It's Not Just One More Bank Product

position in the marketing of life insurance policies? This was the theme of a recent roundtable discussion organized by American Banker. Three prominent industry spokesmen met at the newspaper's New York headquarters for lunch and spirited discussion about some of the banks that sell insurance. The participants were: Paul Feeney, senior vice president for insurance at National Westminster Bancorp, Jersey City. Larry Mayewski, senior vice president, life/health department at A.M. Best, Oldwick, N.J., an insurance rating service. Kenneth Kehrer, principal of Kenneth Kehrer Associates, Princeton, N.J., a research and consulting firm. Investment products editor John Kimelman was moderator. Excerpts follow: AMERICAN BANKER: What do you think is driving the current wave of interest in banks getting into sales of life insurance? KEHRER: The first is clearly a concept of trying to become a broader provider of services for their customers. AB: What do you think the potential is in the industry for sales of various life products? KEHRER: My guesstimate right now is that banks maybe do as much as $500 million in life insurance premiums. And that potential is probably $20 billion a year. AB: Some banks have gotten into this business by buying traditional insurance agencies as opposed to integrating insurance sales in the bank environment. What do you think of this approach? FEENEY: If all banks try to do is recreate an insurance agency force, then they're just going to find themselves making the same mistakes insurance agencies have made. But there's a great potential for them to say what is the customer proposition that we want to create, and work from the customer backwards. Banks can design a new distribution type force and they can do that now. They have a massive competitive advantage economically over insurance companies with captive agencies. MAYEWSKI: I think that the general problem with the general agency systems is productivity. You're just not getting the level of productivity that is supportive or reflects the cost structure. It's an expensive structure - recruitment, retention. But I do think there is a potential improvement in productivity through a bank distribution. KEHRER: Also, one of the things I think banks have found is that they're prisoners of the product mentality. Banks themselves, either given the existing structures or the way they've entered these markets, have tended to be compartmentalized, so that in some places insurance is segregated from investments, segregated from lending and so on. I think the real challenge for banks is to overcome those preexisting structures. AB: Paul, how are you going about marketing insurance at Natwest branches in New Jersey? FEENEY: Our strategy is very simple. Everywhere someone touches Natwest, we want to be able to provide them with a full service, be that insurance, investments, or banking. It will be provided somewhat differently if someone goes to an ATM than if someone comes to our financial advisers. We have hired and we are training what you might term financial advisers - people who will be able to sit down with a customer and analyze their full financial needs. They must be able to not only analyze those needs, but present those back to the customer and provide a product solution package, whatever that customer requires. That's one thing. MAYEWSKI: Right now, life insurance is the missing piece of the puzzle. Clearly with estate planning, transfer of wealth issues. and just the demographic changes that are taking place, insurance can play a key role in a financial plan. AB: Why is the focus right now for banks on life insurance as opposed to other types of insurance, like property and casualty and auto? FEENEY: There are some very clear reasons why banks will look away from auto and homeowners. From the customer's point of view as well, it's a very, very oversupplied market at all levels. At the same time, there are opportunities for the banks. If a bank can pull together a number of companies to provide say a cross-nation or cross- state distribution network for auto or homeowners, that would be a way they could make significant inroads. It's a matter of priorities - a question of which type of insurance do we get into first? We will do the first stage first, which is life insurance. MAYESKI: One way to look at this is that property and casualty insurance is generally bought. But life insurance is generally sold, not bought. I think banks have a great trust with their consumer-base and I think they can parlay and leverage that trust. That's not to say the property and life business won't be brought into the bank; it may be, as Paul said, at a later point after we've moved toward life insurance. KEHRER: Banks that have gone into selling property and casualty insurance have largely been stymied by the marketplace. The typical property-casualty insurer doesn't want to sell any more property-casualty insurance than they're already selling. They're trying to get out of certain states. They are trying to increase the prices of insurance, not find low-cost solutions. And because of the economics of the property-casualty business, which is really a zero-sum game, every policy the bank sells is taking money out of an agent's wallet. But with life insurance, there's a sense that banks can expand the size of the pie, expand the market. AB: What about health insurance? Has the whole movement toward managed care just made this type of insurance very unclear from a bank's perspective? KEHRER: My sense is that the whole financial services industry is kind of waiting to see what happens in the health-care arena before taking new initiatives. FEENEY: I think that's an area that could be a significant growth area of banks. We'll be testing and going out with a long-term-care policy and a