Bancassurance Gets a Boost.

A new federal law may make it easier for banks to sell insurance, but that doesn't necessarily mean they will.

Prospects for the sale of insurance at banks have never been better. The market has barely been tapped, and the Gramm-Leach-Bliley financial-services modernization law went into effect March 13. That law breaks down barriers between the banking, insurance and securities industries that had been in effect for decades.

Those familiar with the banking and insurance industries, however, say that it doesn't mean banks will be selling more insurance anytime soon. "The new law may help some," said Kenneth Kehrer, president of Kenneth Kehrer Associates, Princeton, N.J., which recently conducted a benchmark study on the subject. "The main thing it does is allow banks to get rid of some of the nuisance factors of having to locate insurance operations in small towns," a standard set in a 1996 court ruling in a case brought by Florida-based Barnett Bank. "On the other hand, there's a possibility that it opens up other potential nuisance problems in that it gives the states more leeway than the Barnett decision did."

Excluding premiums for credit insurance and annuities, insurance premiums at banks amount to less than 1% of the U.S. total. Banks have been actively selling annuities with their portfolio of other investment products, and they have historically been allowed to underwrite and sell credit insurance.

If the new law does spur insurance sales at banks, it will have been a long time coming, said Andrew Singer, editor and publisher of Bank Insurance Marketing, which conducts a biannual study on the sale of insurance through banks. The magazine is published for the Financial Institutions Insurance Association (FIIA), Corte Madera, Calif.

"We keep waiting every two years for life insurance through banks to explode, but every year we do this study, life sales are very low;" he said. "On the other hand, when we ask which products will have the fastest sales growth, life comes out ahead."

Annuity premiums produced by banks are 50 to 100 times that of premiums for other insurance products they sell, Singer estimated, even though those other insurance products generate much higher revenues for the institution per premium dollar. In terms of earnings, annuities contribute only 10 times as much as other insurance products, he said.

Kehrer's benchmarking study provides a perspective on how few banks have been able to penetrate their market with insurance products. For his study, Kehrer obtained detailed data on insurance sales and revenue from 19 of the 24 largest bank insurance programs in 1997. The typical household served by those banks spent an average of just $3.17 per year in premiums for insurance products sold through the bank. The average annual commission per household was 83 cents. "And that doesn't count the banks that are not selling insurance, just the banks that are selling," Kehrer said. Of the 19 banks in the study, 15 reported selling life or health insurance. "What they've done so far is just the tip of the iceberg," he said.

Kehrer estimated that life insurance premiums through banks last year amounted to about $300 million.

Opportunity Spawns Concerns

While the Gramm-Leach-Bliley act makes it easier for banks to sell insurance, Richard D. Starr, founder and chairman of the FIIA and director of strategic initiatives at ABN AMRO Insurance Services, Chicago, does not expect banks to stray far from their core businesses, partially because the law introduces other concerns.

Although the law tears down the structural firewalls between the three financial-services businesses, it establishes new privacy restrictions and forces banks to answer to state insurance regulators more than ever before. The act requires that those privacy regulations be in place by May 12.

The intent of the privacy section of the Gramm-Leach-Bliley act is to restrict the amount of customer information that unaffiliated companies may share with each other. In addition, it provides that a state law will not be pre-empted if it provides greater privacy protection for a consumer than the federal law, Starr said. "There are 17 states that have privacy legislation proposed as we speak," he said in February. He believes insurance agents, who have been trying to keep banks out of their business for decades, support these new bills.

"To complicate this further, this is an election year, and privacy is like mother and apple pie," Starr said. "Every state legislature is going to meet this year, and most of the state activity will be finished before regulations are issued on the federal side."

Under the federal law, unaffiliated financial-services companies will not be allowed to exchange any information about customers, not even the kind of data that is freely available to the public at places like county halls of records. "That's not logical," Starr said.

The Federal Reserve Board proposed regulations endowing the Federal Trade Commission as the "arbiter of privacy" on state regulations that are more protective of consumers' privacy. But the commission would have to consult with the Federal Reserve Board before issuing its decions.

