Securing a bright future

Securing a

bright future

China’s insurance sector and the

evolution of bancassurance

Introduction

Walkman Lee

Head of Insurance in China +86 (10) 8508 7043 [email protected]

Sam Evans

Head of Insurance in Hong Kong +852 2140 2879

[email protected]

Richard Siu

Head of Insurance Consulting in China +86 (10) 8508 5056

[email protected]

We are delighted to present our new survey, a guide to understanding

the market dynamics, regulatory framework, customer behaviours and

future direction of China’s bancassurance channel.

There are few insurance markets in the world currently experiencing the

pace of change, competitive tensions, intensity of regulatory oversight

and future growth potential as China’s insurance market. In this market,

the bancassurance channel is becoming increasingly important. This

report looks at the market from a number of perspectives:

• We surveyed 1,220 Chinese consumers to understand their demand

patterns and behaviours when purchasing insurance and their channel

preferences

• We interviewed domestic insurers and banks, international insurers

operating in China and the regulators

• We visited a number of bank branches to assess their effectiveness

as a distribution channel for insurance products and gauge their

response to recent regulatory reform, particularly CBRC 90.

The results have been both revealing and insightful in terms of the

future direction of the channel and the opportunities and challenges that

participants face.

We want to thank all those who took part in this survey, including our

partner, TNS, and the KPMG professionals whose insights have allowed

us to leverage the findings of the survey and draw conclusions about

the market’s future.

Contents

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14

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24

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34

37

38

39

Executive summary

1. Channel dynamics

2. Customer demand patterns

3. Regulatory environment

4. Operating model

5. How effective are bank branches

at selling insurance products?

6. Future direction

About TNS

KPMG: An experienced team,

a global network

Executive summary

China’s insurance market, and the bancassurance channel in particular, is characterised by fierce competition, constantly evolving regulation, significant variations in market dynamics between different provinces and cities, product offerings that may not suit the long-term needs of consumers, and divergent objectives amongst key participants.

Many insurers are questioning their prospects in the China market and how to implement a successful bancassurance strategy. Some are concerned that in the short term, the opportunities for profitable growth are limited. Despite these challenges, we are optimistic about the future prospects for the market.

We were encouraged to find different participants in the market sharing broadly consistent views. For example, we found strong consensus that recent regulation (and in particular CBRC 90) will have a positive long-term influence on the market and bancassurance channel.

We also found a strong desire to increase collaboration between banks and insurers. This included a wish to enhance the connectivity between bank and insurers’ systems, allowing improved information sharing and greater depth and quality of information captured.

A number of banks have established bank-owned insurers as a way to drive greater alignment. We expect bank-owned insurers to play an increasingly important role (albeit developing slowly over time) but we believe there will still be opportunities for other insurers. In this environment, partner selection will become even more critical as the banks look to build closer relationships, with increased cooperation and integration, with a reduced number of partners.

Over the longer term, positive macroeconomic and social factors will also drive reform. The ageing population and concern over the adequacy of the safety net provided by the health system will create significant additional demand for insurance. Already the number-one driver for consumers purchasing insurance is protection in the event of an accident or illness and to secure access to healthcare services. Insurance companies will need to respond by offering a range of products that cater for these evolving demands.

The government is also keen to promote long-term products and retirement solutions, for example, the recent pilot scheme permitting sales of variable annuity products. We believe legislation to develop the pension sector is an important catalyst to jump-start further market reform and create significant momentum in the future.

Agency remains the dominant distribution channel but the gap to bank-based distribution is narrowing and our survey highlights that consumers would prefer to purchase certain insurance products from a bank. In our view, a relationship-based service and the willingness and capability to invest in understanding the client’s needs, will be the critical step for bank-based distribution to surpass the agency channel.

4 Securing a bright future

Responding to the opportunity: The winners of the future

We have observed a number of developments, which we believe are creating a positive feedback loop, that will help improve the market dynamics:

Greater focus on higher

margin products and

designing products to meet

the needs of specific customer

segments, increasing margins

for both banks and insurers.

Increasing awareness of the

benefits associated with

long-term savings and retirement

products.

While there is still significant

work to be done to develop

a needs-based sales culture,

banks are working more

closely with insurers to

capture revenue and target

customers. There is greater

focus on compliance now

that bank branches are

responsible for insurance

sales.

Greater focus on policyholder

rights, consumer risk

awareness, increased

disclosure and improved

training – ensuring that the

right product is sold to the right

customer.

Ba

nk

s

Improving market

dynamics

Reg

ula

_to

rs

In

su

rers

Cus

to

m

er

s

To capitalise on the opportunity, we believe that the banks and insurers will need

to work more closely together to:

• create an effective service model that integrates the sales process into the bank and enables the bank to develop long-term relationships with customers. This requires a comprehensive view of the customer’s needs and how they may evolve over time – supporting the current focus on training but suggesting further improvements are required

• leverage technology to drive cost efficiencies and improve the quality of customer information to enable targeting of specific customer segments

What did the customer say?

• The most popular products are accident, critical illness, motor vehicle and juvenile insurance. There is strong demand to buy additional cover, particularly for accident insurance and critical illness. • The most important product feature

influencing the choice of provider is a desire for long-term protection to safeguard the family.

