Willie Sutton had it wrong. The legendary thief said that he robbed banks because that was where the money was. Banks might have enough vault cash to interest those of Sutton's ilk, but they receive a surprisingly modest share of the cash earmarked by the consumer to financial services. Compare the bank's share with that of the insurance industry.
A representative household generates about $750 in annual net revenue - interest and fees received less interest paid - for the retail part of its bank. This includes the revenue on both the deposit and loan balance. In contrast, that same household provides nearly $1,200 in net revenue for its insurance companies and their agents.
A bank will take to the bottom line about $300 pretax per typical household. Despite the much larger net revenue, the insurer and its agents will manage about the same figure.
Many banks eyeballing these numbers are asking whether they can cut in on the insurance action. Since most banks do not and cannot choose the role of risk underwriter (except in credit life), their interest naturally focuses on insurance distribution.
Given today's relatively inefficient product economics, the distribution share of the $300 in insurance net income is about $150. Thus, if banks can preempt the services of insurance agents, they have the potential of increasing their return per typical household by at least 50%.
To be sure, displacing insurance agents across the full spectrum of product and customer segments is unrealistic at best. But banks appear logically positioned to begin serving some segments effectively and profitably. This article is the first in a series that discusses the economic potential of insurance sales and how to realize that potential.
The insurance business logically segments into three parts based on their end-market dynamics: individual, commercial risk (e.g., workers compensation), and employee benefits (e.g., group health). It is likely that banking institutions will focus at least initially on individual lines, linking this business in varying degrees to the activities of their retail banks.
In 1994, the individual insurance market generated some $400 billion in premiums and deposits. P&C accounted for about 30% of this total (nearly everyone has to get auto insurance), individual health about a quarter, annuities slightly over a fifth, and life another fifth.
Projected growth rates in individual insurance lines vary widely, but, on average, we anticipate that the growth rate of revenue in these lines will exceed that of deposits and consumer credit. Individual annuity sales are anticipated to maintain their velocity, increasing at a compound annual rate of 15% to 20% from now through the end of the decade. Individual health should grow by 10% and property and casualty by at least 5%.
The outlook for life premium is not as rosy: A leveling or even a decline in premiums is predicted. However, this forecast assumes business as usual, which in the life area means that the current distribution system will continue to underserve sizable market segments, such as modest-income families, age 25 through 34. Today it does not make economic sense for an agent to sell to this segment. However, it may make abundant sense for bank entrants into the business, given their potential capacity to mount more cost-effective sales campaigns.
Although banks are accustomed to berating themselves over the inefficiency of their product delivery systems, in point of fact these systems, however flawed, are much more efficient that those of most insurance agencies. One source of the agency problem is the personnel turnover rate. On average, agencies experience a 25% to 35% annual turnover among sales professionals. Within three to four years, about 80% to 85% of agents who start in the business will leave. Imagine the performance impact if banks saw that level of turnover on the platform.
In addition, agencies typically lack the sophisticated marketing data base, decision support systems, and modeling capabilities that many banks have put into place to pinpoint prospects for discrete insurance and other product sales appeals. Not having the operations scale necessary to develop an adequate marketing infrastructure, most agencies are relegated to labor- intensive, and therefore higher-cost, sales initiatives.
Banks can not only reduce the high cost of prospecting for customers, a few have already taken steps to simplify the sales process itself. They are reengineering the complicated life insurance application and acceptance process that has traditionally slowed the selling effort. For example, one insurer, in association with bank marketers, has substituted a one-page "short form" for the usual multi-page application, while at the same time greatly simplifying the requirements for medical underwriting.
Together, more focused marketing and reduced application complexity can conceivably pare distribution costs enough to enable banks to serve life market segments that the agencies have not been able to serve. The upshot is that the future growth in life premiums may prove far more expansive than is currently estimated.
The maturation of bank marketing skills also might serve to expand sales of other insurance products, especially annuities. Bank marketing is increasingly geared to financial life-cycle planning. The more advanced banks see themselves as ministering in a unified fashion to all five consumer financial needs - transactions, credit, investments, insurance, and financial planning. As they develop the capacity to optimize the asset allocation choices of given customer segments, these banks will be advising some who are now too heavily into deposits to shift resources into investments, including bank annuities. This is not some future scenario. Depending on whose figures you believe, banks today sell between 20% and 30% of all annuities in the U.S.
Mr. Kaytes is a managing vice president of First Manhattan Consulting Group, New York. Part two of this article will appear next Tuesday, and further installments will appear in January.
