COUNCIL OF Brussels, 27 July 2006
THE EUROPEAN UNION
from: Secretary-General of the European Commission,
signed by Mr Jordi AYET PUIGARNAU, Director
date of receipt: 26 July 2006
to: Mr Javier SOLANA, Secretary-General/High Representative
Subject: Commission Staff Working Document - Financial Integration Monitor 2006
Delegations will find attached Commission document SEC(2006) 1057.
Encl.: SEC(2006) 1057
12043/06 gw 1
DG G I EN
COMMISSION OF THE EUROPEAN COMMUNITIES
COMMISSION STAFF WORKING DOCUMENT
Financial Integration Monitor 2006
• As the integration of the EU Internal Market for financial services advances,
market structures adjust and new ones develop, offering opportunities and
economic benefits while raising new challenges in terms of financial stability and
• This year's Financial Integration Monitor considers the EU financial sector in the
global context and analyses two market segments, the EU insurance and pension
funds sector and the EU investment funds sector.
1. THE EU FINANCIAL SECTOR AND ITS EXTERNAL DIMENSION
• The EU is a major player in global financial markets, comparable to the US.
According to the market segment, its share in the global market varies from 20%
• The integration of the EU financial sector in global financial markets is
intensifying, as demonstrated by the strong increase in its International
Investment Position (IIP) -from 100 to 140% of GDP - over the period
1999-2005, making international regulatory cooperation ever more important.
• In providing financial services to third countries, establishment is the most widely
used integration channel by EU companies.
2. EU INSURANCE AND PENSION FUNDS
• The EU insurance and pension fund sector has been and is still growing in
importance: investments of primary insurers reached 6.0 trillion euro at the end of
2005 and the assets under management of EU private pension funds 2.5 trillion at
the end of 2004. Differences between Member States remain noticeable.
• The sector is increasingly organised on a cross-border as well as a cross-sector
basis but, from a customer point of view, insurance largely remains a "domestic"
service as retail insurance markets are mainly, although not exclusively, accessed
• The potential for further development of the sector exists but much depends on
the economic growth performance and changes in legislation. Considering the
ageing of the EU population and the pension challenge, a further expansion can
reasonably be expected.
3. EU INVESTMENT FUND SECTOR
• In the past decade, EU investment funds have more than quadrupled their assets
under management to nearly 6.4 trillion euro at the end of 2005. Today, they play
an important role in the EU's household savings and capital markets. Harmonised
– for large part equity- funds (UCITS) dominate the market (80% of total).
• The situation regarding intra-EU cross-border activity in this sector is mixed.
While in some parts of the value chain and for some products cross-border
activity is rather low, there are also more encouraging signs: In 2005, two thirds
of EU-wide sales took place on a cross-border basis and true cross-border funds1
represented 17% of all UCITS in the EU.
• The area of fund distribution is where the lack of competition is most keenly felt.
This is reflected in high charges imposed by the distributors.
True cross-border funds are funds notified for sale in at least two jurisdictions other than their country
of domiciliation, i.e. distributed in at least three Member States
EN 2 EN
Financial Integration Monitor 2006
TABLE OF CONTENTS
1. THE EXTERNAL DIMENSION...........................................................................................5
1.1. The global financial position of the EU...............................................................................5
1.2. Channels of globalisation ....................................................................................................5
1.3. Financial stability ................................................................................................................8
2. THE EU INSURANCE AND PENSION FUND SECTOR...................................................9
2.1. Provider of services..............................................................................................................9
2.2. The investor role................................................................................................................13
2.3. Channels of integration......................................................................................................15
2.4. Financial stability...............................................................................................................16
3. THE EU INVESTMENT FUND SECTOR..........................................................................17
3.1. The sector...........................................................................................................................17
3.2. Towards an integrated market............................................................................................21
3.3. Efficiency and competition................................................................................................22
EN 3 EN
Financial Integration Monitor 2006
The Financial Integration Monitor (FIM) seeks to document major trends in
the European financial system as an input for policy discussion. This is the
third annual report.
The report focuses on three areas of particular interest in the context of the
consolidation of the EU financial sector and its further development in a
global context, as set out in the Commission's White paper on Financial
Services Policy for the period 2005-20101, namely: the EU financial sector
and its external dimension, the EU insurance and pension fund sector and
the EU investment fund sector.
As the EU Internal Market for Financial Services takes shape, it is evident
that this is not a stand-alone project: intra-EU financial activity impacts
upon the world financial markets as it represents about one third of
worldwide financial activity. The first section of the report therefore
examines the global position of the EU financial sector and looks into the
channels of EU financial activity with third countries, with particular
emphasis on EU-US financial flows.