Privacy regulations may add some burden to banks selling insurance, but they won't prevent anybody from doing business, said Paul Pilecki, a lawyer who counsels banks on regulations, planning and acquisidons.

Regulatory Maze

The Gramm-Leach-Bliley act also reaffirmed the McCarron-Ferguson act, which gave the power of insurance regulation to states. It provides states with 13 safe harbors that protect them from pre-emption challenges, "so states that don't really want to have liberal rules on banks selling insurance can't be challenged," Starr said, adding that he hadn't yet seen any examples of how states have used those safe harbors.

As to working with 50 state departments of insurance, Pilecki said most large banks already have multistate operations and deal with multiple regulators. "It's part of the mindset of doing business, and it's already worked into their discipline. It obviously ratchets up the number of contacts they need to make and bases they need to touch, but it won't result in an organization saying it won't pursue this business opportunity," he said.

Banks prefer a more efficient regulatory structure, however, and are not likely to be satisfied with the way the law currently sets it up, he added. In February, the ABA Insurance Association, an affiliate of the American Bankers Association, proposed a dual regulatory system that would allow insurers to decide whether they want to be regulated by the states or by a new federal insurance commissioner.

Potential privacy restrictions and preservation of state regulation might encourage banks and insurers to join together under financial-services holding companies so they cannot be accused of sharing customer information with nonaffiliates, Starr said.

Banks may think twice about tying their fortunes to those of insurers, though. The banking industry currently has a much higher return on equity than the insurance industry, Starr said, particularly property/casualty insurers. An acquisition could drag down a bank's ROE. "Can shareholders afford that?" asked Starr. 'Will they choose to do that? I don't think so."

Another school of thought is that the difference in returns on equity could lead some banks to buy insurers and combine under the financial-services holding-company structure. If banks have higher returns on equity than insurers, it means their stock is worth more and they have the currency to complete an acquisition, Pilecki said.

"The equation depends on whether a bank thinks it can get more out of an insurance company by offering the insurer's products through the bank's retail delivery system," said Pilecki, a partner in the law firm Shaw Pittman, Washington, D.C. "If you're increasing the amount of fee income, that would be attractive."

All Things Possible

"The question is what strategically will make the most sense for banking organizations," said Don Vangel, director of bank regulatory consulting with Ernst &Young LLP, New York.

Banking's two main choices are either to establish an insurance operation from scratch, perhaps through the Internet and e-commerce, or to acquire insurers with a good infrastructure and assimilate them into the holding company's overall environment.

Banks that want to build an insurance business might look to the Internet, because that distribution channel bypasses the agent system, Starr said.

But Pilecki doesn't expect banks to sell insurance online rather than ally with an insurer. "You want to have the critical mass to deliver the products and the expertise," he said. "To start writing insurance de novo [from scratch] would be somewhat difficult."

A large banking organization would prefer to have an insurance organization that matches its size, Pilecki said. Even if distribution is via the Internet, the bank still has to underwrite the insurance, deliver policies and administer claims. But e-commerce might make it less desirable for a bank to buy a big insurance agency, he added.

E-commerce might diminish the value of that kind of company.

Banking organizations can select from a big menu of insurance products. Ernst & Young's Vangel said banking regulators have been more concerned about property/casualty insurance than life insurance. "There is nothing more studied and predictable than mortality," Vangel said, adding that health insurance also might be attractive to banks.

The types of insurance that banks choose are tied to the demographics of core clientele--whether it is a community bank or one that provides services to high-net-worth professionals, Vangel said.

How creative banks can be will depend largely on the federal regulations expected by mid-March to flesh out the law. Most importantly, the Federal Reserve and the Treasury Department need to define what activities are financial in nature or are incidental to financial, Vangel said. The law allows "complementary activities," and the Federal Reserve has jurisdiction to determine what those are.

