The Changing Insurance-Distribution Landscape

THE CHANGING INSURANCE-DISTRIBUTION LANDSCAPE

by Bobby Reagan and Jim Campbell

For years, little changed in the distribution of insurance other than the gradual shift of market share in the Personal Property and Casualty business from independent agents to direct writers. As we approach the end of the century, however, changes are taking place that could, in a relatively short period of time, affect the distribution of insurance more dramatically than the combined changes over the last 20 to 30 years.

The relationships between insurance companies and their agents will continue to change as some companies consider alternative ways to distribute their products and others look for fewer agents with larger volumes of business. The Internet will provide an effective means to market products and services, presenting an opportunity and a threat to independent agents, the insurance companies they represent, and direct writers. Although these factors will influence the distribution of insurance, the most significant impact is likely to come from the growing role of financial institutions in selling insurance products.

For years, financial institutions dabbled in insurance by selling annuities and credit life, with grandfathered banks having the opportunity to sell a broader range of products. The Barnett decision put bank insurance activity into first gear, even if it left several key questions and restrictions unresolved. The proposed Citigroup merger will shift bank activity into second gear by forcing Congress to address the issue, by putting insurance on the agenda of virtually every bank board in the country, and by providing motivation for additional banks to enter the business based on either opportunity or competitive pressures.

Clearly, banks are interested in insurance for a number of reasons. Banks have a large base of customers with insurance needs, a strong desire for increased non-interest income, and a rapidly declining share of personal financial assets. As the remaining barriers to banks entering the insurance business are mitigated or fall altogether, many of the nearly 12,000 commercial banking and savings institutions in the United States will enter the insurance business.

But before conceding a hefty share of the insurance market to banks, let's consider some of the inherent problems they'll face. First, many banks have not demonstrated an ability to effectively cross-sell their own services. As insurance is added to the list of services provided, there's no reason to believe that banks will automatically become effective cross-sellers.

Second, insurance products must be sold. Most banks are not staffed or structured as sales organizations, which may make it difficult to sell and distribute certain insurance products, particularly those that must be sold on a one-on-one basis.

Additionally, for banks to be effective in the insurance business, many questions will need to be answered. What insurance opportunities actually exist within an individual bank's customer base? Which customers should be targeted? What products should be sold? How should these products be sold? How can the insurance and banking operations be integrated?

In our experience, the answers to these questions differ for each bank and are based on the mix of existing business, the marketplace in which they operate, and the level of desired risk, control, and rewards. Most will realize that they don't have the internal manpower or expertise to execute their insurance strategies-and will look to either hire it, acquire it, joint venture with it, or outsource it.

Banks will present a threat to some independent agents, but to many others, they'll present attractive opportunities for joint ventures or other business relationships. Still, there will be other agents, focused on larger commercial risks that will not be affected materially by the presence of financial institutions in the insurance business.

Unfortunately, for bank executives currently attempting to make strategic insurance decisions, little historical data is available on the experiences of other banks. This void will delay the process for some banks and lead others to experiment or simply proceed based on the best opinion they can find. Some banks will make strategic blunders and will have to redirect their efforts. At the same time, some banks will design effective plans and strategies, secure the necessary resources, and make a meaningful penetration into the insurance business.

In the end, the distribution of insurance will be forever changed. Along the way, winners and losers will be found among both the banks and the independent agents.