Integration of Financial Services
AIDA XI World Congress
October 20-24, 2002
Dr. Tobias Entzian
1. What is the current level of integration among commercial banking, investment banking
and insurance in your country?
Contrary to the situation in the US, the German regulatory system does not differentiate
between commercial banks and investment banks. With a few exceptions (e.g. mortgage
banks, building societies etc.) all German banks are “Universalbanken“ (universal banks) and
as such authorised to carry out both commercial and investment banking. Germany has never
known an equivalent to the “Glass-Steagall Act“ and hence commercial banking and
investment banking in Germany has never been completely separated into two lines of
business. Even though there are several banks that exclusively concentrate on investment
activities and others that concentrate on commercial banking there are many banks that have
an investment as well as a commercial and retail division.
Banking and insurance industry are partially integrated in Germany. There is no clear
tendency to combine banking and insurance activities in larger groups. In summer 2001 on the
one hand Allianz and Dresdner Bank merged in a move, that was seen as the beginning of a
wave of further mergers in the financial services sector. However, only in autumn 2001
Deutsche Bank and Zurich Financial Services Group agreed to swap some of their holdings
not belonging to their respective core businesses. Thus, Zurich sold its asset manager Zurich
Scudder Investments (excluding Threadneedle) and in return received Deutsche Bank’s
insurance group Deutscher Herold. At the same time Deutsche Bank and Zurich agreed on
close co-operation in the distribution of insurance, asset management and bank products and
services. Even though in the case the of Allianz/Dresdner the investment division of Dresdner
Bank will for the time being remain part of the Allianz group the tendency in other insurance
groups is clearly to avoid the risks associated with investment banking and not to take on or
start such activities. On the other hand commercial banking subsidiaries can still be found in
large insurance groups and insurance subsidiaries can be found in groups dominated by
Integration does not necessarily mean the establishment of financial conglomerates but also
can take lesser forms e.g. cross-holdings (e.g. AXA/PNB Paribas), specialised co-operations
for the development of a certain range of products or for their distribution or establishment of a
jointly operated data centre. All these kinds of integration also exist in Germany.
The majority of the market (small and medium players) can be considered to be in a state of
Potential synergies between banks and insurers will become more important after the State
Pension Scheme which currently accounts for 81% of the entire pension volume in Germany
will significantly decrease its payments in the next eight years. The gap resulting from this
reduction is to be filled by private and corporate pension provision schemes that are supported
by the state but will be administered by insurance companies and/or banks. According to
press announcements by Allianz and Dresdner Bank their merger was driven to a large extent
by the need to meet the requirements of the new market for private old-age provision. Some
experts estimate that the current German life insurance market (Euro 60 billion) will grow by
up to 50% as a result of the reduction of state pension. The new private pension products that
qualify for state benefits require both actuarial as well as asset management know how which
makes further mergers or co-operation agreements between German banks and insurers
more likely in the future.
2. Compare the level of integration in the insurance industry in your country with the level
of integration in developed countries generally. Explain, which aspects of the
insurance industry are more or less well-integrated than others.
The level of integration in Germany is similar to the level seen in other G7 nations. Especially
life insurance and retail banking are deemed to be a good fit with a view to distribution of life
insurance policies over the bank counter. Often such policies are used as tax efficient
collateral for bank loans.
Other classes such as motor vehicle, property casualty or the corporate clients division of
insurers do not necessarily benefit from integration of banking and insurance.
3. What are the principal similarities between investment banking, commercial banking,
From a regulatory point of view there is no difference between investment banking and
commercial banking as both activities are often carried out by the same corporate entity. If a
bank concentrates on investment business or if a commercial bank has set up its separate
investment entity, such entities basically have to comply with the same set of regulatory
provisions as any commercial bank.
From a principal and/or commercial point of view, the situation in Germany does not differ from
other countries. In basic terms insurers as well as banks offer an “invisible product” consisting
in the transfer, investment and re-transfer of money under specific terms and conditions.
