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ATLANTA-With the doors now open to the insurance market, many banks are expected to take advantage of the income-producing opportunities that insurance can provide.
But there are a number of key considerations bankers must resolve on the way to selling insurance, many of which will surely have implications for bank risk managers.
Although their entry into this market has long been opposed by independent insurance agents, banks now see signs of acceptance and potential partnerships with agents.
"The world of insurance vs. banking isn't so much 'vs.' now," said Douglas C. Winkley, vp with INTRUST Bank N.A. in Wichita, Kan., at the American Bankers Assn.'s annual Security, Audit and Risk Management Conference held last month in Atlanta.
In the wake of recent court rulings, "The only barriers left are your own inventive minds, your banks' resources and your willingness to take risks," said Ed Armstrong, a managing director with Aon Specialty Group's Risk Management Services unit in Washington.
"It really doesn't matter if you're in income-producing activity in your bank. You're probably going to be involved," Mr. Armstrong told bank risk managers during a conference session on insurance income opportunities for banks.
Banks' first opportunities in the insurance market will probably be in the area of "transactional-related opportunities," such as offering auto insurance to car loan customers, Mr. Armstrong said.
To realize those opportunities, he expects to see new joint ventures between banks and insurance agents, along with new ways to compensate banks for selling insurance products.
Banks will target personal lines business at first, but eventually they could expand into commercial lines coverage for corporate clients.
"The method of compensation for the seller of insurance is going to change as the banks become more dominant," Mr. Armstrong said. "If you become dominant certainly you're going to demand new ways of receiving revenue."
He predicted the development of profit-sharing arrangements between banks and insurance companies. "If you do that you become less susceptible to insurance companies squeezing down on your commissions," he said.
Mr. Armstrong said his belief that banks will become a dominant player in the insurance marketplace is based on certain competitive advantages they enjoy, such as effective distribution systems, state-of-the-art information technology, access to an existing customer base and public confidence.
"Banks have some real substantial advantages over other insurance providers in the market," he said.
Those advantages put banks in a solid position to compete on a price basis, said Mr. Armstrong, adding that "the largest single determinant of insurance purchasing in the future is going to be price, because all the other distinctions are blurry."
There are several ways banks can get into the insurance business, Mr. Armstrong said, including:
Start from scratch and assemble a new insurance operation.
This approach can be difficult because the bank's knowledge of the insurance business is limited, he said.
Acquire an agency.
This is the route that most banks entering insurance are selecting, Mr. Armstrong said. Acquiring the right agency can provide the bank a strong source of expertise, he noted.
But a bank acquiring an agency has to be careful to provide incentives for the agency's principals to keep it a profitable concern rather than viewing the acquisition as an opportunity to cash out and retire, he added.
"The problem with buying an agency for most community banks is that it takes a lot of upfront capital," Mr. Armstrong said. "And if they overpay, as so many of them do, it takes a long time to make up that capital."
Form a joint venture with an established agent/broker or carrier.
Joint ventures offer some clear advantages to other approaches, Mr. Armstrong said. They are the least expensive way to get into the business, they provide an immediate source of insurance expertise, and they are usually flexible, he said.
Joint venture disadvantages, meanwhile, include the need to find the right partner and the fact that the bank must share its insurance business profits with someone, he said.
And joint ventures can present several sticky questions, not the least of which is who owns the right to the renewals. "It depends on who has the leverage, but I really can't imagine banks giving up 100% of the customer," Mr. Armstrong said.
He is suggesting to clients entering joint ventures that they keep shared ownership of renewals with some sort of buyout provisions.
There also are various "cultural" issues that must be addressed in a joint venture between a bank and an agency, according to Mr. Armstrong.
For example, he said, bank officials may be concerned that insurance agents may chase away bank customers by calling them at home at dinnertime to sell them homeowners insurance.
Confidentiality and publicity can be another concern. Banks historically have been much more conservative about releasing information than agents, so the issue has been a sore spot in many bank-agent joint ventures, Mr. Armstrong said.
Those cultural issues can be addressed in joint venture contracts that set out, for example, limits on agents contacting bank customers or provisions that any publication of information must be approved by the bank first, he advised.