A Joint Venture In A Small Town

A JOINT VENTURE IN A SMALL TOWN

by Ron Rensink

The heated debate over bank activity in the insurance business has focused primarily on happenings in major metropolitan areas, where huge blocks of business are at stake and multibillion-dollar bank holding companies are among the would-be competitors for them.

Away from the bright lights of the big cities, the context of the debate changes somewhat. For one thing, banks in many rural areas of the upper Midwest have been selling policies in compliance with state and federal laws for decades. In small towns, agencies operated by state-chartered banks sometimes were the only providers of insurance.

Such an agency has been in existence in our community for at last 40 years. It's owned by the principals of a holding company that owns a local bank. At the beginning of 1984, the principals entered into an agreement with our firm, ARI Services, Ltd., under which we now manage the agency and share in its ownership. The bank holding company principals retain ownership of the business that was on the books at the time the agreement went into effect. All new business is owned jointly by them and our firm.

In this article, I'll explain how we sell insurance through this arrangement and share the proceeds from this business with our partners. Although this relationship is still in its infancy, I think it's safe to say that it has tremendous potential for our firm; and I have yet to see any serious drawbacks.

ARI Services, Ltd., came into existence in 1981 in a merger of four firms. It has divisions dealing with auctioneering services, real estate, and insurance. We have premium volume of about $1.75 million. I am one of five owners of ARI Services and am in charge of its insurance operations.

The bank agency that ARI Services now manages was operated for years as a profit center by the principals of a local bank holding company. The owners realized they lacked the time and expertise to develop the agency as fully as possible. They believed the agency had potential, however, and wanted to maintain an incidence of ownership in it. That left them with two options:

Hire professional people to operate the agency or contract with a management service, which is essentially what they did by entering into an agreement with ARI Services.

We were on good terms with the bank and its owners even before we entered into the management agreement. The principals of the bank and our firm trusted and respected one another. We had written group benefits for the bank's employees. The bank had referred depositors with complicated insurance questions to us. Nevertheless, we thought long and hard about entering into the agreement. We asked ourselves how it might affect our present customers (there has been no adverse effect) and whether we could earn enough income from this arrangement to justify it. Once we made the commitment to proceed, however, it took us less than 30 days to work out the details and sign the agreement.

Attorneys for both parties took part in the research that went into the preparation of the necessary contracts. The management agreement can remain in effect indefinitely. Under the terms of an accompanying buy-sell agreement, we have the first opportunity to buy our partners' interest (both their 50% interest in business produced since the beginning of last year and their 100% ownership of previously written business), should they decide to sell it. The value of the business would be determined through an arbitration process at the time of the sale. Should we decline to purchase the business, we still would have the right to take part in negotiations with the buyer.

At the time the agreement went into effect, the bank agency had a small book of business generating about $15,000 in annual commissions. We are paid a fee for servicing this business that amounts to 75% of its renewal commissions. On those jointly owned accounts written since the first of the year, we also obtain 75% of the new and renewal commissions.

The bank continues to furnish office space and equipment for the agency. We have assigned a producer and a clerical employee to work out of the facility. The agency's office is just off the walk-up area of the bank's new two-story building. All the major bank offices are located upstairs. Besides supplying a furnished office, the bank pays such expenses as utilities, postage, and clerical supplies.

Although the bank is located less than a full block from ARI Services, we never considered transferring the insurance operations to our premises. We thought the agency's long-standing identification with the bank was an important marketing advantage. Furthermore, maintaining the agency in the bank building would make it more convenient for bank customers to use. Nor did we seek to change the name of the agency.

Under our agreement with the bank owners, we can sell any insurance product we wish out of the bank agency, except for credit Life and Disability, which loan officers are licensed to sell in connection with installment loans. We continue to place business with the companies the bank agency has for a long time represented. These are mainly small carriers domiciled in Iowa. Business that cannot be handled adequately through the agency's companies is brokered through ARI Services and placed with the companies it represents.