• The most important factors influencing the purchasing decision include a positive previous

experience with the organisation, personalised advice and a recommendation from relatives – all reinforcing the need for strong customer service.

• The majority of people purchase through agents, with banks a close second, depending on the product. However, when we asked people how they would like to purchase insurance in future, banks were more popular than agents for a number of products, particularly annuity and investment linked products.

• People bought insurance from banks due to their financial stability, strong brand recognition and ease of doing business.

• The main obstacles deterring people from purchasing insurance are a lack of awareness of what is available in the market and not knowing which products best suit individuals’ needs and, to a lesser extent, pricing i.e. purchasing power.

• The survey also identified that single premium products represented 17 percent of total sales. However, there was a growing proportion of longer-term regular premium products (although the average policy duration was only four years).

What did the banks say?

• Banks recognise the need to work with a number of insurance partners to provide sufficient geographical and product coverage of the market. Our respondents envisage doing business with potentially fewer partners but having stronger and more aligned relationships. • Banks recognise that broad

cooperation between banks and insurers covering all aspects of the customer value chain is important to build a successful bancassurance model.

• Banks believe recent regulation will have a long-term positive impact on the market.

• Some of our respondents have the ambition to sell longer-term products

We spoke with a number of market

participants. What did they tell us?

6 Securing a bright future

and to tailor solutions to meet customer needs, combined with a customer segmentation strategy.

What did the domestic insurers

say?

• The development of the

bancassurance channel has been driven by banks’ need to grow their non-interest income.

• Current conditions within the bancassurance channel were challenging, with limited growth potential.

• Recent regulation would result in an improved market structure in the medium to long term.

• Whilst recognising the importance of the bancassurance channel and need for it to be a key part of their distribution strategy, there is concern about the development of bank-owned insurers and therefore many insurers are also looking to develop alternative distribution channels.

• Market share was important. • People bought from banks because

of trust and confidence in the brand.

What did the international

insurers say?

• Domestic banks were often too

performance metrics, including the value of new business.

• Market conditions varied

considerably across the country and there was not always a level playing field. The licensing and application process was slow and bureaucratic. • Relationships at head office,

provincial and city levels were critical.

• Recent regulation would have a positive long-term impact on the industry.

What did our researchers in the

field observe?

• Promotion material for

bancassurance products was often limited or not prominent

• Bank staff responsible for directing customers had limited impact and were not effective in ascertaining customer needs and directing their enquiry accordingly

• Bank sales staff can explain relatively simple products, but do not explore and identify customer needs, and may therefore recommend simple - but potentially inappropriate - products.

• Many people were deterred from purchasing, either because they were not provided with a range

1

KPMG’s view

In an environment where bank owned insurers become more dominant, the following will become

increasingly important:

• Developing a product offering targeted at a particular market segment

• A focus on improving persistency to balance pressure on new business volumes

• Differentiating your brand through enhanced customer service.

Customer segmentation will create opportunities for insurers, as it will allow for tailored product development

and targeted marketing campaigns.

Flexibility between channels will be important and we expect to see insurers continuing to build and develop

their agency sales force and developing alternative distribution capability to reduce reliance on the banks.

As banks and insurers look to work more closely together, we would expect further collaboration in packaging

non-life insurance policies more closely with the bank products in both the retail and commercial space.

We agree with the concerns raised, particularly by the regulator, that some consumers are being sold

inappropriate products. These views were reinforced by our consumer survey: approximately a third of

consumers were not satisfied with their existing products or expressed concerns about a lack of options or

information about the most suitable product.

Channel dynamics

8 Securing a bright future

Regulation and macroeconomic factors are having a significant impact on China’s insurance market. In 2011, sales through the bancassurance channel declined significantly and were blamed for an overall slowdown in premiums growth, from 29 percent to 11 percent, year-on-year.1

Some of the large banks experienced a 20-30 percent decline in bancassurance premiums. Full year market data for 2011 has not been published, but in the early part of the year, premiums through the bancassurance channel fell 15 percent.2

The key drivers behind this decline are:

• Regulation, especially the introduction of CBRC 90, which effectively banned insurance sales people from selling insurance products in bank branches, in an environment where bank sales staff have limited experience selling insurance • Liquidity constraints in the banking sector, which have meant that the banks are

less keen on deposit replacement products (in many cases, bancassurance sales are simple savings style products)

• Yields on insurance products, which are not are not as attractive as other wealth management products

• Concerns with inflation, which are creating higher customer expectations and hampering the sale of participating and long-term products.

We expect companies will find it difficult to deliver significant growth in this market, which may serve as a catalyst for change in the business model and development of new products.

A number of foreign insurers have been able to continue growing (although often below initial expectations) reflecting the fact that a smaller, more focused operation can continue to prosper in the current environment.

A further aspect of the competitive environment, and true across the broader financial services sector, is the challenge in retaining, improving productivity and recruiting staff. Many insurers experience high turnover (one respondent experienced turnover of 50 percent in one year).

Based on the experience from recent acquisitions, we observe that:

• Common ownership does not necessarily provide an immediate benefit to the bank-owned insurer as it will take significant time to penetrate the branch network

• The internal approval process may be easier under an integrated model, but there are still significant capital requirements to support the growth of the business

• The banks recognise the need to work with multiple partners, given the size of the market.