The second section of the report examines whether and how integration is
taking place in EU insurance and pension fund markets. With the ageing of
the Europeans, these markets are becoming increasingly important, both as
institutional investors on international capital markets and as providers of
private pension solutions to consumers.
The third section of the report shows how integration is taking place in the
EU investment fund industry. Investment funds play an important role in
households' savings and capital markets and have been developing quickly
in the past decade. This is also one of the areas of possible further
development, as outlined in the White paper on Financial Services Policy
A detailed presentation of these three topics and an updated statistical annex
on the state of integration of EU financial services and markets can be
found in the background document to the Financial Integration Monitor
2006, which is published as a DG Internal Market and Services Working
Document, available at:
COM(2005)629, Available at
EN 4 EN
1. THE EXTERNAL DIMENSION
This section considers the international importance of the EU financial
sector as well as the EU-US financial flows over the period 1999-2005.
During this period, the euro was introduced and the Financial Services
Action Plan2 was adopted and gradually implemented.
1.1. The global financial position of the EU
The EU is one of the main actors in international financial markets, together
with the US and Japan. Depending on the market segment, the EU holds
20% to 40 % of world markets. While its overall size is comparable to the
US, the prevalence of commercial banking in the EU financial sector is
reflected in its global position on world banking markets (45% of total
assets). The EU has also obtained an important market share in global
reinsurance business (35% of total non-life net written premiums).
Chart 1: EU-15 contribution to world financial activity2, (2004 data). The EU is the
the US clearly
leads in equity
Banking assets Debt securities Stock markets Investment funds Insurance Reinsurance
EU US Japan Emerg markets Others
Source: IMF, World Federation of Exchanges, BIS, SwissRe, EFAMA, annual company
reports for reinsurers.
Whereas the respective shares in debt securities and insurance markets are
of comparable sizes, the US clearly dominates in the area of investment
funds (50% against 34% in the EU-15) and stock markets (40% against
25% in the EU-15).
1.2. Channels of globalisation
In the context of EU-retail financial markets, local establishment has been
identified as the dominant channel for market entry and integration. This
also seems to be the case for the links the EU-financial sector establishes
with third countries. A first indication of this is that the average amount of
Global market shares in commercial bank assets, outstanding amount of debt securities, stock market
capitalisation, investment fund net assets, life and non-life premiums and non-life net written premiums
in reinsurance (among top 100 reinsurance companies) respectively.
EN 5 EN
EU15 foreign direct investment outward flows (FDI) in financial
intermediation over the period 1999-2003 was three times more important
than the financial services exported to those countries over the same period.
Chart 2: Comparison of EU-15 external trade and FDI in the financial
sector, average annual value for the period 1999-2003, bn euro
Exports Imports FDI outflow s FDI inflow s
Source: OECD (trade) and Eurostat (FDI)
The importance of "establishment" as a channel of integration in the global
financial sector is confirmed by the data on transatlantic shareholding (see
table 1) and M&A activity. In the period 1999-2004, the EU financial sector
acquired 126 bn euro worth of foreign companies of which 84 bn euro (67%
of total) in US financial companies. In the same period, the US financial
sector acquired 40 bn euro worth of foreign companies of which 31bn
(76.5%) in EU financial companies.
US shareholders tend to hold much higher stakes in major EU banks
(3-23%) than European shareholders in major US banks (1-7%). The same
is true for the insurance sector: US shareholding in European insurance
companies is well entrenched and by far more important than the
shareholding of EU investors in US insurance groups. In 2003, for instance,
US investors were holding between 9% and 40% of the capital of the top
European insurers while European investors held between 1% and 6% of
US insurers' capital.
Table 1: Top ten European and US banks – bilateral shareholding in 2003 – in % Establishment
European bank US American bank EU is the most
shareholding shareholding frequently
Credit Suisse Group 2,8 Citigroup Inc 4,2 used, but not
UBS AG 7,6 JP Morgan Chase & Co 4,4 the only, way
ABN Amro Holding NV 21,2 Bank of America Corp 7,4
ING Groep NV 23,0 Wells Fargo & Co 0,0 for providing
BBVA Bancomer S.A. n.a. Wachovia Corp 1,1 cross-border
Santander Central Hisp. Group n.a. American Express Co 1,3
BNP Paribas 12,5 Morgan Stanley 1,9
HBSC Holdings Plc n.a. US Bankcorp 1,1 services
Royal Bank of Scotland Group Plc 15,00 Goldman Sachs Group, Inc 1,3 worldwide.
Barclays Bank Plc n.a. Merrill Lynch & Co, Inc 1,2
Source: BIPE/PWC (January 2006)
EN 6 EN
The relatively high US stakes in EU financial companies can most likely be
ascribed to the generally higher level of market capitalisation in the US
compared to the EU and the ensuing widespread ownership of major US
financial institutions, which makes it more difficult for EU institutions to
acquire controlling stakes in major US banks and insurance companies.
