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February 6, 2009updated 21 Jul 2022 11:26am

A market yet to realise its full potential

Driven by legislative change in Spains pension market, Spains life insurance industry enjoyed robust growth between 1999 and 2002 Though subsequent performance has been lacklustre, longer-term prospects remain sound in a country coming to terms with a need to promote private pensions savings Despite steadfastly holding on to its position as Europes seventh-largest life insurance market for more than a decade, Spains industry has underperformed the European life market as a whole

By LII editorial

Driven by legislative change in Spain’s pension market, Spain’s life insurance industry enjoyed robust growth between 1999 and 2002. Though subsequent performance has been lacklustre, longer-term prospects remain sound in a country coming to terms with a need to promote private pensions savings.

Despite steadfastly holding on to its position as Europe’s seventh-largest life insurance market for more than a decade, Spain’s industry has underperformed the European life market as a whole. This is highlighted by the Spanish life industry’s share of the European industry, which has slipped from 5.2 percent in 1997 to 3.2 percent in 2007.

Spain’s decline in market share reflects modest premium income growth compared with the total Europe market where premium income growth achieved a CAGR in US dollar terms of 11.5 percent between 1997 and 2007, based on data published by reinsurer Swiss Re.

During the same 10-year period, life insurance premium income in Spain grew at a well-below-par 8.8 percent, increasing from $13.42 billion in 1997 to $31.17 billion in 2007. Because Spain only adopted the euro in January 2002, US dollar data is used for comparative purposes.

The period 1997 to 2007 was marked by extreme volatility in life premium income flows in Spain, a key contributing factor for which was implementation of the Pension Funds and Pension Plan Regulatory Act which was designed to protect workers in the event of their employer’s insolvency.

Under the act, the Spanish government decreed in 1999 that all companies had to transfer all existing and future pension commitments to an external pension fund by 2000, a deadline later extended to January 2002. As a result Spanish life insurers enjoyed booming premium income between 1999 and 2002, recording average year-on-year increases of 18.5 percent and a peak increase of 32.9 percent in 2000. However, once the process of externalisation was over normality returned with life premium falling by 33.5 percent, from €26.6 billion ($34.4 billion) in 2002 to €17.7 billion in 2003.

Disappointing performance

Though premium income recovered gradually from 2004 onwards, development of Spain’s life insurance market between 1997 and 2007 can generally be described as disappointing.

This is reflected in a number of indicators, one of the most significant being life insurance penetration which fell from 2.53 percent of GDP in 1997 to 2.17 percent in 2007, according to Swiss Re. Based on an un-weighted average penetration in the top 10 life insurance markets in Europe increased from 4.57 percent in 1997 to 6.53 percent in 2007. Of the top 10 markets in 2007, the lowest penetration was recorded in Spain penetration and the highest, 15.28 percent, in the UK.

Also notable in Spain has been the rise in the importance of general insurance relative to life insurance. Specifically, general insurance premium income increased from 53 percent of total premium income in 1997 to 58.3 percent in 1997. In Europe as a whole general insurance premium income fell from 44.2 percent of total premium income in 1997 to 36.8 percent in 2007.

However, despite low penetration in terms of GDP, penetration of life insurance in Spain based on population indicates no lack of awareness of life insurance products amongst the population in general.

According to Spain’s insurance industry body, the Spanish Union of Insurance and Reinsurance Institutions (UNESPA in its Spanish acronym), in a study published in 2008, at the end of 2006, 18.3 million men and 12.6 million women had some form of life insurance.

In total this represented just over 78 percent of the population over the age of 14, the minimum age at which life insurance can be purchased in Spain. Risk life insurance predominated in terms of client numbers with some 23 million people covered at the end of 2006, noted UNESPA.

In its study, UNESPA found that men were the most avid buyers of life insurance products, accounting for 59.3 percent of sales. However, UNESPA also noted that the underlying trend suggests sales were growing faster among women.

Investment preferences

Investment asset preference among Spaniards is an important factor influencing life insurance penetration, suggests data from UNESPA gleaned from a study of 2005 year-end data released by the Bank of Spain (BoS) in late-2007.

