteristics. Driven by a deregulatory and increasingly integrated marketplace, the European banking and insurance sectors have acknowledged the necessity for innovation and a re-evaluation of their operations.



The aim of this discussion is to review the major developments behind bancassurance in Europe. The phenomenon has been primarily European, but few studies have attempted to draw together the fragmented literature pertaining to the region as a whole and to individual nation states. Examining the relevant academic literature, publicly available research, the financial press and market activity, this article analyses the historical trends, strategic issues and the likely future of bancassurance in Europe.

This will be a three-part analysis of bancassurance, focusing on Europe. Parts 1 and 2 were written as a standalone academic study prior to the onset of the financial crisis. Part three is currently being researched and will attempt to draw together and analyse more recent post-crisis developments when the data and information is available.

Part 1 presents an overview of the European market environment, discusses the strategic issues in the bancassurance market with an emphasis on life insurance, followed by the key models of development and a descriptive analysis of the regulatory and legal developments in Europe. Part 2 introduces a comparative analysis of national markets in Continental Europe, discussing both the development and rationale behind domestic activities, and evaluates the outlook and realities for the industry in Europe. Part 3 will bring the discussion up to date in the context of the global financial crisis, evolving economic and regulatory trends, and the changing roles and activities of banks and insurers.


The motive behind the microeconomic integration of financial services is ultimately a matter of bringing certain advantages to at least one party involved in the transaction. One of the forces underlying the convergence of banks and insurers is the compatibility of these industries. For instance, both banks and insurance companies operate in the asset accumulation business and in some cases both cater to the individuals’ financial services needs. The distribution channels they use may be complementary and when they overlap they may provide cost synergies. These similarities provide depth to the rationale for bringing these institutions together.

The literature pertaining to this area of study does not reach a common definition of ‘bancassurance’, largely explained by the variety of different bancassurance models in existence. The Association of British Bankers defines bancassurers as ‘insurance companies that are subsidiaries of banks and building societies and whose primary market is the customer base of the bank or building society’. Accordingly, a bank may own an insurance company, may only operate as an intermediary, distributing insurance products constructed by another, or may have a joint venture with an insurer, sharing capabilities in distribution and manufacturing. The magnitude of the operations may also differ. The insurance business may provide a marginal concern for the banking institution or represent a significant share of total revenue and income. The benefits earned by each participant must therefore be assessed carefully before arriving at any conclusion as to the success of bancassurance activities. Pertinent considerations include how a bank benefits from any insurance practices, how an insurer or insurance operation benefits from its association with the bank, the links between the businesses and if the grouping will ever generate an operation greater than the mere sum of its parts.

European financial services

Bancassurance has become a powerful force across European financial markets over the last two decades, driven in part by the need to cut costs and increase efficiencies. The traditional distinctions between banking and insurance products are being replaced by greater co-operation, consolidation and convergence in the market. The associations have also concentrated the earlier, highly fragmented European bancassurance market (Staikouras, 2003). The existing literature expounds several rationales for integration, which may be divided into four categories seen in table 1.


Regulatory overview

Reference to bancassurance in the academic and financial literature tends to refer expressly to distribution. However, regulatory characteristics, determined by the legal, fiscal, political, economic, behavioural and cultural market-framework form the primary component of the concept. Changes within the structure of European bancassurance activity, including deregulation, single-market legislation, the introduction of the euro and capital adequacy requirements have made it easier for banks, insurers and re-insurers to expand into other countries. The amalgamation of these market idiosyncrasies explains the discernible differences in bancassurance across Europe. Although the concept features prominently in some markets, others have not selected bancassurance as their model.

Products and services

The banking and insurance industries have recognised that consumers' financial needs are changing and they are becoming increasingly sophisticated in their approach. Advances in technology and bancassurance have resulted in new distribution models. Consolidation among both insurers and re-insurers has also altered the necessity for coverage and the competitive environment. To ensure subsistence in a competitive global marketplace, a financial institution must recognise the need for new products and services to generate additional revenues. The competitive reality of the risk of failure has stimulated a diversification into insurance activities. The convergence of two financial industries may combine their strengths and create new methods of marketing and distributing their products and services. One sector comprises the banks, traditionally acknowledged as more competitive, and the other is the insurance sector, often representing untapped growth potential.