Banks, as well as insurers, have to build reserves for future liabilities. However, whilst such
reserves reflect the main activity (coverage of risks) of insurers and are, therefore, subject to
detailed insurance supervisory rules, banks with a view to their reserves basically have to
comply with general accounting principles and banking supervision rather concentrates on the
asset side of the balance sheet. As opposed to banks insurers do not need to refinance their
Both, banks and insurers, carry out substantial investment and asset management activity
which in both sectors requires the same know-how and sophistication. However, whilst as a
rule the customer of the bank decides where the money is to be invested and bears the risks
related to such investment, a policyholder generally cannot influence the investment decision
of the insurance company.
Both, banks and insurers, must meet minimum capital requirements. However, the manner in
which such capital requirements are computed differs between insurance and banking
regulation. Typical banking risks (default risk, currency risk, liquidity etc.) can be attributed to
the asset side of the balance sheet, hence, the capital adequacy of a bank is assessed by
weighting the assets and applying the “Cooke Ratio” which requires that 8% of the weighted
assets plus certain balance sheet items have to be covered by the banks own funds. It is
likely that the capital rules for banks throughout Europe will more and more implement
elements of the Risk Based Capital approach similar to the rules common in the US.
As opposed to the balance sheet of a bank, the insurer’s main risk is reflected in the technical
provisions (“coverage reserve”) on the liabilities side. A way to compute the solvency
requirement of insurers differs between different classes of business. A life insurer, for
example, has to cover roughly 4% of the coverage reserve with its own funds.
Not only is the calculation of capital requirements different for insurance companies and banks
but also the way in which capital is and may be invested differs. Whilst German banks are
more or less free to determine their investment policy (provided they have sufficient own funds
to cover the Cooke ratio), German insurers are subject to a tight investment régime which
allows them, for example, to invest only up to 35% in the stocks.
4. To what extent do you agree or disagree with the following statement: investment
banking, commercial banking and insurance are similar because they each involve (a)
risk-management; (b) evaluating investments and managing financial assets on a large-
scale basis; (c) large-scale investing on behalf of small clients (depositors, investors,
and insured individuals)?
(a) Until 1994 the German insurance market was regulated in a way which allowed
insurance companies to concentrate any risk management efforts to the traditional
aspects of insurance business, it’s managing underwriting risks, reinsurance structure,
portfolio policies etc., products and premiums had been prescribed by the regulator in
a way to a great extent protected insurers from entrepreneurial risks. After liberation
of the European insurance market took place in 1994 and the deregulation of products
and premiums, risk management in insurance companies increasingly comprises
investment activities as well as non-insurance activities which are part of the service
portfolio of larger insurance groups. Therefore, one can say that risk management
increasingly becomes a common aspect of insurance and banking business. This
development is also forced by the “Act on Control and Transparency in Commercial
Businesses” (KonTraG) which came into force on May 1, 1998. This Act imposes on
the Board the duty to implement a control system which enables the Board to
recognise developments which may endanger the company early enough to take
counter measures. Even though this Act requires all listed corporations to implement
risk-management systems, it will enhance similarities in the way banks and insurers
conduct their respective business. Asset-liability management has been
acknowledged and has been implemented as important risk management tool has
risen during the last decades in both sectors.
Also, to some extent, insurers and banks offer risk management to their respective
clients, either included in their genuine products or as additional service.
(b) See answer to Q. 3. There are certain similarities between the investment activities of
banks and insurers and thus, similar issues and questions arise when evaluating
investments and managing financial assets.
(c) Insurers, commercial banks as well as “Kapitalanlagegesellschaften” (investment fund
management companies) act as financial intermediaries. However, as pointed out
above (see answer to Q. 3) holders of traditional insurance policies cannot influence
the investment decision of the insurer whilst the clients of commercial banks or
investment companies in general specifically instruct where and how the money is to
The new “Personal Pension Plan Act” (“Altersvermögensgesetz-AvmG”) which will
come into force in January 2002 allows individuals to build up individual asset-backed
pensions plans with the help of state benefits. Such personal pension plans can be
offered by insurers as well as by banks and investment companies. The new Act is
designed to fill up the gap created by the recent reduction of state pension and to
some extent will result in “privatisation” of the German pension system. Insurers as
well as commercial banks and Kapitalanlagegesellschaften have developed pension
products which are bound to be similar as they have to meet the requirements of the
new Act in order to entitle the clients to collect the state benefits.