In no small measure a reflection of the country’s now defunct property boom, the BoS study revealed that private property, both first and additional homes, accounted for about 80 percent of total household wealth in Spain across all age categories. In the under-40 and 40-to-60 categories, private property accounted for about 90 percent of household wealth.

The poor relation compared with property, life insurance and pension plans accounted for a mere 2.2 percent of total household wealth.

Excluding property, an analysis of the BoS household financial assets data by UNESPA revealed that, at the end of 2005, insurance and pension plans accounted for 6.3 percent of financial assets compared with, for example, a total of 23 percent in listed and unlisted equity and 18 percent in mutual funds.

However, the ongoing financial crisis has altered the investment environment dramatically in both Spain’s property and equity markets.

On the private property front, official figures from Spain’s Ministry of Housing reflected a 0.4 percent year-on-year increase to September 2008. In reality the situation is far more serious according to Kyero, a Spanish independent property valuation firm.

“Few people actually believe the Ministry of Housing’s figures which show average Spanish property prices still rising in nominal terms in the middle of a property market crash,” noted Kyero in a January 2009 release. Kyero estimates that, as in the UK, US and Ireland, Spanish property prices experienced a double-digit decline in the past 12 months.

Adding to the property gloom, the Organisation for Economic Cooperation and Development (OECD) warned in a study released in January that the housing market in Spain was overvalued by about 30 percent.

Spanish-listed equity and equity mutual fund investors have also taken a beating with, indicatively, the MSCI Spain equity index down some 55 percent from its late-2007 peak. Indicative of investor reaction, Spanish composite insurer Mapfre reported net outflows from its mutual funds of €142 million in 2007. In the first nine months of 2008 the net outflow had increased to €320 million.

Boost for life insurers


Top 15 life insurers, 2007

€m Market share (%)
Santander Seguros 2,876 12.5
Mapfre Vida 2,363 10.2
Aviva 2,229 9.7
Ibercaja Vida 1,617 7.1
Bansabadell Vida 1,450 6.4
CaiFor 1,386 6
BBVA Seguros 1,003 4.4
Generali 983 4.3
Caja de Seguros Reunidos 839 3.7
Grupo Axa 800 3.5
Allianz 741 3.2
Zurich Vida 731 3.2
Caixa Cataluny 687 3
ING 667 2.9
Grupo Catalana 554 2.4
Source: Zurich Financial Services

The impact of the vastly changed investment environment also appears to be having an influence on consumer attitudes towards life insurance, preliminary 2008 premium income figures released by UNESPA suggest.

A good year by any standards, the Spanish life insurance industry’s premium income grew at its fastest pace since 2002, increasing by 15.2 percent compared with 2007 to €26.6 billion, a level last seen in 2002. Indicating a strong upsurge in sales in the fourth quarter, year-on-year premium income was up by 10.9 percent at the end of the third quarter of 2008.

While UNESPA did not provide a detailed analysis of product sales, there can be little doubt that savings products led the way, given the strong trend in this direction evident during the first three quarters of 2008.

Notably, in a statement published by UNESPA at the mid-year stage it stressed that life insurance savings products – Plan de Previsión Asegurado (PPA) and Planes Individuales de Ahorro Sistematico (PIAS) – were the industry’s “star products”, with sales reflecting year-on-year growth of almost 50 percent. Sales of protection products reflected a year-on-year fall of over 1 percent while annuity sales increased by some 3 percent.

PPA (guaranteed insurance plan) products share the same tax benefits as personal pension plans and were made possible after lobbying by the life industry which resulted in the introduction of tax reforms in January 2003. A key differentiating feature of PPA products is a guarantee covering 100 percent of contributions plus a guaranteed minimum guaranteed yield. The upper limit of the yield is set annually by the Dirección General de Seguros, Spain’s insurance regulator.

PPA products also have considerable flexibility. For example, contributions can be reduced or increased at any time or even interrupted. Annual contributions can vary from €30 up to €10,000 for people up to 50 years old and €12,500 for people over 50.

A more recent innovation, PIAS (systematic savings individual schemes) are insurance savings products designed to create a guaranteed life annuity and were launched following further individual tax reforms which came into effect in January 2007.

