A market yet to realise its full potential

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

SPANISH LIFE INSURANCE
INDUSTRY

Top 15 life insurers, 2007

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

Products 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.

EUROPEAN LIFE INSURANCE MARKET

Top 10 countries, 2007