Towards a revival of bancassurance in Europe?

Banks operate under a regulatory framework that governs how they are capitalized (minimum capital ratios), where they can invest (riskier assets require more capital) and how fast they can grow (leverage). For bancassurance groups, a common form of Financial Conglomerate (‘FiCo’), investment in the insurance company benefits from a specific treatment within the bank prudential consolidation.

Financial Conglomerates are defined as groups led by a regulated entity¹, in which the consolidated activities within the insurance, banking and investment services sectors are significant. This means that:

• the activities of the leading regulated entity of the group should mainly occur within the financial services sector,
  
  
• the balance sheet contribution of the financial sector entities should exceed 40% of the consolidated balance sheet, and
  
  
• for each financial sector in the Conglomerate, the average of the ratio of the balance sheet total of that financial sector to the balance sheet total of the financial sector entities in the group and the ratio of the solvency requirements of the same financial sector to the total solvency requirements of the financial sector entities in the group should exceed 10%.

The Danish compromise is a regulatory mechanism provided by Art. 49.1 of the Capital Requirements Regulation (CRR), adopted by the European Union (‘EU’) in 2012 and initially considered as a temporary measure. It establishes the possibility for a FiCo to reduce the absorption of their regulatory capital. Under certain conditions, the investment in the insurance undertaking can be risk weighted like an equity exposure instead of being deducted from the regulatory capital.  The corresponding risk weight ranges between 100% and 370%, depending on whether the banking group applied a standard or internal rating-based approach for risk monitoring.

For instance, consider a bank with a target Core Equity Tier 1 (‘CET1’) ratio of 15.0%, composed of CET1 capital of EUR 4.5 billion and RWAs of EUR 30 billion under the IRB-F approach. If this bank acquires an insurance undertaking for EUR 1.0 billion, the CET1 ratio would evolve as follows:

• Without application of the Danish compromise, the amount of EUR 1.0 billion needs to be deducted from equity, i.e., available CET1 capital decreases to EUR 3.5 billion and the CET1 ratio drops from 15.0% to 11.67%;
  
  
• With application of the Danish compromise, the amount of EUR 1.0 billion is currently weighted at 370%, so the RWA increases from EUR 30 billion to EUR 33.7 billion and the CET1 capital remains at EUR 4.5 billion. The CET1 ratio decreases from 15% to 13.35%, or a benefit of 1.68% compared to not applying the Danish compromise.

There are strict conditions to be recognized as a FiCo. In addition to having a mix of activities across the various financial sectors as mentioned previously, prudential supervisors will need to be satisfied with the quality of the Risk Management Framework, the Internal Control Systems, and the related Governance and Oversight. Moreover, such groups must meet the so-called Financial Conglomerate Ratio (‘FCR’), which is calculated as the total capital resources available to the conglomerate (including Tier 1 and Tier 2 capital) divided by the aggregate of the capital requirements of each financial sector where the FiCo is active. This FCR serves as a sort of backstop to the application of the Danish compromise.

The Basel 3 Reform is intended to further increase the resilience of banks and the banking system. The implementation is lagging behind the timetable agreed in Basel, according to which the reforms were to be phased in over five years starting from 1 January 2023. In the European Union, the co-legislators reached a political agreement on Basel 3 implementation on 27 June 2023, with the new rules known under CRR3 coming into force as of 1 January 2025.

The implementation of CRR3 is expected to materially increase capital requirements for EU banks, which the EBA estimated at 7.8% on average in its Basel 3 Monitoring Report published in October 2024². By contrast however, the CRR3 turns out to have positive implications for FiCos and the related bancassurance model.

Indeed, the final published CRR3 reform legal texts do not include any change to Article 49.1. This means that this original ‘temporary’ exemption is now formally embedded into the finalized CRR3 framework, and that the benefits from the attribution of the related investment to group RWA are now formally established. This is expected to drive eligible banks to consider the FiCo status and to internalize their insurance activities, allowing them to benefit from the more favorable capital treatment.

The positive impact of the Danish compromise on the capital consumption of the FiCo is even further reinforced by two elements. First, the risk weight of the participation in the insurance undertaking will in most cases decrease from the previous 370% to 250%, thereby further reducing capital requirements for most FiCos³. In the example above, this means that the CET1 ratio would decrease only to 13.85%, an additional benefit of 0.50% as compared to the previous version of the Danish Compromise.

Moreover, in an opinion published on 8 October 2021, the EBA confirmed that goodwill booked at the level of the insurance undertaking does not need to be deducted from the equity of the bank for the calculation of its regulatory capital. If an acquisition is made by the banking entity of the FiCo, the assets would be subject to their normal risk weighting, but the goodwill arising from the deal ought to be fully deducted from equity. On the other hand, if a FiCo is to acquire a company through the insurance subsidiary, the goodwill booked at that level never enters the prudential consolidation and will therefore not be deducted from equity⁴. Instead, the bank will increase the participation in the insurance undertaking to finance the acquisition, whereby this additional amount will be risk-weighted at 250%. This is particularly interesting for the acquisition of asset management companies, where typically a large goodwill arises from the valuation of the client base. This regime is, however, not applicable to the acquisition of another bank through an insurance company.

The expected benefits are important and have already led to various actions taken by FiCos. For instance, a major Italian group has leveraged the reduced capital resources absorption to fully internalize certain insurance units. A French bank has also anticipated the advantages of this revised regime by acquiring a major asset management company through its insurance subsidiary. We have gathered from our conversations with multiple clients that such considerations are very much at the top of the agendas in boardrooms across the EU.

In addition to the optimized capital consumption, there are clear advantages to an integrated bancassurance model, namely:

• a simplified governance model, avoiding the complexity of partnership committees;
  
  
• a centralized risk management, overcoming misalignment of interests between volume growth and capital absorption;
  
  
• the deployment of a consistent yet dynamic group strategy for savings and investment across banking, life insurance, and asset management products; and
  
  
• a leaner integration of CRM capabilities to maximize cross-selling.

It also looks like markets have taken notice of the improved Return on Capital for FiCos. The status of a FiCo has a positive impact on bancassurance groups’ valuation, as reflected by the higher trading multiples: 

FiCos have also registered stronger stock price increases compared to stand-alone banks since the approval of the current treatment in April 2024 (+4.9% vs 2.8%) and the beginning of the related discussion in January 2022 (+24.4% vs 20.8%)⁵.

Against that backdrop, there have been legitimate concerns regarding the complexity of managing sprawling financial conglomerates and players should carefully balance business benefits vs capital optimization. Larger groups may have a bigger opportunity to take advantage of the revised regime due to their investment firepower and ability to implement superior risk management. In view of the elements above, a secondary effect of the CRR3 rules could be to intensify market pressure to accelerate bank consolidation in more fragmented EU markets.

In conclusion, the CRR3 rules and their impact on capital have the potential for banks to renew their growth strategies in the European financial services landscape – in particular in bancassurance and asset management. This has already boosted aggregations and deal-making across financial services. With bank consolidation at a crossroads and sluggish growth in European banking, maximizing customer centricity and cross-sell opportunities would be a much-needed growth driver in European financial services.
 

Strategic support across all financial services sectors

Our Strategy and Transactions teams can support you with acquisition and growth strategies across all sectors of financial services. We can assist you with strategic analysis as part of the CRR3 Reform, including how restructuring, aggregations, and deal-making can optimize your capital requirements, and develop the most effective growth strategy in bancassurance and asset management.