As banks' insurance efforts grow in maturity, a new set of questions emerges. For example, are banks doing enough to promote their insurance efforts? And is buying property and casualty agencies - one popular route for expansion - the right path?

A roundtable of bank insurance experts fielded these questions and many more during a discussion at American Banker's New York offices.

The participants were: Dennis R. Kosovac, president of Chase Manhattan Insurance Agency; Jack D. Cussen, senior vice president of financial services at Summit Bancorp, Princeton, N.J.; John Biasiello, vice president of finance for Commerce National Insurance, the insurance arm of Commerce Bancorp, Cherry Hill, N.J.; and Kenneth Kehrer, principal of Kenneth Kehrer Associates, Princeton, N.J.

John Kimelman, an American Banker senior editor, moderated the discussion.

A lot of consumers out there aren't even aware that banks sell insurance. Should banks be doing more to promote what they're doing? Is it worth the expense?

KOSOVAC: I believe you should, to paraphrase an advertising slogan, do nothing until it's time. And my view, what's in a customer's mind when you say the word "insurance" is varied. And a lot of research we've done starts with auto, homeowners, sort of grudge products the customer must buy. Then it goes down through life and other products. And you can really leverage advertising if you are able to fulfill a broad set of needs. So if you're using mass media, you should have mass capabilities.

KEHRER: We need to remember that advertising is only one of the tools in the marketer's tool kit. And it may not always be the most effective one. Maybe they're doing exactly right or maybe they're even doing too much in terms of cost-effectiveness of the advertising. They're doing a lot of other kinds of marketing - merchandising, statement inserts, direct mail, and so on.

It's useful to look at kind of the predecessor model business for banks. And that's the retail investment services business. And by and large, people who run those programs believe that advertising doesn't rank very high as a way to successfully market their products. And consequently, they've backed off a lot of - many of them have backed off a lot of advertising.

CUSSEN: Most banks have not built up sufficient infrastructure to really handle mass marketing. And the way I look at it, you're going to get one opportunity to do business with that customer. I'm not sure you'll get the second one, so you better do it right the first time.

So what's the buzz right now on the bank insurance universe?

CUSSEN: The hot topics now are acquisition of agencies. I think the agents are all talking about it. I get a call every day from a different agent. And we have to fight through as to what we're trying to accomplish. We've established what we think is the correct strategy to grow the business. And it isn't to buy every corner property and casualty agency in the state of New Jersey or in the Eastern Region.

It seems like most of the acquisitions are in the area of property and casualty. Is that right?

CUSSEN: On the life side, we're growing a business rather than acquiring it. I'm not sure you're going to acquire a life agency that works. I have some real concerns about that.

BIASIELLO: I think it's also difficult to purchase a life insurance- based agency. Because it's a one-time commission deal. The majority of your commission is paid up front on the life insurance policy so it's very difficult to value it. When we sit down and look at agencies to buy, and we've looked at over 40 acquisitions in the last year, very few of them have been life agencies. Most of them have been in the P&C business.

What other buzz issues are out there right now?

KEHRER: Clearly, there's been a lot of buzz over the Banking Reform Act and what that will do for insurance powers, particularly the cross- ownership between insurance companies, underwriters, and banks.

KOSOVAC: Yes, the possibility of HR10 becoming law as it comes out of the Senate leaves people with a lot of "what if" scenarios to contemplate. So if Pandora's box were to open, would you underwrite tomorrow? Would you create your own insurance company to solve those problems? So I think that the buzz on that is, it might happen. But if it hasn't happened this year, it's reasonably likely to happen next year. So what do you do? So I think that's a lot of the discussion going on.

How good a business would underwriting be for banks?

KOSOVAC: There is a multitude of versions of underwriting with different economics. And if you accept underwriting as coming with distributions, as in the classic life insurance company, the companies are by and large going to be below most banks' hurdle for return.

So even if you're boosted by a strong cycle on the investment return side, both life and P&C come with very small group of companies who have sustained above-hurdle returns for a bank's point of view. Further, the P&C companies come with catastrophic risk. And then, on the life side, while some banks do understand that you can hire experts to help you understand the actuarial risk, it's not something bankers are comfortable with. So at first blush, many banks are saying, why would I bother acquiring one of these?