"There's almost no limit to what the mind can come up with, including activities mostly commercial but that are related to financial services," Vangel said. "For example, since financial services are delivered by automated means, banks could argue that manufacturing computer services is a complementary activity they should be allowed to do." Complementary activities give financial-holding companies the ability to expand not only horizontally, but vertically, he said, like a paper company owning a forest.

Attractive Partners

Banks will look for insurers with good reputations, good products, strong management and the ability to enhance value, either because they can achieve efficiencies or can provide an outlet that an insurer doesn't already have, Pilecki said.

Banks and insurers face the same risks as any other companies involved in acquisitions. A bank needs to perform good due diligence and identify all potential problems of the company it's acquiring. "The risks can be guarded against," Pilecki said. "There's nothing inherent about an insurance company that is a risk by itself. You can overpay. If you don't have a good plan about how to use the company, about how to make the companies work together, that's a risk."

Vangel agreed that joining forces could present pitfalls. "Trying to be all things to all people has been a failed strategy," he said. "You have to think of where your advantages are. Banks historically have moved in packs, but that's changed over time. Differentiating yourself from the competition now is key."

The cultures of the two companies, too, should be compatible. "The risk is to be precipitous, to have the feeling you can do all this stuff, so let's go out and buy something," Vangel said.

The law gives all companies the right to buy other kinds of companies, so insurers could buy banks. But Vangel said insurers lack the currency to be major acquirers and are more likely to find themselves targets. "I'm not sure that's a bad thing for them," he said. "I certainly wouldn't be fearful."

The Citigroup Model

When Citibank and Travelers Insurance merged a couple of years ago, the new company, Citigroup, bumped up against what laws then permitted in the United States. Congress may have simply caught up to the Citigroup model when it passed GrammLeach-Bliley. "The Citigroup model is what business organizations will choose because that's law," Pilecki said. "Banking organizations won't be able to establish insurance subsidiaries, so the holding-company model will be used. Through its retail systems, it will attempt to deliver banking, insurance and securities products that the organization develops. That's what the law permits'

Pilecki and Vangel hold slightly different views of what the Citigroup model means to aspiring financial-holding companies. "Consumers have a lot of choices, and it's difficult to tie them down to a single institution," Vangel said. It's important to brand the name of the company into the consumer's mind, however, much like Citigroup has done, he said.

But the Citigroup model doesn't necessarily mean a holding company has to sell all of its products to the same customers, Pilecki said.

                  Bank Sales of Individual Annuities Grow
                                $ Billions
'87      $4.0
'88      $6.0
'89      $7.0
'90      $8.0
'91      $9.0
'92     $12.2
'93     $13.5
'94     $18.1
'95     $14.2
'96     $17.2
'97     $20.2
'98     $18.8
'99 [*] $26.5
(*.)Estimated
Source: Kenneth Kehrer Associates
                            Life/Health Premium
                            Sold Through Banks
                    1997 1998 1999
Single Premium       $92 $110 $154
Reoccurring Premium  $72 $143 $220
Total               $165 $253 $374
(*.)Estimated
Source: Kenneth Kehrer Associates
                Banks' Market Share of Individual Annuities
'87     %10.9
'88     %12.2
'89     %13.1
'90     %12.3
'91     %13.3
'92     %16.5
'93     %15.7
'94     %18.3
'95     %14.3
'96     %15.4
'97     %15.3
'98     %14.7
'99 [*] %16.7
(*.)Estimated
Source: Kenneth Kehrer Associates

Getting a Head Start

Like most other banks, FleetBoston Financial Corp. hasn't sold much life or property/casualty insurance. Like some of its peers, it has a vibrant annuity business. But this corporation has something that most banks don't. It owns insurance agencies, which could give it the inside track should it decide to go after the life insurance or property/casualty market more aggressively.

FleetBoston is the result of the October merger of Fleet Bank and Bank Boston. Fleet reported that it sold $550 million of annuities in 1997, $540 million in 1998 and $830 million last year. Its first agency purchase--in Massachusetts--came many decades ago, and the bank has been grandfathered from a law that had prevented such ownership. In the early 1990s, Fleet worked through a third-party marketer, Bankmark of Morris Plains, NJ., which set up insurance agencies that it owned for the benefit of Fleet. In January 1996, Fleet bought a Rhode Island agency from Bankmark, and it went on to buy agencies in the other states in which it has offices--the five other New England states, New York and New Jersey.

