Believe it or not, the current era of bank-insurance is seven years old. In March of 1996 the Supreme Court decision in Barnett Bank of Marion County, N.A. v. Nelson triggered a flurry of activity and debate as banks began to seek their place on the insurance distribution landscape. Find out what has happened since then in this article by James Campbell.
Let’s begin with what hasn’t happened. Banks have not, as some predicted, seized control of the insurance distribution business, driving traditional agents and brokers to the verge of obsolescence. Nor have they lost their appetite for the business, as others expected. The truth, according to the American Bankers Insurance Association (ABIA), lies somewhere in between.
In September of 2002, the ABIA released its fifth annual Study of Leading Banks in Insurance, based on an analysis of the insurance distribution strategies and results reported by 447 U.S. banks. Collectively these banks represent all 50 states and nearly half of the aggregate assets of all FDIC-insured institutions. The survey portrays a bank-insurance industry that’s shaking off some early sluggishness and beginning to find its focus. Here are some of the key trends from the survey:
BANK-PRODUCED PREMIUM GROWTH IS INCREASING.
In the late-1990s, conventional wisdom held that premiums produced by banks would grow at 30% or more per year into the foreseeable future. In fact, aggregate bank-insurance premiums have increased at a compound annual growth rate of 18% since 1997. Even more telling is the slope of the growth curve. The rate of growth for bank-insurance premiums has increased for each of the past four years, reaching 23% in 2001. With hundreds of banks currently considering a move into insurance and hundreds more aggressively growing their insurance business, this rate of growth will likely continue to increase.
INTEREST IN COMMERCIAL LINES IS GROWING.
The early focus of bank-insurance was predominantly on individual Life and Health products. In recent years, however, a growing number of banks have expanded their focus to include Commercial Lines Property/Casualty and Group benefits business. As a result, bank-produced Commercial Lines premiums have increased by nearly 34% annually since 1997, and grew a staggering 65% in 2001. More than 30% of the 447 banks that participated in the 2002 ABIA study are marketing Commercial Lines, and another 8% plan to enter the business in 2003.
ACQUIRED AGENCIES/BROKERS PROVIDE AN EFFECTIVE PLATFORM.
More than half (57%) of the study participants now marketing Commercial Lines identified an acquired agency as their primary distribution platform. More importantly, these respondents identified an acquired agency as more effective than alternatives — such as an alliance or de novo agency — and nearly three-fourths of the reported acquisitions are meeting or exceeding pre-acquisition expectations. Banks have been the most aggressive acquirers of insurance agents since 1997 and are likely to continue this pattern for the next several years as they continue to build their distribution platforms.
DISTRIBUTION STRATEGIES EMPHASIZE TRADITIONAL CHANNELS.
Banks that sell Commercial Lines market through an average of 3.7 distribution channels. A typical cross-selling strategy might include one or more direct response (e.g., direct mail, the Internet) channels, as well as branch marketing, and distribution through the bank’s business units. Although the effectiveness ratings for direct response channels are relatively low, many banks believe they add value by increasing market awareness. Likewise, such branch distribution efforts as placing agents in branches (used by 36%) and licensing bank platform employees (used by 24%), have been only modestly effective. By a decisive margin, the most popular and most effective distribution channel for Commercial Lines insurance is the commercial lending group. The bottom line: Banks are selling products by introducing traditional producer efforts to their business customers. Although banks might add a wrinkle or two, don’t expect them to try to reinvent the Commercial Lines distribution process any time soon.
THE INSURANCE CONTRIBUTION TO BANK VALUE IS INCREASING.
The question that hovers over all bank-insurance activity is, 'How much value does it create for bank shareholders?' According to the ABIA study, among the top quartile of respondents, insurance distribution contributes 2.8% of total bank revenue and 8.2% of non-interest income. For banks with less than $10 billion in assets, both percentages are considerably higher. Although these contribution levels remain relatively modest, they have kept increasing year by year. What’s more, the strategic value of providing a broader range of financial solutions to bank customers is increasingly relevant to more and more bank executives, directors, and shareholders.
Let’s return to the primary question. Is bank-insurance working? The customer will ultimately judge the value of banks as insurance distributors. However, it appears that Commercial Lines distribution is taking root in a growing number of banks. Banks have spent the past seven years experimenting with insurance distribution, and have learned plenty along the way. At this point, it appears safe to conclude that they’re in the business to stay. Now that banks have overcome some early problems, they have a greater sense of clarity and purpose in insurance distribution. Success, like beauty, might lie in the eye of the beholder — but bank-insurance appears poised for unprecedented success in the years ahead.