The resulting diversification of insurance products has been driven by their varying attributes. Life insurance products are technically similar to investment and savings products, and are not complicated to understand in practice. As a result, marketing efforts have not required significant changes from the methods already employed by banks. Marketed as a simple alternative, financial advisors have encountered little difficulty in selling life insurance products, with a minimal investment in training required by the banks. The potential of the life insurance market continues to grow. Further insurance avenues, including personal risk, health and long-term care, complement financial services. Unit-linked contracts, used in the distribution of mutual funds, confer a tax advantage and cloud any real distinction between insurance and banking.

The change of emphasis from a product or service focus to a solutions-based approach has transformed the development of interconnected financial services. Financial institutions offering a wide range of products to their clients have a greater opportunity to develop closer ties with the client base. This means of transaction may also offer convenience to the customer, as well as customer acquisition cost savings. This encouragement of customer loyalty through the provision of financial products and services is best achieved by catering to the complete life cycle of the client profile. Any advantage is further enhanced using an existing customer base to cross-distribute.

Strategic Issues in Bancassurance

Benefits of bancassurance

The pan-European trend of convergence in the financial services, and the cross-distribution of banking and insurance products, offers advantages for both networks. The strategic benefits are aimed at ensuring a more profitable distribution network and fostering customer loyalty.

The commissions derived from distribution by insurers represent profit potential for the banks. These fees, enhancing the return on the investment (Benoist, 2002), may therefore supplement the outlay involved in both establishing and preserving distribution networks. Accordingly, bancassurance may contribute significantly to supporting positive employment figures across both industries. In general, the costs are marginal for banks and represent a saving in distribution cost over agent networks for insurers.

Even those institutions for which bancassurance is not viable as an established constituent of their operations may identify the advantages of looking to new channels for new customers. This informal bancassurance model identifies the realities of consumer supply and demand characteristics. An example is the offer of household insurance policies to those customers considering a bank’s home loan products, rather than the supply of the policies through real estate brokerage channels.

Insurance sector

The insurance sector was traditionally limited to companies that possessed ‘necessary skills and knowledge’. Increasing competition, both domestically and internationally, and the fact that only 25 percent of the global insurable population is insured have added to the difficulties faced by insurers. The conventional, agent-orientated, distribution channels have become increasingly costly and obsolete, forcing insurance companies to apply a renewed rationale to their future strategic operation. Whilst the productivity of agents has been a growing concern, the pressures of intense competition have presented an ever-greater sense of unease. The trends of liberalisation and globalisation have effected clear and present difficulties in maintaining a significant market share. The increasing levels of commission paid to sales agents have absorbed a major proportion of any premium revenues. The typical commission demanded by agents ranges between 5 and 10 percent of annual premium. This is maintained for the duration of an underlying policy and contrasts sharply with the one-off payment of around 20 percent offered by banks, through the bancassurance channel. Agents have proved reluctant to appreciate the importance of approaching those customers not adhering to the ‘high net worth’ profile. The result, and a problem the industry must increasingly assess how to remedy, is the gap between the insured population and potentially insurable. Many insurance companies have made concerted efforts to either integrate or form a strategic alliance with a bank. The industry has hoped to draw on the customer base of banks, with sophisticated product ranges tailored to individual requirements. Several European insurance companies have set up retail banking businesses, notably in the United Kingdom and the Nordic region. These operations are managed alongside conventional insurance practices, with the intention of retaining the proceeds from policies set to mature by offering the policyholders deposits accounts. Although the operations may utilise the insurance company’s network of brokers or tied agents, a common facet of such operations is a focus on direct selling techniques such as the telephone, postal services and, increasingly, the internet. In order to appeal to customers and grow a share of the available market, these banks offer competitive interest rates on both deposits and mortgage rates. To assess the performance and economic viability of such new businesses, one must therefore consider the level of support and financial strength of the parent company. From an insurer’s perspective, however, the bancassurance model of distribution has distinct limitations, notably with respect to the integration of cultures. The success of Prudential’s ‘Egg’ direct banking operation in the United Kingdom, or of Standard Life’s bank, demonstrated that insurance companies themselves may leverage their brands to establish banking operations, but the enterprise continues to prove difficult.

An alternative to bancassurance as a means of ensuring sustained revenue generation may be consolidation within the insurance industry itself. Increases in scale are inexorably linked to an increase in risk and therefore this route clearly affects a re-insurance requirement. In assessing their part in a re-insurance solution, re-insurers that were previously categorised by business, for example fire and liability, have tended to restructure their operations along client segmentation lines, for example commercial, and industrial. However, the pricing of re-insurance is changing, largely due to re-insurers’ overcapitalisation. In order to feed this capital and generate acceptable cost ratios, re-insurers have been forced to produce certain levels of premium income. This effort has in turn created more competition, driving prices lower. For those companies unable to further grow and develop their domestic operations, consolidation from an international perspective may facilitate the acquisition of new customers. Through cross-border mergers and acquisitions, they may be able to acquire local companies with established distribution networks, knowledge, sales forces, products, and clients.

