A Search for Direction In a Hot New Business

Bank executives generally agree that insurance is the next step in the never-ending quest for fee income. But what types of insurance should banks sell? And to what markets should they be selling it?

These were two of the many questions posed to a panel of four bank insurance experts who met at American Banker headquarters for lunch and a long discussion.

The participants were Jack D. Cussen, senior vice president of the financial services group at Summit Bancorp, Hackensack, N.J.; Thomas J. Sukay, senior vice president for finance at Commerce Bank, Cherry Hill. N.J.; J. Daniel Keppel, director of insurance at Dime Bancorp., New York; Kenneth Kehrer, principal of Kenneth Kehrer Associates, Princeton, N.J.

John Kimelman, an American Banker senior editor, and Howard Kapiloff, the paper's insurance writer, moderated the discussion. Excerpts follow:

How has business been in the last year for each of you. Are you selling more insurance now than you did a year ago? Have you gotten into more lines?

KEPPEL: In 1996 we've expanded our product line to include term insurance and whole life insurance for thrift customers, assuming that not all of our customers are candidates for savings bank life insurance, which was our main product up until recently - we've been selling since 1939.

And we use the platform banker approach to offering insurance to our customers - in any way, shape, or form that they wish it. That is by telephone, by mail, face to face.

In 1996 we'll probably do over $10 million in individual branch-sold life insurance. That's up from about $1.6 million in premiums in '95.

Can you convert that to revenue - to what the bank will get?

KEPPEL: No, because we've done some new things whose ultimate price we really won't know until the year is over.

But it's been a strategic initiative, launched by the chairman and the president of the bank. At every management level, it's a conscious decision that everyone should offer life insurance who's in the sales process. That would include division presidents, branch managers, sales managers.

When you set goals, when you provide incentive to the sales force, you're going to have action. And that's what we got.

What accounts for this growth in your business?

KEPPEL: I think I mentioned senior management support No. 1. If the chairman or the president of the bank understands how important this is to fulfilling a customer need, satisfying our customers, making us different, and they see the value of the income - that's the first step.

The next step is at every level goals have to be set and achieved in life insurance. And it's part of everyone's incentive package.

Tom, let me pose the same question to you. I know that you've actually been purchasing agencies to get into this business. Has it been working?

SUKAY: Prior to 1996, Commerce had not offered insurance products throughout the bank. We have acquired three agencies in the last few months. We are awaiting approval from the OCC to close on those transactions; we hope to be able to do that within the next week or so, and get off and running with a fully established and well-run insurance division.

What do you think you can generate, in premiums and in revenues?

SUKAY: Well, we know right off the start we'll have premium volume in excess of $125 million and commissions in excess of $13 million.

We are a rather large insurance agency right at the start. It's hard to quantify exactly how large, but we think we're easily in the top five in the state.

What about you, Jack? How have things been at Summit?

CUSSEN: We are a combination of two banks - United Jersey Bank and Summit Bank.

On the Summit Bank side, we sold life insurance through our platform program, and it really never went anyplace - mainly because, as Dan said, you've got to have senior management support. Not that we didn't have it from the standpoint that, yes, we want to increase fee income. But it's my belief that in a commercial bank setting, you've got to put it in job descriptions, you've got to put it in your goal-setting process, or you're not going to be successful.

On the other hand, UJB had taken a step to hire 10 agents and set up their own system. And we've been at that now for about a year and three months, and we're showing growth. It's not meteoric growth, but it's growth.

I started out by asking you guys to talk about your individual operations. But what's the buzz you're hearing right now in the industry?

CUSSEN: The No. 1 topic on the minds of insurance agents is "What bank are you going to sell to?" Tom, I'll bet you you've gotten a half a dozen calls from agents?

SUKAY: We get phone calls. The day we announced the deal, we got repeated calls from every local insurance agent. You've got people in the family that work in the business - they want to move on. In the past, there were very few public companies that they could sell to.

