Banking On Sales.

Banks and insurers have been both partners and competitors for many years. Now, nearly two years after the passage of a law that broke down financial-services barriers, they are still experimenting to find the right products and relationships.

Financial products don't come with sales manuals, so manufacturers had better have good ideas about how to self them.

That's particularly true in the open environment created by the Financial services Modernization Act of 1999, which knocked down manufacturing and marketing barriers among insurers, banks and securities dealers. With this new ability to cross old boundaries and find new ways to mix their products and sales forces, financial-services providers have been in an experimental mode. Insurers are finding new ways to team with banks to sell insurance products through branch offices. Some insurers, meanwhile, are trying to sell bank products through agents.

Amid this experimentation, banks have stood out as "annuity-distribution factories," but they haven't been good at sales of more sophisticated insurance products, according to Kenneth Kehrer, a Princeton, N.J.-based consultant and president of Kenneth Kehrer Associates, which tracks insurance sales through banks. Banks account for 25% to 35% of individual annuity sales in any quarter. Move on to life, health or property/casualty insurance, however, and banks have struggled.

Annuities are an obvious sale for banks in that fixed annuities are simple transactions, like tax-deferred certificates of deposit, and variable annuities are like tax-deferred mutual funds. "Life insurance is more selling-involved and needs-based," said Chris Swift, national industry director for KPMG LLP's insurance practice. "It needs a determination of proper coverage and type of life product--such as whole life or term--and an understanding of the tax implications. It's just a more complicated sale."

Life sales through banks are also retarded by consumers' prevailing marketing perceptions that they buy insurance from insurers and banking products from banks, added Robert Arning, national industry director for KPMG's banking practice. The perceptions also work against insurance agents selling savings and checking accounts, notwithstanding initiatives launched by two industry giants, the State Farm Group, Bloomington, Ill., and more recently by Allstate Corp., Northbrook, Ill. "1 don't see a lot happening in either direction," said Arning. "It's happening on a smaller scale in certain organizations or in certain parts of the Country, but I don't see it as very popular or commonplace today."

Bank Staff Get in the Act

The biggest development of the past several years in bank annuity sales is a switch from reliance on a licensed broker to more use of bank staff, according to Kehrer. Under the original model, banks would bring in a broker, typically from a bank's broker-dealer, to sell annuities on the bank floor through referrals from bank staff. These brokers "circuit ride" among five or so bank branch offices, and they also prospect for customers, Kehrer said.

Increasingly, banks are supplementing that model with the training and licensing of bank staff to sell annuities and, in some cases, mutual funds. These are known as "platform staff," a throwback term to when bank employees were on a level above the main floor. Forty-two of the 50 largest banks in the United States are using this model, which is backed by wholesaling support from the life insurance companies, Kehrer said.

To sell life insurance, banks have tried direct mail, telemarketing, the Internet and several face-to-face methods involving use of a licensed life agent. These agents have had "one hand tied behind their backs," however, because banks typically segregate the annuity broker from the life agent. "Otherwise, you have a problem of channel conflict," said Kehrer. "That's one reason life agents in banks haven't fared that well."

Banks typically employ two kinds of agents. Retail agents, the "kitchen-table" variety in insurance circles, sell to middle-income customers. Advanced agents cater to wealthier clientele with complex financial needs. Retail agents, often recruited from insurers with career agent forces like Prudential Insurance Company of America or MetLife Inc., might earn from $40,000 to $100,000, but the advanced agents can earn much more, Kehrer said.

Alternatively, banks might refer customers to a nonaffiliated local agency with whom they have a deal or to a high-end insurance brokerage, he added.

"But we have a long way to go before banks can achieve healthy life sales and profits," said Kehrer. "Even though banks are successful at selling annuities and mutual funds, they don't contribute much to the bottom line, perhaps only 2% to an enterprise's annual income. And typically the life-health operation contributes only one-tenth of that."

