Full Service Finance: Insuring Customers for Life; an Overview of Why Banks Should Add Insurance Sales-Plus How They Can Enter the Business and Market Products Effectively. (Fundamentals)
Vandenberg, Edward H., ABA Banking Journal
There are many reasons why banks should consider selling insurance. First, insurance is a good fit for financial institutions. Second, compared to other sources of bank income, insurance sales have relatively low risk. Insurance, for example, has no affect on capitol and no interest-rate risk. Third, insurance fees produce a regular cash flow, which is always helpful. Lastly, banks have a competitive advantage over insurance agencies in that financial institutions have more information about their customers--enabling them to identity insurance needs and target potential customers more efficiently.
In light of the attractions of the insurance market; this article will examine the basic steps that financial institutions have to take to enter the insurance market and market insurance products.
The initial step is to assess the feasibility. This assessment, done prior to the creation of a business plan, should gather relevant information and project revenue under a set of assumptions about the prospective operations and the available market There are three major things that need to be done.
Measure the qualified and available market for a basket of insurance products. General insurance products--like homeowners, auto and small business--are the most common needed by the bank's existing customers as well as other prospective customers in the market. The qualified and available market for property and casualty coverage tracks closely with the number of households and businesses in a target area. There are several ways to further qualify the market potential based on the data in your MGIF or a simple count of your bank products. For example, your current individual and commercial accounts are likely to be your best prospects. A thorough approach would break down the available market by line of coverage for both property and casualty, and life and health. The insurance needs of your own employees may contribute to this market potential as well.
Quantify the revenue associated with the available market. Here, some estimating of premium rates and commission is necessary. Bankers can gain insights into this data through industry publications or by simply asking a knowledgeable insurance agent or insurance company representative in the area. However, the feasibility study is a critical step in confirming your revenue opportunity. It is important to get accurate and comprehensive data by product line and to adjust the data for your bank's account base.
Estimate the market share you could reasonably expect. Market share encompasses some best guesses about competition, the scope of your operations, and how much of your time, energy and financial capital you intend to devote. Though this is a bit of a "chicken and egg" story, it is an important step as you begin to set goals for your future enterprise and gain the support of your board members.
Other competitive factors contribute to this analysis. Ideally, insurance services in your current market area are fragmented, with no dominant insurance agency. The basis may be growing, with the number of households and businesses increasing--creating a bigger overall market. For most banks, the opportunity is attractive simply due to the size of the available premium in the market area. It's time to be optimistic--with ever-growing pressure on traditional income sources and the poaching of customers from bank competition, this may be the best use of management and bank equity in the ongoing effort to increase return on investment.
The business plan will spell out your approach for obtaining enough share of the market identified in the feasibility study--and squeezing profit from the venture. The process of creating a plan will help you to understand the market environment and determine the bank's overall strategy. There are three ways to enter the market.
De novo (or starting new). Hiring a manager and setting up shop may seem like a bold route, but in most cases, the revenue flow will not catch up with expenses quickly enough for this option to be attractive.
Joint venture. This might be a route for bankers to learn more about the dynamics of the insurance business, but the bank loses some control over customers and gains only a small fraction of the revenue potential.
Acquisition. Buying your way into the market by acquiring an existing agency is a fast route to gaining the management and staff necessary to exploit your insurance opportunity. It eliminates a competitor and creates day-one cash flow to help finance the purchase.
The acquisition process involves selecting agency candidates, performing a financial valuation and due diligence, and negotiating a purchase agreement with the principals. Most banks will want outside help in these steps. Post acquisition, the integration of the acquired agency's management and employees, facilities, systems, accounting and business processes can present management challenges. Again, the time devoted to planning and to the due-diligence process will smooth this transition.
To understand the marketing fundamentals of insurance distribution, let's look at the issues relating to product, price, place and promotion.
