many bank insurance programs are striving to convert insurance into another retail bank offering, others are happy to view insurance as a stand-alone business.

"If you do this and plan to live just off your bank clientele, that is not going to work over a long period of time," said Vernon W. Hill, chairman of Commerce Bancorp, Cherry Hill, N.J.

Recently, Mr. Hill and three other bank insurance executives met at American Banker's New York offices to discuss a wide range of issues concerning banking's foray into insurance and annuities.

The other participants were Peter Aharonyan, president of Chase Manhattan Corp.'s insurance group; Melvin L. Cebrik, a senior vice president and head of insurance operations at Dime Bancorp, New York; and James H. Overholt, a consultant with Milliman & Robertson. John Kimelman, American Banker's special projects editor, moderated the discussion.

What's the buzz in the bank insurance industry? What are people talking about today that they weren't talking about a year ago?

AHARONYAN: The focus is very much on coming up with products and services that are specifically geared to the bank market, to really leverage the technology and the efficiency of bank distribution.

CEBRIK: There is a lot of discussion of how we can leverage our distribution capabilities much like some of the models in the bancassurance markets in Europe. At Dime, we have put tremendous emphasis in terms of our ability to sell on the platform.

OVERHOLT: I agree that there will be a product development renaissance as insurance companies get Y2K behind them and get some resources freed up from what has been a huge product development effort in investment-type products.

I think you're also going to start to see a lot more innovative things with distribution. I would have to add Internet activity, and more direct sales as opposed to the ongoing development of distribution through the branch network. I can see the Internet making up to 5% to 10% of overall insurance sales. I think it could become a very, very significant piece.

Keep in mind that the Internet strategy of banking, and for that matter insurance companies in general, is still in the developmental stage. So it's not like you're talking about how long it will take to plug an insurance product into an existing distribution system. The system itself is really still under construction in the industry for the most part.

How does the reality of this business today compare to what your expectations were for it three years ago?

CEBRIK: I've been very impressed in terms of where this business has gone and where it's going. I think there is much more activity now across a broader spectrum of banks in the business, both the large money centers as well as the large regionals, and getting down to the thrifts. An area that I think will just explode is the Internet. And I think no one has really developed a model for that, but I truly think that over the next couple of years you're going to see tremendous activity and opportunity available to those organizations that can figure out the best way of using that.

HILL: The insurance operation is going to be 9% of our net this year and that's mostly commercial property-and-casualty. And it has definitely exceeded our expectations. We've grown by acquiring P&C brokers. We've acquired a couple this year already, and we'll probably acquire a couple more. And our results have really exceeded our expectations.

AHARONYAN: The insurance business with Chase now is a real business. This year we'll exceed $170 million in revenues, about half of which is from credit insurance. The revenues have continued on the growth path that they've been on for the past five years. And the profitability continues. So we're now on the radar screen. We're recognized as being an important product set, especially on the retail side. We had set some lofty targets, some aggressive targets, and I think we've met them. In some cases, we've exceeded them.

How much of the revenues that you were talking about, the $170 million in insurance-related revenues, are coming from the commercial customers?

AHARONYAN: The commercial clients this year, if we add everything that we do with them, will probably be less than 10% of that number, although the growth is expected to be fairly significant over the next few years.

And I gather you haven't done all this with too much marketing. I don't get a sense that you are out there really touting insurance.

AHARONYAN: You're right. We have held back on the marketing until we're ready to say that we are in the insurance business. Next year, we will begin to publicize that Chase is in the insurance business. And when a customer comes to Chase, a customer can buy insurance from Chase. And you'll see that in a variety of ways, and it will be very much segment- and customer-focused.

We may try mass media type advertising because it is important, especially for the branch sales, to have the customers to use a full strategy where the customer does go in and ask for a product.

All these bankers believe that insurance has more than lived up to earlier expectations for banks. As a consultant, what's your view?

OVERHOLT: I agree that insurance is now taking on a life of its own that probably did not exist three years ago. But I think that when I look around the industry and talk not just to the banks, but also to the insurance carriers, I would say that insurance has really not lived up to the expectations that a lot of people had for it.

