A recently completed nearly two-year project with the Community Bankers Association of Indiana shows the feasibility of creating a multiline, member-owned and -operated insurance agency.
Banks' Insurance Agency gives member community banks an opportunity to own and operate an agency with profits distributed to the member-shareholders. This is different from community bank association models, like Virginia's, in which money is raised to buy existing agencies and, for the most part, the bankers' investment is passive. In the Indiana model the bankers must become involved as a prerequisite to joining and commit themselves to program support, not just monetarily but also by championing the business internally.
We know from the experience of many banks with less than $500 million of assets that buying an agency is not often very productive for the bank or its clients.Usually the acquired agency has no experience in dealing with mass market, direct mail, or Internet-based environments, and therefore the bank's core customer base is not well served. In addition, building senior management focus and commitment, retaining quality specialized employees, achieving consistent training and economies of scale, plus maintaining competitive product pricing and relationships with carriers can be difficult for a small agency.
Building the Indiana agency began in March 2003.
Development was in four phases: feasibility study, business plan, capitalization, and operations. Any community banking association interested in owning and operating its own insurance agency can use the model outlined below.
The feasibility study was completed to educate the association's board of directors, communicate the viability of the multiline agency approach, and size up the opportunity. The study used a layered approach, grouping banks by asset size so that capital investments, investment returns, and total returns could be calculated accordingly.
Demographics from the potential bank participants' databases and general market data were used to obtain a normalized composite.
Data were acquired using a questionnaire designed by the author for a proprietary financial model. The model uses 32 predefined insurance product families grouped into three lines of business. Customer groups were established in four categories with 11 subgroups. And 10 distribution channels are grouped into either direct or agency categories.
For example, agency distribution channels include bank platform reps, agents as stand-alone entities in branches, and agents aligned with: commercial bankers, trust and private bankers, and securities and investment groups. Though calculations within the model are complicated, their purpose is simple - to identify the potential insurance sales hidden within banks' customer bases.
Though the Indiana association has 110 member banks, the feasibility plan assumed that only 12 would become founding members and that 25 banks would ultimately use the agency's services as a third-party administrator and back-office and marketing arm. Nearly two years later, though initial interest was much higher, the founding member banks in fact number 12.
Very early on the decision was made not to work with banks that already owned agencies; determining acquisition prices and integration timing would have complicated and delayed the de novo agency's launching. This does not preclude acquiring an agency or blocks of business once the agency is better established.
Business planning, the second development phase, required speaking at association conferences and traveling throughout Indiana to explain the concept and generate enthusiasm. Based on indications of interest from 32 banks, this phase included plans for marketing, product distribution, financial analysis, and operations. Concurrently, a search was begun for an executive experienced in banking and insurance operations.
The capitalization phase required the preparation of legal documents, refining the financials to reflect the 12 founding members' data, and the agency's initial capitalization.
In the fourth phase an experienced bank executive, William R. Shoemaker, began executing the plan as the agency's president and CEO. Working from a well thought out plan puts him "ahead of the game," he says.
This model gives community banking associations a chance to consider whether creating a member-owned, multiline agency at a small cost per bank would work for them.