Role of banks

The underlying motives behind the entry of the banking sector into the insurance market include the potential for growth in life assurance and pensions, disintermediation, branch efficiency and creation of shareholder value (Regent and Reid, 1999). The necessity for banks to generate a greater income from commissions, due to disintermediation of credit and savings, has been coupled with a focus on ensuring a greater efficiency of their branch networks. By offering a broader range of products, the sector found a means of both increasing revenues and spreading the cost of operating the extra networks associated with a wider product range. The natural consequence of an ageing population and ‘privatisation’ of welfare services offers an appealing lure to banks looking to share in the European life assurance and pensions industry.

The European banking industry has traditionally been characterised by powerful institutions with large capital bases. This has facilitated the acquisition of insurers, often defined by a financial inability or structural lack of interest in bank acquisitions. The German insurance market has conventionally provided a contrast to this scenario, prevalent in the United Kingdom, due to the preservation of an independent insurance industry by robust insurers. In the last few decades, the most significant barrier to the potential offered by insurance in many countries, Germany included, has been the regulatory environment. The deregulation of financial services across Europe has been a relatively recent movement, sanctioning the move by banks into insurance activities and driving the development of bancassurance. Regent and Reid (1999) highlight that banks have generally proved more comfortable in the management of short-term assets. In addition to the risk of underwriting insurance policies, a lack of the necessary knowledge and skills and the costs of training, this operational reality served to keep the pace of industry developments at a slower pace than may have been expected. More recently, the banks have found that providing a more varied product range can prove to be a significant generator of fees and commissions. Bancassurance has provided a comfortable synergy of training and data, often with little or no extra costs incurred from the distribution of insurance products via an established banking network.

Non-life bancassurance has met with a mixed response from the competitive European banks. Whilst bancassurance has accounted for an increasing share of personal lines, non-life models have varied across the continent. The best option has been exercised by banks approaching the issue on a sui generis basis, acknowledging the unique nature of their distribution potential. Although household insurance is a common non-life policy offered by banks, the supply structure for non-life bancassurance collaborations has generally been very fragmented. However, Lloyds TSB and the Royal Bank of Scotland in the United Kingdom demonstrated the possibilities offered by non-life bancassurance, and bancassurers have continued in their attempts to grow their market at the cost of traditional distributors.

Overall, bancassurance is now predominant in the French, Spanish and Italian markets. The respective market shares are illustrated in figure 1. The model accounts for over 70 percent of the premium income in life insurance in Spain, 60 percent in France and Italy and 50 percent in Belgium. However, its success has not been repeated across the full spectrum of European financial services, with the market share of banking networks in the UK and Germany less than 20 percent.

Figure 1: Market share of insurance per distribution network (2002)


Source: Morgan Stanley Equity Research

Financial convergence

The model of the global financial institution has been the likely point of convergence for many banks and insurance companies. This phenomenon consists largely of distribution, cross sales and the development of a broad range of products provided as mutually compatible alternatives with differing investment horizons. In this respect, the academic literature commonly refers to an increasing move by the European financial services industry towards a ‘one-stop shop’, offering a broad product range at one point of sale for the convenience of the customer. With an increasingly competitive market subject to an augmentation in demand for lower costs and more transparency, economies of scale have been viewed as the route to success in the provision of long-term savings products (Regent and Reid, 1999).

Alternatively, specialisation may offer the benefit of a more lucid identification of the advantages and disadvantages associated with each product, through dissemination of the processes of ‘assessment, origination and administration’. Moreover, this may provide an invaluable tool for management to employ on pricing and profitability analysis. Potentially, this offers the ability to make decisions both more rapidly and accurately in response to changes in market conditions.


The opportunities to profit from constructively integrated bancassurance strategies are manifold. In addition to the supply of products, the innate features that have evidenced its success include the organisational structure, training and salary of sales people, information systems, and methods of sales. The strategy centralises the policy and claims management in the insurance venture whilst decentralising the underwriting process in the banking arm. Effective marketing strategies will inherently include the training and informing of bank staff to sell insurance products. In addition to those products more obviously linked to the activities of banks such as credit insurance, significant savings may be achieved through a personal savings disintermediation channel. The longer-term characteristics of life insurance products enable a bank to increase the value of revenues generated over a longer time horizon, facilitating better future planning.