Our producer at the bank agency obtains business from walk-up customers, cold calling, and referrals. Recently, we've begun to solicit insurance through direct-response mail with promising results. We mailed 100 letters a week for five weeks to depositors selected at random by the bank's computer. The letters were sent out on the bank agency's stationery over the bank president's signature. We had intended to solicit individual Health insurance, but received a surprising number of Group Health leads from the mailing. Depending on the outcome of this campaign, we hope next to solicit individual life insurance from bank depositors via direct-response mail.

We've sold Personal-lines insurance through the bank agency. From our point of view, however, the greatest potential for this partnership may lie in the sale of Life and Health products. ARI Services has strong competitors for Homeowners business and probably already has as large a share of the limited local market for this business as it's going to get. We've never solicited Life and Health insurance in systematic fashion, however. This we are now doing with the help of the prospecting lists from the bank.

In time, we hope to sell more Commercial-lines insurance through the bank agency, although, again, the size of the local market is limited and ARI Services already writes a significant share of it. At present, we are writing farm Owners/Ranch Owners insurance through the agency. In fact, about half of the applications generated at the facility have been for such business.

All the Farmowners/Ranchowners business is brokered through ARI Services. We have an excellent market for this coverage in ST. Paul Insurance Companies. We are one of the few agencies in the state participating in a special program the carrier has for this class of business. Under this program we have broad underwriting authority, including the discretion to apply up to 25% IRPM credits.

This program has meshed well with our activities at the bank agency. The bank's depositors and loan customers include many affluent farmers. In the past few years, however, these farmers have had to cope with a statewide agricultural economy that can only be described as terrible. Bankers are trying to help their farmer clients any way they can. If a farmer can cut a $3,000 to $5,000 insurance premium 25% by dealing with us, the banker will be only too pleased. Consequently, we've been getting referrals.

To encourage such referrals from bank employees, I have created a program I call LORIP (Loan Officer Referral Incentive Program). Under the program, if a loan officer provides us with a referral that leads to a sale, he or she is paid a referral fee.

Having the loan officers contact us, rather than refer customers to the bank agency while they're at the bank, eliminates any hint of coercion. The loan officers write down their referrals on a brief form I've created and forward it to the bank agency. The producer follows up on the lead within seven working days. A loan officer can indicate whether he or she wants to be identified as the source of the lead by checking the appropriate box on the form. At the end of each month, we prepare a LORIP report for each loan officer, and for the bank president.

Even if a loan officer's name is used, we try not to give the customer the impression that he or she is obligated to buy insurance from us. Our approach is something like, "Bob Smith and I were talking, and he indicated that you were unhappy with your Auto insurance. Would you be interested in a quotation?" We never use such a tactic as, "I understand you just financed the purchase of a new car through the bank, and I was wondering if you needed insurance." In most cases, we don't even know whether a loan transaction has taken place. Nor do we want to know.

One might ask why we bothered to take over the management of what had been such a modest-sized insurance agency. From our point of view there were two overriding reasons to enter into the arrangement. First of all, it broadened our prospecting base. It provided us with a list of 5,000 preferred customers-the bank's depositors. More important, however, the arrangement will make it much tougher for an outside bank holding company to ever compete against us in the local market. Should the bank affiliated with the agency we manage ever be acquired by another organization, our interest in the agency's insurance business would be protected. We would have the right to buy all of the agency's business; an antipiracy provision in our contract would protect the business from the bank's new owners.

If this venture works as well as we believe it will, it is our intent to approach other locally owned banks and offer them the same arrangement. We feel our experience with the bank agency we currently manage will give us the kind of track record that other banks will look favorably on.

I believe our approach would work well in other rural areas. I'm sure there are many bankers in small communities who would love to find a good insurance technician for their agencies-without having to put that person on the payroll. The keys to making the relationship work, in my opinion, are mutual trust and rigid separation between the loan process and the marketing of insurance.