Academic journal article ABA Banking Journal

Take a New Look at Insurance: Banks Eye Sales of Insurance to Grow Revenue. How to Make It Pay Off

Academic journal article ABA Banking Journal

Take a New Look at Insurance: Banks Eye Sales of Insurance to Grow Revenue. How to Make It Pay Off

Article excerpt

The road to the insurance brokerage business can be bumpy if a bank is unclear about its objectives and the way it should approach the market. But in this low interest-rate environment, it's a road many are traveling in search of other sources of noninterest income. Insurance can be an attractive source of this income, because it's a market that poses little risk to banks, which only take on the distribution and not the underwriting.

It's also a market that seems to be on the rebound. The Federal Insurance Office's Annual Report on the Insurance Industry says that the financial performance and condition of U.S. insurers, as well as the market values of insurers, continues to show recovery and improvement from the decline during the financial crisis.

The banking industry seems to be warming up to insurance again, with an active acquisition period at the end of last year and a continuing interest in the market this year.

"There is an increasing number of banks that are looking at the insurance brokerage business, that are having discussions, and that are taking serious looks at opportunities either to enter or expand what they're doing," says Jim Campbell, partner at Reagan Consulting, Atlanta, Ga.

To be sure, there are still challenges and hurdles to entering this market--one of them being changing capital and regulatory standards.

"There are a number of things happening in the banking industry that might make it harder for some of these banks to act immediately," says Campbell. "And we may see the real increase in activity kick in maybe a year from now."

Another challenge: the knowledge gap. Many banks are unfamiliar with insurance sales and products and stick with what they know, rather than enter a market that requires a great amount of investment and training up front.

Fortunately, despite these hurdles, banks have precedents to look to and programs that can help them determine if now is the time to enter the market, and if so, which road to take to get in.

Resource focused on insurance

One of the first stops on the path to insurance sales should be the American Bankers Insurance Association (ABIA), which is a subsidiary of the ABA. The ABIA represents banks selling or planning to sell insurance, with a strong focus on advocacy.

The association also offers a range of resources to members, including studies, best-practice panels, and an annual conference (Sept. 16-18). (For more on ABIA resources, see box, p. 29.)

"What we hear from members is that they love to connect with each other," says Deanne Marino, executive director of the ABIA. "Banks of similar size really find it useful to sit across the table from a colleague that might be from a different part of the country and hear their story, share challenges, and discuss things."

Reasons for jumping in

Having an advocate in the bank's corner to help it determine its goals in the insurance market is important, as these goals dictate which path the bank should follow. Here are three feasible objectives.

Noninterest income. The biggest reason banks get into insurance is to diversify their portfolios with other sources of noninterest income.

"Insurance products are generally consistent with the nature of banking relationships," says Campbell. "Many of the products have a renewing feature to them, which also makes the income renewable."

Customer retention. In addition, banks see insurance as a way to hold on to and strengthen their relationships with customers.

"The tenure of insurance-buying depositors is greater than the average depositor," explains Wayne Conte, executive vice-president of sales in the Insurance Group, Affinion Benefits Group. "If they have an insurance relationship with the bank, there's a greater tendency to consider that bank their primary institution."

According to a study Affinion conducted through Synergistics Research, more than six out of ten depositors stayed with their financial institution primarily because of the insurance relationship. …

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