As the barriers fall to providing insurance services, banks are beginning to develop insurance programs. Often these are developed through partnerships with insurers.
It is hard to overstate the importance of finding the right insurer to partner with. Without the right partner, failure is inevitable.
That failure can take two forms:
The program will be very small and not benefit your customers or your institution.
The program will be unprofitable for the insurer, whose reactions-which can include large rate increases, nonrenewal increases, and a pullout that leaves you to find a new insurer-will anger your customers.
Insurance markets vary widely with the needs of different insureds. And each target group of bank customers will include a different insurance market.
Credit card customers, for example, will represent a different market from those with big CDs and big money market accounts. The personal-auto needs of those two groups differ.
Similarly, the insurance needs of checking customers differ from those of people with jumbo mortgages. They need different sorts of homeowners policies, pricing, underwriting, and claims-handling.
Your insurance partner needs to understand and have expertise in your target market. For example, an insurer that specializes in writing insurance for 1,000-square-foot homes will have difficulty underwriting and pricing the fine arts, jewelry, and other expensive personal articles owned by your jumbo mortgage customers.
Therefore it is essential that the insurer understand and have experience in the bank's markets.
Distribution systems generally fall into one of three categories: independent agents, exclusive agents, and direct marketing. The bank must ensure that it is not caught in competing distribution systems.
For example, an agent representing the insurer might be located near a bank branch where a representative is selling the same insurer's policies. Unhealthy competition could ensue. A potential insured might get a quote from the agent and, not liking it, go to the bank with different information (like forgetting about a 16-year-old son) to get a lower rate.
Also, if the bank is using a direct marketing system and the insurer has competing agents, the insurer will begin to see difficulty in relationships with the agents. Eventually the insurer will have to make a choice-the agents or bank. Chances are agents will win.
Insurers need to be able to manage the distribution systems. For example, an insurer might arrange to have the agent work with the bank and then might take special care to control expenses.
Another arrangement is to have the distribution systems serve different markets. For example, the insurer might use agents to serve one region and the bank another region. Alternatively, a multiple-lines insurer might use agents for commercial accounts and the bank for personal lines. Whatever the case, the distribution systems need to be coordinated so that they are not stepping on each other's toes.
Another aspect of distribution systems is which to use.
A number of banks have purchased independent agencies. The independent agency system includes insurance agents who represent more than one insurer. In essence these agents shop among insurers and then place the customer's business with the one offering the best fit.
Eventually, banks may find this system unrewarding. Also, commissions are relatively high, so it is hard for an insurer to provide competitively priced products. And insurers that aren't an agency's first choice for the most profitable business will probably lose money.
The exclusive-agent approach is more popular. In one variation, insurer or bank employees sell insurance exclusively through the bank branch network. Alternatively, the agent is an employee of the insurer who accepts referrals from the bank. Whatever the agreement, an individual meets physically with the insured and sells and services the policy, but represents only that insurer.
This system costs less than the independent agency system and avoids the situation where insurers have to either be first or lose.
An exclusive-agency system permits insurers to meet with and understand potential customers. This allows for the development of personal relationships that can be used to cross-sell. Also,personally selling insurance can help control fraud and "rate-jumping"-the practice of misrepresenting personal information to avoid a high insurance rate.
Direct marketing, by telephone or direct mail, is the fastest-growing method of selling personal lines of insurance. Representatives paid on a salary basis, not commissions, take inbound calls to process insurance quotes, bind coverage, and handle policy changes.
The start-up costs are high, but over the long term direct marketing can be extraordinarily efficient. Direct-market insurers have expense ratios (expenses as a percentage of premiums) 5 to 10 percentage points lower than exclusive agency companies, and usually 10 points or more below those independent agency companies.
But direct marketing has its drawbacks. It is harder to prevent fraud and rate-jumping, and the benefit of "front-line underwriting" by an agent is largely lost.
