More banks in Asia-Pacific are expected to shed their capital-heavy insurance businesses to focus on their core as the global economy faces uncertainties.

Lenders in the region have been selling their insurance businesses at a faster rate than acquiring them, S&P Global Market Intelligence data shows. In 2021, the region saw 10 such transactions, from the likes of Australian lenders Westpac Banking Corp. and Commonwealth Bank of Australia, up from seven in the prior year. Buyers have largely been insurance-focused firms such as AIA Group Ltd.

"We expect this trend of vertical disintegration to continue into 2022 and beyond as insurance portfolios face rising claims frequencies and inflation, supply chain issues posing customer satisfaction challenges as well as customer affordability," said Ashish Sharma, partner, financial services and the lead on insurance and wealth management in Australia at consulting firm Oliver Wyman.

Recently, banks have focused on simplifying their core businesses, Sharma said. Insurance businesses have become more costly to banks as regulations around such products become tighter and banks have yielded lower-than-expected benefits from the cross-selling of banking and insurance products. Sharma said the acquirers of these portfolios are often established insurance players looking to grow their scale or penetrate new market segments.

Core business

All 20 of Asia-Pacific's largest banks recorded declines in market capitalization in the second quarter as investors fear a looming recession. Shedding capital-heavy businesses could help lenders stay resilient in the current market.

Typically, banks will maintain long-term distribution agreements with the buyers of their insurance units, allowing them to continue offering insurance services to their customers without having to take on the cost of such products.

Banks that double down on core businesses or are specialist lenders accounted for more than half of market capital gains between February 2020 and October 2021, according to a report by consulting firm McKinsey & Co.

"What capital markets are rewarding is much more specialist niche players," Sumit Popli, a partner at McKinsey, said in a phone interview with Market Intelligence. "That's the trend we have seen, from being a universal bank, the trajectory is much more towards big winners in specific areas."

Guillaume de Gantes, a senior partner with McKinsey, said the way that banks and full insurance companies generally work together now is via collaboration, a move away from the joint-venture model between banks and insurance companies. The collaboration model brings more flexibility for banks in providing the products that fit their customer needs without being as tied to an insurance company, de Gantes said.

"There is a trend for banks to want to work with a full insurance company as opposed to a smaller one," de Gantes said.