Part of the problem is scale, and part is heading down strategic dead ends. "By far, the most successful approach has been to have advanced life agents, but the scale at which banks have done that is relatively small," said Kehrer. He said he knows of a bank with $8 billion to $10 billion in assets that has only one advanced agent, and one of the largest banks in the country has only seven.

Another problem is that the use of retail life agents has not been very successful. "A lot of banks had focused on that, and they've begun to realize it's not going to get them anywhere," Kehrer said. "And as they try to expand their most successful method, they come into more competition with life agents who are really good at what they do."

A Long Time in Banks

Nationwide Financial Services Inc., through a subsidiary, has long been involved in the bank channel. Before 1994, the subsidiary operated as a third-party marketer in which it set up programs and hired personnel. "But once we saw the market turning, where banks would run their own programs, we made the switch to a wholesale operation to support what the banks and credit unions had set up," said Matt Reibel, president of Nationwide Financial Institutions Distributors Agencies Inc. He said the company expects to generate close to $4 billion in revenues this year through sales at about 350 banks and credit unions.

The subsidiary employs about 150 in its sales organization and another 100 to 150 in service areas, administration and support. Unique to Nationwide, Columbus, Ohio, is that its wholesalers are dedicated to specific products, a strategy that provides a competitive advantage in the bank channel, Reibel said. The organization sells eight product lines: variable annuities, fixed annuities, variable life, pensions such as 401(k) plans, offshore annuities, immediate annuities, fixed life products (term, universal life and whole life), and the mutual funds of Gartmore Investment Management plc, the United Kingdom-based firm it bought in May 2000. It began offering the mutual funds in April.

Fixed and variable annuities, in about equal amounts, are Nationwide's leading products sold through banks; Reibel said the company is the nation's second-leading provider of variable annuities and fourth-leading provider of fixed. Next in line are the pension products, offshore annuities (in which Nationwide ranks second nationally), and variable life, in which the company ranks first.

Nationwide sees good potential for variable life. "The reason it hasn't been successful in banks up to now is that it's more complex than fixed life, it's underwritten vs. transaction-oriented, and it therefore takes the producer longer to get paid," said Reibel. "But we think it has a tremendously exciting future."

The nature of the product makes it alluring. For customers, it can be set up as a tax-free investment vehicle. It is a very profitable sale for producers, and there is more revenue for the banks. Those reasons "provide the motivation for companies like us" to make it easier to sell variable life, Reibel said. For example, Nationwide will soon launch a less-complex product that should be easier to sell and should significantly reduce the underwriting time so brokers can be paid faster.

The bank channel has grown so big at Nationwide that Reibel's company is the second-largest producing organization in the Nationwide Group, he said. In the annuity business, it has sold more than any of the other companies of Nationwide. Through June, the subsidiary sold 44% of the total $1.55 billion that Nationwide's individual annuity businesses sold.

John Hancock Financial Services, Boston, has also built its bank channel. As of June, it had relationships with about 300 banks, according to Peter Mawn, senior vice president, John Hancock Distribution Services.

Mawn said that in today's climate, banks are willing to enter into agreements with carriers that offer good products, sales support and service. He said Hancock has particularly strong relationships with about 30 banks nationwide.

Hancock began marketing through banks in the early 1990s, but accelerated its efforts beginning in early 1999, shortly after Mawn came aboard. It markets fixed and variable annuities, term life and whole life, long-term-care insurance and mutual funds. Last year, Hancock sold $2.01 billion in individual annuities, $854.3 million of which (42.7%) were fixed. Of those fixed annuities, the bank channel sold $742 million, or 86.8% of Hancock's total. Variable annuity sales through banks came to $154.7 million.

Mawn said banks "are in a learning curve now," but will likely become good at selling insurance. Those successful in selling annuities have learned that they have "responsive customer bases:" he said. Bank clients trust their banks, and Mawn said sales representatives must learn to refer prospects to insurance specialists or licensed agents at the banks, who have office hours and who also prospect, depending on the institution. He said that banks can also introduce insurance products to customers through statement stuffers and other mailings.