1.2.2. Direct provision of cross-border financial services
Statistics of foreign trade in financial services provide information on the
structure and trends in direct cross-border provision of services (net flows).
It is clear from the charts below that the EU, the US and Japan are net
exporter of non-insurance financial services. In fact, the size of extra-EU 1
net exports in non-insurance financial services is comparable to the US.
Chart 3: Foreign trade in non-insurance financial services in the EU, the The EU is a net
US and Japan (2004 data, in bn euro). exporter of
0.0 5.0 10.0 15.0 20.0 25.0 30.0
Exports Imports Net exports
The situation is different for insurance services where the US is a major net
importer, mainly from the EU15.
Chart 4: Foreign trade in insurance financial services in the EU, the US …also of
and Japan (2004 data, in bn euro). reinsurance
US is the main
USA those services.
-30.0 -20.0 -10.0 0.0 10.0 20.0 30.0
Exports Imports Net exports
Extra-EU foreign trade includes the foreign trade of the Member States with third countries, thus
excluding intra-EU foreign trade.
EN 7 EN
This can mainly be related to reinsurance products: in the period
1999-2003, growth of US imports of EU reinsurance products has indeed
been impressive and reached 31% of total US imports of reinsurance
products by the end of the period.
1.2.3. The EU International Investment Position (IIP)
The International Investment Position (IIP) measures the value of an
economy's outstanding financial claims/liabilities to the rest of the world.
The sharp increase of the euro area IIP2 during the period 1999-2005, from
around 100 to 130-140 per cent of GDP, is one indicator of the area's rapid
financial integration with the rest of the world (see chart below).
Chart 5: Euro area IIP, as a percentage of GDP The EU's
euro area liabilities financial
90 90 period
US liabilities 1999-2005.
1999 2000 2001 2002 2003 2004 2005
Source: ECB, Monthly bulletin
1.3. Financial stability
The globalisation of the EU financial sector may entail both positive (e.g. While creating
by promoting a better risk distribution) and negative (e.g. by providing opportunities
potential channels for financial contagion) consequences for financial for better risk
stability. The outcome will depend on the vigilance of and cooperation diversification,
between regulators in setting up and enforcing proper prudential rules, thus globalisation
providing the right incentives for robust risk management. also provides
One example of potential risk transmission can be found in the reinsurance channels for
sector, where Europe is a net receiver of major and unusual US risks (e.g. potential risk
terrorism, natural disasters etc). However, whether there is any financial transmission.
stability risk ultimately depends on the quality of risk management in the
companies and on proper monitoring and supervision.
Another example is off-shore centres as counterparties or transfer points for
European portfolio investments. Together they are the second most
important counterparty for EU portfolio investments, after the United States
(see chart below). Effective global cooperation among regulators is needed
to ensure that Europe is not building up risk exposures towards less
Even though figures are only available for the euro area, they provide a good proxy for the whole EU.
EN 8 EN
Chart 6: Geography of euro area IIP portfolio assets (bn euro), 2005
Other EU Canada Japan Sw itzerland United OFCs Others
Source: ECB, monthly bulletin
The European Union is an important global financial player: its financial
sector represents 20 to 40% of worldwide financial activity, depending on
the market segment. In general, EU financial markets are expanding and
there is optimism that this can continue as integration intensifies in the EU.
In providing financial services to third countries, establishment is the most
widely used integration channel by EU companies. This is clear from data
on M&A and shareholding as well as from the fact that FDI flows are on
average much larger than trade flows.
Looking at financial services trade flows involving the European Union, it
can be concluded that the EU is not only a net exporter of non-insurance
financial services but also of insurance services, where it seems to hold a
significant share of the US reinsurance market.
2. THE EU INSURANCE AND PENSION FUND SECTOR
The importance of the EU insurance and pension fund sector as provider of
services as well as an institutional investor has grown strongly over the past
decade. To assess developments in this sector, this section examines the
areas of primary insurance, occupational pension funds and reinsurance.
2.1. Provider of services
2.1.1. Primary insurance
The size of the insurance sector has increased noticeably with EU25 gross As a provider
premiums growing from 362.5 bn euro in 1992 to 925 bn euro at the end of of services, the
2005. In the EU15, gross premiums nearly tripled while they grew six-fold insurance
in the new Member States (NMS) over the same period. sector has
EN 9 EN
The importance of the insurance sector to the domestic economy varies importance in
widely among EU Member States, from less than 2% of GDP in Lithuania the period
to well over 40% of GDP in Luxembourg. 1992-2005,
Chart 7:Gross premiums as a % of GDP, 2005 data but its size
LT LV EE gr HU PL SK CZ CY MT es SI at de se it dk ie eu25 eu15 pt fi nl fr be uk lu
Source: CEA and Eurostat
While this clearly demonstrates the role of Luxembourg as a financial
centre, it does not reflect the relative importance of the different national
insurance markets to the EU market. Chart 9 shows that Luxembourg
represents just over 1% of overall EU primary insurance activity while the
UK accounts for nearly a quarter of the market1.
