Insurance Sales: Old Hat for Northeast Thrifts

Should Congress allow banks to sell insurance? That question is hotly debated in Washington these days, but it probably seems like a tempest in a teapot to savings banks in three northeastern states that have been selling life insurance for decades.

Taken together, savings banks in Connecticut, Massachusetts, and New York have $32 billion of policies in force, enough to rank among the nation's 50 largest life insurance companies.

And the business is growing apace. Over the past five years, the value of savings bank life insurance in force has doubled, largely because the states have increased the amount of insurance that a bank can issue to any one individual. In Massachusetts, for example, individuals can now get $250,000 of SBLI coverage, up from $62,000 just four years ago.

"Immediately, our issuance tripled," said Francis D. Pizzella of the Massachusetts SBLI Council, which administers the state's savings bank life insurance program.

Another factor driving the growth of SBLI: It is relatively inexpensive, given that the SBLI Council and its counterparts in Connecticut and New York limit the profits that member thrifts can earn on the business.

Alternative to Capitalism

After all, SBLI is not a creature of capitalism but of state governments that wanted working people to have access to basic, low-cost life insurance. With the strong support of former Supreme Court Justice Louis D. Brandeis, Massachusetts' SBLI program came into existence in 1907, following several insurance scandals. Thirty years later, New York and Connecticut initiated their own SBLI systems.

A.M. Best's Cost Analysis

Savings banks decline to give comparative costs. But A.M. Best Co., the Oldwick, N.J.-based firm that tracks the insurance industry, indicates that SBLI can be far less expensive than traditional insurance.

For example, the median premium for the first year of a $250,000 term policy sold to a 35-year-old, nonsmoking male by 75 major insurance companies nationwide was $300.44, according to A.M. Best data. A comparable SBLI policy sold in Massachusetts would cost $225, a 25% savings over the median.

Savings would be even more dramatic over time. By the 10th year, the same policyholder would have paid $3,050 in Massachusetts versus $4,369.61 for a median-price policy -- a 30% savings. In New York, comparable figures for SBLI are $180 in the first year and $3,232.5 in the 10th year, savings of 40% and 26% respectively.

|It's a Good Package'

What's in it for the thrifts? So far, SBLI has been little more than a way to build customer loyalty.

"It's a good package to offer consumers," says William P. Morrissey, executive vice president of the Boston Five Cents Savings Bank, a major SBLI policy writer in Massachusetts. "It gives us a little advantage over commercial banks. It's one-stop shopping."

"It's an attractive means of building customer relationships," agrees Daniel Keppel, insurance administration manager for the Dime Savings Bank, one of the largest writers of SBLI in New York state.

But that could change in Massachusetts under proposed rule revisions that would allow savings banks to charge fees and make profits on SBLI. Last year, following a five-year struggle, the state passed a law allowing the Massachusetts Savings Bank Life Insurance Council to become a corporation. The banks, which will be sole shareholders in the corporation, may receive dividends and banks selling policies will be able to collect fees.

If, as appears likely, the Massachusetts insurance commissioner signs off on a plan putting the new system into effect, as of Jan. 1 the new company will supplant both the council and the individual SBLI departments in the 53 Massachusetts banks that currently sell policies.

Prospect of Greater Savings

The new legislation could mean substantial cost savings to consumers, said Mr. Pizzella of the SBLI Council. Those savings will arise from the fact that the council will no longer have to keep 53 sets of books, do 53 tax returns, and keep separate files -- as is required under current regulations, Mr. Pizzella said.

The savings could amount to 25% of the approximately $16 million annual cost of running the Massachusetts SBLI system.

Of course, those savings must be weighed against the costs of higher dividends and commissions for the banks.

Even with the changes, Mr. Pizzella does not foresee banks making big money on SBLI. "There will be some potential for dividends," he said. "I don't think they'll be making millions of dollars. The appeal will still be synergistic-type advantages, cross-selling. The main advantage will continue to be that."

Under the Massachusetts plan, the SBLI company will take over most of the functions of the business, including selling policies and investing the proceeds. Banks' roles will be confined largely to providing customer lists to the SBLI company, in return for fees.

Few to Join Bandwagon

Even though banks offering SBLI swear by it and sales appear to be rising steadily, bankers and industry observers do not expect SBLI to be allowed in other states any time soon.

"It's not going any place except in Massachusetts, New York, and Connecticut, because the insurance industry has defeated it all over," Mr. Pizzella said.

Even within those states where it is allowed, SBLI's potential is limited because it is a bare-bones, low-cost product. There will always be a market for mainline insurers offering more elaborate products.

"We're not going to conquer the Prudentials," said Robert Sheridan, executive vice president of the SBLI Council. "Our niche is low cost. There's a need for exotic insurance products, but with it comes expense."

SBLI makes up only a tiny fraction of life insurance in force in the three states where it is allowed. In Connecticut, for example, SBLI currently accounts for 2.6% of life insurance policies in force from all sources. In New York and Massachusetts, the figures are about 3% to 4%.

Ironically, President Bush's bank-reform legislation, while generally aimed at getting banks into more businesses, could have the unintended effect of curtailing SBLI sales. One clause in the legislation, for example, would limit state-chartered institutions to activities in which federally chartered institutions are allowed to engage. If federally chartered banks remain barred from selling insurance, some bankers worry, the legislation could be used to stop savings banks from selling SBLI.

The debate continues. [Graphs Omitted]

BanksBANK RATE FEESAmerican Security Bk, 11.50% None

Washington D.C.

Bay Bank, 11.25 None

Middlesex, Mass.

First American Bank, 11.50 None

Mclean, Va.

First of America, 10.25 $50 Processing

Detroit

Mellon Bank PSFS, 11.95 None

Philadelphia

ThriftsTHRIFT RATE FEESBoston Five Cents Svgs Bk, 11.00% None

Boston

Chevy Chase Svgs Bk, 10.50 None

Maryland

Commonwealth Fed S&L, 11.75 None

Philadelphia

Great Lakes Bankcorp, 11.00 $50 application

Ann Arbor, Mich.

St Paul Fed Bank, 11.50 None

Chicago Source: [c] Bank Rate Monitor, North Palm Beach, Fla. 33408. All inquiries: (407) 627-7330

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