There are also potential challenges for a bank-owned insurer in selling to other banks, which may be disinclined to support the performance of a rival.

In the long-term, we expect the bank-owned insurers to start to dominate the distribution opportunity created through their parent.

HSBC estimate annual growth of 26 percent for bank-owned insurers over the next 10 years compared to 9.5 percent growth for insurers’ bancassurance premiums3 with the differential resulting in bank-owned insurers growing their market share from 6 percent to 30 percent.

However, managing two businesses with fundamentally different operating dynamics is a challenge and in other markets, we have seen banks unwind their integrated model.

The introduction of Basel III in China may also create a capital disincentive for banks to own an insurance company.

Needs-based selling

Our research revealed a consensus that banks need to focus on deepening customer relationships, creating an opportunity to sell tailored insurance solutions. For example, consumer realisation of the future savings gap in later life will create opportunity for insurers.

For now, it is evident that product recommendation is driven excessively by commission levels, with insufficient time spent exploring the needs or objectives of the client.

3 HSBC report titled “Asian Insurance – Buy China, taking profits elsewhere” 11 July 2011

“Customer needs-

based selling

doesn’t exist at

the branch level”

Chief distribution officer,

international insurer

“Sales staff don’t

have the capacity

to sell [insurance

products]”

Head of distribution,

international insurer

Integrated financial services groups outside China

The ability of domestic banks to form integrated financial services groups depends on a number of factors. It is not simply enough for the banking and insurance elements to share a P&L that captures both the manufacturing and distribution profits: to be successful, the products that the insurer offers need to be integrated into the suite of products that front-line bank staff can provide to their customers.

If we look at the international experience of the integrated bancassurance model, the picture is somewhat mixed. Over the last 20 years, there have been many attempts to form integrated groups in Europe, the U.S. and Australia. While it is an oversimplification to say that the model has not been successful in Europe and the U.S., we have seen a number of instances where some large integrated groups have separated their insurance businesses relatively soon after they were acquired or created.

There is no single reason why the model has not endured for many organisations – a combination of poor integration, GFC-related asset disposals, changes in strategy and capital considerations appear amongst the reasons for

divestitures. There are, of course, examples where the model has worked, particularly in the Australian market where the big four banking groups have successfully implemented an integrated model comprising banking, insurance and investment management operations.

Distribution Products are sourced from an independent insurer or insurers and sold to bank customers. Bank receives a commission payment and potentially a profit share, but doesn’t carry any insurance risk

Typical model currently employed in China

Bank-owned insurer The bank owns a majority stake in the insurance company. The bank is responsible for distributing insurance products through its branch network and the insurance company is responsible for managing the insurance risk

A number of Chinese banks have recently acquired a majority stake in an insurance company

Fully integrated insurer A fully integrated model, with the bank owning 100 percent of the

insurance company

There are only a limited number of fully integrated insurers in China (e.g. HSBC)

Products

Banks are competing for market share based on total sales. Typically, they are more focused on sales volumes and commissions than on the value of new business, and are therefore likely to encourage the sale of single premium products.

Many banks rank their insurance partners quarterly based on sales volumes. They may cut the bottom 10 percent, forcing everyone to sell at least some single premium products to stay on the preferred supplier list.

A key challenge facing the insurance industry is how to move the banks and consumers away from short-term single premium products, particularly given many consumers do not understand regular premium products and are disinclined to buy them.

Market education and increasing awareness will be a key part of this evolution.

Foreign versus local insurers

Interestingly, the objectives, challenges and hopes of the domestic and foreign insurers were largely consistent. However, there are a number of structural areas where foreign insurers are placed at a disadvantage:

• Foreign insurers find it difficult to compete as they have more limited investment options compared to their domestic peers, and therefore cannot generate as attractive returns

• Banks will often favour insurers with which they have significant business or make use of other services and bank products.

Leveraging the businesses’ broader relationships is essential. Foreign insurers with a large SOE partner, for example, should use the strength of their partner’s banking relationship to help promote their insurance business.

12 Securing a bright future

Supporting factors

Challenges

• Growing demand for protection products, particularly with a focus on retirement and providing for children

• Agents typically spend more time with their customers, giving them greater opportunity to explain the benefits of longer-term or more complex products

• A lack of adequate training within the bank branches hinders the sale of complex insurance products • Recent regulations require an increase in the minimum

payout period from three to five years

• The primary feature of insurance should be protection, which may not be compatible with the wealth

management focus of the banks • A limited pilot scheme to trial variable annuity products

(helping to increase customer awareness of longer-term products)

• Insurance products are often not competitive compared to Trust products, which are also sold through the banks, and typically offer a higher return

• Increasing opportunities to package the insurance policy with the bank product, for example in the retail space, linking home insurance to the mortgage and similarly for commercial property linking the insurance cover through to the financing arrangement

• Limited investment solutions inhibit product development

In summary, we see a number of supporting factors and challenges impacting the market in the short to medium term.

2

Customer demand

patterns

KPMG’s view

A key to the future success of the bank channel will be to demonstrate to consumers that the bank can

provide a relationship-based service and work closely with clients to understand their needs. We are seeing

limited development of this model outside of the foreign-owned banks.

The most important factors influencing a consumer were all linked to providing a high-quality service. If banks

can demonstrate a needs-based selling approach, they will overcome the primary advantage of the agency

channel and by capitalising on their other strengths, may be able to move to a dominant position in the market.