Tax reform featured two specific points, one of which was aimed at encouraging retirement savings via products such as PIAS. Specifically, income arising from insurance and annuity products received by individuals is now taxed at an 18 percent flat rate while under the previous tax regime income arising from these products was taxed under a progressive tax rate ranging 15 percent to 45 percent.

The second major change is aimed at discouraging people from receiving proceeds from an investment in a lump sum. Specifically, when income is received as a lump sum it is now subject to full taxation while under the previous regime lump sums enjoyed tax reductions of between 40 percent and 75 percent.

Maximum contributions to PIAS are €8,000 and €240,000 euros for the complete accrual phase. PIAS policyholders must contribute for a minimum of 10 years in order to qualify for tax concessions. At the end of the first quarter of 2008, UNESPA reported that since their launch PIAS products had attracted 205,000 investors and total assets of €650 million.

Scope for savings growth

Spanish life insurance industry. Premium incomeProducts such as PPA and PIAS reflect the potential yet to be realised for savings in Spain where, according to UNESPA, the median amount of savings in insurance and pension plans per household in 2007 totalled only €6,300.

Arguably, this modest savings level reflects being a citizen of a country with a generous state pension scheme that offers a worker 90 percent of final pay after 35 years of employment. Indicative of the burden, the Spanish Ministry of Social Affairs reported that state pension payments in 2007 totalled €76.3 billion, dwarfing private pensions benefit payments of only €3.2 billion.

However, Spain’s welfare system faces a growing demographic challenge created by a falling birth rate and rising life expectancy. One of many research studies into this problem was undertaken in late 2003 by Allianz Dresdner Asset Management for the European Commission (EC).

Among the study’s conclusions was that state pension costs have the potential to rise from 9.4 percent of GDP in 2000 to 17.3 percent of GDP in 2050, resulting in Spain becoming the European Union country with the highest state pension costs. Similar conclusions have been reached by the OECD and International Monetary Fund which, together with the EC, have urged Spain’s government to consider major reforms of its pension system.

While most Spaniards may not be intimately aware of detailed research studies, many are certainly aware of the need to supplement their state pension. This is evident from research conducted by UNESPA in 2007.

In a survey conducted as part of the research respondents were given the proposition that state pensions would be sufficient to cover their economic needs. Only 23.5 percent agreed or agreed strongly with the statement. The breakdown was 21.9 percent of people of working age and 30 percent of retirees. The percentage of women in agreement was nearly 10 points less than that of men.

Another notable finding was that 72 percent of respondents agreed with the statement that in retirement “anyone not saving on their own account will not be able to maintain their lifestyle”. Similarly, 70 percent of working respondents agreed that people are responsible for saving for retirement.

Retirement savings are accumulated in individual and company sponsored schemes, with the former representing the largest proportion.

According to Spanish investment and pension fund manager body INVERCO total private pension assets ended 2008 at €78.4 billion of which €49.1 billion (63 percent) was accounted for by individual plans. Establishment of a company sponsored pension scheme is voluntary and, according to UNESPA, is usually the result of a bargaining process between employer and employees.

Progress is being made, with UNESPA estimating about 27 percent of workers now have access to “some form of employer-sponsored pension commitments”. Indicating scope for expansion, UNESPA also estimates pension schemes are offered by only 6 percent of Spanish employers.

Life insurers play a key but not dominant role in the employer-sponsored pension market, accounting for some 40 percent of pension assets under management and 45 percent of pension scheme members.

Reaching the consumer

Development of the bancassurance marketing channel is a prominent feature of life insurance industries in many European countries, but few to the extent of Spain.

According to the Comité Européen des Assurances (CEA), the European federation of insurers and reinsurers, the bank channel accounted for 63 percent of total life insurance sales in 2007, almost double the level of a decade earlier. This put Spain in fourth position in the bancassurance league in 2007, behind Portugal (85 percent), Italy (68 percent) and France (64 percent).

There are exceptions to the rule, the most notable being Mapfre, Spain’s second largest life insurer and largest general insurer. In the first nine months of 2008, Mapfre reported the banking channel had accounted for 47 percent of new life insurance premium income with other channels, tied agents in particular, accounting for the balance. In the first three quarters of 2008, 80 percent of Mapfre’s bancassurance sales were via Caja Madrid, a savings bank with some 2,000 branches and 7 million customers.