Product is made up of two components: the contract for insurance and the services wrapped around that contract. The agency does not control the insurance contract. Insurance policies are written by the insurance company and are virtually standardized in the personal insurance market. While there are many features that make one insurance company's policy different from another, the differences tend to be marginal.
The insurance policies your agency will offer depend on the companies you represent under an agency agreement. Generally, several leading insurance companies and some niche or regional carriers serve the same market but have underwriting preferences for the type of property they want to insure or a market segment in which they are most competitive. The typical small- to medium-sized agency will represent over seven insurance companies for personal insurance products. The agency must have an agency contract and appointment to represent these companies. Your competitors probably represent the same companies, making it difficult to differentiate your agency on product. However representing strongly branded and well-rated insurance companies is a critical success factor for leading insurance agencies.
Policyholder service is a major service commitment and a way to differentiate a high-quality agency. There are two kinds of service: that provided by the insurance company and that provided by the agency. At the time of a claim, the agency's producers (agents) and customer service representatives often work in concert with the insurance company to help the policyholder. But the agency also has the responsibility to renew the policy, and to make changes to the coverage during the policy year. Leading agencies rely on specialized agency management systems for efficient policyholder service. Similar to the situation in banks, information systems--including the Internet--are playing a larger and larger role in the business processes of an insurance agency.
What are you selling?
As a service provider, what are you selling? It's worth exploring this question because it relates directly to the proposition that a consumer will accept the bank as a qualified provider of insurance. The essential activity of an insurance agency is needs-based selling in which a special relationship of trust is formed. Insurance needs are naturally individual, private and personal, involving a person's assets liabilities and other personal information. Insurance clients trust their agent to understand their needs and to provide for those needs through the agent's understanding of a very complex agreement and a detailed contracting process. Clients also trust their agent to maintain the privacy of personal information. The consumer is buying only a promise--that the insurance company will pay at the time of a claim.
Because of the consumer's heavy reliance on the agent, the agent has a professional and legal duty to conduct this process according to industry standards. The high level of trust is the basis for a long-term relationship with benefits to both parties--benefits that increase over time. A successful agency is in the relationship business, trading off high customer acquisition costs against a long-term, increasing revenue stream. There are many ways a consumer can purchase insurance; but, what they are buying is the relationship.
How does the relationship formula for an insurance agency transfer to a traditional banking formula? A bank promotes institutional trust as a central feature in its relationship with its customers. Customers trust the security of the bank in holding their deposits safely and protecting the privacy of their transactions and personal financial details. In their entry to the insurance market, banks are offering a new value proposition. However, it is a natural extension of their already established relationship--and the potential insurance customer has already accepted part of this value proposition.
Needs-based selling and CRM
The needs-based selling activity of an insurance agent is the ultimate one-to-one or relationship marketing opportunity. The challenge is to engage and benefit from customer relationships--and also to scale the process cost-effectively.
Relationship-based service businesses must accept a difficult proposition: that a relationship with your customer is inherently inefficient. This may seem like a losing proposition to executives who are concerned about gaining scale efficiency (and minimizing costs) in every aspect of business processes. In order to bridge this scale conflict in the banking business, financial institutions have invested heavily in CRM systems. Information systems are not a substitute for a customer relationship. Information systems increase data flow and reduce the paper flow that takes up a disproportionate amount of time in the process of forming and keeping relationships. Thus, information systems enable relationships to be formed and retained more easily.
Insurance sales, supported by information systems, will result in more profitable relationships being formed with bank customers.
In the personal insurance market segment, many consumers shop almost exclusively on price. Unfortunately, price is another feature that is out of the agent's control. Policy prices are set by the insurance company and are regulated by state insurance commissioners. Much of the price is determined by the risk itself, through the underwriting process (for example, the value of the car and the risk profile of the driver).
Agencies have the ability to increase their average policy premium and commission by simply focusing on individuals with higher asset values to insure. This is one example of the competitive advantage that a bank agency has over a traditional agency: Banks can use information they have collected already. Data on the relative wealth of customers can help banks differentiate higher revenue potential and special insurance needs. Other than traditional demographic data, insurance agencies do not own information about the value of prospects' homes or autos to help them market to high-premium households.
