Small Business: Selling Insurance to Small Business: What are the Odds

When it comes to the question of where banks can make money in selling insurance to small business, the consensus is that distribution is the key Let's hope so for the few pathfinders out there now, with no profitability statistics for inspiration. It can't be the margins, notoriously thin in the best of times, which the insurance industry has not seen for years. Don't expect financial reform to help, either. Insurance sales are regulated on a state-by-state basis, and that is not likely to change easily.

There is no question of potential customers, however. In 1995, small businesses made up over half the work force and 40 percent of the nation's gross national product, according to a recent BAI/McKinsey & Company, Inc. report, "Unlocking Winning Strategies to Serve Small Business." Traditionally, small companies (defined by the report as $10 million or less in annual revenue) stay with a particular financial institution for a long time and consolidate a significant portion of their business, which makes them apt to be more profitable than retail customers. Yet these days banks have to guard small businesses, as well as retail bank customers, from interloping innovators on the prowl.

Firms need insurance

The report points out that insurance products are the largest group of other financial service products which small businesses need (see chart.). Most small businesses have property and casualty insurance (including workers' compensation), generating $22 billion in annual revenues. Almost two thirds of companies (64 percent) provide group life insurance, the next most popular product, which generates $1 billion in revenue.

The profitability issue aside, some sources say that small business customers would benefit from buying insurance through banks. Besides simplifying their lives (one less person to deal with), premiums would go down (they would have to, in order to be attractive) for what one analyst calls the last industry to be rationalized; i.e., selling a low-margin product in a costly one-to-one fashion with high-priced agents makes no sense.

Even so, the next hurdle is getting small businesses into the bank at insurance time. They do not associate banks with insurance, partly because of regulatory strictures here. No problem: Surveys show that small businesses look first to accountants as financial planners, and second to bankers as financial partners, channel or relationship managers, according to Jeffrey Brown, director at McKinsey & Company. "Banks are better positioned (for financial planning) than an independent insurance agent, who is just seen as providing a product," he says. "Customers think of banks helping assure them of enough cash flow, so the conversation about (preventing) revenue interruption from illness, fire or loss, is a natural (one)."

Though banks will offer both personal and commercial coverage to small business owners, the banks' inclination to add to the relationship manager's grab bag of products is not enough to guarantee success, according to Nick Pirsos, an insurance analyst with Ryan, Beck & Co., based in West Orange, NJ First of all, crossover is difficult. People tend to buy personal insurance through personal connections, such as relatives. More to the point: Insurance is complex. "The only thing the two (life and property/casualty) have in common is the term called insurance. They are different products in regard to risk and reward; they are two different beats," he says. "If banks say they are going full speed ahead, I would ask if they understand what insurance means."

Vernon W. Hill, chairman of Mount Laurel, NJ-based Commerce Bank, said to be the largest insurance company in the metropolitan Philadelphia area through a bank-owned subsidiary, agrees. "Banks think insurance is one big word, but it is many niche businesses," he says, referring in part to the special requirements of many industries, such as medicine and architecture. Industry professionals say that banks will need a patchwork of providers; independent agencies routinely contract with different insurers for such products. Commerce will expand its expertise to keep all policies in-house. The bank already specializes in local government insurance for towns, counties, school boards, and the like.

Banks: to buy or not to buy

As to scope, life insurance accounts for five percent of business at Commerce, where the main thrust is property and casualty. "We sell it all, from giant ticket fire coverage for commercial property to car insurance for your children," says Hill.

Typically banks enter new businesses through acquisition or alliances. Acquisition increases the share of the profits, and the risk associated with being a principal. Commerce rejected the idea of a partnership. "We don't believe in partnerships. We want to control the product, service, and delivery," Hill says.

Commerce's entry into insurance was big and bold; the bank acquired the four largest independent agencies in its market area in four months this year. The result is $200 million in insurance premiums, 175 people, and 35,000 accounts, including 10,000 commercial clients.

As Hill sees it, size is becoming important. Larger agencies have more power with insurers to get better pricing. Insurance agencies are primarily two worlds, Marsh McClennan and mom and pop firms, with very little in the middle. "That's where we are, the area we believe will grow," says Hill. "The mom and pops will slowly die; Marsh McClennan will stay in its fortune 500 market." Commerce will expand continuously, and could acquire five to 10 agencies a year for the next few years.

Commerce will cross sell as much as possible, but focus on talking to small business owners directly about insurance. Like some people close to the situation, Hill says that small business insurance is a one-on-one market.

Squarely in the other camp is Charlotte-based First Union Corp. Through First Union Insurance Group, its full-service insurance affiliate, the bank has formed a partnership with The Hartford Services Financial Group.

It is reportedly the first time an insurer is forming a partnership with a bank-affiliated agency to provide direct marketing and servicing commercial insurance programs to small business customers.

In May the bank started mailings to accounts with sales of less than $5 million in the mid-Atlantic states. By year-end, it will add eastern and southern states, reaching a total of 600,000 First Union customers. Products range from from property and general liability to commercial auto and workers' compensation. The Hartford will operate a 24-hour call and claim center to support the direct mail effort.

Industry experts agree that alternate delivery channels cut costs; some say that personal interaction is not necessary for businesses under $5 million in revenues. About 80 percent of small businesses have revenues of less than $2 million and make up 40-50 percent of the revenue potential for banks. "Companies with under $5 million in revenues make decisions on property and casualty insurance largely on price, as long as they are not specialized," says Geoff Lane, managing associate, Coopers & Lybrand. "A 10 percent reduction in return for (forgoing) face to face contact is a good thing (for them)."

Like a lot of independent agencies, insurers like Nationwide and State Farm are trying to standardize that end of the spectrum, automate underwriting and treat specialized cases separately.

Furthermore, this thinking goes, even if small business owners buy a policy through a bank, they don't have to keep it there. Once in place, most policies don't change much over time. Customers can "shop it" at renewal time, as one expert says.

Similarly, since many insurers go directly to very small businesses, those companies may not need banks at all.

At the same time, State Farm Insurance is said to be buying a bank. Echoing the views of others, John Hall, analyst at Alex. Brown & Sons, based in Baltimore, calls this event highly significant. "In most comments you hear from analysts, pundits, regulators, they always think of banks getting into insurance, as if it were a one-way street. State Farm shows (that) it will not be that simple."

The consensus is that State Farm's banking operation will get underway within three to four years. State Farm has lots of agents already out there talking to people. Well qualified, respected, and educated, they sell other financial service products too, and have been a source of referral to other organizations in the past. With 22 to 25 percent of the personal insurance market share, primarily auto and homeowner, State Farm is ready to spread out into different products, reports Hall.

Some say that State Farm is a special case. As a mutual insurer, it is not subject to pressure for quarter to quarter earnings performance, and can plan for the longer term. Others say that banks should view entities like State Farm as competitors in the same league as Merrill Lynch. Finally, as one analyst says, "He who gets there first, gets the most."

-bosco tfn.com

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