Chart 8: Share of the domestic markets in the EU primary insurance market So does the
-2005 data share of the
markets in the
AT, 1.7% overall EU
BE, 3.7% market.
LU, 1.2% DE, 17.1%
The insurance sector is a sector in continuous development, evolving from a The sector is in
preponderance of non-life insurance in the earlier stages of market continuous
development towards a prevalence of life premiums as markets mature. development
When comparing the share of life and non-life in total insurance (see chart
10), the share of non-life insurance is more important in developing
Under the heading 'other Member States' are gathered those Member States with less than 1% of the EU
market. Percentages for all Member States are listed in the background document.
EN 10 EN
insurance markets, in some cases close to 100% of total. In the more mature
insurance markets or markets where pension provisioning is being supplied
by non-budgetised life insurance schemes, life markets tend to represent an
increasingly important share of the overall domestic insurance market (often
well over 50%).
Chart 9: Share of life and non-life in total insurance- 2005 data with increasing
shares of life
80% of the
lv lt ee si cz sk es hu de at cy pl gr nl mt EU eu15 dk it se pt uk fr ie be fi lu
The potential for further development of EU insurance markets is
significant but developments will depend a lot on economic growth
performance, changes in the legislative and fiscal environment as well as
reforms or arrangements regarding the national pension systems1. Examples
of the impact of legislation (and taxation) can be found in the Baltic States:
following pension reforms, life insurance grew strongly in Estonia and
Lithuania whereas life insurance markets dropped dramatically in Latvia in
2000, after a significant reduction of tax incentives.
2.1.2. Pension funds
In line with the enhanced importance of life insurance markets, pension Private
funds have gained in significance as providers of private pension solutions: pension funds
in 2004, the assets under management of private pension funds in the EU are becoming
amounted to 2,468 bn euro (compared to 1,600 bn in 2002) 2.The United increasingly
Kingdom has the largest private pension funds with 1.107 bn euro of assets important as
under management, or 45% of the EU market. The Dutch are also very an alternative
large in relative terms, representing 21% of the EU market.
FIM 2005, background document p10, http://ec.europa.eu/internal_market/finances/docs/cross-
ECB, Banking structures, October 2005. For GR and FR no data are included as all pension funds are
state owned, for SK no data are provided because of the current reform of the social security.
EN 11 EN
Chart 10: Share of EU private pension fund market (assets under to state-funded
management), (2004 data) pensions but,
to date, EU
in a few
LT the UK
PL close to half of
Source: ECB market.
The structure of the reinsurance markets is quite different from the markets EU reinsurers
for primary insurance. Reinsurance is very much an international activity hold a strong
and not directly linked to the development of the domestic insurance position
markets. Germany, for instance, is home to a number of large reinsurers worldwide
(see table 2) and the reported levels of reinsurance accepted are high for with over 40%
both non-life (34.1%) and life (15.0%). The UK, where Lloyds is of the top-10
domiciled, also has relatively high levels of accepted reinsurance for non- market.
life (15.0%). Other main reinsurers are registered in Switzerland, the US,
Bermuda and Japan. In 2003, EU-based companies represented over 40% of
the global top-10 reinsurers' net premium. This confirms the strong position
of EU reinsurers worldwide (see chapter on the EU external dimension).
Table 2: Top 10 reinsurers, according to net premiums earned- 2003 data
1 Munich Re DE 25,499
2 Swiss Re CH 22,779
3 GE insurance solutions US 10,001
4 Hannover Re DE 9,181
5 Gen Re US 8,245
6 Berkshire Hathaway Re US 4,430
7 Scor FR 4,162
8 Converium US 3,677
9 PartnerRe US 3,503
10 Transatlantic US 3,171
Given the basic concept of reinsurance to accept and spread the risks 80% of
underwritten by the primary insurer, reinsurance is naturally more about reinsurance
non-life insurance than life insurance. Life insurance products contain an business
important savings element, and carry a smaller insurance risk; they are worldwide is
therefore to a lesser extent reinsured: in 2004, ceded premiums in the life constituted by
segment worldwide amounted to 33.4 bn USD (20% of total) and 134.4 bn reinsuring
USD in the non-life segment (80% of total). The non-life reinsurance non-life
activity is also less concentrated than the life activity, with a CR101 of 52% insurance
EN 12 EN
in non-life and 87% in life. risks
2.2. The investor role
2.2.1. An increasingly important role 2.2.2.
As a financial intermediary, the sector plays a role in the pooling and
channelling of savings from the household sector towards investments. It
thus offers retail customers access to a diversified investment. As an
institutional investor, the sector provides funds to both borrowers and
issuers of securities, investing in equity and debt securities markets as well
as in non-listed securities.
