How To Decide Best Way To Offer Members Insurance

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Deciding how you'll distribute your property/casualty and health insurance products is the first and most critical step when entering the market.

Credit unions have three methods to choose among: buy, build or outsource. In the buy scenario, a credit union acquires an existing insurance agency. In the build mode, a credit union creates a new (de novo) agency. Outsourcing entails a credit union negotiating an agreement with an unaffiliated agency to provide insurance products and services. In this article we will help you choose among buying, building or outsourcing your insurance operation by discussing their potential benefits and drawbacks.

Some issues are universal whether you plan to buy, build or outsource:

* How much capital is required?

* What is the quality of the insurance carrier(s)?

* How much insurance fee income will flow and when?

* Who controls the processes and outcomes?

* What products will you offer, how will you distribute them and how will commissions be shared?

* Who owns the member's insurance relationship?

Buying An Agency

Buying existing agencies is the fastest way to enter the insurance business. Some other advantages of buying an agency include day-one revenue; employees with insurance expertise; intact agency systems and operational structures; ownership and control over the insurance program, and no termination issues associated with outsourcing

Buying an agency does have its shortcomings, however, starting with the substantial capital outlay required to purchase an agency as well as the working capital to operate and expand it. You must also carefully evaluate its strategic, tactical and cultural fit, determine its fair market value and negotiate the purchase-all of which take time away from credit union activities.

Listed below are some other issues you should be aware of when deciding whether to buy an agency:

* Make sure there are no contractual change-of-control issues that would harm the agency if you buy it.

* Avoid inflated or unrealistic value expectations since the average full ROI can be 8 to 10 years.

* Determine whether the agency's technology needs to be upgraded.

* Be sure your credit union's service operation can handle the property/casualty claims process-disputes over claims can be unnerving to credit union management.

* Prepare performance-bonus mechanisms to ensure the agency principal's commitment to helping the CU meet its insurance goals.

Building Your Own Agency

Building a property/casualty agency is considerably riskier and more expensive than buying or outsourcing. One advantage you would attain if you built a de novo agency is complete control over management, operations and the service relationship. Your agency would grow organically through the sales of sufficient volumes of premium to members.

However, the financial pressures associated with building an agency likely cancel out this incremental approach to entering the insurance business.

If you're considering building an agency, here are some other issues to consider:

* Building an agency requires a significant time investment as well as substantial capital outlay before any revenue generation.

* Start-up expenses are higher and, for several years, fixed expenses will be higher than those of a mature agency.

* Start-up costs are further exacerbated by technology and physical location considerations.

* A de novo agency has no carrier contracts, customers or track record, which can prevent it from getting carrier contracts.

* You must recruit all personnel from scratch-a costly and time-consuming process.

These potential problems in building a new property/casualty agency all point to the fact that you'd be learning about the insurance business the hard way-on your own.


In the outsourcing scenario, a credit union and an outsource agency enter into an agreement where the agency provides the insurance expertise, backroom functions and access to insurance carriers and products for the credit union. In return, the credit union hires the agent and receives almost immediate fee income from a sales program that is installed fairly quickly. Outsource agencies share much of their agency expenses across multiple credit unions, making outsourcing the least costly and least risky method of entering the insurance business.

Some advantages of outsourcing include the following:

* Outsourcing can usually deliver a return on investment within 12 to 18 months.

* You gain immediate access to insurance company contracts and products.

* Technology is already built along with established operating routines.

* Training costs are reduced because the agency has knowledgeable, insurance-trained staff who can train credit union personnel.

* The marketing and sales agreement is generally adaptable to changing needs.

* You get experienced management to help you enter the insurance business, making it less risky than buying or building.

* Some outsourcing agencies can place an agent inside your facility as a credit union employee, helping to further assimilate the credit union and its employees to insurance sales.

Partners Also Bring Some Risk

While outsourcing removes many of the risks associated with entering the insurance business, reliance on a partner always carries some risk. Since selling insurance from credit unions is still evolving, it can be difficult to find a partner with a proven track record, although there are a few.

Be sure to select a high-caliber agency that has demonstrated a commitment to making credit union insurance programs work.

Some other drawbacks with outsourcing include lack of control over distribution costs and compensation structures; some member confusion when insurance services are provided by a third party (however, appropriate signage, promotions and advertising can abate confusion), and lack of commitment by credit union employees to selling insurance (a credit union employee agent working inside your location can offset this issue.).

We know of several credit unions that have decided to outsource their backrooms after an unsuccessful attempt at building their own agencies. In less than six months, their insurance agencies went from cost centers to profit centers, and they added a much broader selection of insurance products for their members in the process.

About This Article

This article is excerpted from the book How to Sell Insurance from Credit Unions by John Dawson and Michael White. The book was written in response to credit union executives' questions on how to start selling property/casualty and health insurance successfully from their credit unions. John J. Dawson is president of Financial Keyosk and has more than 20 years of insurance industry experience to the practice of helping credit unions sell insurance. Michael White is president of Michael White Associates, and for almost 30 years has worked to develop alternative insurance distribution systems.

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