Overall, banks produce about 2% of overall insurance premium for term and whole-life products, Mawn said. In Europe, about 70% of insurance premium comes through banks. "I don't expect we'll see 70% in the United States, but I expect 10% is a reasonable number sometime in the future:" he said.

Long-Term Care

Bank sales of long-term-care insurance have been minuscule. "Banks have been trying to sell LTC for 15 or 20 years, but so far, they've been able to achieve a drop in the bucket, probably less than $5 million of premium last year:" said Kehrer. Except for some attempts by mail, banks have barely tried to sell health insurance, he said. But he expects sales of property/casualty insurance to climb now that banks have actively been buying private insurance agencies.

Long-term-care insurance "could be a product to watch" in the bank channel, according to KPMG's Swift. He said long-term care is "sort of between" the transactional investment-related products that banks sell so easily and the complex, financial planning type of products with which they have trouble. Mawn agreed with that assessment and said Hancock, which has made a significant commitment overall to long-term-care insurance, is seeing some "healthy percentage increases" in its long-term-care sales through banks. "The age cohort of the bank customer fits well," he said. "LTC sales are meant to protect assets when a client needs home care or nursing-home care. I think the bank customer tends to be older and a good fit for the product."

Nationwide a couple of years ago launched a combination annuity and long-term-care product, InvestCare, that Mawn said is a great product, "but a little before its time." The product, a single-premium variable annuity that also pays for long-term-care coverage, is primarily for older clientele concerned about long-term-care costs. It addresses the "use-it-or-lose-it" objection to standalone long-term-care insurance by guaranteeing at least the return of the original investment, less any benefit received or funds withdrawn, through the death benefit. Mawn said long-term-care insurance is well-suited for bank sales, but that it faces some of the same problems that variable life sales have encountered.

Who Wins?

Whether banks or insurers have more to gain from the 1999 legislation remains a matter of debate. Swift said banks will benefit more because they know their customers better, have better access to them, and interact with them more frequently. But KPMG's Arning said insurers have more to gain in earnings because they stand to gain from access to banks' client bases. Meanwhile, mergers of banks and insurers may not immediately result in better earnings for banks, he said.

According to Kehrer, insurance agents are the ones gaining most from the legislation, an ironic twist in that they were the ones most against financial modernization. The legislation gave banks the right to buy agencies, and banks have driven up agency prices as they have sopped up the best of the property/casualty agencies, but they have shown little interest in buying life/health agencies. Insurance companies are also selling bank products through agents, but Kehrer said he regards such activity as experimentation and questions the potential for success. "Brick and mortar has been very important in banking, and a State Farm office is not the right kind of brick and mortar," he said, adding that securities firms such as E-Trade have a "leg up" in online banking.

Insurers entering banking may want to be all things to all customers at a time even well-run banks are getting out of some banking businesses, such as credit cards or mortgages, Kehrer said. "If they see themselves good at some element, and they have scale and market dominance, they don't want to be in businesses as second-tier players," he said. "Secondtier players have to compete on price. And so it seems hard to believe banking can be a major business for these insurance companies. It can be diversionary to management, create regulatory problems for them, and suck resources away from core businesses. So I wonder if it's a winning strategy or not."

According to Nationwide's Reibel, banks have benefited more from the legislation so far, and he sees that trend continuing. "Banks are the distributors of all our products," he said. "Distribution is who runs the show. They can expand and go into all the businesses they want to. We won't buy a bank because banks are our partners, and we're not going to compete with them. They can do whatever they want."

At the same time, Reibel said banks and insurers can both thrive. Citigroup, for example, owns the Travelers Group of insurance companies, but Citigroup is Nationwide's "No.1" partner, he said.