disability-income policy. MAYEWSKI: I agree the market right now is kind of in a wait-and-see mode, but echoing Paul's comments, the thought that disability coverage is a long-term care plays a critical role in a financial plan. Clearly the market is still in a shake-out mode, but I think there are very significant growth opportunities to provide disability and long-term care coverage ultimately through a banking distribution channel. AB: Right now there is very little special underwriting for banks. When do you expect that banks, working with underwriters, will start offering customers a product that's distinctly better, a product where there's more benefit per premium dollar than the kind of products traditional agents are now offering? MAYEWSKI: I guess it's going to be when the managements of banks totally embrace the concept of selling insurance products - when that bank management recognizes and fully supports throughout the organization the push to sell insurance. KEHRER: The insurance companies I work with say they find it very difficult to develop products with better consumer value to go to a distribution system that competes with their agents. That just doesn't wash. AB: There are lots of loopholes that allow banks to enter the insurance marketplace now. Given that fact, do you think that the business impediments right now are greater than the legal impediments from those banks who are considering insurance? FEENEY: Yes, from a distribution point of view. The greatest impediments to bank insurance is the banker's mentality. AB: If you were to poll CEOs of banks of the top 500 banks in this country, how many of them think about life insurance on a regular basis as a future source of fee income and want to make a serious commitment to it? KEHRER: I don't think most of them are thinking in terms of life insurance per se. They're really thinking about what is driving their bank. Some of them would see the role of their bank as asset-gatherers. Others see themselves as customer driven - with a mission to find out what the customer needs and wants and to see whether that can be delivered profitably. They might ask, 'How does life insurance fit into that role, how do you fit it into the role of an asset-gatherer?" MAYEWSKI: From the life insurance underwriter's side of it, I think companies are going through a similar reassessment. I think companies realize it's no longer business as usual. This idea of reinventing distribution ... taking a longer-term view of the businesses ... focusing on getting closer to the customer. Many large insurers are obviously tied in with subsidiaries in the securities business, tied in with mutual fund organizations and they can clearly redefine the way they do business. AB: As you know, sales of life insurance have been stagnant in recent years. Many customers question the investment value of life insurance in an age where so many other investments - such as mutual funds or annuities - are out there. Does all this make your job that much more difficult? FEENEY: I think it makes the opportunity all the greater. You're right. If you look at life-insurance sales over the last few years, sales are stagnant. But that's because the agents have abandoned the mass market of America. And I think that's why banks can't afford to just emulate the captive agency network. Because they'll end up themselves moving up to their private banking client base and away from the retail banking client base. And you'll end up serving 5% instead of 95% of the market. . MAYEWSKI: Following up on Paul's comments, I think banks can be the financial planners of the middle class, I think they can serve that need. But there's going be a lot of change at the banks' level to deal effectively with that, and insurance companies have to change the way they do business to deal with banks. KEHRER: Maybe banks need to rethink that old motto - life insurance is sold, not bought. Why is that the case? People used to say that about mutual funds didn't they? MAYEWSKI: I think there are certain insurance products that are bought. I think a commodity product, for instance - a term product - somebody knows they have to buy insurance, they're going do it in the most economical way they can and they know that they need x-amount of coverage ... that's a product that I don't think needs to be sold. Yet estate planning, financial planning, second-to-die policies - policies that involve looking at somebody's total financial picture and their future - that to me involves a needs-based, face-to-face sale. KEHRER: Life insurance is complicated but, again, people don't want life insurance. They have needs - psychological and financial needs - I'll bet other products are going meet those needs. But life insurance can also meet those needs. And it's sort of getting the customer to come face-to-face with his or her needs and then showing them various solutions to help them meet their needs. This could be the historic role of banks. FEENEY: Everyone's pushing us to look at product. But if you just forget that for a moment and say, well what could we provide to our customers which would be simple for them to understand and which would ensure their financial security under adverse circumstances, and death is a pretty adverse circumstance, what could we do? MAYESKSKI: In many respects the focus has to move from death to life - people living too long, annuity products, the thought about estate planning and wealth transfer ... I mean death is one thing, but you need to look at it from the standpoint of the survivors. What is happening to the survivors? Products today are being designed to think about what happens when someone passes on and how the beneficiaries are best served. There needs to be a focus beyond just death protection. It needs to be on this whole lifetime of estate planning, wealth transfer, and