Three years ago, there were some fairly high expectations for insurance. And I'm not talking about annuities now. Annuities certainly have taken off and have done well in the bank channel and in the thrift channel. I'm talking more about pure traditional life insurance now. Unfortunately, the model that everyone has looked to for these last several years has been the European bancassurance model, which called for integrating insurance sales within the bank environment. And from that standpoint alone, I think there has been some disappointment.

HILL: I would agree with Jim on that. If you do this and plan to live just off your bank clientele, that is not going to work over a long period.

Spoken like a true nonbeliever in bancassurance. Chase Manhattan has probably embodied the spirit of bancassurance as well as any U.S. bank. How have you been able to achieve it, to sell effectively to bank customers?

AHARONYAN: I think you really have to look at it on a product-by-product basis. If the question is, are branches selling a lot of life insurance, they probably are not. We do have a fairly active life insurance business. We sell life insurance to affluent customers. We sell life insurance as part of group benefits to commercial clients. We sell to entrepreneurs of large companies. We have dedicated life agents in the branches that sell life insurance to clients. And, we have platform people that sell life insurance. But the platform piece is not a huge part of our business. So in that sense, I think that there is room for growth, there is certainly the opportunity to expand that business. But, if you look at that business on a product-by-product basis, certain products have grown faster and done better than other products.

Which ones have grown the fastest?

AHARONYAN: On the P&C side, certainly we have a pretty active business, both commercial P&C and homeowner and automobile insurance, using the direct marketing, telephone type of selling. We have specialized products that we do via direct mail to a lot of our large customer bases like the credit card base and the mortgage base, for example. We're getting involved in a variety of products closely related to bank transactions, such as title insurance and mortgage insurance. Annuities are certainly becoming a very important product set in the branches. So there are just a series of these products that are becoming a part of the sales process. And certainly, life insurance is there as well.

The issue with life insurance, especially on the mass-market side, is the profitability and how do you build that business and how do you make money out of it. And it's a tough business. It's a very competitive business.

If you look on the traditional broker side, they have a tough time selling life insurance to the mass market as well.

So perhaps the life insurance product needs to be redesigned, reformulated so that it fits that channel and then works in that channel for the mass market and for the private client base, the affluents and so on.

How far away are we from the point where banks can design life insurance policies tailored to a bank's economies and customer needs in the way banks have designed proprietary annuities?

AHARONYAN: I think you will see Chase products - not underwritten by Chase, but certainly partnering with an insurance company - specifically geared to the bank distribution channel.

And the Internet turns up a very interesting question as well. If the life product is to fulfill its promise on the Internet, do you want it to be truly interactive and truly de-automated? So all of the technology that has to go into place with the Internet, for example, can also be suited for the face-to-face channel as well. I think you will see us and you will see other banks partnering with insurance companies to come up with product sets that work specifically for their mass market channel.

When is that going to happen?

AHARONYAN: It could happen soon. I think you will begin to see product next year.

CEBRIK: Right now, we're offering a term life product at the platform that is really driven off the fact that this is easy to sell at the branch level. So again, I think you will see more of that type of product and product customization that will allow the (bank) to sell product much more easily to the customer who is transacting more than one product at the branch.

Switching subjects, what kind of impact will the death of pooling-of- interests accounting for mergers have on a bank's efforts to buy insurance agencies?

HILL: In our case, the deals are so small that they're nonmaterial, and I think that generally there are very few large insurance brokers in America, certainly in our market.

And I guess most banks are buying insurance brokers of similar size to yours. So you don't think it's going to be an issue for the rest of the banking industry?

HILL: I would be surprised.

CEBRIK: But I do think for some of the regional companies that could potentially buy a large group of agencies, as opposed to individual agencies, it could make a difference. And the commercial brokerage business is an important one. You have the opportunity to cross-sell banking product to a customer base that may be quite different than your own. So we really look at that opportunity as something that could be very attractive to us at Dime. And I personally think you'll be seeing much more. And my guess would be that you'll see much more activity in this area, not from the money center banks, but possibly in the smaller regionals.

What are insurance agencies going for now?

HILL: Well there had been a disconnect between what the insurance guys thought their business was worth and what the real value is worth. They're coming back to earth now. Agencies are going for five to six times adjusted pretax income.

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