KEHRER: In fact, this is resuscitating the value of insurance agencies.

There was a period in the mid- to late '80s when big national insurance brokerages were being formed, and so they were buying up a lot of the mom-and-pop and midsize insurance agencies around the country to create a national network of insurance offices. And that drove the value of insurance agencies, particularly the property-and-casualty agencies, up above the two-times-revenue rule of thumb for what an agency is worth.

And once those national networks were built, the buyers dried up. The agencies that missed out on that boom were left with no buyers. As they got older, their children weren't interested in going into their business. "What do I do with this business? I really want to play golf now. I don't want to work anymore."

What are some of the other things that you're hearing from your colleagues, from other bankers?

SUKAY: Other banks see what they think we're doing and they see there's a possibility that they can do the same thing. I think that there are a lot of people that are just gathering information and seeing what other people do before they are willing to make that step.

KEHRER: But the buzz I'm hearing now is that maybe banks have focused on the wrong part of their customer base, the retail customer. Maybe they should begin focusing on the business customer, the commercial side of the bank, as the way to go.

Banks have a unique relationship with the midsize businesses. That kind of relationship fits very well with a commercial insurance kind of endeavor.

But commercial insurance is probably the most complicated area. In New Jersey you've got to deal with chemical companies, right? Or other big organizations and a big trucking company are probably a big part of your customer base. There are very specific commercial needs for those kinds of customers.

No doubt you're all hearing more and more from insurance underwriters interested in serving you folks. How would you characterize their role?

CUSSEN: I don't think that the insurance companies have been very creative in the development of product. Ken and I were talking a couple of weeks ago, and I said, "I don't know if there is such an animal, but I've challenged three insurance companies to come up with a plan to combine investments, long-term care, and a life policy all together."

KEPPEL: Well, that gets back to who the insurance underwriters are focusing on.

I would suggest to you that in the consolidations that are going on right now in the insurance industry, companies are being forced to look at who their customers are, who can they serve well. Unless they take it on themselves to decide, they're not going to come up with a creative product, they're not going to meet the need of those customers.

They are trying to reach everyone in America with the same type of policy. We can't sell one product for everyone anymore; each person wants it custom-tailored.

With insurance companies focusing on the end user, we would have creativity. And certainly banks can help, because they are closer to their customers than the insurance company.

Ken, given your job as a consultant, you are probably in a better position than anyone else at this table to know who the real successes are in bank insurance. Who are they?

KEHRER: I think you've got two of them here in the room with the Dime and Summit using quite different approaches. There are a few success stories in selling retail insurance - retail life insurance with full-time agents. Chase Manhattan probably being the most successful in that area.

CUSSEN: I don't count Chase as being successful yet. Not in the category of Norwest or the Bank of America; they've been in the business for 25 years, they have agencies, and they have thousands of people working for them.

KEHRER: I would disagree with Jack about BankAmerica. BankAmerica has been heavy on the mortgage insurance side, but they haven't done much of the noncredit. But Norwest is a success. It operates like a collection of community banks. Norwest is also doing a lot of direct-response marketing.

Most of the focus in recent months has been on the potential for life insurance sales. But what about other types of insurance, such as homeowner's and automobile? What's the potential for banks?

KEHRER: When I first began looking at banks being involved in insurance - in fact, in the early '80s - the buzz then was selling automobile and homeowners insurance to retail customers.

In the nonbanking world, selling automobile and homeowner's insurance to individuals has been largely taken over by people who do it by direct response, like the Geicos and so on.

Are you suggesting that it's a lousy business for banks to be in?

KEHRER: Not necessarily. It may be a good business for a direct- response-marketing bank to be in.

CUSSEN: A partnering arrangement between a bank and a property-and- casualty company could come about where the insurer used the bank's customer list to sell insurance - the insurer does a lot of the work and we get some of the money.