The economic significance of the insurance sector and its presence on The
international capital markets increased strongly throughout the 80s and 90s1 increasingly
and is still on the rise: investments grew from 2,357 bn euro in 1995 to important
5,981 bn euro in 2005, representing over 50% of the EU's GDP. Given the investor role
different business lines, it comes as no surprise that the "investor role" of of insurance
the insurance sector chiefly concerns the life insurance sector: over the companies
period 1995-2005, the share of life-insurance in total investments and pension
represented close to 80% of the total (see chart below). funds
Chart 11: Investments of the EU insurance sector in terms of gross
premium (bn euro)
is linked to the
1995 1998 2001 2004 2005
TOTAL LIFE NON-LIFE
The investments of funded (private and public) pension fund schemes2 (see
table 3) have also known a robust growth over the 1994-2004 period. In the
more recent years (2001-2004), significant growth can be reported for
France, Spain, Hungary, Poland, the Czech Republic and Slovakia, most of
which are countries where pension funds started recently from a low base.
In the same period, countries with more mature pension systems, like the
Netherlands and the United Kingdom, have shown stability or even a
CR10 is the market share of the 10 biggest companies and provides an indication of the level of
concentration of activity in a particular market.
The IMF reported a stronger growth in insurance sector assets than in banking assets in the period
1990-1999. IMF, 2002
The OECD takes into account private and public pension funds that are privately funded. Data
availability is limited to the Member States listed in the table.
EN 13 EN
decline in the importance of pension fund investments expressed as a
percentage of GDP.
Table 3: Investment by pension funds2, expressed as a percentage of GDP3
2001 2002 2003 2004
at 3.9 3.9 4.2 4.5
be 5.6 5.0 4.0 4.1
cz 2.3 2.8 3.1 3.6
de 3.3 3.4 3.6 3.8
dk 27.2 25.6 27.6 30.0
es 5.8 5.7 6.2 9.0
fi 8.2 8.0 8.3 45.3
fr 3.9 6.6 7.0 7.0
uk 72.5 66.5 65.1 65.1
hu 4.0 4.6 5.4 6.8
ie 44.3 35.1 39.4 42.6
it 2.3 2.4 2.5 2.6
nl 107.0 89.4 106.2 106.2
pl 2.5 4.0 5.5 7.0
pt 12.1 12.1 12.5 11.2
se 8.3 7.7 7.8 12.7
sk 10.7 16.6 22.7 22.7
Source: OECD, Global Pension Statistics, 2005
The growth of assets managed by pension funds and life insurance
companies as well as by the fund industry in general can be expected to
accelerate in coming years as efforts to prepare for the impact of the ageing
population are being stepped up. The importance of the "investor role" of
these institutional investors on securities markets can thus be expected also
to gain in importance.
2.2.3. The allocation of assets
Insurance companies mainly invest in fixed income and equity: on average, Investments
66% of European (non unit-linked) insurance assets are allocated to fixed include bonds
income products, 24% to equities and participations. Practice, however, but also
diverges considerably between European countries, depending on equity,
investment practices and differing legal provisions regarding the investment
diversification of asset allocation. fund assets…
This is also the case for the allocation of pension fund4 assets: in the UK As far as
and the Netherlands, investments in shares represent approximately 50% of pension funds
total, in Poland, Germany and Finland about 30%. In the other countries, are concerned,
asset allocation seems to include a larger share of fixed income but the the share of
amounts involved are significantly less impressive. Taking into account the equity seems
importance of the Dutch and British, but also increasingly the German to be larger
pension funds in total EU pension fund business, the capital market impact the bigger the
of pension fund investment could be more significant for equity markets, in funds are.
particular for early-stage Venture Capital funds, than for fixed income
OECD definition, see footnote 12.
The OECD reports that this jump is due to the inclusion of the statutory pension funds, which had not
been the case previously.
OECD definition, see footnote 12.
EN 14 EN
2.3. Channels of integration
As an investor, insurance companies and pension funds are increasingly
operating on integrated EU capital markets. As a provider of services,
potential benefits of integration seem to remain largely unexploited as
insurance and pension fund products are primarily sold by domestic or
foreign providers (branches, subsidiaries) present in the national market.
