"I love the insurance distribution business," said the CEO of one of our largest and most successful banks, mentioning that the bank has many mortgage and used-car borrowers who need insurance.
The CEO of a major mortgage servicer must have felt the same way. His data showed he'd engaged in 16 different insurance sales programs over the years. But, sales were minimal every time. .
Has selling personal insurance ever done much for banks? Or can it generate substantial profits going forward? Most of us aren't acting as if we think so. I can see why.
If bankers can succeed selling consumer protection, they better start with protection supporting the primary financial services banks provide—such as loans and payments. The best and possibly the only profitable time to make the protection sale is when the underlying service is sold—for instance, when the loan is made. Otherwise, sales rates will be extremely low, as they were for the mortgage servicer.
At least until last year, if we mercifully put aside force-placed insurance, the biggest bank success in selling consumer protection was not insurance. It was payment or credit protection on credit cards. It's notable that this isn't legally characterized as insurance and hence doesn't require sharing control and profits with an insurance company—nor exposure to state insurance regulation. These advantages are powerful profit drivers.
Credit protection yielded extremely high profitability on billions in revenues in part because, like force-placed insurance, it isn't subject to any effective sales competition against the bank. Virtually no one who takes a credit card considers the issuer's rates and terms for credit protection when choosing the card.
Over the years since I introduced lender card credit protection in the late 1980's, there have been attempts to apply a similar approach to other kinds of lending, such as mortgages ("home protection") and, much more recently, to identity theft. None of these brought in anywhere near the amount of profits generated by card credit protection.
Probably because there are far more credit cards than other loan and payment accounts; the true cost of protecting open-end, fluctuating balances is incomprehensible to consumers (for instance, "90 cents per month per $100 of balance"); and, under the tutelage of aggressively committed vendors of credit-score services, such as Experian, consumers have become fanatically focused on maintaining or increasing their scores, not just avoiding dunning. Credit protection can be perceived as assuring this.
Given these strong, steady tailwinds, plus regulatory tolerance, card issuers raked in revenue for decades while doing little or nothing to clean up, improve or even market these products. And in this fostering, hot-house environment, abuses also grew.
Enter the Consumer Financial Protection Bureau. Nine-figure settlements with Capital One, Discover and Amex in 2012 scared banks away from the entire class of products, particularly since the published CFPB documents didn't provide a template for sound compliance in product design and sales. (The CFPB said they'd leave that guidance for later! Damnable.)
With tiny funds costs and record-low credit losses—neither of which is permanent—issuers preferred, irrationally, to simply exit or downplay payment protection. This was illogically exacerbated by the beating banks have recently taken over their contemptible role as "agents" for force-placed insurers such as Assurant.
Given direct and unique access to card customers and the copious risk data they've accumulated, banks can develop and fairly sell non-insurance protection that is valuable, and profitably priced. Such products can also be adapted to auto and home-secured borrowers, to carry them over periods of reduced income and protect their collateral.