KEHRER: That's right, and so all the bank is doing is putting its name on the letter - "This is an offer from Summit Bank" - but it's really a Travelers or a Progressive policy. In addition, banks that have sold homeowner's insurance to new mortgage customers have had very strong sales success - they have been able to sell between, say, 20% to 40% of the people they make the offer to, really good sales penetration - but they don't make much money doing that.

Let's say a homeowner's policy cost $500, and the commission on that is 15%. That means you get revenue of $75. You give half of that revenue to the agent, you're down to $37 something. It probably costs $5 to push the paper to do the policy. That just shows how the old way of selling doesn't work.

On the other hand, if you would just give a list of your home originations and new mortgage customers to a direct-response-marketing insurance company, and they're willing to pay you 5% or 10% commissions off the top, suddenly you're in a much better business. That's what a lot of banks are looking at now.

But if banks are selling insurance with lower commissions, they are making less money, right?

KEHRER: There is a chicken-and-egg problem.

Earlier, we were saying that lower commissions would make life insurance easier to sell. The problem is that life insurance has been attractive to sell because of the high commissions; if they come down and it's easier to sell, it may not be as attractive anymore. So we're caught on the horns of a dilemma.

A lot of banks, such as Summit, try to push insurance companies to give us products that are more beneficial to the consumer - more for your money. Right now you have a high-cost distribution system, and it's high- cost largely because you pay the agent so much. So the theory has always been - bank theory has always been - that if you pay your agents less, you plow that money back into the value of the product and give people more insurance for less money.

That's what's happening with mutual funds. They're going to no-load, no-commission structure rapidly.

KEPPEL: (Insurance companies are) so tied to the cost-structure question that we talked about originally that they can't even come up with a product that allows you to structure the way you would prefer.

I think that till insurance companies step into the partnership with your customers and form a product that meets your customers' needs, we're going to continue to see the redesigning of the agency system, the purchase of agency systems, but no fundamental change in the cost structuring.

KEHRER: We don't want to dump on the agency system where it works.

It doesn't seem to work in life insurance - particularly middle- market life insurance and lower. And it doesn't seem to work with the day- to-day automobile and homeowner's insurance policies. It's a cost burden; the acquisition costs are too great.

But in a commercial insurance setting, where you really do have this consultant who knows a lot of stuff and can really help you manage your risk, there's a lot of value there.

I'm talking about an agency system with all the specialists: Support specialists at the agency know trucking, know the different risk problems for industries, which carriers write risk in those areas. That kind of thing the agency system looks like it was born to do.

CUSSEN: Ken brings up an interesting point: There's a different level of expertise that's needed for each one of these products.

The delivery of a term life insurance policy is very uncomplicated. It's generally six or eight questions, and then it's written on a telephone by a paramedical, and then of course there might be a visit, there might be a blood test and saliva test, couple of things like that. It would be tough to screw that up - I mean, very tough.

When you get into an estate-planning situation, that does require a CPA or the CLU or CFP. And I think that people are willing to pay for value. But I think of customers who look at a term policy and they say: "They asked me six questions. Why is that guy worth 100% of the policy or 80% of the policy through the first year?"

KEPPEL: I think Jack is right.

When we find a much more difficult situation, we have thought about going back to the carrier and asking for help. We have the person's lawyer and accountant, and we've been able to leverage our position with the carrier. Because they have staff who can support the technical side of "How do I design a plan?" In Hartford they have droves of people like that, as far as I understand, who are able to help us.

It doesn't substitute for a personal adviser - I'm not saying that. In some cases you need that personal adviser. But I also think that in that area, changing the cost structure would revolutionize the industry. If we could do with a salaried specialist who's an expert on designing estate plans with other people . . . you don't necessarily have to pay them 100% first-year commission to make it work. So I get back to cost structure, because I think that's a key formula here.

How are community banks approaching the insurance business?

KEHRER: Many of them have been in this business a long time. Maybe 5% to 10% of all community banks are selling insurance, and they've taken a very traditional, agency approach.