Thus, one can say that the new Personal Pension Plan Act will increase competition
between banks and insurers in the pension sector. As a consequence “large-scale
investing on behalf of small clients” will become a more common feature of insurers
5. What are the principal reasons for integration amongst commercial banking,
investment banking and insurance in your country (circle all that apply)?
Since commercial banking and investment banking are already thoroughly integrated in
Germany the following answers only refer to the integration of banking and insurance: one of
the most important reasons for integration in the past have been cross-marketing opportunities
(e). Many insurers tried and some were successful in marketing insurance policies over the
bank counter. Life insurance policies are often used as tax efficient instrument to secure and
repay mortgages. Currently less than 10% of the life business are sold via the bank counter
but some experts believe that this figure will approximately double within the next five years.
Further, integration of banking and insurance is meant to achieve economies of scale (a) for
example by combining investment and asset management activities. Furthermore, the
economies of scope in operations (b) have played a role in recent mergers as well as the need
to meet international competition (h) and to increase the overall market share (c) in the
financial services sector. The reduction of risks associated with the insurance business (g) is
not likely to have played a role in the integration of banking and insurance in Germany since
insurance business is generally considered to be less risky than banking.
6. Are there significant regulatory obstacles to integration among investment banking,
commercial banking and insurance businesses in your jurisdiction?
Whilst investment banking and commercial banking can be combined in one legal entity,
insurance business can only be carried out by specialised entities which are not allowed to
diversify into other lines of business. Hence the need to establish financial conglomerates
with separate entities that specialise into separate lines of business (e.g. insurance,
commercial banking, leasing, factoring, securities, management of investment funds, venture
capital etc.). There are no significant regulatory obstacles to establish such a financial
conglomerate with a non-regulated holding entity as ultimate parent company. If either a bank
or an insurer serves as holding entity such entity has to meet the general regulatory
requirements with a view to minimum capital, investment limits, reliability of shareholders and/
or other regulatory restrictions. Another regulatory obstacle is e.g. the German Data Protection
Act that restricts a free data flow between different legal entities even if they belong to the
same group of companies. However, all in all the regulatory obstacles to integration of the two
sectors in Germany can not be regarded as “significant”.
7. Are there significant cultural, economic or other non-regulatory obstacles to
integration among commercial banking and insurance businesses in your jurisdiction?
There are no cultural, economic or other non-regulatory obstacles specific to Germany that
hinder integration amongst commercial banking and insurance businesses. As a result of their
century long separation banks and insurers have developed and still have different corporate
cultures that make integration difficult. However, the cultural gap e.g. between a large
insurance corporation and small mutual insurer can well be more significant than the cultural
gap between a large insurer and a large bank. The recent integration of the investment bank
Dresdner Kleinwort Wasserstein in the Allianz group as a consequence of the merger between
Alliance and Dresdner Bank will probably show that even though investment banking is
considered to be more risky than insurance business, there are no insurmountable obstacles
8. In your view, what are the principal obstacles to integration, amongst investment
banking, commercial banking and insurance businesses? Please rank the following in
order of importance with the number 1 one indicating the most significant obstacle to
integration and higher numbers indicating less significant obstacles to integration:
1. Lack of compelling business justification (however this may change as a result of the
new business opportunities opened by reduction of state pensions);
3. Business risks associated with taking on of new lines of business (especially from the
point of view of an insurer);
4. Local cultural norms;
5. Regulatory obstacles unrelated to anti-trust concerns (prohibition for insurers to
conduct non-insurance activities);
6. Anti-trust concerns (these are likely to emanate from EU law rather than from German
9. As a general matter, which industry is more heavily regulated in your country at the
present time, investment banking, commercial banking or insurance?
Insurance regulation has been tighter in the past than the regulation of banks. Even though
one of the former main features of insurance supervision in Germany, the mandatory
authorisation of all insurance products and premiums, has been abolished in 1994, still various
restrictive provisions apply to the insurance industry that have no parallel in the banking
sector. Examples are the tight regulations which govern the investment and asset
management of insurance companies, the obligation of insurers to submit certain products
(e.g. life and health) for authorisation, the blanket clause that allows the German Insurance
Regulator to take any adequate measures to safeguard the interests of policyholders. These
examples show that elements of the “Material Supervision” (Materielle Staatsaufsicht) are still
playing an important role whilst there is a tendency to reduce the regulatory regime for
insurers towards a mere “Financial Supervision” (Finanzaufsicht) mainly focussing on solvency
and capital requirements, similar to the current level of regulation in the banking sector.