By definition, the banks are distributing transactions insurance, thereby providing customers with greater ease of access and better understanding of the supply and demand of insurance products and services. More importantly, by adapting insurance products to the banking network the customer is presented with a simpler payment method and the advantageous financial cover of group rates.

Winners and losers

Banks and insurance companies have distinctly different asset-liability structures and expose themselves to a variety of risks (Staikouras, 2003). As a result, the thriving players in the bancassurance sector have been those institutions able to take advantage of the factors influencing the successful implementation and development of bancassurance. The bancassurance distribution model has not been successful in every Europe market. In the United Kingdom for example, the banks have not found extensive success in the direct sale of insurance products, while brokers have actually increased their share of the market. In France or Spain, among others, banks have been much more successful. These countries have an established convention of ‘bancassurance’ operations.

A more protectionist regulatory framework has tended to work to the detriment of efforts by banks to distribute insurance. In addition, the existing penetration rate has clearly determined decisions over whether to invest in bancassurance. Differing traditions of distribution in the industry have also impacted upon competitive advantages and disadvantages. The Netherlands and the United Kingdom, for example, have a history of independent advice and distribution. This poses a greater challenge to the sale of life insurance products of only one provider by the banks.

Levels of product sophistication vary enormously across Europe. The difficulties faced in trying to sell complex products coupled with the problem of ensuring adequate advice has continued to dissuade many banks. Banks may also be unable to offer competitive policyholder returns, especially relating to a newly established operation. The success of any financial institution within the remit covered by bancassurance must be based upon its facility for and realisation of an innovative product range. In parallel, however, any successful bancassurance operation must efficiently align the effort and expertise required to sell a given product with the skills and cost base of the chosen distribution method, as may be seen in figure 2. Products that prove very difficult to sell through the available distribution channel will not be successful, whether in terms of sales volume or profits.


The pressures of increasing margins prevalent across competitive markets tend to favour larger companies. These institutions may be able to effectively utilise their economies of scale and advantages of advanced technology, robust administrative and origination procedures and in many cases a better ability to cross-subsidise products.

Acknowledging that brokers are likely to remain important constituents of insurance provision, some banks have reacted constructively by acquiring insurers with an independent broker distribution network. The risk of this approach is the potential for a development of discords between the bank’s own branch network and the independent brokerage operation. By focusing the different distribution channels on dissimilar parts of the intended market, however, a well-organised bancassurance group may be able to reap the benefits of both methods.

Bancassurance activity

The differences among and between the bancassurance markets of European Union member states will continue. Despite the existence of a regulatory single market, the marked variation of cultures and products has proved to be a significant challenge to the theory of maintaining a real single market across all regimes and financial services. Developments over the last two decades have eroded many differences but some cultural, linguistic, geographical and economic disparities will remain in the future. Global institutions have attempted to address these divergent markets through mergers and acquisition of local companies with an established, local market understanding or by forming an operation outright. Some European mergers and acquisitions have focused on the strategic formation of financial services groups able to operate across two or more markets. Still others have centred only on the potential offered by distribution and cross-selling of the groupings.

Bancassurance models

The bancassurance models adopted across the European financial arena have been dependent on the group’s strategy, production areas, management and distribution (Benoist, 2002). Varying levels of structural integration and the effectiveness of the response to the challenges presented lay at the core of the differences.

The first model comprises marketing partnerships. Popular in France, this necessitates considerable logistics and information technology investment and may be categorised by three broad forms: distribution agreements, franchise agreements and cross-shareholdings. Joint ventures, the second method of development, have proved a common choice in Switzerland, including that between UBS and Rentenanstalt to form Swiss Life. Although the potential for mutual benefits has promoted this strategic alliance, the model raises the difficulty of finding the point of equilibrium between powers and contributions. The third bancassurance model is achieved through the creation of integrated groups. The more recent trend of mergers and acquisitions forms the fourth choice, with a dearth of examples before the 1990s. The approach is popular in The Netherlands, Belgium, France and Switzerland, with an increase in activity since 1998. Aimed at the existing banking customers, the last model involves an internal development by the banking institution. As expected, this method is characterised by the requirement for substantial resources and involves a significant element of risk.

