Large insurers in Spain with a competitive advantage in their distribution network through stronger banking groups are likely to benefit from Spanish banking consolidation, according to Moody’s Investors Service.
This is because of the major role that banks play in the distribution of life products, says the report entitled “Spanish Insurance: Banking Consolidation Will Further Advantage the Strongest Insurers”.
The report notes that vast majority of Spain’s savings banks, or cajas, have undergone a meaningful consolidation process in the last two years, reducing in number to 13 from 45, whilst simultaneously converting their legal status to retail banks.
This is important because in Spain, as in many other Southern European countries, the banking channel is the largest distribution channel for life insurance products, representing 73% of the premiums in 2010.
Many banks have sold 50% of their owned insurance subsidiary through ad-hoc joint ventures (JV), or signed exclusive distribution agreements with third-party insurance companies.
A large number of cajas have also signed exclusive distribution agreements with insurance providers.
Therefore if the cajas merge, the report explains that distribution agreements will have to be renegotiated or potentially cancelled in favour of new agreements with other existing insurers within the enlarged bank, or in some cases potentially with external ones.
According to the Moody’s report, each individual savings bank merger is unlikely to significantly affect the largest groups with stronger franchises, such as Mapfre or the bancassurance operations of larger banks, such as Caixabank.
However, the ratings agency said the effects could be more substantial for medium-sized insurance providers that rely on bancassurance agreements such as Caser, Aviva or Aegon.
The Moody’s report said: “As stronger banks with their own insurance operations – or agreements with large players – participate in the ongoing consolidation, a more drastic scenario with one single insurance provider per enlarged group would probably materialise in some cases.
These banks intrinsically have a higher ability to meet exit penalties of smaller bancassurance deals, and would probably benefit from integrating their insurance operations from a cost and operational perspective.
Moody’s said the degree of consolidation among insurers in Spain will ultimately depend on:
- the level of integration of the existing insurers with the leading bank in the enlarged banking group
- the size of any relevant exit penalties
- the bank’s ability to meet these penalties
Diffentiate to innovate
In conclusion, the ratings agency only anticipates significant improvements for those insurers that are able to “differentiate their product offering” successfully from banking products towards non-life or protection insurance.
This is because the study says life savings products will continue to face strong competition from deposits, in the short to medium term.