by Jim Campbell, November 2002

National Underwriter

Believe it or not, the current era of bank-insurance is approaching its seventh birthday.  It was in March of 1996 that the Supreme Court delivered its decision in Barnett Bank of Marion County, N.A. v. Nelson, setting in motion a flurry of activity and debate as banks began to seek their place on the insurance distribution landscape.

But what has really happened in the time since?  Well, let's begin with what hasn't happened.  Banks have not, as some predicted, seized control of the insurance distribution business, driving the 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), is found somewhere in between.

In September of this year, 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 U.S. states and nearly half of the aggregate assets of all FDIC-insured institutions.  The picture painted by the study is one of a bank-insurance industry that is shaking off some early sluggishness and beginning to find its focus.  Following are some of the key trends identified.

1. Bank-produced premium growth is increasing.  In the late-1990's, conventional wisdom held that insurance premiums produced by banks would grow at 30% or more per year into the foreseeable future.  Reality has been more modest with aggregate bank-insurance premiums growing at a compound annual growth rate (CAGR) of 18% since 1997.  What may be more telling, however, is the slope of the growth curve.  The rate of growth for bank-insurance premiums has increased consistently over 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, the rate of growth for bank-produced premiums will likely continue to increase.

2. 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 and embraced the commercial lines (i.e., commercial property/casualty and group benefits) business.  As a result, bank-produced commercial lines premiums have grown by nearly 34% annually since 1997, and grew by a staggering 65% in 2001.  More than 30% of the 447 banks that participated in the 2002 ABIA study are currently active in commercial lines distribution, and another 8% plan to enter the business by 2003.  

3. Acquired agencies/brokers provide an effective platform.  Of the study participants currently active in commercial lines sales, more than 57% identified an acquired agency as their primary distribution platform.  More importantly, an acquired platform was identified as more effective than alternatives (e.g., 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 that pattern over the next several years as they continue to build their distribution platforms.
 
4. Distribution strategies emphasize traditional channels.  Banks selling commercial lines insurance use multiple (i.e., average of 3.7) distribution channels to do so.  For example, a typical cross-sell strategy might include one or more direct response (e.g., direct mail, the Internet), channels, as well as branch distribution and distribution through the business units. Although the effectiveness ratings for direct response channels are relatively low, many banks believe they add value by increasing market awareness.  Likewise, branch distribution efforts, including placing agents in branches (used by 36%) and licensing bank platform employees (used by 24%), have been only modestly effective.  By a decisive margin, however, 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 may add a wrinkle or two, don't expect them to try to reinvent the commercial lines distribution process any time soon.

5. The contribution is emerging.  The question that hovers over all bank-insurance activity is, "How much value does it create for bank shareholders?"  According to the ABIA study, at the top quartile, 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 increased with each passing year.  Additionally, the strategic value of providing a broader range of financial solutions to bank customers is increasingly relevant to many bank executives, directors and shareholders.

So, let's return to the primary question.  Is bank-insurance working?  The customer will ultimately judge the value of banks as insurance distributors, but it appears that commercial lines distribution is taking root in a growing number of banks.  Banks have spent the past seven years experimenting in insurance distribution, and have learned plenty along the way.  At this point, it appears safe to conclude that they are in the business to stay.  Having not been scared away by some early struggles, banks now have a greater sense of clarity and purpose regarding insurance distribution.  Success, like beauty, may lie in the eye of the beholder, but bank-insurance appears poised for unprecedented success in the years ahead.