Banks Eye Options On Insurance Sales

When banks look to enter the insurancedistribution business or expand existing programs, the mostfrequently discussed strategic options are building, buying oroutsourcing. However, one of the few considerations they have incommon is they all require the talents of experienced insuranceagents.

Within the three broad options are hybrid alternatives. Forinstance, a bank might arrange a strategic alliance with aninsurer, develop a referral relationship with a local agency, orbuy an insurer.

The integration of multi-product lines with different sales, backroom and administrative functions is a challenge facing a number ofbanks that have been in the insurance distribution business formany years. The most successful programs are based on knowing howand what the banks customers buy.

No distribution decision should be made without first analyzing thecustomer database thoroughly. Banks should expect to sell insurancefirst to existing clients, then via referrals from existingclients, and thereafter to people who are not current clients--justas any agency does. The major advantage the bank has overtraditional insurance agencies is the ability to cross-sell moreeasily.

An "expectation of revenue" or "opportunity" model has the specificpurpose, as the name suggests, of determining potential bygarnering the right information. In my experience, this is bestbuilt on a series of penetration models of the bank's customerdatabase.

The types of information to review include a methodical assessmentof the business lines the bank is writing today. Does the bankspecialize in the small-business customer, residential mortgages,or consumer or commercial loans? How many branches exist, howstrong is its Internet or PC banking presence, and how active isthe bank call center?

A customer profile, at a minimum, should divide retail customers byage and level of affluence. For the commercial side, customersshould be profiled by annual sales volume and size, in terms ofnumber of employees and geographic distribution.

The bank's technological capability is another key consideration indeciding whether to build, buy or rent.

Once banks have this data, they must determine which insuranceproducts could most easily be sold to bank customers as a companionto existing products or services, either at the time of sale or asa subsequent purchase.

Another question to answer: What are the expected gross revenuesfrom insurance, and what amount of commission is built into thedesired insurance product?

After an expectation-of-revenue model is built covering a five-yearperiod, banks must evaluate their internal resources to determineif they have the talent and appetite to build the insuranceoperation entirely or partially in-house, which product lines tooutsource, or whether it is necessary to import the neededexpertise by buying an agency.

Senior bank management must also assess its reasons for entering orexpanding its insurance business, as it will influence the strategychosen. Other than adding non-interest fee income, the reasons canrange from leveraging the existing client base, to positioning thebank as a full-service financial institution, to adding the clientsof an insurance agency to the banks client base.

The route taken will affect the percentage of commission received,the net revenue, the risk-adjusted return on capital and theeconomic value analysis.

There are five key drivers that lead to a bank's decision topurchase an agency:

The best opportunities for cross-selling are in the commercialarena, both for property-casualty and high-end life insuranceproducts, such as corporate-owned life insurance or employeebenefits.

The bank will allow the entrepreneurial spirit of the agency tothrive.

The bank embraces a pay-for-performance attitude.

The ability and capital is available to acquire qualityagencies.

The ability to define the potential acquisition candidates withserious profile and search criteria.

Four key drivers that lead to the decision to build an agencyin-house are:

The bank has a good history of cross-selling, and has or candevelop the technology, referral procedure and reward programs tosupport the effort.

There is a good match between the products desired by the bank'scustomers and the banks ability to work with carriers to providethem.

Proven channel management exists in introducing new products.

Management chosen to lead the effort has successful start-upexperience.

Five key drivers leading to the decision to outsource are:

Management wants to take a pilot approach to the business, or isnot sure it can support the cost of expanding into a specific lineof business.

Internal tech support is limited.

Little capital is available to develop insurance.

It is necessary to import a sales culture and training.

There are few, if any, agencies that cover the same geographic areaas the bank, or there is a lack of understanding or ability by thelocal agent in managing large-scale marketing and salesefforts.

Each of these strategic distribution options, some used incombination, have been successful in a number of banks.

What is most important is making the decision with all the facts atthe bank's disposal, and revisiting that decision periodically asthe bank expands into new markets or product lines.

Carmen F. Effron is president of C. F. Effron Company, aWestport, Conn.-based bank-insurance consulting firm. Her emailaddress is
[email protected].

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, February 4, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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