The industry has a clear incentive to actively promote the features and benefits of insurance, their role in

supporting society in times of need and increasing the level of disclosure. The main factors preventing the

sale of insurance is a lack of understanding and trust.

A lack of income appears to be constraining how much cover people can afford to buy. There is strong demand

for additional cover for existing products, supporting the future growth potential, inherent in the current

market as income levels increase.

Complexity of the product is not necessarily a barrier for bancassurance sales – the results of our survey

highlighted strongest demand in the bank channel for the more complex products (including annuity and

investment linked products).

14 Securing a bright future

Our online survey covered 1,220 people spread evenly across China. Our respondents were typically from the affluent income bracket, with 67 percent earning more than RMB 4,000 per month. The majority were university educated and employed in the professional or white collar sectors. The respondents were relatively young, with 76 percent between 20 and 35 years of age.

What products are most popular amongst

consumers?

The most popular products are accident insurance and critical illness coverage, with 66 percent and 55 percent of respondents, respectively, covered by these products. Motor insurance, juvenile insurance, medical outpatient, hospital and surgical expenses and life (participating) are part of a group of products with coverage between 32 percent and 38 percent.

Consumers had strong demand for additional coverage, particularly for critical illness, investment-linked products and motor vehicle insurance. A significant change in personal circumstances (e.g. getting married, having children or buying a home – the common lifestyle changes that typically trigger the purchase of insurance) was identified by many as the catalyst for new demand.

Typically, about a third of customers were not satisfied with their level of coverage. At the extreme, 47 percent were unsatisfied with their hospital and surgical expense coverage.

What additional products/coverage

would you like to buy?

What insurance policies do you currently hold?

Accident insurance _66% 55% 38% 38% 34% Critical illness Motor-commercial vehicle insurance Juvenile insurance Medical outpatient Accident insurance 50% 49% 38% 36% 35% Critical illness Life-participating Motor-commercial vehicle insurance Hospital and surgical expenses

How are people buying insurance?

The agency channel clearly dominates for many products, though for some products the domestic bank channel is a close second.

However, for certain products (including annuity and investment-linked products) consumers expressed a preference to use banks rather than agents for future purchases.

Based on consumer preferences, we expect the gap between agents and banks to narrow for the vast majority of products.

Only motor insurance currently has significant volume through tele-sales.

Where did you buy your policy?

Where would you prefer to buy your policy in the

future?

Insurance agent Bank Online Telemarketing Accident Short-term travel

Long-term travel Critical illness Medical outpatient Hospital and surgical expenses Life-participating Life-non participating Annuity insurance Investment-linked plans Juvenile insurance Universal life insurance Motor House property 57% 48% 50% 57% 58% 57% 43% 44% 41% 39% 57% 48% 44% 48% 34% 31% 35% 36% 34% 36% 49% 48% 51% 53% 35% 42% 35% 44% Accident Short-term travel Long-term travel Critical illness Medical outpatient Hospital and surgical expenses Life-participating Life-non participating Annuity insurance Investment-linked plans Juvenile insurance Universal life insurance Motor House property 75% 59% 59% 74% 69% 72% 56% 68% 52% 50% 76% 69% 61% 55% 21% 25% 37% 23% 29% 25% 42% 30% 45% 44% 22% 29% 22% 40%

16 Securing a bright future

Why did you buy insurance?

continued access to healthcare services _4.0

4.0 4.0 3.9 3.9 3.9 3.8 3.7 3.7 3.6 3.4

fear of having an accident fear of illness fear of vehicle damage access to better healthcare services fear of property loss fear of loss of income (non-health reasons) lack of pension fear of natural disasters higher cost of raising children everybody has it

Why did you buy your policy from a bank?

Why did you buy your policy from an agent?

Why are people buying insurance?

The primary driver for people to buy insurance cover is to protect themselves in the event of an accident or illness and to secure access to healthcare services. This reflects a low level of state provision within China and the implications of an ageing population.

Why do people buy from banks and agents?

During our interviews, the banks and insurers identified the following factors that they thought were important for consumers in buying insurance from a bank: • Ease of doing business – banks operate as a financial supermarket • Trust and credibility – people expect banks to do the right thing

• Importance of the relationship manager – although turnover of relationship managers can be an issue, service levels in banks are expected to be higher than for agents.

The results of our online survey rank brand, trust and financial stability together with ease of doing business as the most important factors. Consumers also identified the importance of offering a broad range of products and products with attractive features. However, a strong relationship with their bank relationship manager was ranked last.

For agents building and maintaining a relationship over a long period of time, demonstrating a strong understanding of a customer’s needs and managing the relationship proactively were all identified as important.

In summary, the two channels are valued for different attributes: on one hand, stability and ease of doing business; on the other, long-term relationships and understanding the needs of the customer. If banks can demonstrate the latter, they will be well placed to capitalise on their position in the market place.

What factors are influencing the purchasing

decision?

The three most important factors in influencing a consumer to buy an insurance policy were linked to providing high quality customer service: a positive previous experience, personalised advice, and a recommendation from relatives or friends. Pricing was also identified as a key factor, demonstrating the competitive nature of the market.

The impact of direct marketing, advertising and promotions was considered relatively unimportant.