Historically, pan-European and domestic regulatory restrictions have proved a real barrier to the development of the bancassurance sector. More recently, however, the regulatory environment has increasingly facilitated a breaking down of these obstructions. Implementation of European Union Treaties and Directives by member states altered domestic legislative direction and constructively improved the prospects for an integration of financial services.

European monetary union and the Single Market Program are significant points in the history of European financial integration. The Single Market Program, centred on 1992, demonstrated a significant commitment towards the end-goal of liberalising both the European banking and insurance industries (Vives, 2001). Deregulation and a liberalisation of European banking have brought about a marked increase in competition. Disintermediation and direct competition from financial markets, the Single Market Program’s push towards integration and a more innovative financial services industry have all promoted this competitive focus. The result is that the established universal banking tradition, prevalent across Europe, has moved away from the conventional deposit-taking and loan-granting business towards the provision of diversified services to firms and investors. Given this remit, insurance services have proved popular, with the financial margin replaced by revenues from fees and commissions. A notable element of the consolidation among financial institutions in Europe has been the predominance of domestic banking mergers, including BNP-Paribas in France and RBS and National Westminster in the UK. On the other hand, international transactions were most prominent among insurers from 1985 – 1997, examples of the mergers of insurers and banks including Fortis-Generale de Banque, ING-BBL and CS-Winterhur.

Significantly, legislation aimed at forcing bank-owning institutions to divest from controlling stakes (Vives, 2001) and the privatisation of public banks in Spain (Argentaria), France (Credit Lyonnais) and Italy (Banca Nazionale del Lavoro) has not diminished the importance of publicly owned banks. Industry restructuring has been slowed by the market share of these institutions, in addition to mutuals and cooperatives, due to a position of insulation from corporate plans and take-overs. Bank failures in Europe have brought an ethos of increasing liberalisation into question. However, both the Spanish and Scandinavian crises coincided with other factors such as economic recession and fiscal errors respectively. Deficiencies in banking supervision, the pressures of disintermediation and competitive increases have warranted a re-appraisal of regulatory oversight but, arguably, have not resulted from liberalisation per se.

The established tendency towards increased competition was strengthened by introduction of the single currency, the euro. Forming a catalyst for integrated financial services across Europe, the euro has expanded and consolidated deep and liquid financial services markets. Although segmentation and cross-border penetration have yet to be fully developed, the single currency has hastened the continued restructuring of the industry.

The European regulators have continued to evolve their consideration of the pan-European financial services industry. A growth in the financial savings markets, in addition to increasing competition, has resulted in a consistent increase of bancassurance transactions. This has in turn led European regulatory authorities to react through directives to manage an additional supervisory function over banking, insurance groups and financial conglomerates. In order to integrate the European financial sector, implementation of regulatory direction over freedom of capital movements and freedom of establishment has proved essential (Vives, 2001). The European Commission established the single banking license in the Second Banking Directive (1989, revised in 1992 and 1995, and effective in 1993) as well as the principle of mutual recognition and home country, enabling financial institutions to branch across member countries. The Second Community Directive established the prudential supervision of solvency and major risks, including a minimum harmonisation of capital levels, protection of investors and risk concentrations between countries elsewhere. These principles have formed a regulatory competition framework, but European countries may centralise supervision. This may be achieved through the central bank, a separate agency or a deferment to a mixed approach. Vives (2001) highlights that among the countries in the Basle Committee on Banking Supervision, only The Netherlands and Italy have supervisory powers delegated solely to the central bank. More recently, universal regulators for banking, insurance and financial markets have been formed. The UK (via the Financial Services Authority) and Scandinavian countries have adopted this approach, whilst in Belgium, Finland and Luxembourg there is a separate regulator for insurance and another for banking and insurance.

The European Commission passed a vote for a directive concerning the supervision of insurance groups in 1998. Following this regulatory decision, the Commission defined a strategy for directives relating to the additional supervision of financial conglomerates, or groups with activities generally focused on financial services. The directive could affect upon all financial entities including either credit or insurance companies. ‘Bancassurance’ necessarily encompasses a broad spectrum of financial institutions. A large number of domestic organisations would be expected to have established connections with credit institutions, or to do so in the future, via equity or former co-operative agreements. As a result, these companies could be considered financial conglomerates by the directive, bringing them under the supervision of the Commission.

