It has been roughly a decade since federal lawmakers cleared the way for insurance carriers to enter banking, yet progress has been more the exception than the rule. Only a few players have built up a lending business and profits have been scarce.
Now there's a chance to make up lost ground. At a time when the U.S. mortgage lending crisis has brought the banking industry to its knees, the market is wide open for alternative providers of credit and deposit products. This spells opportunity for resilient carriers that have delayed exploiting banking expansion opportunities.
To be sure, not all carriers are poised to act. Troubled investments in mortgage-backed securities and commercial real estate continue to pose major headaches for some companies, and there are problems with collateralized debt obligations as well.
Yet many other competitors remain abundantly capitalized (especially mutual organizations) and could act now. There are three major types of opportunities to introduce banking products into regularly recurring types of insurance transactions:
o Cross-selling loans to auto insurance customers is a conspicuous opportunity, especially given the national crunch in auto credit.
o Small-business lending is a natural extension of the advisory role that field agents play in the outreach to small business owners.
o High-yield savings products are especially attractive at a time when businesses and households are focused on asset protection.
Let's examine each opportunity.
o Auto Loans: Beyond the obvious advantage of having funding at a time when many traditional auto lenders do not, carriers have an edge in underwriting as well. In cross-selling to established insurance customers, for example, carriers can gain credit context from payment histories on policies, household information gleaned from policy underwriting, and impressions gained in the course of agent-client relationships.
In evaluating the opportunity, it is useful to look beyond auto lending margins to a potentially higher prize, which is increased policy longevity. Customers with multiple account relationships tend to stay with their carriers much longer than those with single products, and such "stickiness" provides additional latitude in loan pricing strategy.
In turn, specially priced insurance/credit packages can be effective in winning new business.
Small-Business Loans: A general push into the vast small-business market has been underway for several years. For carriers that have gained momentum in this space, banking credit and deposit products expand the cross-sell possibilities. It is largely a matter of taking greater advantage of established customer relationships.
Here again, policy prospecting and underwriting activities provide insight into customer bank needs, product suitability and creditworthiness. Such analytical insights can be used in segment-based sales initiatives for target customers.
o High-Yield Savings: There is a huge amount of business up for grabs in the current turbulent investment climate. At a time when battered investors are seeking safe haven for their liquid assets, better-positioned carriers can claim superior levels of soundness compared with many major banks.
Viewed as stodgy in recent times, safety-and-soundness brand imagery is now making a comeback for players that can back it up.
With their vast distribution networks and deep experience in products with savings and investment components, carriers are naturally positioned to sell bank-like offerings such as certificates of deposit and money market funds. They also have a targeting advantage, given the client and household financial knowledge built up in policy prospecting and underwriting.
This is a natural cross-sell opportunity. By leading with deposit/savings accounts, carriers can win certain categories of customers who might then become candidates for long-term insurance relationships. And they can expand banking relationships with established insurance customers.
As they pursue banking opportunities in auto loans, savings and small businesses, one critical factor carriers will face is mobilizing field offices and agents. Issues include capabilities, motivation and fulfillment, as well as marketing and sales support.
Often it will be best to address such issues within the context of specific sales scenarios. A comprehensive campaign for auto loans, for example, includes training and orientation for field reps and office staff, plus a review of product packages, pricing and sales incentives on loan/insurance combinations.
Additionally, progressive carriers are finding that centrally-driven marketing campaigns are valuable in targeting local prospects and driving traffic to local offices.
Realistically, many players still are at the onset of leveraging rich account information from the insurance side to improve underwriting and marketing on the banking side. This provides yet another argument for beefing up central customer analytics and the ability to pursue database-driven campaigns.
In turn, such orchestration points to the need for a different management center of gravity. Certainly, agents remain central to the insurance industry sales model.
Yet so much more can be done by harnessing collective customer knowledge and the power of the overall retail distribution system. Through segment-based strategies, carriers can analytically identify the customer groups that will be most receptive to various product combinations, and then use a blend of direct marketing and agent-client interaction to unlock cross-sell revenue potential.
Obviously, simply parking a banking subsidiary over in the corner and tossing an occasional product over the fence to insurance agents in the field won't do. But the challenges involved in pursuing a comprehensive strategy are well worth tackling, especially in light of the lending vacuum created by the current banking crisis.
At a time when the competitive entry barriers to banking have been reduced to the minimum, insurance carriers have the opportunity to forge new growth strategies that fit with their overall direction and are tied to specific banking products and target customers.
Absent prompt action, however, inert carriers are going to miss this golden moment as better-prepared competitors capture the lion's share of new banking opportunities.
Sam Radwan is managing director in the Chicago offices of Novantas LLC, a management consultancy.
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