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Monday, April 8, 2013

Bank-Insurance Resurgence, Part 3: Can Community Banks Effectively Execute Insurance Strategies?

By Jim Campbell, Reagan Consulting, Inc

The significance of an acquisition-based insurance strategy presents both an opportunity and a challenge for community banks. On one hand, most community banks can achieve relevant scale in insurance brokerage through a single acquisition of a mid-sized or smaller agency. For this reason, the list of banks earning the highest percentage of non-interest income from insurance brokerage is almost exclusively populated with banks below $5 billion in assets. On the other hand, community banks that wish to acquire agencies will face challenges that are generally less threatening to larger banks. The primary challenges for community banks include the following:

Lack of Targets. ABIA's Study of Banks in Insurance found that the primary impediment for banks that want to acquire agencies is a lack of acquisition candidates. This may seem counterintuitive in a nation of more than 37,000 independent insurance agencies, but most of these firms are either too small or lack the characteristics needed to be a bank platform. In addition to finding the right profile, reasonable alignment of culture, timing and expectations is required. All of which is made more challenging for community banks that often search within a narrow geographic footprint.

Lack of Knowledge. Many bank leadership teams are reluctant to invest in an unfamiliar industry. While this can be overcome, building institutional knowledge of insurance often requires injection of a new hire, board member or industry advisor. And such investments are not made casually by community banks.

Lack of Capital. Because insurance agency assets are predominantly goodwill, an agency acquisition will generally impact a bank’s Tier 1 capital position. As a result, community banks that are not in a strong capital position may have to defer their acquisition strategy.

Only those community banks that recognize and address these challenges are likely to achieve their long-term objectives for selling insurance.

While it is clear banks are now a permanent component of the insurance brokerage industry, the implications for banking are less clear. Insurance brokerage is currently a relevant line of business for only a small percentage of banks. Will it remain as such or will the base of relevant participation expand? Emerging conditions may provide an answer over the next several years. Current performance trends for insurance brokers are compelling and likely to be sustained. If so, they will capture the attention of community banks starved for attractive sources of non-interest income.

Banks serious about evaluating the potential benefits of an insurance brokerage strategy should first define their objectives and then assess their ability to compete for agency acquisitions. Challenges will be identified but most can be overcome. Ultimately, insurance brokerage is a good fit for many community banks and now may be the time to engage.

Read Part 1: Is the insurance brokerage recovery sustainable?

Read Part 2: Will banks align insurance strategies with objectives?

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.