An encouraging development for the industry is the fact that consumers identified long-term protection for themselves and their families as the most important factor when selecting a product.

What product features attracted you to the

product?

long term protection for you and your family pricing saving element short term guaranteed returns duration of policy > 5 years long term returns that may not be guaranteed duration of policy < 5 years

4.3 3.7 3.6 3.5 3.4 3.3 2.8

What factors influenced your decision?

good experience with other products from the same company personalised advice by an insurance agent or financial planner

premium price recommendation from relatives or friends

product brochures incentives/free gifts TV/radio/press/banners/outdoor advertising information through mail/by post roadshows or seminars direct marketing or telemarketing

4.0 3.9 3.8 3.8 3.3 3.2 3.1 3.0 3.0 2.8

18 Securing a bright future

What is preventing consumers from buying

insurance?

The main factor hindering the sale of insurance products is a lack of education and awareness. Consumers highlighted a lack of understanding of the products available to them and what products are best suited to their needs. These issues are exacerbated by a lack of trust in insurance companies to pay claims and a complicated application and approval process.

For a number of products, cost was also raised as a potential barrier.

In some respects, these issues can be addressed through increasing disclosure (which can help overcome a lack of trust) and improving understanding of the potential benefits associated with the product.

3

KPMG’s view

Regulation will drive more rational behaviour and encourage positive development of the bancassurance

channel.

We expect future regulation to continue to build on recent momentum, with a focus on policyholder rights,

risk awareness, increased disclosure, improved training and greater number of authorised agents.

We believe future regulation will provide momentum for banks and insurers to drive needs-based selling,

promote a greater awareness of product features, and enhance protection of consumers.

Regulatory

environment

20 Securing a bright future

Both the CBRC and CIRC have been increasingly active in the regulation of the bancassurance sector.

The CIRC and CBRC have issued a number of recent circulars and guidelines targeting the bancassurance channel, including:

• Circular on further strengthening the sales compliance and risk management of bancassurance business of commercial banks4

• Circular on strengthening the restructuring and improving the healthy development of banks acting for life insurance services5

• Guidelines for supervision of bancassurance services of commercial banks6 • Draft regulations for supervision of entrustment of insurance agency business

by insurance companies to financial institutions, issued by CIRC on 7 April 2011 (Draft Regulations).

CBRC 90 contains two of the most influential developments: the ban on insurance salespeople selling insurance products in bank branches and a limit of three insurance partners for each bank branch.

One of the central concerns in the current environment is ensuring that the customer is receiving the right advice and ultimately a suitable product for their needs and financial situation. The CBRC was concerned with mis-selling, and, in particular, increasing customer complaints about bank-related sales (80 percent of total insurance complaints related to policies sold through banks).

The CBRC highlighted the following four areas of concern: • Customers confusing insurance policies with saving products • Customers being unaware that they were committing to annual premium payments • A sales culture heavily influenced by commissions and maximising the volume of policies • A potential lack of ability and training to sell insurance products.

The recent regulation also prohibits the insurer paying ‘off-the-books’ commissions or providing economic benefits to bank personnel – measures targeted at

preventing under-the-table payments.

Whilst the recent regulations had a significant adverse impact on sales volumes in 2011, we believe that the medium to long-term impact will be beneficial not only for consumers, but also for the long-term viability of the industry.

Some of the positive developments arising from CBRC 90 are listed below: • Banks are now responsible for insurance sales and accordingly recognise the

importance of compliance and selling the right product to the right customer – this should help with product development and and see a move away from from deposit replacement products

• There is less opportunistic behaviour from insurance agents trying to sell insurance products

• Improved training of bank staff and increased numbers of authorised agents • A reduction in under-the-table payments.

The CBRC commented that CBRC 90 had an immediate positive impact with a decline in the number of complaints. The CBRC continues to encourage banks to increase the number of qualified agents and improve the level of training.

Creating a better informed workforce will help sell protection products, which in turn will drive consumer benefits and enable the banks to extract greater value from their customer base.

There are significant differences in how the regulations are being applied across the country. For example, in some provinces, banks have discretion in how to apply the requirements or can apply to exceed the three insurers rule.

Going forward, we understand that the CBRC will employ onsite and offsite surveillance, together with a review of complaints to monitor compliance and ensure consistent applications across the country. We also understand that the CBRC hopes to conduct joint surveillance reviews with the CIRC in the future. 22 Securing a bright future

“I don’t see the sense in the three

insurers per branch rule”

VP bank distribution

Responses to the three insurers per branch rule have varied considerably. Some banks are planning to rotate insurers annually (the minimum period required by the regulation) while others are waiting to see how regulations will play out in practice.

The three insurers rule may have unintended consequences in that it perpetuates a sales volume driven culture, particularly if insurers focus on maintaining their position in the top three and may restrict consumer choice. It may also drive up commission levels.

Future direction

We expect future regulations to focus on consumer protection, including cleaning up sales practices, reducing mis-selling and improving training of insurance sales staff within banks.

We expect that policyholder rights, risk awareness and increasing disclosure of information to policyholders will continue to be targets for new regulations. We understand that new regulations scheduled for implementation next year will require banks to undertake a customer assessment before selling a wealth management product and to classify products according to different risk profiles.

We hope to see increasing coordination between the

“I expect to see stricter licensing

around insurance professionals.

