Though big banks seem to have the edge in entering insurance sales, with their high-profile acquisitions of large property/casualty and employee benefits agencies, small community banks are finding that they are not closed out - there's more than one way to get into selling insurance.

Wayne Walkotten, a vice president and senior consultant at Marsh Berry & Co., a Concord, Ohio, firm that brokers bank-agency deals, said community banks have three main routes to insurance sales. They can develop an agency from scratch, form a joint venture or alliance with an existing agency, or buy an agency outright.

Several auxiliary routes exist as well, he said. Community banks, for example, can contract with individual insurers to offer one or more products through direct mail, over the phone, or on the Internet. Or they can hire an agent with his or her own book of business to come work for the bank as a salaried employee. Or a bank can form a consortium with a group of similar banks and buy an agency.

But which approach is right? That all depends, Mr. Walkotten said, on factors such as the bank's size, the geographic area it serves, what is available nearby to get the bank into insurance sales, and finally, the bank's willingness to allocate capital to buy an agency.

Some banks prefer to form an agency because that gives it control over how the agency is structured, its staff, and the products it sells, Mr. Walkotten said.

Setting up an agency, however, can present problems. A new agency needs to hire licensed people and develop contracts with insurers. But insurers want volume commitments from an agency before they will appoint it to sell its products. They also save their best commission plans for large producers with profitable books of business and high sales for several years running. So a new agency is "going to be on the low end of the food chain," he said.

But a bank that wants to offer one simple product - such as term life insurance - will have it easier because getting appointed by one insurer for one product is simpler than developing a full suite of providers.

Felice L. Larmer, the president of FirstMerit Commercial Insurance Agency, said that FirstMerit Bank, the $10.2 billion-asset subsidiary of FirstMerit Corp. in Akron, Ohio, took two tacks. It founded a denovo agency in 1997 to sell annuities, life insurance, and disability insurance and formed an alliance two years ago with James B. Oswald Co., a Cleveland insurance agency, for property/casualty products.

The company built on its experience selling annuities through a third-party marketer to develop its own agency. "Expanding to sell life insurance and long-term disability to our market was a natural," she said.

But with commercial products, though the bank wanted to capitalize on its strong commercial lending client base, it did not believe it had the expertise to build a commercial lines agency, which led to the alliance.

Going the joint venture or alliance route can jump-start a bank's insurance operations, because the bank can draw upon the insurance agency's provider appointments, staff, and technology without having to make a large capital outlay. But joint ventures tend not to last, because a bank and an agency can have different agendas and growth plans, Mr. Walkotten said. Customer ownership issues can cause strife, and disagreements can arise about how customers should be approached, he said.

Also, joint ventures require a bank and an agency to split commissions, which could make it less profitable for the bank than if it owned an agency itself, Mr. Walkotten said. For these reasons, he said, his firm is "not aware of a joint venture that stays in existence for any length of time. They get going and tend to fizzle out."

Yardville National Bank, a $1.6 billion-asset institution in Hamilton, N.J., chose the alliance route. In February, the bank formed alliances with three agencies - Borden-Perlman Insurance Agency Inc. of Lawrenceville, N.J., Nottingham Insurance Agency Inc. of Hamilton Square, N.J., and Princeton Assurance Corp. in Princeton, N.J. The bank refers its customers to these agencies for personal and commercial property/casualty insurance and for group and individual life, group health, and disability coverage.

Timothy J. Losch, Yardville's executive vice president and chief operating officer, said Yardville wanted to control the referral pipelines between the bank and the agencies.

At Yardville, bankers discuss insurance during conversations with their customers, but the bank's customer lists are not given to the agencies. The bankers refer customers on an individual basis, when they express an interest in insurance. Also, Tina H. Orben, a vice president and managing director of YNB Financial Services, the bank's insurance and investment arm, sits in on meetings between agents and bank customers and makes sure customers are satisfied.

Mr. Losch said the alliance is too new to show a lot of results, but bank executives say they are starting to see interest from their customers.

A hybrid between a denovo agency and an alliance is being marketed by Banc Insurance Services Inc. in Springfield, Mass.