Insurance agencies sometimes market on price, but this is self-defeating. The variability in the underwriting from one customer to another is such that no agency can be the low-priced provider all the time. Since the agency's income is tied to the price, competing strictly on price erodes profitability. While you cannot avoid being competitive on price, you can add value to the price by offering superior service, advice and reliability.
Price is influenced more by the market dynamics and the state of the industry. Though these factors are outside of the control of an insurance agency, they affect the profitability and competitive position of an agency. Premiums, and hence, commission, are cyclical. Competition drives rates down until claims costs exceed written premiums. Then the market "hardens" and premium rates rise. This cycle is independent of the general economy and is affected by natural disasters and catastrophic events. The effect may be to offset the variability in interest-sensitive income.
Place is a financing and operations issue as much as a marketing question Whether to completely merge bank and insurance operations and to include insurance agents in the branch will depend on many factors. There is little guidance in industry practice since bank insurance operations are still emerging. The key to success is to leverage the banks installed-cost structure as much as possible. A bank may already have a branch structure that was purposely built to access the market area. Modern information systems allow back-office processes to be separated from selling locations. However, most insurance agencies are filled with paper files that must be accessed for some customer service issues. Insurance transactions are less frequent than banking transactions but convenience to physical locations is still an important marketing strength.
Visibility of the insurance activities in the branch is an important step in gaining awareness and preference for the service among your customers.
A bank must determine what its new value proposition is: What is it that the institution will provide that the customer will show a preference for over the available alternatives? Value proposition statements are a good way to organize and motivate your employees. They are also helpful as the basis for sales and marketing activities. Banks already have a strong service mission that they have carefully built and consistently reinforced. This is another area of synergy that supports a convergence between banking and insurance.
Once a bank defines its value proposition and service mission for insurance sales, many of the traditional promotional activities of banks carry over to insurance. New concepts such as permission marketing and new techniques for targeting your customers through complex data analysis will help to make your marketing effective.
Your brand is both the name of your bank and what your current and prospective customers expect when they think of your organization. Beyond the name, you invest your brand with meaning in the customer's eyes at every point of service and with every advertisement, promotional mailing, community event, and the look and feel of your branches.
Your brand is a proposition: a promise of quality to your customers, both existing and prospective. Your customer's preference for your bank is a sign that they accept that proposition in part or in whole. This proposition, restated at every level and confirmed with services your bank actually delivers, becomes a franchise.
In offering insurance, you are introducing a new service and a new proposition that your brand will stand for. At a minimum, you are proposing that your bank is a well-qualified provider of insurance services and that your pricing and service are more valuable to your customers than their current provider offers. You must back up this proposal in the service that you deliver.
Insurance is a steady and profitable market that is a natural fit with a bank's existing customer relationship and brand franchise. Planning, strategy and an awareness of the synergies between banking and insurance will help support a successful entry into the insurance market even though many of the propositions supporting bank insurance enterprises are untested. Banks that embrace this opportunity will improve both the banking and the insurance experience for their customers. And these financial institutions will be rewarded with superior return on the equity and management resources invested.
Edward H. Vandenberg is a bank consultant with Aon Risk Management Services, Washington, D.C. The American Bankers Association endorses Aon for services related to bank assurance. He can be contacted at firstname.lastname@example.org.…
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Publication information: Article title: Full Service Finance: Insuring Customers for Life; an Overview of Why Banks Should Add Insurance Sales-Plus How They Can Enter the Business and Market Products Effectively. (Fundamentals). Contributors: Vandenberg, Edward H. - Author. Journal title: ABA Banking Journal. Volume: 34. Issue: 3 Publication date: April 2002. Page number: 42+. © 2009 Simmons-Boardman Publishing Corporation. COPYRIGHT 2002 Gale Group.
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