Blurring the Lines

There has also been some disagreement about whether financial services companies would eventually blur the distinctions between banks and insurers. Mawn predicted each has expertise that is the core of what it does. "That will continue to be the case," he said, although he expects some consolidations.

Arning said widespread consolidation is likely to be further off than the one to three years that many in the industries had anticipated. "It will be more like five years when you'll see a few more big, successful Citigroup types," he said. About 10 years from enactment of the legislation, customers are more likely to visit a bank or financial planner than they are to see an insurance agent, he predicted.

Deals like Citigroup and acquisitions by the big European financial services companies, such as Germany's Allianz AG and Dresdner Bank, are already happening around the world, "but we're probably close to 10 years away" from so many deals occurring that people will no longer distinguish between banks and insurers, said Swift. Along the way, he expects "intervening structures" that will not risk capital, particularly the use of alliances. "I would partner with a bank that has a widespread credit-card business so that I know what customers are spending," he said. "Do they have kids in college? Are they nearing retirement? If you look at the data on spending, you know what stage of life they're in."

Citigroup will be successful, because it will know a lot about a lot of customers, he predicted.

Reibel said he doesn't know how long it will take, but eventually there will only be financial services companies, and people won't be able to tell whether they had been insurance companies or banks. Nationwide today is in the property/casualty business, annuities, life insurance and mutual funds, and it is more global than it was in the 1970s, when it was a property/casualty company. "To a degree, we're moving toward an organization that can deliver multiple services across the world," he said. "Where it goes from there, we'll see.

"We're not going to buy a bank, though," he added.

Bank Share of U.S. Variable Annuity Premium
Bank Share fell in 2000 due to the bear market in stocks.
      Percentage
1997  10.6%
1998  10.9%
1999  12.4%
2000  11.3%
Source: Kenneth Kehrer Associates
Note: Table made from bar graph
Agent Productivity: 2000 Bank Life Sales Study
Annual first-year gross commission produced per agent.
Retail Agents           $48,964
Financial Consultants    $8,379
Licensed Bankers           $779
Advanced Agents        $130,593
Source: Kenneth Kehrer Associates
Note: Table made from bar graph
Life/Health Premium Sold Through Banks
While banks are successful selling fixed and variable annuities, they
still haven't learned to sell life or health insurance
$ Millions
      Recurring Premium  Single Premium
1997                       $165
1998                       $253
1999                       $322
2000                       $422
Source: Kenneth Kehrer Associates
Note: Table made from bar graph
[Given prices aretotal cost for both
 recurring premium and single premium]
Growth in Bank Variable Annuity Sales
Bank sales of fixed and variable annuities totaled $31 billion in 2000.
$ Billion
1997     $9.6
1998    $10.8
1999    $14.1
2000    $15.6
Source: Kenneth Kehrer Associates
Note: Table made from bar graph

Profitable Partnerships for Mass Mutual

In the battle for business, banks and insurers once fought hard to keep each sector out of the other's territory But this era of competition has turned into one of cooperation.

The territorial stance of banks and insurers has led to a "nice blending of the two sectors and a healthy end-effect for customers," said John Sousa, vice president of financial institutions at Massachusetts Mutual Life Financial Group, Springfield, Mass. Like many of its competitors, Mass Mutual finds the value of insurer-bank relationships contributes not only to profitability but also to enhanced client satisfaction.

The company entered into partnerships with banks nearly two years ago to take full advantage of the tremendous growth of the annuity market. Mass Mutual has leveraged the success it has had on the annuity side with other institutional firms, such as brokers and dealers, and used that to its advantage in the bank channel, said Philip Stevens, vice president of institutional distribution. Today, nearly a dozen banks across the nation market a host of Mass Mutual products to their customers.

Over the past 18 months, Mass Mutual's relationships with its bank partners have resulted in sales growth, increased outside distribution exposure and additional relationships with financial institutions.