Regulation to date is just the first

salvo”

4

KPMG’s view

The operating model for bancassurance is being shaped by the divergent objectives of the banks and insurers,

the dominant role of the banks in the relationship, and a diverse, growing and evolving market.

In the interim, we believe that insurers should be focusing on the following strategic areas: optimising their

partner mix, controlling cost, market segmentation and developing a unique selling point.

Operating model

24 Securing a bright future

Optimise partner mix

What is the optimal partner mix for your

organisation, including the mix between domestic

and foreign banks? The domestic banks provide

national coverage, but require significant

commitment of time and resources whereas the

foreign banks typically have a wealthier customer

base creating an opportunity to focus on value

creation products with larger case sizes.

Control costs but

maximise coverage

Consider how you work with

your partners – for example, a

primary relationship manager and

insurance specialist acting as the

primary facilitator and providing

training to bank branch staff can

cover a number of branches.

This approach can minimise the

number of people needed on the

ground at the branch level thereby

helping to control costs.

Use of IT to drive an efficient

operating model, including

developing an online query

system to help bank staff.

Create a unique selling point

Insurers need to create a differentiating factor

in a highly competitive market, particularly with

the potential growth of bank-owned insurers. It

is typically very difficult to differentiate through

product features and therefore insurers must

focus on understanding the insurance needs

of the bank’s customers. Insurers should have

an integrated strategy to create an institutional

brand and reputation at head office and branch

level and a marketing plan to attract customers.

White labelling may also be an option, given the

Establishing a relationship

An insurer that wants to partner a domestic bank needs to demonstrate capability and sincerity (which translates into a willingness to provide resources to support the bank). There is a focus on training local bank staff (particularly following CBRC 90), using two common models:

• Insurance specialists: a route expected to be favoured by domestic banks, this model sees one or two bank employees in each branch trained to sell insurance products

• Blanket training: a route expected to be favoured by the foreign banks, this model involves training all sales staff.

There are differences in how the costs of this training can be allocated. Some banks fund the salaries of the insurance sales force and support products of all potential partners. Alternatively, the insurer pays the cost based on sales volume or a similar metric. We expect the domestic banks to favour paying the staff costs given the importance of remaining independent in the current environment.

One of the issues is the number of products that bank staff need to learn and manage; accordingly, the training is often kept very simple. Typically, there is no online query system, so bank staff must work closely with the insurance representative. This is a potential area for development for insurers, which could help manage costs and improve the effectiveness of the sales channel.

Ultimately, the domestic banks will need to increase and improve the skills of their people, which will take considerable time given the scale of the branch networks.

Managing the relationship with your partner

An additional challenge is managing a business which covers a large geographic area, split into a large number of smaller markets with different regulatory and competitive dynamics.

One of the key questions is the optimal number of partners in this environment. Insurers should map out their footprint with their banking partner to optimise their reach nationally.

Managing multiple relationships requires a significant commitment, particularly given the importance of maintaining relationships across the bank and the new product approval and licensing process which has to be managed at the head office, regional and branch level.

It can typically take 12 to 24 months for an insurer to develop and build a relationship with a large domestic bank and achieve reasonable penetration across the branch network.

26 Securing a bright future

“Differences

between

provinces, and

cities within the

same province,

have resulted in

a very complex

operating

environment”

VP bank distribution

The approach of foreign and domestic banks is also different:

• For domestic banks, the relationships at head office, provincial and city levels with branch staff are critical. Products are often a secondary consideration • For foreign banks, the product is typically key, attractive products (i.e. those that

meet the long-term needs of the wealthy client base) will allow an insurer to develop a strong relationship.

It may be easier for an insurer to build a partnership with a foreign bank because the scale of operations is much smaller and there is often closer alignment of objectives.

Some insurers are looking to develop strategic cooperation agreements with banks, which will generate mutual benefits for both parties.

Customer segmentation

The more successful strategies focus on customer segmentation rather than pursuing market share. Foreign insurers in particular are increasingly adopting a segmented customer strategy, targeting high net worth individuals or other niche areas within the market.

For foreign insurers which cannot compete on price with their domestic peers, targeting protection products, where consumer are less price sensitive and product features are seen as more important, can deliver success.

When choosing their banking partners, the majority of respondents identified the customer base and specifically the proportion of middle- to high-end customers as a critical consideration.

Customer relationship management within the banks is often impeded by the poor quality of the underlying data or a lack of investment in systems that allow effective data mining and tracking. For example, there is limited tracking of credit card patterns and the ‘transactors’ (i.e. those who pay their balance in full each month) and resolvers (who do not pay in full each month) – transactors have proved to be a much more attractive segment for insurers.

“We need to do

something

different [to

establish a value

proposition]”

Technology

One of the challenges for the insurer is getting the bank to understand underwriting.

A technology solution is important in minimising disruption: the system has to allow capture of the customer information, system generated quotes and straight-through processing for underwriting.

Many of the larger banks have moved to a fully automated process, with the insurer required to ‘plug in’ to the bank’s underwriting system. The better systems allow straight-through processing, with the policy document issued on the spot. Only when the sum insured exceeds a certain limit is the policy referred to the traditional underwriting process.

Smaller banks still rely on a manual process (which may take three to five days to issue the policy document), although many are also developing an automated system.