From a services provision perspective, integration in the EU insurance Insurance is
sector has mostly, though not exclusively, taken place through still largely
For the EU as a whole, consolidation has mainly taken place within national on a local-
borders (85.5% of total activity), resulting in domestic concentration levels establishment-
(CR5) of well above 35% of the market in most Member States. basis
This being said, integration has not only taken place within national mainly, but
borders: the main exception is the consolidation of the insurance activity in not
the new Member States, which has largely taken place on a cross-border exclusively, by
basis and has resulted in high foreign market shares, for instance in domestic
Slovakia (97.45% in non-life and 99.25% in life insurance). Within the companies.
EU15, cross-border consolidation has taken place but levels are much
lower, reflected by considerably lower levels of foreign ownership (5-55%).
Integration has also taken place through cross-sector consolidation with
other financial sectors such as banks, investment and market activities. The
emergence of the bancassurance at the domestic level has been the
dominant combination in cross-sector consolidation in the EU insurance
EN 15 EN
Chart 12: Proportion of target types by type of acquirer in domestic
and cross-border deals (measured in value) in the period 1999-2004.
Domestic insurance Cross-border insurance
Dom. bank/cong. Dom. insurance Dom. inv. activities Dom. mkt activities Dom. Other
For. bank/cong. For. insurance For. inv. activities For. mkt activities For. other
Source: FIM 2005, data Bureau van Dijk, Zephyr database
2.3.2. Other channels of integration
Intra-EU cross-border provision of services is anecdotal but exists. The EU Direct cross-
life insurance market in cross-border provision of services is broadly border selling
organised around Luxembourg and Ireland, who hold 90 % of the market. remains
Cross-border selling of insurance could be further promoted by changes in could be
distribution channels, in particular by the development of electronic further
channels. At present, this distribution channel is only used in a few developed by
countries (NL, UK, PT) and mostly for non-life products. changes in the
present use of
Integrating links with other financial market segments (banking, stock electronic
markets) have been created through the development of products such as distribution
unit or index-linked. channels.
2.4. Financial stability
These "channels of integration" provide opportunities of market access, risk Changing
spreading and cost reduction but at the same time constitute "transmission structures and
channels". links involving
the sector may
The changing structure of the EU insurance sector also has impacts on raise new
financial stability questions, which are mainly linked to the increased financial
importance of the insurance sector as an institutional investor, to the stability
increased size of some pan-European insurance companies with a global issues.
reach and to the links with other market segments involving risk transfers.
The EU insurance and pension fund sectors have been and are still growing
in importance. The size of the sector varies substantially across member
states and its potential for further development very much depends on
economic growth, changes in legislation and demographics.
EN 16 EN
From a "consumer" point of view, insurance largely, remains a "domestic"
service. Retail insurance markets are mainly, although not exclusively,
accessed through establishment. Other "channels of integration" can
nevertheless be identified.
From an "investor" point of view, the sector is increasingly organised on a
cross-border as well as on a cross-sector basis, as evidenced by the high
levels of foreign market shares in some Member States and by cross-sector
consolidation activity, mainly with the banking sector.
3. THE EU INVESTMENT FUND SECTOR
Investment funds receive individual, corporate and public sector savings
and channel them into investments. Compared to the more traditional
financial intermediaries, investment funds may offer higher returns and
more possibilities of risk diversification.
3.1. The sector
3.1.1. The sector's importance in the economy
In recent years, investment funds have been expanding in most of the EU
countries. Total assets of investment funds more than quadrupled between
1995 and 2005 to come close to 6.4 trillion1 euro by the end of 2005.
Between 1995 and 2005, assets under management grew in each Member
State. The increases were highest in Ireland, the Nordic countries and
Central Europe. By the end of 2004, assets under management averaged
50% of EU GDP.
Chart 13: Assets of investment funds in the EU(1995-2005) Investment
EUR bn funds have
7,000 been growing
over the EU…
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
The countries with the biggest funds sectors2 by domiciliation in the
European Union are Luxembourg and France, each with total assets
Data refer to UCITS (see the Glossary) and non-UCITS, excluding hedge and private equity funds; for
Member States covered by EFAMA data (EU-15 plus Czech Republic, Hungary, Poland and Slovakia)
UCITS and non-UCITS, without hedge funds and private equity (EFAMA Quarterly Statistical Release
No 24, March 2006)
EN 17 EN
exceeding one trillion euro. They are followed by Germany (where non-
UCITS1 have a big share of the market), United Kingdom, Ireland, Italy and
Chart 14: Assets under Management (2005 data) …but specific
By domiciliation By management activities of
Ireland** the value
chain, such as
Others 13.73% Luxembourg 3.81% 20.93%
Spain 4.19% 23.23%
Italy 6.25% Spain
Ireland 8.88% Switzerland Germany
in a few
France 19.35% 6.32% 19.35%
United Kingdom US
Germany 14.70% Italy UK
Source: EFAMA, Association Française de Gestion Financière2
From a perspective of localisation of the managers (and after reallocating
the assets of funds domiciled in Luxembourg and Ireland) France, Germany
and the UK are the biggest European asset management centres. This can be
considered to be a better approximation of "real size" of national markets.