Mass Mutual says its strong bank partnerships are the result of the company's expertise and effectiveness at sales education, advanced sales support and the company's 150 years in business. "We're finding what is really having an impact on banks is Mass Mutual itself," Sousa said. Banks are drawn to partner with the company, because it boasts more than $200 billion in assets, owns Oppenheimer Funds and spans more than a century of service to its customers, he said.

The company provides support through both annuities and life specialists. Many of its institutional partners look to that expertise to help in their own institutions and "really bang the drum for value of these types of products and sales," said Stevens. This allows the company to get people within the organization to think of these partnerships as a high-leverage opportunity, something many of them are just coming to grips with, he added.

Mass Mutual primarily carves out its life products, including whole life, traditional universal life and variable universal life, for the upper end of the market through its bank partners. "While we might be a little late into the game, there isn't any reason why we can't be tier one in the upper market where growth and profits lie," Stevens said.

While the industry waits to see whether banks will find the same success in life sales that they have experienced in the annuity market, Sousa believes that a handful of banks are already reaping the benefits. In fact, a number of significant national players who are targeting high-end, private banking customers are currently finding the greatest reward. In addition, banks who are targeting the wealth-transfer market are also succeeding, he said. While many banks may not have yet mastered the selling of "run-of-the-mill" life policies, Sousa is confident that they will soon become a central sales port for these products.

Mass Mutual hopes to expand its bank partnerships and will continue to search for new players committed to both the life and annuity businesses. In addition, the company plans to expand its bank offerings to include products such as long-term care and proprietary life packages. "As long as we're willing and able to service bank customers in a meaningful and professional way, while being creative in our product design, we're enthusiastic for continued success in this industry," said Sousa.

Lori Chordas

InsurBanc Is Banking on Relationships

It's the relationship, stupid. This modification of the campaign slogan that helped President Bill Clinton to be elected in 1992 sums up why InsurBanc was created this spring. The banking joint venture of the Independent Insurance Agents of America and WR. Berkley Corp. is described as a marriage of the best of online and telephone-based banking with relationship-based agent marketing. "We've taken the technology for Web and telephone banking and married it to the relationships the independent agents have had for years. It's the best of both worlds, where technology isn't a replacement to the relationship but an enhancement to the relationship," said Michael W Herlihy, InsurBanc's president and chief executive officer.

That sentiment is echoed by Fairfield, Conn.-based independent insurer Mark Connelly, who has been running his 54-year-old family-owned agency for the last 16 years. "InsurBanc gives agents the ability to offer products and service that our customers are used to. Banks tend to treat their customers like numbers; over the years they've been minimizing their interactions with customers. In insurance, relationships are everything. InsurBanc gives agents the ability to put the relationship back in banking," Connelly said.

InsurBanc offers an array of products, including ATMs, certificates of deposit, auto loans, home equity loans and mortgages. The products are to be marketed by independent agents, with banking customers making deposits and withdrawals remotely--by mail, telephone or the Internet. There are no bank branches and just one location in Farmington, Conn.

Herlihy points to the Supreme Court's 1992 Barnett decision, which allowed small banks to sell insurance in Florida, as the catalyst for the formation of InsurBanc. "Once the decision was made, the camel's nose was in the tent. The Big I [Independent Insurance Agents of America] thought that this was a trend that was going to continue, and there may be an opportunity for agents there," Herlihy said. Then in 1998, the executive committee of the IIAA decided to hire consultants to examine whether to buy an existing charter or to apply for a new bank charter. Since the existing bank charters were too expensive back in 1998, the association decided to apply for a new charter, and in April, InsurBanc was open for business in three states--Connecticut, New Jersey and Massachusetts.

W.R. Berkley's involvement was born out of its founder's desire to help independent agents and his investment in other banks. Although Herlihy wouldn't reveal William R. Berkley's total investment in InsurBanc, he described it as a "significant amount."

In its first six months of operation, InsurBanc is limiting its business to independent agents and their employees.

