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BANK INSURANCE SURVEY: STRONG GROWTH, BUT UNTAPPED OPPORTUNITY

recent survey of bank insurance activities sponsored by A the Association of Banks-In-Insurance (ABI, of Wash- ington, D.C.) shows strong growth in bank insurance pro- grams, but a lot of untapped opportunity.

A recentsurvey shows stronggrowth in bank insurance programs, but also a lot of unexploited opportunity.

A strongly growing industry The survey was conducted last year by Reagan and

Associates for ABI. The company’s representative, Jim Campbell, said he found evidence of strong growth.

“Banks generated about $27.8 billion in insurance and annuities premiums last year,” said Campbell at a recent ABI conference. “In 1996, theestimates were that it was about $14 billion to $1 8 billion. So I think we can safely say there’s been growth of at least SO percent. And more than likely, it’s been more than that. So there was a strong growth in 1997.”

Campbell noted that 40 percent of banks surveyed were selling insurance products other than credit insurance and annuities. If you include credit insurance and annuities, the figure goes up to about 7 1 percent of those responding to the survey.

However, even the best banks have a lot of room to grow. “Even when you look at the 40 percent,” Campbell noted,

“those banks really aren’t even approaching their potential, in most cases, of what they could be doing. So I think the growth opportunities are really pretty strong. I think you can see the numbers explode over the next few years. Because growth is coming in a lot of ways. We have growth of new banks entering the business.”

When he did the survey, Campbell projected that about 500 or 600 banks would enter the insurance business over a 12-month period, starting in Summer of 1998.

“But we also have banks,” Campbell offered, “like the 40 percent I spoke of, that are in the business-but have a lot of

room to expand, going into new product lines and doing new things. And then, within the various product lines, most banks haven’t really approached their potential there yet. So I think we can see that number really grow.”

So far, most of the banks in the business are larger banks. “Bank insurance activities directly correlated with bank

size,” said Campbell. “The larger banks are more active in the business. A higher percentage of them are participating. They’ve been more aggressive, in terms of expanding their product lines. And they have the bulk of the business right now. We estimate in the study that those banks that have greater than $10 billion in assets make up about 1 percent of all banks-but they accounted for about 63 percent of the commissions earned in the bank insurance industry in 1997. The larger banks are clearly out front and are leading right now.”

Shifting strategies But banks’ insurance business strategies have shifted

over the past few years. “Since ’95,” Campbell revealed, “banks have shifted

from de novo starts [starting from scratch, building an insur- ance sales operation within the bank] to relationships with carriers, agencies, and third-party marketers (TPMs). We saw a real sharp decline in the de novo starts, or internal starts. We didn’t see a lot of them over the response of the last year or two. I think for some banks it probably is the right way to go, but it brings them some challenges in creating infra- structure, staff, and carrier relationships, and so forth. And so we saw a real movement over the last couple of years to partnering with or acquiring an agency or an organization that could bring those things, rather than trying a de novo start.”

The strategies that banks chose to adopt depended on which products they sold.

“Sales strategies are product-driven,’’ said Campbell. “We found that a lot of the respondent organizations were growing in sort of stages or waves. As they would develop unique strategies for each product and layer them on, they would grow.”

Most banks are focusing on retail customers or mortgage customers.

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“Retail customers were the most popular target for insurance products for the banks,” Campbell confirmed. “About 80 percent of the respondents that are in the business of insurance are targeting the retail customers. Most banks were targeting mul- tiple customer bases. Retail is most popular; second was mort- gage customers, at 63 percent of the respondents.”

Still small-but for how long? But bank insurance sales are still a small fraction of most

banks’ total earnings-although that may not last for long. “We found that insurance programs are still making a

relatively small contribution to the bank,” Campbell told us. “For the average respondent, about 0.54 percent of total bank income was coming from the insurance program. So it’s not very big yet. But that’s a number that’s going to move real fast. And I think if we’re looking into the future, we think about ten years from now and how that’s going to grow and trend, I think we’re going to see some pretty interesting growth in that percentage.

“I think the question is,” he continued, “how fast is it going to grow and how big is it going to get-where does it start to stabilize? Will it be 10 percent, or 12 percent, or 15

The strategies that banks chose to adopt depended on which products they sold.

percent? We don’t know those things yet, but I think we do know at this point that it’s still arelatively small contribution, but that it’s growing very quickly.”

Campbell’s survey-especially when he spoke with the eight industry leaders-confirmed something we’ve heard from other bank insurance experts before: You won’t succeed unless your bank’s top management actively and enthusiasti- cally supports the insurance operation. “What have we learned,” Campbell said, “from the eight industry leaders? I think the things that they emphasized to us, more than any- thing else, and the message that was hard to miss, was that to succeed in this business you have to have the commitment of your senior management team. And that is basically an irreplaceable aspect of this.

“They also talked a lot about the integration process,” he continued, “and emphasized the cultural differences that exist between the banking business and the insurance busi- ness. And how a lot of those cultural issues deal with ap- proach to sales and sales orientation.

“Bankers believe that insurance people are sometimes too sales-oriented, and insurance people sometimes think that bankers aren’t sales-oriented enough. There’s a gap that is sometimes created there, and a need to manage that gap-

and to really manage the integration process, not believe that that’s going to take care of itself.”

How did banks compensate reps (sales producers)? Campbell saw a lot of variation among the most successful insurance-selling banks. But one thing they had in common was an ability to go beyond traditional bank methods of compensation.