10. In your country what are the specific regulations which impose the highest costs on:
(a) the commercial banking industry; (b) the investment banking industry and (c) the
The highest costs are probably caused by the capital requirements in all three industries.
11. Describe the general nature of the regulations that govern the insurance industry in
Any insurance company that has its general place of business in Germany has to be
authorised by the German Insurance Regulator (Bundesaufsichtsamt für das
Versicherugnswesen - BAV). Insurers from other EU member states do have to apply for
authorisation to conduct business in Germany with the regulator in their respective home
country. They can carry out business either directly or via a branch. The German regulator as
well as the regulators in other European Member States only grant approval if (i) the company
has sufficient own funds to meet the capital requirements, (ii) the managers and owners of the
company are “fit and proper” to conduct insurance business, (iii) a business plan shows that
current and future obligations, under the policies and otherwise, can be met and (iv) certain
other preconditions are fulfilled and notifications made.
The scope of supervision exercised by the BAV after insurers have been licensed has
decreased as a result of various European directives. Before deregulation took place in 1994
the terms and conditions of all insurance products marketed and sold in Germany had to be
approved by the BAV that also exercised control on the premiums. As of 1994 the BAV is not
allowed any more to control products or premiums except for certain classes of business (e.g.
mandatory insurance and to a some extent life and health insurance). A principal task of the
German regulator nowadays is the “financial supervision” which involves controlling the
solvency margin, the investment activities, the building of sufficient reserves as well as the
management and the owners of insurance companies. Further, a blanket clause in the
Insurance Supervisory Act allows the BAV to intervene in case of irregularities that could be
detrimental to the policy holders’ interests.
12. Is the insurance industry in your country regulated by the same regulatory agency that
regulates commercial banking and/or investment banking?
Not yet. Commercial banks and investment banks are supervised by the same regulator
(Bundesaufsichtsamt für das Kreditwesen - BAKred) but insurance companies are currently
still regulated by a separate authority (BAV). Plans to merge both regulatory agencies as of
January 1, 2002 have been put on hold due to political reasons. In any case a future merged
authority would continue to apply the two different sets of regulatory rules that currently govern
the different industries.
13. If the insurance industry in your country is not regulated by the same regulatory
agency that regulates commercial banking and/or investment banking, which
regulatory agency is
a) more efficient
b) more technically competent
c) more sophisticated
d) more transparent
e) more free of corruption, special interest groups pressures and/or political
BAKred and BAV both are federal authorities. There are no differences to be observed with a
view to the aspects raised by the question.
14. Which industry do you believe has been more profitable globally during the last
decade, investment banking, commercial banking or insurance?
Most likely investment banking has generated a better Return on Investment than insurance
and commercial banking in the decade between 1990 and 2000.
15. Which industry do you believe has been more profitable in your jurisdiction during the
last decade, investment banking, commercial banking or insurance?
See answer to Question 14 above.
16. Which industry is likely to be more profitable over the coming decade, investment
banking, commercial banking or insurance?
Profitability in all three lines of business is subject to a variety of factors, such as development
of the national and world economies as a whole (affecting all three businesses including
insurance sector through capital income), politics (e.g. war, terrorism), development of the
climate (e.g. natural disasters in relation to property insurance).
17. Which industry has been more risky during the last decade, investment banking,
commercial banking or insurance?
As the different businesses are subject to different risks, no general answer can be given. In
Germany neither a commercial bank, nor an investment bank or an insurance company has
filed for bankruptcy.
18. Which industry is likely to be more risky over the coming decade (2002 to 2010),
investment banking, commercial banking or insurance?
Miscellaneous risks may affect the various businesses.
19. What sort of firm would be riskier: An integrated financial services firm that offers
investment banking, commercial banking and insurance services or an insurance
An integrated financial services firm which includes investment and commercial banking is
more likely to be affected by a possible decline of the overall economic situation than a mere
insurance company (probably with the exception of insurance companies specialising in the
classes credit and surety).
This applies to Germany as well as globally.