The idea is to get the agents familiar with the products before they begin offering them to their clients. Independent agents undergo a one-day training session that covers state regulatory information, marketing techniques and InsurBanc's products. If independent agents want to offer mortgages, they will have to obtain a license according to each state's requirements.

"We hope the typical agent becomes more competitive in their existing client base. Any time a client takes out a home equity line of credit or a mortgage with an agent, it gives the agent an opportunity to cross-sell insurance. They are defending their territory," Herlihy said.

Within the next year or two, Herlihy sees InsurBanc broadening its reach. "We're just scratching the surface as far as market penetration is concerned. In the three states that we are in, there are roughly 3,200 independent agents representing 22,000 people. The market afforded in these three states is significant," Herlihy said. There are also plans for branching out nationwide.

In the long term, Connelly believes InsurBanc will be a great help to independent agents. His small, hometown agency is surrounded by insurance agencies that were acquired by banks, and he was getting "pretty nervous." "Now that I have the tools to compete, I plan to be online and marketing the InsurBanc products by October 1," Connelly said.

Lynna Goch

Stoneham Savings Bank Shops for Insurance Agencies

When Joseph C. Cioni, chairman and chief executive officer of Stoneham Savings Bank in Massachusetts, planned for the bank's future, he envisioned a single source of multiple financial services. "I've always thought banks should be full-service providers," and now competition requires it, he said. "Our goal is to be the community's first choice for financial services, including banking, investments and insurance."

When Kim O'Neil looked for ways to grow the Robert E O'Neil Insurance Agency, based in Stoneham, he decided to make some acquisitions. "You can only grow so quickly in sales, and you have to try to do mergers or purchases to continue to grow:" O'Neil said. So, he went to Stoneham Savings to negotiate a line of credit. The two organizations discovered they had similar objectives, and Stoneham Savings decided in 2000 to buy the O'Neil agency, which sells mostly property/casualty insurance, with a little life and health. Then, in July 2001, Stoneham Savings bought New England Heritage Insurance Agency, based in Wakefield, Mass., and merged it with the O'Neil agency to form the New England Heritage Insurance Agency Group.

Stoneham Savings and the O'Neil Agency were a bit ahead of the acquisitions made possible by the Financial Services Modernization Act of 1999-commonly known as Gramm-Leach-Bliley--because of a 1998 Massachusetts law that allows banks to enter the insurance business.

Cioni expects the two merged agencies to become more profitable for the bank because of the increased volume of business, which will earn larger commissions from insurance carriers. Combined premium volume for the two agencies in 2000 was $10.5 million in direct written premiums, O'Neil said.

For O'Neil, who is now president of the New England Heritage Group, being part of Stoneham Savings means having a source of capital and "another way to market my products." Beyond that, very little has changed. Cioni believes in letting the insurance executives "run their own show."

"We're not experts in the insurance business, so we wanted to make sure that any agency we bought would have good experienced professionals to run the agency for us," Cioni said.

Instead of purchasing insurance agencies, Stoneham Savings could have chosen to market products directly from insurance carriers, but that "was not for us" Cioni said. "We can make more money this way."

Mergers on the Rise

Stoneham Savings is not alone in its choice. Banks have acquired more than 300 insurance agencies since 1997, said John M. Wepler, senior vice president, mergers and acquisition services, for Marsh Berry & Co. Wepler predicted early this year that the number of bank-insurance agency transactions that will occur in 2001 will exceed the prior three years combined and more than 40 of the largest 100 insurance agencies will be bank-owned by Jan. 1, 2002. Based on current consolidations, his predictions are right on track, he said.

Many of the acquisitions have not been particularly successful, however, according to Wepler. While the average agency has a pro forma EBITDA margin (earnings before interest, taxes, depreciation and amortization) equivalent to 19.5% of revenue, the average bank-owned agency has an EBITDA of 13.4% of revenue-two-thirds of the insurance industry average. But as banks learn more about how insurance agencies operate and incorporate insurance into their overall business strategy, that trend is likely to change, Wepler said.

