Bank-Insurance Success Redefined

In the late-1990s, banks began aggressively acquiring independent insurance agencies to build their distribution platforms. At that time, the insurance industry was in the midst of a prolonged soft market that depressed agency growth rates to single digits.

Unconvinced the insurance distribution business could produce sufficient stand-alone growth, banks rationalized that cross-selling would fill the gap. With limited history to go by, cross-sell projections often crept to irrationally optimistic levels. So important was the cross-sell component in acquisition strategies, it usually determined both the size and location of agencies to acquire. The definition of bank-insurance success was essentially reduced to the attainment of cross-sell targets.

Today, the picture has changed. Cross-sell results have been more moderate than hoped. Coincidentally, the soft market has lifted and stand-alone growth rates have soared. Meanwhile, the definition of bank-insurance success has expanded. As the industry matures, the tenets of bank-insurance success are being redefined as follows:

Size: Size matters to bank-owned agencies for two reasons. First, economic relevance. Although the hurdle of relevance varies, a rapidly growing number of bank-owned agencies are making a material contribution to overall bank performance, producing five to 15 percent of bank earnings, and 20 to 35 percent of non-interest income.

Second, competitive advantage. Bank-insurance leaders arent content to simply be in the business, but expect to achieve excellence. This means having the kind of access to carriers and products that size affords.

Returns on capital: The cross-sell revenue reasonably expected from a high-quality, platform agency acquisition is usually insufficient to fully justify the purchase premium paid.

So how will the necessary returns on capital be achieved? Through acquisitions that are priced less aggressively and create cost elimination opportunities. Margins are nudged higher and the invested capital is further leveraged.

Ability to attract quality: Past performance is the best indicator of future performance. Banks that bought high-quality agencies are generally getting high-quality results, and those that bought less are getting less.

Therefore, success in bank-insurance deals will continue to go to those able to effectively compete for the best agencies and for the most talented people.

Targeted strategic impact: Cross-selling is not abandoned in the new model for success. It is more strategically focused and is better aligned with agency strengths. Mass marketing strategies are being replaced by targeted efforts, often focused on the banks small and middle-market commercial customers and their affluent individual clients.

As the definition of bank-insurance success grows more robust, some constraints have eased. Specifically, prior constraints of size and geography have become less relevant.

For example, lets consider the issue of size. Under the cross-sell based success model, cross-sell potential defined the size agency to acquire. Buy too small and you will have too little capacity to support your cross-sell opportunity. But buy too large and you will have too little cross-sell revenue to leverage your capital investment.

With the broader definition of success, banks have been freed to pursue critical mass and economic relevance. The ceiling is lifted on the size agency a bank should pursue.

Likewise, cross-sell potential historically defined the geographic parameters of agency acquisitions by banks. Acquisitions always occurred within the banks footprint–and, usually, in the areas of greatest customer concentration.

Today, a growing number of banks are shopping for agencies beyond, and sometimes well beyond their footprint. Why? Access to quality agencies and the ability to compete for talent increase as the playing field expands.

The past seven years of bank-insurance efforts have been filled with trials, errors and an encouraging level of early success. Collectively the journey has taught us an important lesson.

Banks will reach the next level of success more through adaptation than reinvention. Its not necessary, nor is it practical, for banks to reinvent the insurance distribution business.

Recognizing that the cross-sell opportunity is more icing than cake, bank-insurance strategies will no longer be held hostage by it. Instead, bank-owned agencies will be built much like the best independently owned agencies, with many augmented by additional products offered via third-party marketers.

Meanwhile, banks will wisely use their capital to achieve competitive excellence, produce strong financial results and better serve their most valued customers.

James M. Campbell is a principal and senior vice president of Reagan Consulting Inc., an Atlanta-based management consulting firm that serves the insurance distribution system. He may be reached at 404.233.5545 or at jim@reaganconsulting.com.

Reproduced from National Underwriter Edition, May 19, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.