U.S. commercial banks and thrifts now face a major opportunity for profitable growth in insurance sales. In fact, we know a few forward-thinking institutions that are already reaping a harvest of as much as 10% of their pretax profits from this line of business.

Unfortunately, the rest of the industry is characteristically focused on the many reasons why expansion into insurance won't work, rather than how it can.

No Trailblazers Here

What's holding them back? One major reason iS simply the "follow-the-leader" personality of financial institutions chief executives, which causes most of them to wait until their peers are doing something (and making money at it) before they dip their toes into the water.

The phenomenon repeats itself frequently: we've seen it in the entry into the mutual fund and brokerage businesses, in technology delivery upgrades.

Specifically, when it comes to insurance, we hear a number of "alibis." For example:

* "The regulatory scenario isn't clear yet."

A year ago, the industry received the favorable U.S. Court of Appeals "town of 5,000" ruling that removed a major barrier of entry. What's been the response in the intervening 12 months? Quite simply, it's made banks more aggressive in pursuing additional regulatory advantages - but it has not led to the pursuit of other sales and marketing opportunities that don't require new regulatory moves.

* "It's not a good fit with our existing product line."

Success stories in insurance sales prove that this simply isn't true - insurance rounds out a bank's total product portfolio and provides new value to customers. In fact, when it comes to the "life events" that cause customers to purchase all financial products, including insurance, bank branch managers should have the inside track over insurance agents.

When a customer buys a home, sells a business, gets a divorce, retires - each of these events typically causes the customer to make a trip to the bank; changes the number or type of account holdings; and triggers the purchase of a gateway product.

A mortgage is a gateway product that has a linkage to insurance, but insurance, for some life events, can be a gateway product with linkages to traditional banking products. For institutions looking for ways to forge closer customer relationships, insurance products are a natural.

* "We don't have any insurance expertise."

Bankers think they don't understand insurance products, and are hesitant, to say the least, to take on additional unknown risks and uncertainties. But you don't need to be an actuary to sell insurance profitably.

The insurance business, like the banking business, is made up of four basic processes: origination, or selling & marketing; servicing, or claims & customer service; underwriting, or pricing and risk taking; and intermediation, or funding.

Banks can make money originating the business and providing just enough servicing so that they don't cede control of their customer information to the underwriting entity.

Despite their objections to the contrary, most banks are already in the insurance business. They provide credit life insurance, collateral protection insurance and annuities - they just don't have a coherent strategy for guiding this business into the future.

* "We tried it before and it didn't work."

This reason is the toughest to work through, but also the most important. Because they see themselves as unfamiliar with the insurance business, even some of the nation's leading banks have turned to (and often hired) marketing people from within insurance companies to set up sales and distribution operations.

This strategy is flawed. Insurance insiders replicate what they know - a distribution strategy based on agent sales - that is hugely expensive and ignores the power of the banking relationship and banking customer information files.

In fact, in a recent Towers Perrin/Tillinghast survey of life insurance CEOs, fixing the distribution system and reducing the cost of origination ranked high on the list of major challenges the CEOs face.

Banks who begin without the traditional insurance agency ball-and-chain around their necks are already a giant leap ahead of their insurance competition.

Experience in the U.K. and Europe demonstrates that banks can originate insurance products for 20% - 50% the cost of the traditional agency distribution system, and sell four five times the number of products per agent.

USAA, RBS Models

So far, only a limited number of financial firms have broken the paradigm of traditional agent brokerage. USAA is one; the Royal Bank of Scotland is another.

A few years ago, Royal Bank of Scotland wasn't even a player in the insurance market. Now, through its direct line insurance subsidiary, it is one of the largest personal auto insurers in Britain, surpassing many larger, traditional institutions.

It took a textbook approach: start with a market need, target profitable segments, build a lowcost delivery system, and compete on price and service.

The Royal Bank insurance program, like USAA's, is built around an in-bound telemarketing function that is the envy of the U.K. insurance industry. It is now successfully expanding into homeowners insurance and installment lending through its direct-marketing infrastructure.

Other banks in Europe and the Pacific Rim have developed distribution systems that provide the consumer with both cost and convenience advantages.

A Good Time to Start

Now is the time to replicate banks' insurance success on this side of the planet. As the economy improves and rates move up, banks need earnings alternatives to offset lower spreads.

What's more, industry profits and low asset growth have bolstered capital levels, so that the banking industry is in a strong position to invest in strategic initiatives that enhance enterprise value.

Finally, the regulatory chokehold is loosening, and the best insurance partners are still available and willing to talk.

Towers Pertin believes that, within three years, banks will be major players in the origination and distribution of broad-based insurance products.

The leaflets are beginning to break away from the pack. Will your institution be among them?

Mr. Arnold is a principal in Towers Perrin's Atlanta office and director of its financial institutions consulting practice for the Southeast.

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