The O'Neil agency didn't see such a downslide after its purchase, O'Neil said. "We grew last year at about the same rate I was doing in prior years. I've been doing this now for 26 years:' he said. In the first year of its purchase, the O'Neil agency gained about 75 new personal-lines accounts and 10 commercial accounts from bank customers, O'Neil said. It lost three or four personal-lines customers who didn't like the bank.

Cross-selling between the bank and the insurance agency is done primarily through brochures and newspaper advertising. "Massachusetts law does not allow the people at the bank to bring up the subject of insurance," Cioni said. "If customers ask us, we can talk about it, but we can't bring it up." Independent insurance agents negotiated this restraint when banks were given permission to get into the insurance business, he said.

The insurance agents, however, can actively sell the bank. "They have picked up some commercial loans from some of my commercial clients:' O'Neil said. "We're also working with their commercial loans officers in being introduced to their commercial customers so they get to know who we are, and if they need insurance, we hope they'll come to us."

Both the bank and the insurance agencies worked hard during the negotiations process to resolve any difficulties that might arise from merging the two businesses, Cioni said. For example, the insurance agents' compensation structure is different from banking, but that's to be expected, he said. "I don't begrudge anybody what they're due for the job they do. They're much better salesmen than bankers have ever been."

As part of its plan for one-stop financial services, Stoneham Savings has a contractual agreement with Infinex Investments that allows the brokerage firm to operate in the bank's facilities.

Eventually, Cioni hopes to also have an insurance agency in each of the bank's locations. "It's my job to start purchasing agencies in the communities where the banks are:' O'Neil said. "But we won't be inside the bank. We'll be strictly independent agents in that town:'

Sally Whitney

If You Can't Build 'Em, Buy 'Em

While banks are still not much of a factor in the sale of life insurance, health insurance or other sophisticated life products in the United States overall, they are instantly becoming major players on the property/casualty side. This entree may also build other insurance lines.

Since the passage of the Gramm-Leach-Bliley financial services modernization law, banks have shown little interest in buying insurance companies to become insurance underwriters, but they have been purchasing full-line insurance agencies with a property/casualty slant at a record clip. Banks have acquired more than 300 insurance agencies since 1997, said John Wepler, senior vice president, mergers and acquisitions services, for Marsh Berry & Co., a Concord, Ohio-based firm that consults on the insurance distribution system. And the pace is likely to accelerate: Five banks have individually reported plans to collectively acquire almost $1 billion of insurance revenue during the next three years, or 50% more than the revenue of the third-largest insurance agency in the United States in 1999, according to Marsh Berry & Co.

Banks have three basic options in beefing up their insurance sales: buy an insurance agency, enter into a joint venture with an agency, or outsource to an insurance company under a joint-marketing agreement. "We have seen very few joint ventures on property/casualty or group health succeed," Wepler said.

Joint ventures may be useful in commodity marketing, more so when the joint venture is with an insurer rather than a local agency, Wepler said. Commodity marketing reaches buyers looking for low prices and convenience. But the best success is when the focus is on a preferred customer base made up of the commercial market and high-net-worth individuals in that market-- clients who yearn for and are willing to pay for high-touch service and a problem-solving relationship with financial-services providers, he said.

Regional Banks Lead the Way

Regional banks are leading the acquisition binge. Their goals are to expand geographically or to expand within their footprint by developing better relations with preferred customers, or some combination. Through the acquisitions, these banks look to provide insurance, lending, trust services, investment banking services, human resources consulting, financial planning, risk management and employee leasing. By focusing on these high-touch services to preferred clients, the regional banks increase retention and revenue per customer, and they avoid pricing battles with national banks, Wepler said.

More specifically, the banks see agency acquisition as a means to cross-sell insurance products to bank customers, to diversify their revenue streams through fee income rather than rely on the spread between earnings on loans and interest payments on savings accounts, and as a means to accumulate customers. Agencies, meanwhile, are amenable to bank acquisitions, because banks provide capital and a strong expectation of long-term employment, Wepler said.

