For 10 years, Roger Dunker salivated over the prospect of selling policies through banks.

After all, the insurance executive reasoned, banks already have business relationships with insurance prospects. They have credibility with their clients. They know if a prospect is creditworthy. In short, banks have the ins with small businesses.

Mr. Dunker, most recently president of Life Partners Group, an insurance holding company, mused that if a bank could sell health plans, it could make millions. If only it were legal.

In early 1996, when a Supreme Court ruled in the Barnett case that financial institutions could sell insurance of all sorts, it became legal.

"I've been thinking about it a lot longer" than the Office of Comptroller of the Currency, Mr. Dunker said. "I've always thought banks would be the next great distribution and delivery system (for insurance). When the walls came down, I saw it as a major strategic opportunity."

Today, Mr. Dunker is president and chief executive officer of KeyCorp's insurance management group, and he is spearheading KeyCorp's novel effort to market health insurance and commercial property and casualty plans to the vast small-business market. Cleveland-based KeyCorp, the No. 1 SBA lender in the nation, already has close ties to as many as 370,000 small businesses in 14 northern states.

Banks throughout the country are likely to be watching KeyCorp, particularly its health-insurance thrust, as it rolls out its new products with key partners in select markets. Banks, more accustomed to selling annuities and credit insurance than health plans, have been slow to move to the health markets. All that is changing.

"It's a natural progression," Kenneth Kehrer of Kenneth Kehrer Associates, a management consultant firm in Princeton, N.J., said. "Banks are exploring all the ways they can to leverage existing business relationships to market insurance. A lot of banks have done a lot of other things in insurance and now they're looking at health."

In the next year or two, Mr. Kehrer believes, more and more banks will trot out health insurance in conjunction with underwriters.

"It's starting to open up now," he said, partly because Congress and President Clinton appear unready to enact the kind of sweeping changes in health care that were bandied about in the President's first term. The unsettled nature of the industry has been the biggest barrier to expansion, Mr. Kehrer believes.

On the job since August, KeyCorp's Mr. Dunker foresees 6% of the bank's small-business clients snapping up the new health and property-and-casualty plans during the next three years, for the same reasons he has always thought banks could rack up commissions in the insurance business.

"It's a multimillion-dollar revenue opportunity," Mr. Dunker said. "You cannot imagine the potential."

Those are strong words from an executive who, in his two-year tenure with Denver-based Life Partners Group, managed to triple the value of the company's shares. Life Partners' subsidiaries included Massachusetts General Life, Philadelphia Life, Wabash Life and Lamar Life.

KeyCorp has already begun selling its health policies to Ohio small- business owners in Akron, Canton and Cleveland. It expects to ramp up its property-and-casualty line late this year, expanding to all states in which Key does business by late 1998

In Ohio, KeyCorp forged partnerships with Kaiser Permanente, United Health Care, and QualChoice to offer managed-care plans marketed under the name Select Partners. It is eying markets in New York and Washington State for its next rollout.

KeyCorp's arrangement with the insurers is essentially the same as for any independent insurance agent, Michael Hellyar, senior vice president of the bank's insurance management group, said. KeyCorp earns a commission on premiums paid. "We wanted to keep it simple to get up and running," Mr. Hellyar said. KeyCorp will attempt to ally itself with three insurers in each market, he added. In all, about 80 partnerships are expected.

The key to KeyCorp's insurance strategy is piggybacking on existing resources. For example, the company's 200 small-business relationship managers will be counted on to push policies to existing bank clients.

KeyCorp's health insurance sales will get an extra boost from new hires, Mr. Dunker said. By the end of next year, the number of health-insurance reps is expected to more than double to 200.

KeyCorp also wants to leverage the banks' technology in ways traditional insurance companies cannot. For example, a worker whose employer buys its health insurance through KeyCorp might have co-payments drawn directly out of his or her KeyCorp checking account. Or companies might give employees a password to a KeyCorp Internet site, where workers could peruse insurance- plan options or claims information on their home PC at their leisure.

Similar value-added measures are planned for KeyCorp's property-and- casualty line. In conjunction with Baltimore-based USF&G, one of the nation's largest property-and-casualty insurers, KeyCorp expects to provide small businesses with quotes within 15 minutes.

While other banks might view KeyCorp's endeavor as a prototype they can adapt, they should keep in mind that KeyCorp is trying to capitalize on a small-business segment that it has already spent years cozying up to. The bank has no designs on the big-business market and is not emphasizing consumer sales, Mr. Dunker said

The small-business market seems especially ripe for aggressive sales efforts. KeyCorp executives note that U.S. Census data indicate only 28% of businesses with fewer than 25 employees carry health insurance.

Also, an Independent Insurance Agents Association survey shows that two out of every three agencies with annual revenues of more than $1.25 million believe small-business marketing isn't worthwhile for the business it generates.

Finally, the same source estimates that the number of independent insurance agents will drop from 53,500 in 1987 to 38,000 in the year 2000, another sign that small businesses are not being hotly pursued

"We know it's needed out there," Mr. Hellyar said of KeyCorp's health products. "It's just not being marketed. These carriers recognize the distribution channels in Key's customer base alone."

Indeed, Kaiser Permanente of Ohio, one of KeyCorp's first partners, says the small-business market is so vast that even though it considers its efforts to court the segment successful, it welcomes extra help from the bank.

"Why go to a bank when you can advertise managed care on the backs of buses or in the Yellow Pages or on billboards?" he asks. "Because of the trust that business owners have in banks, in KeyCorp. They're already doing business with us with loans, lines of credit, deposits. We have more to lose than an insurance policy. We have an entire customer at risk."

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