20. What sort of firm would be riskier: An integrated financial services firm that offers
investment banking, commercial banking and insurance services or a commercial
The question can not be answered in a general way. The risks related to investment banking
may possibly be mitigated by the less risky insurance business. Thus, an integrated financial
services firm will probably be as risky as a commercial bank.
21. What sort of firm would be riskier: An integrated financial services firm that offers
investment banking, commercial banking and insurance services or an investment
Pursuant to the logic set forth in the answers to questions 19 and 20 (investment banking
involving a higher risk, commercial banking a medium risk and insurance services a relatively
low risk) an investment bank would be riskier than an integrated financial services firm that
offers the complete range of financial services. However, modern economy is obviously too
complex to allow such statements. Whether diversification helps to mitigate risks or rather
leads to large corporate structures that make risk management increasingly difficult can not be
answered ex ante, but has to be proven by future developments. It will always depend on the
specific circumstances, the product portfolio of the integrated firm, the areas in which the
investment bank is active, the overall economic situation, the legal framework etc.
22. Please respond to the following questions, which are related to the base in which
issues of national identity are intertwined with the issues of financial integration:
a) As a general matter, do you agree or disagree with the assertion that countries’
national identities are closely intertwined with certain industries?
It can be observed that in some cases foreign observers or the national population do
identify a nation with a “flagship industry”, with single corporations or with brands.
b) If your answer to the above question is “yes”, please list the industries that you
think are closely associated with national identity.
Automotive, banking, chemical, media and insurance industry can be or become
associated with national identity.
c) Do you think that national identities are closely intertwined with certain industries
in your country?
See answer to question 22 a) above. In this respect, Germany is not different from other
d) If you think that national identities are closely intertwined with certain industries in
your country, which particular industries are closely associated with national
See answer to question 22 c) above. In addition, there may be “latent flagship industries”,
i.e. industries that become an issue of national identity once they are at risk to be taken
over by foreign investors. In any case, the importance of a certain industry for national
identity should not be overrated. The identification of the German population e.g. with a
German national formula one pilot will be stronger than the identification with the make of
e) If you think that national identities are closely intertwined with certain industries in
your country, do you think that regulators should have the power to block a cross-
border merger on the grounds that such a merger would result in the elimination of
a major firm in a “flagship industry”?
Cross-border mergers should not depend on questions of national identity, but rather be
assessed in commercial and economic terms as well as under anti trust aspects.
f) Do you think that the insurance industry is a “flagship industry” in any country?
It is very likely that the insurance industry in some countries is at least a “latent flagship
industry” (see answer to Question 22 d) above).
g) Do you think that the insurance industry is a “flagship industry” in your country?
Recent mergers of German insurance companies with dominant foreign insurers (e.g.
AMB Generali, Axa Colonia) have not raised significant concerns in the market place but
have been well accepted. Thus, if one chooses the reaction of the German population to
cross-border mergers one would rather not categorise the insurance industry as a
German “flagship industry”, even though this obviously might not reflect the actual
economic importance of the insurance industry in Germany.
23. The following questions relate to the integration of insolvency regulation by banks:
a) Describe the way that insurance company insolvency is regulated in your country.
An insurance company that becomes either insolvent or over-indebted has to notify the
regulator of this fact. The regulator alone then has the right to initiate insolvency
proceedings. Neither the board of the company nor its creditors have the right to file a
notification with the insolvency court. The regulator decides which measures best
safeguard the interests of the policy holders. All kinds of payments, especially insurance
payments, distributions of profits and, in life insurance, surrender values or policy loans
can be temporarily prohibited. The regulator can also reduce the obligations of a life
insurance company, so that the remaining obligations correspond to the actual assets of
As a general rule German insurers do not contribute to a common guarantee fund. An
exception applies for motor vehicle insurers that have to contribute in a national
guarantee fund that covers claims of victims that, for certain reasons, can not take
b) To the extent that you are familiar with insolvency regulation for commercial banks
and investment banks, describe those regulations.