During the financial modernization debate in Congress, most insurers publicly would not endorse the banks' entry into the business, but Wepler said they are privately pleased that banks are buying agencies. Many insurers believed independent agencies were overdependent on so-called contingent income, or bonuses insurers paid for new business. They saw the average agency as undercapitalized. Too many agencies were run not as a business, but "for the short-term benefit of the owner's lifestyle," Wepler said. And agencies weren't committed to perpetuation after the owner's retirement. "So even though there are many fine agencies out there, insurers all along secretly were very much interested in having a modification to the agency system," Wepler said. Insurers are also enthused that banks are add sophistication to long-term planning and will add a customer base, he added.

Consultants Gain Most

The party with the most to gain in these agency acquisitions will be the party that positions itself not as a product vendor, but as a financial consultant that delivers solutions to problems and that maximizes retention and client loyalty, said Wepler. But he also warned that independent agencies now face growing numbers of competitors that are well-capitalized, have long-term horizons and are "strategically trying to handhold the more sophisticated accounts."

Wepler warned banks about getting into insurance for the wrong reasons. "If they don't have the first clue about what to do with an agency, they'll fail miserably," he said. "And if a bank sees that it is losing market share in the commodity business, and it recognizes that to survive it has to become a sophisticated problem solver, it still has to do it right."

Among banks that have not already positioned themselves through acquisitions, an "air of desperation" prevails, Wepler said. "In every city, there's one, maybe two, agencies of high enough quality to help a bank with this strategy," he said, but many have already been bought. In Florida, Wachovia Bank has bought Davis Baldwin in Tampa, Huntington Bancshares bought J. Rolfe Davis Insurance Inc. in Orlando, and F.N.B. Corp. has bought Roger Bouchard Insurance Inc. in Clearwater. "If you look at the state, there might be one or two insurance agencies left in each area, and the quality ones are taken," he said.

The feeding frenzy for quality started in January 1997 in Michigan, then spread to Indiana, Connecticut, New Jersey, Maine, the Carolinas, Texas, Florida and the West Coast, according to Wepler. Many acquisitions failed. "By the time the success stories hit the papers, people realized this is part of the evolution of the banking system," he said. "You can't build your own; it would take you forever."

Early failures stemmed from banks not realizing the importance of preserving the entrepreneurial spirit, incentives and pay for performance, Wepler said. "Banks must make insurance a commitment, not an experiment, and they have to make acquisitions as a way to enhance the consultative rather than the commodity side of the business. They need to provide autonomy and a profit plan." And whatever model they use, they have to get a signoff at closing that the agency is responsible for entrepreneurial growth, he added.

The U.S. Insurance Brokerage Marketplace
In the past couple of years, banks have aggressively bought insurace
agencies and have been a principal force in consolidation of the
number of agencies. This trend is expected to continue, resulting in
a greater concentration of business among the largest agencies.
                       1990                2000              2010 *
Revenue Size      Number of  Average  Number of  Average  Number of
(Not Premium)      Agencies     Size   Agencies     Size   Agencies
$10 Million +           100   $92.30        211   $71.60        393
$5-$10 Million          500     6.00        939     6.00      1,464
$1-$5 Million         1,500     3.00      3,207     3.00      2,786
$1-$2 Million         3,000     1.50      3,929     1.50      2,143
 Subtotal             5,100               8,286               6,786
Under $1 Million     29,000      .30     13,536      .40      4,321
 Total               35,000     $.86     21,822    $1.91     11,107
Revenue Size      Average
(Not Premium)        Size
$10 Million +      S90.50
$5-$10 Million       6.00
$1-$5 Million        3.00
$1-$2 Million        1.50
 Subtotal
Under $1 Million      .40
 Total              $5.19
(*)Estimated
Source: Marsh Berry & Co.