The directive distinguished between three categories, within the broad sphere of influence it intended to affect. The first was the homogeneous financial group made up of insurance and credit institutions, but with a primary focus on either banking or insurance. The second, the financial conglomerate, comprises financial services institutions, including banks, investment and insurance companies, but with no dominance in any one business line. The third, the mixed financial company, was held to be a holding company with control over a financial conglomerate, creating substantial business for the group as a whole.

However, an acknowledgement by the directive of the ineffectual nature that additional supervision over a mixed financial company will bring presents the first problem. The non-financial business activity may represent more than 50 percent of the company’s total activity, thus this measure may bring about a discrepancy over equal competitive terms. The rule would not take some financial conglomerates into account where they are active within a much larger, amalgamated, conglomerate and represent less than 50 percent of that group. With no clear definition of what intra-group activities are, it is difficult to monitor any accumulation of financial risk and intra-group operations, despite recommendations to this effect by the directive. The central scope of the directive is to avoid equity double gearing in evaluation of the consolidated solvency of composite financial groups. However, to undertake this goal the regulatory framework dictates deducting all equity participants exceeding a 10 percent share in the insurance or banking company from the solvency margin of the parent company. As highlighted by Bonnet and Arnal, these rules appear inappropriate to meet the aforementioned goal.

From a legal perspective, assessment of the solvency requirements of conglomerates must include a comparison of the methods employed by banks and insurers. In June 1999, the Basel Committee issued a new capital adequacy framework consultative paper to supersede the accord of 1998. This paper proposed a strengthening of the minimum capital requirements with additional supervisory pillars; an effective use of market discipline and a supervisory review process (Rime, 2001). The internal process of establishing capital targets commensurate with risk and control profiles would be subject to supervisory overviews and, if necessary, intervention.

The New Basle Agreement, implemented in 2001, comprises three categories or regulatory requirements. The first is a minimum equity demand, considering market, credit and operational risk. Prudential monitoring processes make up the second rule. The intention is to force the banks to establish internal procedures to gauge their funding level in relation to the risk posed. The third requirement is a consolidation of market discipline through establishment of common standards for published information. A notable element of this strategy is that of self-regulation. Through internal management and regulatory monitoring by the national authorities, the risk management lacking from identified risks may be improved. This is particularly evident in assessment of the minimum capital requirements and operational risk, as the banking system has historically considered only assets’ risks. The Risk Based Capital approach contrasts with this new strategy, in that it encompasses all risk undertaken by an insurance company in one analysis. The role of the regulatory authorities is paramount therefore when solvency margin is not covered.

On first appraisal, this model appears quite unjust. The inequalities of competition brought about by varying powers held by supervisory bodies, in addition to the potential for differing actions across national boundaries, raise problems. To avoid prospective troubles over allocated capital and the domestic preferences likely to emerge, the Basle Committee has imposed limits on the risk analysis and margin requirements. The conventional reference system translated into credit, market and operational risks will form the basis for the risk analysis. The supervisory authorities will have the powers to modify the internal model, and adjust the requirements for capital.

Unlike the banking industry, insurers have no common, all-encompassing rules as actuarial requirements. European Union directives have adopted the basic principle that insurance companies must limit their activities to insurance and other activities “arising directly therefrom”. Despite this, with the appropriate licenses insurers have been permitted to sell “capitalisation” products, a form of deposit taking. Provided any ‘other’ activities remained of “limited importance”, these institutions have also engaged in further financial activities. Bancassurance groups have therefore remained in an enviable position, as they were able to choose between the various constituent companies of the group to optimise solvency margin requirements according to the different financial operation undertaken.

Changes to capital requirements proposed by Basel are taking the opportunity to close some of the ‘loopholes’ that developed under Basel I. There is parallel regulation under discussion by the European Union within its ‘Prudential Supervision of Financial Conglomerates’ papers. None of these rules are yet fixed, and some of the rules are open to different interpretations. However, for the moment Jarvis and Down (2003) have outlined two major changes under Basel II.

First, Investments in insurance subsidiaries will in future be deducted 50 percent from Tier 1 and 50 percent from Tier 2. This effectively closes a loophole that allowed banks to use capital within insurance subsidiaries to cover banking risks as well. Currently many European banks make no deductions for investment in insurance, so this change may act to their detriment. However, the national regulators may retain some capacity to exempt banks from full application of this ruling, although the practical reality is unlikely to absolve many institutions. Second, significant minority investments in banking entities will also be deducted 50 percent from Tier 1 and 50 percent from Tier 2, ensuring some equality of consideration across the European ‘bancassurance framework’.

Part 2 and references


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