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Friday, April 5, 2013

Bank-Insurance Resurgence Part 2: Will banks align insurance strategies with objectives?

By Jim Campbell, Reagan Consulting, Inc

The 2012 Study of Banks in Insurance, recently completed by ABIA, found that bank-insurance participation remains broad. Nearly two-thirds of bank holding companies (BHCs) larger than $500 million in assets are selling insurance. Most, however, do so only marginally. In fact, less than one-in-ten is earning at least 10 percent of its total non-interest income through insurance brokerage.

This fact highlights a key challenge for bank-insurance. Overwhelmingly, banks that sell insurance do so in order to grow non-interest income. So, why are so few achieving a meaningful impact? The answer appears to be a prevalent misalignment of insurance objectives and strategies. To better understand this misalignment, the Study of Banks in Insurance analyzed two groups of banks that currently sell insurance. The first group (the “Players”) included only banks earning 10 percent or more of their non-interest income through insurance sales. The second group (the “Dabblers”) included banks that sell insurance but earn less than 10 percent of their non-interest income doing so. The study found pronounced strategic differences between these two groups. Specifically, the insurance strategies pursued by the Players differ from those of the Dabblers in three key areas.

Establish a Goal. 67 percent of the Players have established a specific goal for the percentage of non-interest income they want to earn through insurance brokerage. This compares to only 36 percent of the Dabblers. Furthermore, of those that set a goal, two-thirds of the Players target insurance to contribute more than 10% of total non-interest income, while only one-third of the Dabblers do so.

Sell Retail Products. Virtually all of the Players are actively participating in retail insurance sales (i.e., property & casualty, group benefits) while only slightly more than half of the Dabblers are doing so. By contrast, the participation rates vary little between these two groups for other product lines, such as individual life & health, annuities and title insurance.

Acquire an Agency. For the Players that sell retail insurance products, an acquired agency is the primary platform for nearly 9-of-10. And a majority of these banks plan to acquire additional agencies over the next 24 months. Among the Dabblers, however, only 28% of those that sell retail products do so through an acquired agency.

The results of this study strongly suggest that few banks have achieved relevant scale in insurance brokerage without selling retail products through an acquired platform. Other insurance strategies tend to lead to perpetual dabbling. To be clear, dabbling is not inherently wrong and some banks will be content with only marginal participation in insurance brokerage. But for those determined to achieve the non-interest income impact that insurance brokerage has demonstrated it can deliver, an acquisition-based strategy appears essential. In the near-term, we expect most Dabblers will maintain their current course. Over time, however, the persistent gap between objectives and results will motivate a growing number to pursue acquisitions.

Read Part 1: Is the insurance brokerage recovery sustainable?

Join a Best Practices Panel discussion of the topic.
Jim Campbell will lead a Community Bankers Best Practices Panel, hosted by chair Brian Duffy, RSI Insurance. This event will be held Thursday, May 16 at 2:00 EST. Register now.

Order ABIA's Study of Leading Banks in Insurance. The 2012 ABIA Study of Leading Banks in Insurance presents the findings from our biennial research of the current and planned insurance activities of U.S. banks. This management tool will help executives understand how the bank-insurance industry is developing, what strategies banks are pursuing, and what practices are producing successful bank-insurance programs. Learn more about the study.