Remember, in the old days anybody could start a bank. And so when the guy sold his farm and moved to town and he wanted to get into a business, he probably thought, "Should I open a hardware store, an insurance agency, or a bank?"

Some of them opened all three; they owned all these things. And over time, as legal structures changed and holding companies came into existence, it made sense to take the insurance agency they owned and the bank and put them in the same company. And so that's how you find a lot of these banks are now agencies.

The typical small-town insurance agency is 90% property-casualty, 10% life; that's where the revenue comes from. And of that, a mix of maybe 60% commercial, 40% consumer.

And that's because P&C traditionally is a necessity for most consumers and life is the optional insurance?

KEHRER: That's right.

What are the best strategies for small banks to get into this business? One way is to buy agencies, the way Commerce Bank did. What about starting an operation from scratch?

KEHRER: One problem is that it may now be too late for the old approach of starting from scratch, building a business one customer at a time.

The reason is that it takes too long to make that business profitable in the personal life/property-casualty business. Maybe by the end of the second year you still haven't made any money. It's only when you begin getting renewal commissions every year that begin to get a little bit bigger than your servicing costs that the business begins to make some money.

So given how much banks need to make money today, as opposed to five years ago, it's very difficult to say to management, "I have this plan of a business that's going to turn green in five years." It's a rare banker who can do that today.

How difficult is it for small banks to work with large insurance underwriters?

KEHRER: In general, underwriters are worried about working with banks because the underwriters' agents are violently opposed to them working with banks.

If a huge bank comes along, the underwriter is more likely to say to the agents, "What have you done for me lately?" But if a community bank comes along that won't sell as much as one agent would, is it worth the risk of hundreds of agents getting mad at you?

Also, with property-and-casualty it's a zero-sum game. Every automobile policy in the country that can be sold has been sold, essentially. So if a bank sells a hundred of them, they're taking a hundred from some other agents, out of their pockets.

So some agents are violently opposed to this. And they can hold the insurance company hostage.

Also there's a problem with start-up property-casualty operations: They tend to have higher risk or worse claims experience than established agents. That's because there's a selectivity bias, and a new agency tends to attract more of the higher-risk customers.

You'll find a new agency will attract people who say they've been good drivers, but they won't tell you about their two DWIs and so on. And so you sell them the policies, and by the time you find out that they aren't good drivers some of them have had accidents already.

SUKAY: (Underwriters) want to deal with someone with size, also. They want to come in with someone who has an established operation with an established claims experience.

Tom, was that one of your motives for buying three agencies in quick succession - you wanted to gain as much size as you could to attract a carrier?

SUKAY: Oh, absolutely. I mean, whenever we bought these agencies, one of the issues was how the insurance companies were going to react - were they going to be for or against us getting into this operation?.

Our thinking was that they were going to be very much supportive of the transaction. And they have been. I mean, because they have seen that we can put these three companies together - that we can tap this other base - we can be a formidable client for them.

As a result, many insurers have come in and want to do business with us. They all are encouraged by the transaction. They see it as an opportunity for themselves, for us, and for our customers.

SUKAY: No problems in that regard - just the opposite. Customers of the bank are coming to us and saying, "I heard that you're in the insurance business now. Could you give me a quote?"

KEHRER: One traditional reason that banks have shied away from buying agencies is because the other agents and brokers who are customers get mad at them - "You bought my competitor, now you're competing with me, so I don't want to bring my banking business to you anymore."

Have you run into any of that?

SUKAY: We have none that we're aware of.

KEHRER: They bought the only three in town.

SUKAY: There are a few left. We think that Summit will get them.

Now that you're evolving in this business, do you find that the number of calls you get from underwriters is just increasing? Are you getting a lot of callers who might not have called you a year or two ago?

CUSSEN: It's rare that a day goes by without an insurance company calling.

SUKAY: Because of the size of our operation, we will represent just every major carrier - we're likely doing business with them already.

But the others have contacted us, because again they're seeing the potential. They see these potential customers just as much as we do.

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