The bancassurance model is not new in Europe. Owning and controlling the full insurance value chain has been attractive to banks in several markets and the distribution of insurance products via bank branches remains a compelling commercial proposition in most countries.

S&P Global Ratings believes that several factors will spur the advance of the bancassurance model in Europe over the next few years. Some factors are structural, such as natural distribution synergies and cross-selling opportunities between banking and certain insurance products. Others are of a regulatory nature, with the EU financial conglomerate (FiCo) framework allowing for a risk-weighting--rather than a deduction--of banks' equity investments in insurance subsidiaries.

What's more, some European banks are looking for ways to improve and diversify their revenue streams. They recognize that insurance activities, when efficiently managed, generate double-digit return on equity and a lower level of balance sheet leverage than banking activities.

We note, however, that the favorable EU capital treatment somewhat flatters the regulatory capital position of bank-led bancassurance groups and therefore boosts the return on regulatory equity of insurance activities and the overall group's activities.

In our risk-adjusted capital approach, we consider it prudent to avoid double-counting of capital in bancassurance groups. We therefore deduct a bank's equity investments in any insurance subsidiary from the bank's total adjusted capital, similar to the Basel standards.

Our rating assessment also weighs the benefits and risks associated with the integration of insurance activities. For instance, the cross-selling of bank and insurance products makes commercial sense but also creates regulatory complexity and compliance risks, as bancassurers need to comply with related consumer protection regulations.

Beyond that, insurers and banks share meaningful exposures to certain asset classes such as sovereign bonds or real estate. Although the banking credit cycle is not necessarily correlated with the pattern of insurance earnings, a deterioration in economic and financial conditions could affect the value of portfolio holdings on both the banking and insurance side.

The Pros Of Owning An Insurance Subsidiary

Revenue diversification

Banks are looking for ways to protect, grow, and diversify income streams. Just like companies, they want to provide additional products to leverage their existing customer bases and increase cross-selling.

Additionally, offering insurance products helps banks increase customer engagement and therefore loyalty. The bancassurance model has been prominent in several European markets for a long time.

A prime example of commercial synergies are life insurance and pension products, which banks see as complementary to their traditional saving products. Insurance acquisitions enable banks to target the long-term savings market, which has an impressive potential in Europe, given the demographic profile.

Strategic alignment

Integrating all activities within a bancassurance group, as opposed to relying on commercial partnerships, enhances strategic and operational alignment between banking and insurance activities. For instance, integration provides full control over the product design and allows for a full embedment in banks' IT systems, which reduces overall operating costs.

From a commercial perspective, the distribution of insurance products allows for an efficient use of banking distribution channels (branches or digital), which makes cross-selling easier.

An integrated bancassurance model also provides flexibility to allocate profits across the value chain, for example by compensating low margins on mortgage loans with very high margins on term life insurance.

For banks, developing life-insurance products is also a way to retain outbound deposits as asset management products via the associated fee income. Other insurance products also offer natural synergies with banking products and enable banks to offer integrated solutions for housing (mortgage, mortgage insurance, house insurance) or car ownership (car loan, car insurance).

Finally, insurance activities, when efficiently managed, can generate a double-digit return on equity. While margins are higher in property and casualty insurance, life insurers have been able to improve return on equity by partially moving to products where risks are borne by the policyholders. These products require limited amounts of regulatory capital and can generate attractive return on equity for the insurer.

Regulatory capital efficiency for EU bancassurance groups

For EU bank-led bancassurers, the strategic opportunities are reinforced by the capital framework. Since 2012, this framework has allowed for a more favorable treatment of equity investments in insurance subsidiaries. The agreement is commonly referred to as the Danish compromise because it was formalized under Danish EU presidency.

For recognized FiCos, equity investments in insurance can be risk-weighted, rather than fully deducted from regulatory capital. While this treatment ensures a level playing field across bank-led bancassurance, it deviates from global Basel standards, which call for a deduction of equity investments in financial corporations, including insurance subsidiaries.

The treatment also creates an unlevel playing field versus insurance-led bancassurance, as the EU insurance Solvency II regulatory capital framework requires a deduction of equity investments in banks for insurance groups.

As such, banking subsidiaries of insurance groups in Europe are generally small banks by balance sheet size. They focus on supporting parent insurers' client retention by providing savings products, such as term deposits and securities accounts. Their lending activity is limited.

As FiCos, bancassurance groups are subject to supplementary supervision, for instance stricter requirements for the groupwide risk management, and must comply with a financial conglomerate ratio.

The ratio is calculated as the total capital available in the conglomerate, divided by the sum of capital requirements of each financial sector entity of the FiCo above 100%. The ratio serves as a form of backstop to the application of the Danish compromise.

That said, we believe the overall preferential regulatory capital treatment has contributed to the consolidation of the European bank-led bancassurance model after the global financial crisis.

Tailwinds Will Propel The Bancassurance Model Forward

Improved profitability and equity valuations for some banks

After several years of balance sheet clean-up and in light of more favorable interest rates, many European banks now record improved profitability, excess capital and liquidity, and overall solid financial metrics.