A further challenge relates to launching new products. The large number of insurance partners and the volume of new products often lead to a long delay in implementation. The insurer must liaise with the central IT department to set the product code in the system and then provide testing, a process which can take several months.

The insurer must also complete the appropriate new business proposal form and train the branch sales staff.

As with any logistical and complex process,it is important to know how to manage the various stages and associated documents to maximise the speed of implementation.

The more advanced insurers are also developing web-based systems with online application functionality, straight-through processing, a query system for the sales team, online claims functionality and a customer service offering. They are also employing tablets at the point of sale for demonstrating product features and submitting online applications.

We are also seeing an increased focus on sharing of information between the bank and insurer and improving the quality of information.

28 Securing a bright future

“Technology is the

key to winning in

China”

VP bank distribution

5

KPMG’s view

We found that the branches were performing better than our initial expectations, given the recent regulations,

with bank staff operating independently of the insurance support staff and having a reasonable understanding

of the products they were offering.

However, our researchers remained unconvinced, and the majority would not have purchased a product. Our

recommendations:

• Shift focus from pushing particular products to a broader discussion to identify a customer’s needs

• Present a range of products and improve disclosure to help the consumer make an informed decision

• Focus training on improving customer service and developing a long-term relationship.

How effective are bank

branches at selling

insurance products?

30 Securing a bright future

As part of our survey we visited 24 separate branches across China, covering 10 different domestic and foreign banks, to assess the effectiveness of the bank branches at selling insurance products, in light of the recent regulations. The branches were located in Beijing, Xiamen and Qingdao.

We asked our own researchers to visit the branch and express an interest in buying an insurance product and to ask for advice on the potential options available for their individual circumstances. We used the same people in each city to ensure a consistent approach.

Overall environment

The overall branch environment was positive for both the domestic and foreign bank branches. An inquiry/reception desk with a lobby manager or receptionist was generally available and easily found. Signage in the branches was clear and customers could direct themselves if they were not approached by bank personnel. Approximately half of the bank branches had marketing materials and brochures displayed in the open for customers, while the remaining branches required the customer to ask before materials were provided.

The prominence and quality of bancassurance marketing materials can be significantly improved. Almost none of the branches had prominent advertising material for insurance products.

In addition, most of our field researchers found the brochures they received to be overly simple and had to request further explanation from a financial advisor.

Generating leads

The majority of our field researchers (58 percent) were not approached by a bank representative and had to direct themselves to a financial advisor. For those that were approached they found no particular strengths in the lead generation process and believed that bank staff could improve their efforts in ascertaining customer needs and knowledge of available products.

In some instances, only one bank employee (e.g. lobby manager or receptionist) was managing this initial interaction, resulting in customers being neglected during

The role of the financial adviser and needs-based

selling

All of our field researchers dealt with a bank employee and had no direct contact with representatives of the insurance company, indicating compliance with CBRC 90.

The majority of researchers (71 percent) dealt with a financial adviser and we asked them to interact with the financial adviser to ascertain how many insurance needs the financial adviser could identify.

A majority of our field researchers were comfortable that the financial adviser had a good understanding of the products discussed and were able to explain the benefits of the product. This is an encouraging result given concern around the lack of training of bank sales staff.

Number of insurance needs

discovered

How clearly were product

features explained to you

Very clear 25% Clear 50% Uncertain 25%

32 Securing a bright future

Would you buy the products?

I would buy 5%

Did the financial advisor follow

up?

Although our researchers were satisfied with the enquiries and explanations they received, the majority would not have bought the product because:

• There was limited or no follow-up by the adviser • They did not find the products offered attractive

• They were not provided with options, so it was difficult to make an informed decision.

This experience differs from our expectations for the agency channel where, based on the feedback from the customer survey, there is a greater focus on proactively managing the relationship and identifying the customer’s needs.

Our conclusion is that whilst bank staff possess a good understanding of a limited range of relatively simple products, they are not, at this stage, holding more in-depth discussions with customers to offer a broad range of potential products. One distinction between the domestic and foreign banks is that the foreign banks were less focused on pushing a particular product and more interested in a broader discussion on wealth management solutions and providing financial planning advice.

This demonstrates the relative scale of these organisations, better training and the focus on developing a customer service culture for more affluent customers.

6

Future direction

34 Securing a bright future

“Unit-linked products are the future”

Head of distribution, China, with a leading insurer

“We’re not expecting to see massive change in the overall

market dynamics. China market is 20 years away from a

developed IFA model”

VP bank distribution

One of our respondents painted a vivid picture of a titanic struggle between two rival factions, the banks and the life insurers, both creating fully integrated financial services organisations through the acquisitions of insurers and banks respectively and then battling for supremacy – something he described as a ‘battle of the gods.’ As with many financial services sectors in China, there is a view that whilst there may be positive prospects today, a long-term strategy is required and financial returns should not be expected until well into the future. Current endeavours are planting the seeds for the next generation of management.

We expect the recent regulations to have a positive impact on the industry over the long term and further regulation is expected to continue to drive improvements in training, consumer protection and development of longer-term savings products. Accordingly, we expect to see a gradual move away from deposit replacement products to protection products. This should drive better margins for both the insurer and the bank and improve customer satisfaction as consumers are getting a product better suited to their needs.