FleetBoston's agents, which number about 250, work under one management team and have offices at the bank's branches, said Jeremiah France, vice president for product distribution and development, which is responsible for selling mutual funds and annuities. The agents are not in their branch offices at all times, and some serve more than one branch, but a branch would know where the agent is each day and can schedule appointments. "We've created and run a very successful business around that initiative," France said. Another part of the bank handles sales of life and property/casualty insurance.

France said the bank generates annuity or mutual-fund business in several ways. If a customer inquires about a higher savings account rate, the clerk might refer that person to an investment specialist/agent. Customers might also respond to the bank's mailed advertisements, a statement stuffer or promotional items located in a branch office. Sometimes the contact is a recommendation from another customer.

Fleet Bank ranked eighth in bank annuity sales at the end of the third quarter, according to Singer's Annuity & Funds Report, Mamaroneck, N.Y. France said that Bank Boston ranked 42nd, so he expects the merged banking corporation to move up to at least No. 7.The new corporation has about $185 billion in assets, making it the eighth-largest bank-holding company in the United States.

FleetBoston has teamed up with several insurers to sell annuities, including ING, American General, Putnam Capital Manager (offered through ITT Hartford), another ITT Hartford product, American Skandia, Nationwide, GE Capital and American International Group. About 70% of the bank's annuities are fixed and the rest variable, which France said bucks the recent trend toward variables.

Its latest annuity venture, with Boston neighbor Keyport Life Insurance Co., has been judged a success by both companies. Keyport, whose headquarters is two blocks from FleetBoston, designed two private-label fixed annuities and a securities-registered equity-indexed annuity. According to Keyport, premiums totaled $350.4 million last year, with $269 million from sales of Galaxy Fixed Annuity 5, the product with the shorter, five-year surrender period.

"The relationship is a tremendous success that has brought us from minimal sales with Keyport to a figure that is astounding to us," France said. "We couldn't be more pleased."

Fleet Bank had put Out a request for proposals. Keyport "came back with an option that truly fit our needs," France said. The product design matched elements important to clients based on the bank's sales experiences, and it encouraged clients to add to their accounts.

Keyport started distributing annuities through banks in 1985. Since then, the insurer has distributed mostly fixed annuities "in almost every conceivable way" through banks, said Paul LeFevre, chief operating officer. "The culmination was the deal with Fleet."

As part of its partnership with FleetBoston, Keyport also provides sales support and service support, including sales ideas, training, seminars and continuing education. It also helps to keep the bank's representatives licensed.

The new financial-services modernization law is not likely to give Keyport any more freedom to sell its products, LeFevre said. "Maybe Fleet would buy Keyport, but that would be the final step," he said. Added Keyport spokeswoman Janice Foley, "The way we do business and form partnerships is not dependent on the act."

But France recognizes that the law could affect Keyport's business model. "If a bank takes the step of affiliating with or buying an insurer, it might be more difficult to do business with that bank," he said. "We've dealt with that in the brokerage houses. They sell a lot of proprietary products, but their brokers demand product choice.

"It probably works both ways. If Keyport were bought by Fleet, other banks we do business with might not want to do business with us anymore."

France also recognized that the new law could cause changes as banks gain the right to underwrite their own products and reinsure them. He said banks were likely to examine those opportunities. He declined to comment on whether Fleet was considering any insurance company acquisitions. "We have a strategic team that looks at this kind of thing constantly," he said.

The partnership with Keyport, he said, is not the bank-insurance model that the Gramm-Leach-Bliley act engenders. "It's more in terms of reinsurance and underwriting," France said. "It does ease the restrictions of what a bank can actually sell, and it allows for ownership and greater control of the process to allow more value by combining institutions."