More confident in their financial standing and bolstered by positive market repricing (see chart 1), some European banks are leveling up their ambitions to diversify their income streams in anticipation of lower net interest income contributions.

Chart 1

Higher capitalization and dividend capacity for insurance subsidiaries

In recent years, banks' insurance subsidiaries have, in general, maintained solvency ratios close to 200%, despite interest rate volatility and consistent dividend payments. This is partly due to a switch to more capital-light life-insurance products and the build-up of policyholder reserve buffers. As a result, banking groups' insurance subsidiaries leveraged their improved regulatory capital buffers to expand organically and through acquisitions.

Additionally, insurance subsidiaries were able to distribute close to 100% of profits in dividends to their banking parents, largely due to shifts in the insurance product mix and a focus on margins. This increased insurers' distributable excess regulatory capital, with sometimes extraordinary dividend distributions on top of high payout ratios (for example, Credit Agricole Assurances in 2022).

Finally, insurance subsidiaries of banking groups have raised significant amounts of regulatory capital in the markets, such as long-dated tier 2 and restricted tier 1 hybrid debt instruments. This gives insurance subsidiaries additional levers to manage their capital and maintain comfortable regulatory solvency ratios, without entirely depending on parent banking groups. Bank groups' French insurance subsidiaries were the largest issuers of hybrid debt.

Regulatory changes

The final published capital requirement regulation (CRR) reform that entered into force on Jan. 1, 2025, did not include any change to the Danish compromise, that is Article 49.1. This means the original temporary compromise is now permanently enshrined into the EU capital framework. We expect more EU banks will consider the FiCo status and therefore internalize their insurance activities to benefit from the more favorable capital treatment.

Furthermore, the revised CRR eased the capital treatment of insurance subsidiaries for many large FiCos. Indeed, the risk weight associated with participation in the insurance subsidiary has decreased to 250%, from the previous 370%, for FiCos using internal models.

On the other hand, the small number of FiCos that use the standardized approach have seen an increase to 250%, from 100%, which was subject to transitional rules.

Separately, the European Banking Authority (EBA) recently expressed its view that the goodwill generated by an acquisition at the level of the insurance subsidiary does not, in principle, need to be deducted from the regulatory capital of the parent bank.

• If a FiCo makes an acquisition via its banking subsidiary, the investment is subject to its normal risk weighting. The goodwill arising from the deal, however, needs to be fully deducted from the parent bank's equity.
• On the other hand, if a FiCo acquires a company through its insurance subsidiary, this goodwill will be deducted from the insurance subsidiary's capital under insurance rules. Yet the EBA considers that this goodwill does not enter the scope of the bank's prudential consolidation and, therefore, needs not be deducted from the parent bank's regulatory capital. Depending on the excess capital available in the insurance subsidiary and the size of the goodwill generated by the acquisition, this means that the parent bank could be required to inject capital into its insurance subsidiary. Although this capital injection would need to be funded, we believe the overall cost for the parent bank is considerably lower than if it had to fully deduct the goodwill from its own regulatory capital.

Our Methodology Diverges From The Regulatory Approach

In our risk-adjusted capital approach, we consider it prudent to avoid double-counting of capital. We therefore deduct a bank's capital investments in any insurance subsidiary from the bank's total adjusted capital, similar to the Basel standards.

This approach partly explains the differences between regulatory tier 1 ratios and our risk-adjusted capital ratios for bancassurers (see chart 2).

Chart 2

However, we give partial credit to the group if we consider that insurance subsidiaries hold excess capital under our ratings insurance capital model. We measure the excess capital above the 99.8% confidence level. This is the case with most bank-owned insurance subsidiaries that we rate at the moment.

Our Rating Assessment Also Considers The Risks Associated With Investments In Insurance Activities

Execution risks from acquisitions

In the case of external acquisitions, we note some execution risks associated with the integration of activities. For instance, we see the integration of IT systems as necessary to unlock all the potential benefits from the integrated bancassurance model.

Additionally, banks have communicated on attractive future returns on the capital following acquisition made by their insurance subsidiaries. These high expectations partly rest on the premise that the groups will benefit from the favorable regulatory capital treatment as FiCos, including the non-deduction of the goodwill generated by acquisitions made by their insurance subsidiaries.

In a recent opinion on the Banco BPM/Anima transaction, the European Central Bank expressed a negative view on this non-deductibility of goodwill. Although this did not prevent Banco BPM from finalizing the acquisitions, this will lower the return on capital of the operation and could change the economics in future similar transactions.

Shared exposures to sovereign debt

The banking credit cycle is not necessarily correlated with the pattern of insurance earnings. Yet many banking and life assurance activities are correlated to the strength of the capital markets.

An obvious common exposure is that to government bonds (see charts 3 and 4). In a sovereign stress scenario, the fair value of bond holdings by banks and insurance companies would face losses. At the same time, bank-led bancassurers that rely on market funding or are exposed to trading activities could see further profit-and-loss-related headwinds.