“We saw a lot of different structures,” Campbell re- flected. “But basically, what we saw from these organiza- tions is that they’re willing to pay for performance, and they’re willing to be somewhat creative. They’re willing to go outside of the normal structure or the typical standard structure of compensation for their producers. They’re will- ing to do things other than what the bank would normally dictate as a compensation structure, and be a little more creative-in order to get the people, recruit the talent, bring in the people that they need, and to get the performance levels that they need. As for carrier strategies, we found, in general, a movement toward fewer relationships-but stronger re1 at i on s h i p s . ”

Campbell’s data indicated that mid-sized banks are feel- ing an increasingly pressing need to sell insurance. He saw this when comparing participation levels by bank size: greater than $10 billion, $1 billion to $10 billion, and finally banks less than $1 billion in size.

“The number I want to highlight for you,”Campbell stressed, “is that 8.9 percent of the banks in the $1 billion to $10 billion range told us that they were planning to sell, planning to get into the insurance business within 12 months, when we were inter- viewing or surveying in Summer of ’98. I think that’s obviously a high percentage. When you look at the larger banks, basically, they’re already in. And what this seems to indicate is a growing sense of urgency among the banks in this size range that it’s time to get moving and get in.”

Why some are holding back But why do some banks still hesitate to get into the

business? Campbell looked at banks that had no plans to get into the business over the next 12 months.

“There were three reasons given most often for not getting into the business,” Campbell noted. “But the top reason, regulatory concerns, accounted for probably more than 80 percent of the responses, and everything else was a distant second. So the message there was that banks generally believe this to be a compelling opportunity and a good strategic set, they just have concerns about regulatory issues. Very few banks were telling us, ‘We really don’t think this fits in with what we’re trying to do.”’

Campbell also examined which lines of insurance banks are selling. Among banks already in the business, a surpris- ingly high percentage were involved in commercial lines of insurance.

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“Of the 70.9 percent of responding banks that are in the insurance or annuity business,” said Campbell, “only 2.5 percent are in annuities only, which gives us 68.4 percent in [traditional] insurance. There are 28.3 percent that are in credit insurance only. And this is where we get the 40.1 percent that are in [more traditional kinds of] insurance. If you look at some specific product lines, 3 1 percent of those surveyed were in individual life insurance; 22.9 percent were in commercial lines. The commercial lines percentage was higher than those in personal lines. We had several indications throughout the research that commercial lines programs might be more developed and further along than we had previously thought. Some of these commercial lines are not terribly developed yet, but at least in terms of the banks that are in the business, it was a surprisingly high percentage.”

However, Campbell reemphasized that there is a lot of untapped opportunity to grow-even. for those already in the business.

Banks rated face-to-face selling by agents as the most effective sales method.

“When we look at the banks that are in the business,” Campbell offered, “most are not selling that many different insurance products. We found a big drop-off after three products, and then again after six. These banks in these areas have a lot of room to grow, and expand their product lines. And we’re seeing that in waves or stages. So I think we’ll see those banks do that. But many of them are new entrants into the business and haven’t had the opportunity to do that yet.”

The best marketing methods But what about marketing methods? Which ones are getting

the best results? “We talked to the eight leaders about the marketing methods

they were using,” Campbell said, “and those that were making the greatest contribution to their success. In total, we looked at about 50 or so. Face-to-face selling by agents was clearly the number one, in terms of effectiveness, on a one to ten scale. And cross-selling by bank personnel rated very high. It would be the third or fourth most popular. We found that the rating for cross-selling by bank person- nel was quite high-which is interesting because banks take a lot of heat for not being tembly effective cross sellers. But these eight organizations basically said, ‘Our bank personnel are an important part of our success, and they’re doing a good job. And the cross- selling through those bank personnel has been very effective.”

“Insurance seminars,” he continued, “as a marketing method, had a pretty good overall rating. But that one really stood out in one area-and that’s long-term care. We heard a lot of stories about a lot of success in the long-term care area with seminars. Many of these organizations had very enthusiastic stories to tell us about what they were doing in that area with seminars.”

However, selling insurance using automatic teller machines (ATMs) got decidedly mixed results.

“ATM solicitations were not that strong,” said Campbell. “I had one bank that actually told me that it was a detriment, that it was causing problems for them. The banker said that sometimes people would be at the ATM and they’d have a problem. They’d get their receipt, see an 800 number, and call. So they were getting calls into the insurance department of people saying, ‘Hey, I just lost my card in one of your ATMs,’ or ‘I asked for $100 and got $50.’ So I didn’t get a whole lot of positive comments on the effectiveness of ATM solicitation.” W

Banks in Insurance Advisory Board

Roger Arnold, President, Empire Agency, Buffalo, NY; Carlton Copp, Conning &Company, Hartford, CT; Gregory J. Garvin, Investor Life Services, Cincinnati, OH; John J. Harrison, President, DiMark, Inc., Langhorne, PA; Donald Henderson, Jr., LeBoeuf, Lamb, Leiby & MacRae, New York, NY; J. Robert Hunter, President, National Insurance Consumer Organization, Alexandria, VA; John C. Larson, President, John C. Larson Associates, Minneapolis, MN; Michael D. Levison, President, Coverdell & Company, Atlanta, GA; Robert W. MacDonald, President, Life USA,

Minneapolis, MN; Douglas C. Moat, President, The Man- hattan Group, New York, NY; Paula G. Nelson, President/ CEO, AMCORP, Minneapolis, MN; Ken Reynolds, Execu- tive Director, Association of Banks-In-Insurance, Washington, DC; Robert Swegle, Vice President, Market- ing, SAFECO Corporation, Seattle, WA; Michael D. White, CEO, Institute of Bank Insurance Services, Radnor, PA; Ken L. Williams, President, Banclines Programs, Inc., Birmingham, AL.

Printed on recycled paper. @

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JUNE 1999