3.1.2. The structure of the market
UCITS (harmonized funds3) dominate the EU investment fund market: in UCITS
2005 their assets amounted to nearly 5,2 trillion euro, which corresponded dominate the
to a 79% market share. In 2005 UCITS grew by 23% (11% in 2004 and EU market…
13% in 2003).
… and equity
Equity funds had the biggest share of the UCITS4 market in 2005. funds have
Following the developments on the global stock markets, they were on rise gained the
again from 2003 to 2005. The overall share of equity funds in the UCITS biggest share
market increased from 26% in 1995 to 41% in 2005. Bond and money funds among UCITS.
experienced the reverse trend: the bond funds' share fell from 36% to 27%
and the money market funds' share from 30% to 19% in the same period. Hedge, private
Non-UCITS, including hedge, private equity and real estate funds, have also real estate
been growing fast in the recent years. They have traditionally been reserved funds have
for professional investors, but an increasing interest of retail investors also been
typifies the current trend. Non-UCITS are concentrated in a few Member developing
States, for example hedge funds in the UK and real estate funds in quickly.
In particular special funds for institutional investors and real-estate funds, offered also to retail clients.
For Luxembourg: AFG estimate based on CSSF data;**For Ireland: AFG estimate based on DIFA data
Note: EFAMA data includes data for non-EU countries: Lichtenstein, Norway, Switzerland and Turkey.
Collective investment schemes exclusively dedicated to the investment of assets raised from investors.
They benefit from a "passport" allowing them, subject to notification, to be offered to retail investors in
any EEA jurisdiction once registered in one Member State.
Data breakdown for the UCITS categories is not available for Ireland.
EN 18 EN
Germany. A certain
The evolution of assets under management suggests that there might be a specialisation
geographical concentration and specialisation trend in the EU investment trend could be
fund market. In 2004, assets of the five biggest national markets reached noticed in the
80% or more of the EU market across all UCITS segments. Between 1999 UCITS
and 2004, Luxembourg and France clearly strengthened their overall segments.
position as pan-European fund centres. In the equity segment, the combined Such trend is
share of three main players (Luxembourg, France and the United Kingdom) even more
has increased from 59% in 1999 to 66.6% in 2004. In the bond segment, visible for
Luxembourg clearly leads and has strengthened its position in the period non-UCITS
considered. France holds over 40% of both the balanced and money market funds.
fund segments, although its share in the money market has been reduced
somewhat.1 The share of the other big national markets decreased in almost
all cases (e.g. Germany, Italy).
3.1.3. Provider of services
Saving in investment funds is one of the options for households to allocate
their assets. Some funds are suitable vehicles for long-term investment. funds play an
They can therefore be potential saving instruments for retirement, increasingly
depending on the degree of portfolio diversification and the investor's important role
willingness to take risk. for consumers
A number of Member States have undergone a reform of pension schemes investors…
from pay-as-you-go to more investment-based systems, including a role for
specially regulated funds.
Although banking deposits (34.9%) and insurance reserves (29.3%) still
dominate household savings in most European countries, funds have
acquired an important position (12.8% of EU household assets) but vary
strongly among the Member States: between 4,4% in the UK and 23% in
3.1.4. Importance for the capital markets
By investing in various types of assets, funds have contributed to faster … and for
growth of the capital markets: over the period 1995-2004, savings placed in development
banks grew 1.5 times, in capital markets 2.3 times and in investment funds of the capital
2.7 times. markets.
Without taking account of Ireland, for which the data is not available.
EN 19 EN
Chart 15: Growth of EU investment funds versus capital market and
banking assets (1995=100)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
All non-interm ediated as s ets Mutual funds s hares Depos its and currency in banks
The role of EU funds in capital markets can be analysed by comparing the
development of equity funds with the growth of stock markets. Statistics
suggest a positive correlation between the volume of equity funds assets and
the stock market capitalisation (see the chart below).1 Overall, countries
with a high level of stock market development, such as the UK, France or
Sweden are also characterised by high equity funds assets/GDP ratio. The
opposite can be observed in countries with low stock market capitalisation,
such as Slovakia, Poland and Hungary.