Chart 3

Chart 4

We recognize that the scenario of a European sovereign default is very unlikely. Yet we analyze its potential repercussions for a handful of bancassurers, which have stand-alone credit profiles that are above the ratings on the home sovereign.

In the case of Italy-based Intesa Sanpaolo, and despite the fact that the insurance subsidiary is outside the group's resolution perimeter, we assume that, in a sovereign default scenario, the group would have to cover for losses from the banking and the insurance arm's exposures to Italian government bonds. We therefore do not expect the group to pass the sovereign stress test and cap the rating on Intesa Sanpaolo at the 'BBB' sovereign rating level.

This rating treatment is consistent with our view that, even in an extreme scenario of sovereign stress, the banking group would have to support its insurance subsidiaries, partly due to reputational and political risks.

Effect of a potential real estate correction

Another typical common exposure across banks and insurers is to the real estate market. European banks hold sizeable mortgage exposures on their balance sheets, as well as commercial real estate lending exposures.

Real estate assets accounted for about 10% of European insurers' investments at year-end 2023, according to the European Insurance and Occupational Pensions Authority (EIOPA, see charts 5 and 6). This exposure includes direct investments in properties and indirect investments via real estate funds, structured notes, mortgage loans and corporate bonds. A material and protracted correction in real estate prices could therefore lead to losses for bancassurance groups' insurance and banking arms.

Chart 5

Chart 6

Stock market decline

In the distant past, banks and insurance companies were affected by public equity bear markets, with direct negative effects on the fair value of equity portfolios and indirect effects on banks' investment activities. We believe the relevance of this risk has reduced after the 2008 global financial crisis as regulation has tightened.

Insurers have long reduced their exposure to public equity markets in anticipation of the implementation of Solvency 2 in 2016. This is not least because equities carry a high regulatory risk charge under Solvency 2.

In recent years, European insurers have also switched some allocations from public to private equity markets, where valuation volatility is lower. Overall equity exposures remain moderate, even considering that a portion of mutual fund exposure is also invested in equity instruments.

Quality Of Risk Management And Use Of Double Leverage Are Key Rating Factors

Integrated comprehensive risk management is among the most significant challenges for European bancassurers. The banking and insurance sectors have traditionally had different approaches to risk management, partly due to business differences.

In the past, challenging economic and market conditions--including the global financial crisis--have laid bare how disjointed risk oversight could impair overall risk management. Specific functions, such as market risk management, were often organized on a "bank only" or "insurance only" basis.

Compliance risks stemming from cross-selling practices

The flexibility to allocate profits across the different entities of a bancassurance group is limited by specific compliance and consumer protection rules. Consequently, bancassurers must navigate a complex regulatory environment that includes multiple authorities.

Bancassurers face more complex compliance risks than banks, as they must ensure that their cross-selling practices fully comply with consumer protection regulations in the banking and insurance space. While parent banks may wish to maximize the number of insurance products sold to their banking customers, they must pay attention to regulation, such as the markets in financial instruments directive II (MiFID II) and the insurance distribution directive.

The directives require that the banking network distributing the insurance products take into account the level of sophistication of the customer and the value for money of the product. Potential compliance breaches could result in regulators imposing restrictions that could limit the benefits of the bancassurance model.

Bancassurers also face scrutiny from regulators on the pricing of insurance products sold to bank clients. In 2022, the EIOPA issued a warning to bancassurers on the high level of margins regarding the sale of credit protection insurance--that is, term life insurance on mortgage loans--by the banks' insurance subsidiaries.

Term life insurance on mortgages is a mandatory insurance product, for example in France. French banks have often compensated the low interest on mortgages with high margins on related insurance sold in a packaged approach. The French government has introduced a law to allow policyholders to more easily switch insurance providers, but it is not easy for independent insurers to compete in this segment.

Overall, however, we believe European bancassurance groups have learnt from the past and improved their overall risk management and compliance functions. In our rating assessment, we continue to take into account how bancassurers adapt to new challenges.

Double leverage is a double-edged sword

The bancassurance model and its favorable regulatory capital treatment in the EU create the risk of elevated double leverage. This can amplify risks and lead to contagion across the various entities of a bancassurance group.

By using double leverage, financial groups can improve their capital efficiency. However, in case of mounting losses in one subsidiary, an extensive use of double leverage can drastically reduce the scope of remediation measures available to a group. This is because absorbing losses in a troubled subsidiary could jeopardize the group's capacity to repay its external debt, as happened in the case of the SNS Reaal group over 2009-2012.

For bancassurance groups in the EU, the FiCo framework and the Danish compromise effectively enshrine and incentivize the use of double leverage on regulatory capital.

We think EU policymakers view positively that insurance activities tend to be less risky than banking activities and that they have a separate regulatory framework. Additionally, policymakers can supervise the FiCo as a whole, which limits the risk of a sudden increase in capital strain for the parent banking group.

Annex

Table 1

Table 2

Table 3

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