living too long rather than dying too early. AB: You're obviously going to find individual examples of banks will be very successful in selling a wide variety of life products in an integrated customer needs-based approach. But looking at the industry as a whole, the criticism I've heard is that banks haven't proven themselves to be the most sophisticated sellers of investment products and at best the industry can only hope to be maybe a high-volume order-taker of simple insurance. Is that true, or is the industry getting a bum rap? KEHRER: I think it's kind of a bum rap. If you look at what banks have accomplished in 10 years in the investment business, bank investment programs are on average - I mean the bad, the ugly as well as the great - are more profitable than the regional brokerage firms like A.G. Edwards and Edward D. Jones. They bring more to the bottom-line than the regional firms that are touted as being models of experience. I think banks have been getting a bum rap partly because they're not perfect. They've got a lot to learn yet, but so does the whole financial services industry. The financial services industry itself has not taken a holistic approach to the customer. AB: I gather that your operation across the river in New Jersey does not retain the services of any third-party marketing firm to help you market insurance? FEENEY: We do retain the services of a firm called Essex for product support and administration. What we don't do, which many companies do, is have third-party programs to provide sales support. I don't believe it's a long-term solution for any bank to use a third party to market and distribute. While it's maybe a good way to get into the market, any bank which sees its future along those lines is mistaken. AB: And why is that? FEENEY: Because at the end of the day you either learn how to do this stuff yourself or you get out of the business. AB: Does this mean that there's a limited role for third-party marketers in this business? KEHRER: I think that it means a tremendous role for third-party marketers. By and large, with one or two exceptions, third-party marketers didn't start out to provide sales forces to banks. The reason they did is because in many cases - because of state insurance laws - banks were not allowed to have their own sales forces. So third-party marketers never wanted to provide sales forces and never will be the provider of sales forces. Their primary role has always been to provide marketing support. What the industry loosely calls wholesaling is really the basic training and retraining of sales forces, coaching of the sales forces, providing marketing materials, marketing ideas - that whole panoply of things that banks might internalize someday. This is what third-party markers can provide for banks getting into insurance sales. FEENEY: My point was that I think you will see a lot more banks distributing and marketing these services themselves rather than using third-parties to intervene between their customer and themselves, even on their behalf. I think whether that's a regulatory issue in certain states or not, I can't believe that a lot of banks will continue with that as an ongoing strategy. In the smaller-bank market, where the economics are different, it might be different. But for larger banks - $30, $40, $50 billion and up in assets - I think the role for the third-party administrators will tend to be more on the administration side rather than the marketing and distribution of those services AB: In talking to underwriters about banks as market agents for life insurance products, what do most of them say are the basic reasons why they would enter this channel? MAYEWSKI: I think insurance companies are looking for ways to broaden their distribution and grow their business. And I think they're once again looking for cost-effective ways to do that. And many of them have relationships with banks on the annuity side and are now trying to parlay that into insurance products. I think they feel there are growth opportunities. I think that right now demographics are driving the potential significant growth in the whole world of financial services, and I think insurance companies want to play a role in that. But I must admit that when you look at selling life insurance through banks, the insurance industry is still in the early stages. There are select companies that are focusing on it, but it is not a broad-based initiative. Most still are now trying to just enhance their ability to sell annuities through banks. But I think they see growth opportunities, they see cost-effective distribution, and I think many of them see financial services reform obviously forcing them to do more business through the banking channel. But the ones that once again will be successful will be those that can bring some value-added to the relationship. Banks aren't just goingg to deal with an insurance company for the sake of dealing with an insurance company ... They're going to deal with an insurance company if they can bring some value-added and have a relationship that benefits both parties. AB: I have attended a couple of banks-in-insurance conferences, and at both events the number of executives with underwriting firms outnumbered the bankers. That suggests to me that underwriters may be more excited about banks marketing insurance than banks are. Is that so? MAYEWSKI: I think the underwriters are there because their senior management wants them to be there and it's a directive of the company to explore what opportunities there might be to grow their business. And I think it would be very short-sighted if insurance companies didn't look at the possibility of doing business through banks and developing strategic alliances and partnerships through banks. There is a focus that banks can be a cost-effective way of distributing product.