Similar to the situation with insurance companies, only the banking supervisory agency
(BAKred) and not the bank or its creditors can initiate insolvency proceedings, if the
fulfilment of the obligations of the bank vis-à-vis its creditors is at risk. The banking
authority can take any measures, e.g. prohibit the acceptance of moneys and the granting
of loans, instruct the management of the bank or prohibit or restrict the activities of the
management or the owners of the bank, if such measures are likely to remedy the
All private commercial and investment banks contribute to a guarantee scheme
(Entschädigungseinrichtung Deutscher Banken GmbH) which has been established in
1998 as a response to a European directive which requires that in all Member States
such scheme is set up in order to safeguard the claims of smaller depositors and
investors. Compensation of bank clients under this scheme is limited to EUR 20,000. This
minimum protection under the recently established guarantee scheme is topped up by
three more guarantee funds operated by different groups of banks. Almost all banks
contribute to one of these funds. Even though the funds do not grant direct claims to the
banks or the creditors, it is commonly held that these funds are sufficient to protect the
vast majority of the so called “small savers”.
c) Regulators in general, and guarantee fund administrators in particular, have an
interest in the solvency and stability of out-of-state (foreign) insurance companies
operating within the jurisdiction, because they have a responsibility to the policy
holders within their jurisdiction. Describe the extent to which regulators at the
state level are able to enforce safety-and-soundness regulations, capital
requirements and related insolvency regulations on foreign, e.g. out-of-state
One has to distinguish between foreign insurance companies from other EU member
states and foreign insurance companies from non EU member states.
Insurers from EU member states are controlled by their respective home state authority
regarding their financial soundness (so called “financial supervision”, see answer to
Question 11 above). The powers of the BAV are restricted to supervise the way in which
insurers from other EU member states conduct business in Germany (so called “legal
supervision”). However, once such foreign insurer establishes an insurance subsidiary in
Germany in order to conduct business, such subsidiary would be subject to the regular
financial and legal supervision in the same way as all other German insurers.
Foreign insurers that are not based in other EU member states have to apply with the
BAV, if they intend to actively conduct business in Germany. Such insurers have to
establish a branch in Germany, i.e. they must not sell policies by using independent
brokers or agents without having a local organisation that allows them to collect
premiums, administer the portfolio, do the claims handling and represent the company
vis-a-vis the BAV. The foreign insurer must also provide evidence that it has accumulated
uncommitted assets sufficient to cover the solvency margin that applies to German
insurance companies. The calculation of the required solvency margin is based on the
volume of business of the branch. At least a third of assets that cover the risks written in
Germany must be located in Germany, whilst the other two thirds can be located in other
EU member states. Foreign non EU insurers also have to make a deposit amounting to at
least 25% of the required guarantee fund. Such deposit is counted towards the
uncommitted assets. The branch of the insurer has to be organised in a way that allows
the BAV to monitor that the capital requirements and investment regulations are
continuously met also after the initial authorisation has been granted.
d) To what extent does solvency regulation or concern over issues related to
solvency affect cross-border-mergers of firms in the insurance industry?
See answer to question 23 c) above. Within the European Internal Market solvency
regulations have been adjusted to a similar level. Thus, cross-border M&A transactions
are not significantly affected by solvency concerns, also because solvency regulations in
the past applied mainly to the operative unit itself whilst solvency of the parent company
and/or the whole group was only of limited importance. However, this will change when
the proposed European Directive regarding the group solvency within financial
conglomerates will become effective. Cross-border transactions involving EU and Non-
EU companies can be more problematic since different solvency regulation, different
accounting standards, different investment restrictions etc apply. Actual cross-border
“mergers”, i.e. the merging of two legal entities with their respective corporate seat in
different countries into one single unit are not practicable because of legal constraints
under German corporate law (not related to solvency concerns). Similar effects, however,
can be obtained by portfolio transfers from a German company (or the German branch of
a foreign company) to the German branch of a foreign insurance company. As
precondition for such transfer the BAV requests evidence that the foreign insurer and its
German branch comply with German solvency and other regulatory requirements.
e) To what extent does solvency regulation, or related concerns about solvency
issues, affect mergers between firms in the insurance industry and firms in other
industries, such as manufacturing, investment banking, and commercial banking?
Insurance companies as a rule are not allowed to carry out non-insurance business and,
therefore, can not “merge” with firms in other industries but can only establish or become
part of a group of companies. As the solvency requirements apply to the insurance
company itself (“solo supervision”), the solvency situation of the group as a whole only
plays a minor role under the present regulatory régime and thus the establishment of a
group with an insurance company as a member is not significantly affected by regulation
specifically relating to solvency issues.