A growing number of banks are eyeing small businesses as a market for insurance products.

One reason is that banks are focusing more on small businesses in general. Another is a ruling the Supreme Court announced this spring that state laws can't ban nationally chartered banks from selling insurance from towns of 5,000 people or less. About 20 states had such laws.

Indeed, Barnett Banks Inc. - whose lawsuit against the Florida insurance regulator prompted the Supreme Court decision - plans to get active soon.

"We are evaluating how we can do that properly and should be out there by next year," said Steven D. Hickman, director of Small Business Banking for Barnett, which is based in Jacksonville, Fla.

First Commerce Corp., New Orleans, is another banking company investigating the possibility of selling insurance, said Rick Cary, a senior vice president.

"This is something we're looking at," he said.

Barnett and First Commerce aren't the only ones who see opportunity in selling life, property and casualty, and other insurance policies to small- business owners, their employees, and their businesses. Right now a minority of large banks are active, and interest is growing.

According to a survey by the Consumer Bankers Association, 38% of big banks sell insurance to small business and another 12% plan to start by the middle of next year.

The survey was of 58 banks representing $1.6 trillion in assets.

A study by the Life Insurance Marketing Research Association suggests that banks have potential to make inroads. The reason: The small-businesses market is woefully underserved.

"It's always amazing to me that small-business owners have a lot of unmet needs - either for the businesses, the employees, or themselves," said Cheryl D. Retzloff, a researcher for the group. "These people do have high needs and they do have the ability to pay. "

But if the market is underserved in insurance, it is not because vendors haven't been trying. Seventy-five percent of small companies were approached about buying insurance, the trade group says.

The problem: Salesmen didn't do a good job of cross-selling.

"Certain products - life, disability income, and retirement products - are less likely to be discussed, and therefore less likely to be cross- sold," said the March issue of the group's MarketFacts. The article, "Small Business, Big Opportunity," was written by Ms. Retzloff and based on data gathered from about 1,000 businesses in late 1994, the most recent data available.

The president of Norwest Corp.'s insurance subsidiary agreed that small business is an underserved market, but said it is not by design. The sheer number and rapid proliferation of small companies makes them hard to reach, he said.

"I think it's a trying-to-be-served market," said Timothy King, president of Norwest Insurance Inc., Minneapolis. "The need out there is so great that there aren't enough hours in the day for agents to get out there.

"It's a great market."

Ms. Retzloff said that business-continuation planning and coverage is glaringly lacking at many small businesses. Half of all small-business owners lack formal continuation plans, and 68% of small firms lack individual life and disability income insurance for business-related purposes.

"They are really poorly covered in this area," Ms. Retzloff said.

Mr. Hickman said that Barnett is interested in offering such business- interruption plans. So is KeyCorp, Cleveland, which plans to widen the range of its small-business products during the fourth quarter, said David Jarvis, chief executive of KeyCorp Insurance Management Group, the bank's insurance subsidiary.

KeyCorp plans to supplement its small-business credit insurance offering, currently its only policy with a small-business focus, Mr. Jarvis said. He spoke of insurance against the death of key personnel and a buy/sell agreement product that would let a business partner buy out a deceased partner's share.

Mr. Jarvis cited two reasons for KeyCorp to ramp up its insurance efforts: the Barnett decision, which frees it to sell insurance in some of its Midwestern markets; and new technology that will let it deliver products more efficiently.

"We've gotten serious about selling to small business," Mr. Jarvis said.

One area in which small businesses' coverage has actually grown thinner is group insurance.

For example, although 90% of companies with more than 25 employees offer group medical insurance, smaller firms have fallen behind because costs are prohibitive, the article said. Further, only 31% of all small firms offer group life insurance, down from 36% in 1987. And 23% of small firms offer disability insurance, down from 31%.

Mr. Jarvis said that health insurance is on KeyCorp's radar screen, but he fretted that the bank would not be able to offer a competitive product. However, he added, the bank may sell a policy in underserved areas.

"We are exploring the opportunity of finding group health opportunities in rural markets," he said.

Banks looking to crack into group insurance might consider the route suggested by Ms. Retzloff's article: Pitch voluntary products.

"One viable option for these firms is voluntary products," she said in the article. "Only 7% of all small businesses currently offer their employees any voluntary products."

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