Having said that, I think that there are a number of banks that are considering niche plays.

KEHRER: What Dennis is saying is that banks would want to try to improve the return on capital by having a more focused underwriting.

BIASIELLO: I do think that if you can have a niche player who has an ability to distribute the proper type of insurance that's required and that you can concentrate on lowering costs, I think it could be a good play.

KEHRER: It may be important to kind of break these companies apart and look at the pieces. Even if you went inside the bank, there are lines of business in the bank that don't meet the bank's hurdle rates. And those particular business lines might be very similar to the core business lines in insurance companies. It's some of the other business lines that are much more profitable. That's what the advantage going forward for a bank would be. They're not locked into owning an insurance structure. And they can go in and build the business or buy a piece of a business if it's particularly attractive to them.

Looking at the bank insurance industry, do you see any classic mistakes that are being made in approach and philosophy? Are banks going about it in, en masse, the right way?

CUSSEN: Well, I would suggest that the wrong way to go about it is to distribute one product from one carrier. I think that smacks of unprofessionalism. And it just really doesn't give the customer any choice, it doesn't give the customer an appearance that, or a perception that, you know anything or have any other markets.

KEHRER: John, you had asked what other mistakes banks might be making in the insurance business. To turn to our second potential mistake, and this is one that might elicit some more strong response, one mistake that they might be making is buying insurance agencies.

How's that?

KEHRER: They may be buying them for the wrong reasons, they may be paying too much. They may be diluting their balance sheets by buying agencies. Agencies typically are not growth businesses. The question is, how are they going to get earnings growth by buying these agencies, and how are they going to reach the rate-of-return hurdles by buying these agencies.

Well we have two men who have bought agencies, so we can get real answers to that. Why don't you guys answer the question?

CUSSEN: There's opportunity for cross-selling activity within the personal lines and the commercial lines business. And we do think that there's going to be some segments that will be able to sell commodity type insurance on the property and casualty side. And with the ability to control the distribution costs to a greater degree, we think that will return the proper hurdle rate.

That being said, banks buying nonbank companies do not have a splendid record. But there's so much synergy between the two industries right now that it's almost impossible to think that it would not be successful.

KEHRER: For someone to sell something to you, you've got to think it's worth more than they do. So all these banks that have bought insurance agencies have bought something from someone who thinks they're getting a better deal by selling out now. And so do they know something that the banks don't know who bought these agencies?

BIASIELLO: That's a great question. We ask it every time we sit around a table with somebody.

KEHRER: But you ought to be able to answer the question, why are you buying? And you're probably paying a premium over the financial returns of the company.

BIASIELLO: Price is a matter of whether you want the agency or not. I mean, what's it going to do for you. Typically we want to buy an agency that isn't going south. And that's all a function of doing the financial analysis. If we're looking at 30 or 40 acquisitions a year, and we're buying one or two or three, we're obviously doing a lot of homework.

CUSSEN: Also, you have to have a strategic plan in place. Price is one part of it and chemistry, obviously, is an extremely integral part of it.

There are a lot of companies that are buying some agencies just because that's the thing to do. If they don't have a plan to implement it and to execute it, I don't think they'll be successful. It sounds to me like Commerce does have a plan, a template that says, "Here's how we're going to be successful."

But what's the plan? If you're buying something at a premium, you've got to grow earnings to make your rate of return.

BIASIELLO: And you're assuming that we're buying insurance agencies at a premium. Well, why would someone sell their agency not at a premium?

At a discount?

BIASIELLO: Well, not at a premium. Let's say that we're looking at one times revenue. That's an even-up deal. Why would they want to sell? Because they believe that there's value in what we're giving them with a business, when they see current value. For example, I think most of the people that we've purchased have seen a large value in our stock price. There's a reason for that, because they're getting New York Stock Exchange stock that has performed exceptionally well.