We expect to see continued growth and prominence of bank-owned insurers over the medium-term as organisations optimise the benefits associated with an integrated model.

However, there are two notes of caution. First, capital strain and the

implementation of Basel III may constrain growth. Second, the difficulties some organisations have faced in the US and Europe, which has led them to unwind an integrated model.

We believe there are three critical areas that will need continued development: • Increased consumer and developing a relationship-based sales model • Targeted regulation that is consistently enforced – we believe that future

regulations will continue to focus on consumer protection. The scale and diversity of the market means that in reality it will take many years before there is a level playing field across the country

• Product development aimed at better solutions for retirement – an area which is likely to attract increasing attention from the government and one where the insurers have an important contribution to developing a solution. Our experience suggests that some form of compulsion or tax incentive is required from the government to drive significant momentum.

In the short term, we expect that the market will continue to experience challenging conditions and low or negative growth rates, but those willing to invest for the long term will be well placed as recent initiatives start the slow move towards a more attractive market environment.

The winners of the future are likely to be those that are prepared to invest in superior customer service, take the time to understand customer needs, leverage technology and design attractive and innovative products focused on specific market segments.

36 Securing a bright future

About TNS

TNS offices

26/F, Tower B, Winterless Center, No.1 West Da Wang Road, Beijing, China 100026

+86 (0)10 6583 9988 Shanghai

11F, Henderson Metropolitan, 300 East Nanjing Road, Shanghai, China, 200001 +86 (0)21 2310 0808 6/F, Hua Ye Building, NO.69, Yi Xue Yuan Rd, Shanghai, China, 200032 +86 (0)21 5461 9696 Guangzhou A2001-2004, 20F, A Tower, China International Center, No.33 Zhongshansan Road, Guangzhou, China, 510055 +86 (0)20 2829 4300 Shenyang

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No.68 Minzhu Road, Heping District, Shenyang, China, 110001

+86 (0)24 3137 0212 Chengdu

1-9-22, Jiufeng International Furniture Plaza, No.20 Jialing Road,

Wuhou District, Chengdu, China, 610041

+86 (0)28 8626 3326

TNS advises clients on specific growth strategies around new market entry, innovation, brand switching and stakeholder management, based on long-established expertise and market-leading solutions. With a presence in over 80 countries, TNS has more conversations with the world’s consumers than anyone else and understands individual human behaviours and attitudes across every cultural, economic and political region of the world.

TNS China is the leading custom market research agency in China. With around 500 employees and more than 200 researchers across six offices in China, we deliver actionable insights and research-based business advice to our clients so that they can make more effective business decisions. We are committed to helping local leading companies win in both China and global markets and multinational companies be successful in China.

TNS China Finance Sector

Established in 2006, TNS China Finance Sector has been an early pioneer in finance sector research in China. TNS China Finance Sector is focused exclusively on solving common finance sector marketing problems as well as uncovering new markets, new products and new services; the group is dedicated to getting to the heart of our clients’ business issues to help clients grow their business. As a leader in the market research industry TNS China Finance Sector specialises in retail banking (especially high net worth customers and SMEs), insurance and funds management, and is committed to providing fully tailor-made research solutions. For more information please visit the website www.tnsglobal.com.

KPMG: An experienced

team, a global network

KPMG’s Insurance practice

KPMG has a dedicated insurance practice in China focused on helping our clients understand industry trends and operational, commercial, regulatory and technology related issues.

Our team offers skills, insights and knowledge based on substantial experience. We are also able to leverage the experience of our global practice for the benefit of our local clients, sharing best practices and insight from other markets around the world.

How can we help?

We believe in creating holistic solutions to our client’s problems, leveraging our broad industry experience both in the China market and through our global network.

We can support you in developing and implementing your bancassurance strategy, including:

• Market assessment and

identifying growth options – this

may include an assessment of the external environment (covering emerging trends and implications, customer needs and product requirements, competitor analysis and possible entry options) and

the internal environment (covering profitability, key drivers of the business, market strength and competitive advantage, barriers to growth and potential capability gaps) • Strategic direction and business

model design – this may include

working with your organisation to set strategic direction and key focus areas for your bancassurance business, including customer segmentation, value proposition, product offering, customer experience and pricing strategy • Operating model design and

optimisation – the operating

model provides the link between the strategy and execution. We can help you optimise the core building blocks for your business, including business, IT, organisational and physical architecture

• Partner selection – we can help you define the key parameters to assess potential partners given your strategy, business model and operating model, help you identify potential partners and work with you to negotiate and complete a transaction.

38 Securing a bright future

Contact us

Head of Insurance Consulting KPMG China

+86 (10) 8508 5056 [email protected]

Edwina Li

Insurance Partner Eastern & Western China Tel: +86 (21) 2212 3806 [email protected]

Joan Wong

Partner, Insurance M&A Transaction Services Tel: +852 2140 2862 [email protected] Walkman Lee Head of Insurance KPMG China Tel: +86 (10) 8508 7043 [email protected] Clarice Yen Insurance Partner

Hong Kong and Southern China Tel: +852 2978 8117

[email protected]

Douglas Lecocq

Partner

Actuarial and Financial Risk Management

Tel: +852 2978 8282 [email protected]

kpmg.com/cn

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

© 2012 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Hong Kong.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Publication number: HK-FS12-0001

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