Banc Insurance Services sets up insurance agency services for banks and credit unions. The bank or credit union actually owns the agency and its clients, but the work of selling the insurance is done over the telephone by employees of Banc Insurance Services Inc. All bank employees do - much like agents at Allstate or State Farm who work with banking products - is distribute materials and direct customers to the phone line.

Thus far, Philadelphia Credit Union; Berkshire Bank of Pittsfield, Mass.; Middlesex Savings of Natick, Mass.; Bridgewater Savings Bank of Bridgewater, Mass.; and Community Bank of Brockton in Brockton, Mass.; have signed up with Banc Insurance Services.

Jeffrey Chesky, the president and chief executive officer of Banc Insurance, said the banks that work with his company benefit from the larger scale of its operation, which enables it to provide several insurance contracts with high-quality providers and a sizable, experienced staff.

Brian Stewart, the president of Weathervane Insurance Services, the insurance agency operation of $2.4 billion-assets Middlesex Savings Bank, said his bank has been actively making referrals to Banc Insurance Services and is pleased overall with the results and the level of service.

But for his bank and others, he said, true success in insurance will eventually involve buying an agency.

"I really think that long term, to be successful, you have to go the agency acquisition route," Mr. Stewart said. His bank is looking for agencies to acquire.

Buying outright, however, has its advantages and disadvantages. Like joint ventures or alliances, banks that buy can benefit from the agency's prior relationships with insurers and customers, and its market niche. But, if a bank does not choose carefully, it can wind up with an agency riddled with problems, which will not help the bank achieve its fee income or its cross-selling goals.

Mr. Chesky said community banks face several barriers when buying agencies. These banks are "reluctant to buy a business they don't understand. Also, most agencies in America are not well-managed, and don't have earnings that will accrete to the banks' earnings. The few agencies with strong earnings are priced at very high premiums," meaning they cost a lot of money for the amount of annual revenue they bring in.

One community banker who opted to buy an agency is Craig Larson, the president and chief executive officer of First Southwest Bank, in Bismarck, N.D. His $265 million-asset bank has sold life, health, auto, homeowners, commercial property, long-term care and other insurance from its rural Ellendale and Oakes, N.D., branches for 30 years. In July 2000, it bought Metzger & Associates, an agency in the Bismarck suburb of Mandan, and moved those agents into its Mandan branch.

Mr. Larson said his bank chose to buy instead of align because "we're pretty protective of our customers, and quite honestly, we haven't yet made the leap of faith yet where we would send customers to an affiliate or another organization."

Buying an agency gives banks access to carriers and product lines, but banks must examine not only the location and staff of a potential acquisition, but also the actual shelf products, he said.

He said, for example, that he wished Metzger had more contracts with commercial carriers because of the bank's large commercial client base.

"One has to be careful how one reviews an agency being bought and the lines of business that agency has," Mr. Larson said. "In the latest acquisition we made there are some companies or lines we wished that they had that they don't."

While the acquisition is working out well in spite of that, Mr. Larson said, in the future his bank will look even more closely to make sure a potential acquisition has the right product and carrier mix.

Another approach, which can help with economies of scale, is for banks to join together with other banks to buy one or more agencies.

Richmond, Va.-based Bankers Insurance LLC, a consortium owned by 65 banks, was set up by the Virginia Bankers Association in 1999.

The consortium was formed to buy agencies on behalf of the community banks that own it. It now owns six insurance agencies, and is still owned by the trade group.

Each member bank has an agent assigned to work with its loan officers to help them sell commercial property/casualty insurance to their small-business clients.

In July the group hired a marketing manager for personal lines, who will spend the rest of this year looking at ways the banks can market insurance to individuals. It has not yet made decisions about what personal lines of insurance it wants to sell.

Bruce T. Whitehurst, the deputy executive vice president of the Virginia Bankers Association, said that a key attribute of the consortium is the one-on-one meetings the agents have with customers. "If you really want to make inroads selling insurance in a community bank, you have to sell insurance the same way you sell banking products, based on the personal relationship," he said.

Ultimately, Mr. Walkotten said, the best decision for any bank, no matter what its size, is to buy its own agency, so the bank can control the whole insurance process.

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