Chart 16: Equity funds compared to stock market capitalisation in 2004
Equity funds assets / GDP
6% AT IT
SK HU CZ
0% 20% 40% 60% 80% 100% 120% 140%
Stock market capitalisation / GDP
Source: EFAMA, FESE, Eurostat
The role of investment funds in the European equity markets has been
steadily increasing in recent years. The proportion of aggregated equity
funds’ assets compared to aggregated stock market capitalisation in the
EU-15 grew from 12% in 1998 to 19% in 2004, i.e. an increase of more
The caveat to this comparison is that the data on stock market capitalisation reflect both domestic and
foreign capital (of domestic and foreign investors), while the data on assets of equity funds cover only
domestically domiciled funds. In a given country, domestically domiciled equity funds can invest on
stock exchanges home and abroad, just as the foreign domiciled equity funds can invest on the domestic
stock exchange. Luxembourg and Ireland have been excluded from the analysis due to a special role of
investment funds in these countries.
EN 20 EN
than 50% in only 6 years.
3.2. Towards an integrated market
Domestically domiciled funds seem to dominate the UCITS markets in Most EU funds
most of the Member States. It appears that the level of cross-border are registered
consolidation of funds in the EU is very low. But most of the new funds set in one
up between 2001 and 2004 are of a cross-border nature, i.e. distributed in at country. But
least three Member States. In 2004, the number of true cross-border funds many new
amounted to 4,875, or 17% of all UCITS in Europe (up from 12% in 2001). funds are set
up to operate
3.2.2. Cross-border sales cross-border.
Data on fund sales in the EU suggest a high level of cross-border Luxembourg
distribution. Sales of funds domiciled in Luxembourg (236 bn euro) and and Dublin
Dublin (45 bn euro) accounted for about two thirds of total sales in the EU are hubs for
in 2005 (see chart 17). Given the fact that almost all Luxembourg and cross-border
Dublin domiciled funds are sold abroad, the combined volume (281 bn fund
euro) can be considered as a good proxy for the volume of cross-border registration…
sales in the EU.
Chart 17: Net sales of investment funds in selected domiciliations1 … and about
€ bn 66% of total
sales in the
200 EU comes
2003 2004 2005
Source: EFAMA Quarterly Statistics
From the demand side, there seem to be significant differences in investors' Demand for
preference for foreign domiciled UCITS. To estimate the market share of foreign funds
foreign funds, assets of funds domiciled and sold in a given country are varies
compared with assets of funds sold in the same country, but domiciled significantly
abroad. This comparison shows that in some markets clients tend to hold by Member
their assets only in nationally domiciled funds, while elsewhere they are State.
more willing to choose foreign based funds. For example, in 2004 only 3%
of assets belonging to French investors were placed in funds domiciled
abroad, whereas this share was reaching in 41% Germany and 36% in
The negative values for Italy (2003-2005) and for Germany (2004) can be explained by investors
redeeming funds domiciled in those countries.
EN 21 EN
3.3. Efficiency and competition
Due to complexity of the value chain and scarcity of the data, it is difficult An average
to draw conclusions on EU asset management sector's efficiency or on the EU fund is
level of competition in the market. The operational costs of EU asset many times
managers are lower than the costs of their US counterparts (see chart smaller than
below), which might testify of higher efficiency. But an average EU fund is an US fund…
five times smaller than an US fund. Therefore, the EU asset managers might
still forego a part of the latent economies of scale.
Chart 18: Profitability of the EU and US fund industries …which
there might be
Basis points in % of AuM
35 10 11
13 14 economies of
20 40 41 scale.
15 30 30 30
10 20 20 19
2002 2003 2004 2002 2003 2004
Operating costs Profit margins Net revenues
Source: Mc Kinsey
The higher operational profits of EU asset managers compared to US asset Level of
managers could be related to a lower level of competition in some EU competition is
markets another issue.
The area of fund distribution is where the lack of competition is most Competition
keenly felt. This is reflected in relatively high charges imposed by the seems to be
distributors. According to available sources, charges for distribution missing above
account for two thirds of total expenses incurred by investors 1 in the EU, as all in the area
opposed to only one third in the US. This would mean that the total costs of of fund
the EU fund industry (both production and distribution costs) are higher distribution.
than those of the American industry. New trends in distribution in the EU
markets, such as the open architecture or sales via the internet, might
contribute to introducing more competition into the distribution segment.
Investment funds play an important role in EU savings and capital markets.
For the last ten years they have on average been growing by 15% per year,
developing faster than the banking sector and the capital markets.
There is a clear geographical split in the value chain: France, Germany and
the UK have developed as centres for asset management, whereas
Luxembourg and Ireland are centres for middle and back office activities
Equivalent to asset managers total gross revenues.
EN 22 EN
EU harmonised funds (UCITS) dominate the EU fund market2 with a share
of about 80%. Non-UCITS, including hedge, private equity and real estate
funds, have been also growing fast in the recent years.
The level of cross-border distribution of funds is high in spite of the lack of
competition in local fund distribution, reflected in high charges imposed by
distributors. New trends in distribution may contribute to introducing more
competition into the distribution segment.
Excluding the hedge funds and private equity funds.
EN 23 EN