The other advantage is, the larger you are with the insurance carriers, the more clout that you have in your pocket to work with them and get the best possible deal you can. There's a lot of opportunity there. I think that by themselves the insurance agencies are not gaining the commission levels that we can gain. They're also not gaining the bonuses and incentives that we're gaining. So there are some economies that you gain by bringing those together.

KEHRER: And they're certainly there. But those are probably marginal in terms of the bottom line. They're not going to, for example, add 10 points to the bottom percentage revenue margin, and so on.

BIASIELLO: But I think coupled with all the things we talked about, I think we can say that we're going to have a fairly decent return on what we're buying. All those things together. We've been successful and it's not diluted.

Corporations buy lots of insurance, from liability to key-man policies. Yet most of the bank efforts that I've seen focus on retail customers and, to a lesser extent, small-business customers. Should the corporate market be more of a priority for banks?

KOSOVAC: The middle market would comprise, in terms of sales, roughly $500 million of sales or less. And we service the breadth of that market. Certainly above that market you're dealing with the major brokerages. And it's quite difficult to compete against the large insurance brokerages with their global coverage and their unique market access and in-house expertise. The global corporate market is one that we don't plan to make large inroads into.

Having said that, our primary focus is middle market and below. Middle market is where Chase happens to have a very large market share and a very strong relationship base with the customer.

That middle market is a place where the large brokerages have tried repeatedly to compete and have failed because of the inability to deal with what is a very intimate, modest-scale relationship, by their terms.

BIASIELLO: I agree. I think that there are profits there also. But the higher you go up into the larger businesses, I think what happens is the profit gets squeezed out. Coming from a large insurance broker myself, I think what you're dealing with is a different consumer who is squeezing every ounce of dollars out of their profit that they can because they understand the business.

How big will the Internet be as a distribution medium for insurance and will banks be helped by this or will this be a threat to banks? Will it be a way for carriers to bypass banks?

KOSOVAC: The elimination of the interim distributor, the advice giver, is a welcome thought for many customers. But it's not for many other customers. So I think, yes, the Internet will grow. Will it become the dominant medium? I don't think so. It will become a source of information. It will sell a fair amount of insurance. If you're going to be serious about being in the business, you have to be in that channel. And the other thing about the Internet is that, over time, brand will become more important.

KEHRER: The brand attracts customers to your web site, or it could mean the brand that they recognize when you're on a list with other providers on an intermediary Web site. You're the one they picked because it's all sort of the same but they recognized you as a company brand.

Two of the banks represented on this panel have been quite acquisitive, buying up agencies at a fairly fast clip. What are the major challenges in consolidating agencies in such a short time?

CUSSEN: There's obviously a culture fit. Most of the agencies that we buy are entrepreneurially motivated and they are able to move and change direction on a dime. And in a bank environment, that's not always easy. So there's some difficulties there. But we have kind of built a path so that we do a preparation job on them so that they understand the realities of joining a bank, and they do it now with their eyes wide open.

Chase has not been buying up agencies. Why is that?

KOSOVAC: Specifically on the commercial side, we looked at a wide range of options, including acquisitions, including de novo and including partnerships. And we decided to choose the partnership route. With acquisition, we could never make the numbers work.

How big will the bank insurance industry be in five years?

CUSSEN: I look it as a continued relationship builder. I don't think it's going to dominate the banking business but I think it's going to be part of the glue that holds the relationship together.

KEHRER: Right now we've got the wild card of banks buying agencies, and some of which seem to have no plans to integrate that into the bank. And if you count that as banks and insurance, that increases the size of the industry. I don't count it. That's not what I think of as banks being in insurance. That is, meeting the insurance needs primarily of bank customers in some new, efficient ways, in a more profitable way, and ways that meet the customers' needs better. That will grow slowly.

KOSOVAC: If a bank is able to integrate the technology, the underwriting and the distribution into its core businesses . . . you should be able to attain, in my view, within five years, after a financial modernization, about 20% of your core revenues from insurance.

So the European model as imperfect as it is, I think will be the one, if adopted, that will allow us to build substantial profitability.

BIASIELLO: I absolutely agree that it depends on how we mesh the selling of insurance with the selling of the bank services.

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