Spanish banks are not only a key marketing channel they are also major players in the Spanish life insurance market. Notably, of the top 10 life insurers based on premium income in 2007, five were controlled by banks – including the top player Santander Seguros – and accounted for more than 36 percent of total life insurance premium income.

Concentration of total premium income among the major Spanish life insurers has also been rising steadily. In 2007, the top five life insurers accounted for 45.9 percent of total premium income, the top 10 67.8 percent and the top 15 82.5 percent. According to the CEA, in 1996 the top five life insurers accounted for 21 percent of premium income, the top10 34 percent and the top 15 44 percent.

However, despite the increased concentration, Spain’s life market remains somewhat less concentrated than many of the other top 10 European life markets. For example, the top 10 insurers accounted for 82 percent of the market in France in 2006, 83 percent in Italy, 94 percent in Sweden, 95 percent in Switzerland and 97 percent in Belgium. At 64 percent, only Germany had a lower concentration level among the top 10 players than Spain.

Clearly scope for a further increase in concentration exists in Spain and this is indeed occurring. The most significant developments in this respect in 2008 were two acquisitions by Swiss insurer Zurich Financial Services (ZFS).

In the first of the deals, ZFS acquired a 50 percent stake in Spanish bank Caixa Sabadell’s life insurance unit, CaixaSabadell Companyia d’Assegurances Generals (CSG), and small general insurance unit. Depending on performance, the deal is worth between $360 million and $510 million, and gives ZFS exclusive access to the bank’s 620,000 customers and network of 366 branches. CSG recorded premium income of some €280 million in 2007.

In the second deal, ZFS acquired a 50 percent stake in Spain’s fourth-largest bank Banco Sabadell’s life insurance unit BanSabadell Vida (BSV) and general insurance arm BanSabadell Seguros Generales. Depending on performance, the deal which closed in August last year is worth between €750 million and €970 million. Included in the deal is an exclusive 25 -year bancassurance alliance that provides access to the bank’s 1,225 branches and about 2 million customers.

Based on 2007 results, ZFS’ two deals have substantially boosted its market position in Spain. The combination of Spanish life insurance unit Zurich Vida’s premium income of €731 million, CSG’s €280 million and BSV’s €1.45 billion, boosts ZFS from 12th to fourth position in Spain’s life market.

Consolidation in Spain’s bancassurance sector appears set to continue. While ZFS believes large banks will to continue management independently, smaller banks are “searching for business opportunities”.

Of particular significance, in respect of consolidation and the fortunes of the life insurance industry in general, will be the influence of the dire economic situation Spain faces. According to a report published by rating agency Moody’s, Spain’s unemployment level has soared and is approaching 14 percent, about double the average in the European Union. Unsurprisingly, Moody’s predicts Spain’s GDP will contract by about 2 percent in 2009, after growing by about 1.2 percent in 2008 and 3.8 percent in 2007.

However, on a positive note, Spaniards are responding to economic gloom by saving more. According to the Bank of Spain, savings in the four quarters to September 2008 increased to 11.9 percent of disposable income, up from an average of 10.2 percent in 2007. It could well be that Spanish life insurers are spared from some of the impact of the recession in 2009 by strong demand for savings products such as such as PPAs and PIAS.


Top 10 countries, 2007

Premium income ($bn) Penetration (%GDP) CAGR* Market share (%)**
1997-2007 (%) 2007 1997
UK 423.74 15.28 15.36 38 27.2
France 189.54 7.3 7.93 17 23.7
Germany 102.04 3.05 6.01 9.2 15.2
Italy 88.22 3.99 15.08 7.9 5.8
Ireland 52.86 9.63 26.72 4.7 1.3
Netherlands 35.99 4.7 6.46 3.2 5.2
Spain 31.17 2.17 8.8 2.8 3.6
Belgium 30.38 6.64 15.42 2.7 1.9
Sweden 23.97 5.29 15.8 2.2 1.5
Switzerland 23.92 7.3 1.17 2.1 5.7
* In US dollar terms ** Total European market Source: Based on Swiss Re data

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