Banks have virtually limitless opportunities to sell insurance, now that the Supreme Court is in their corner, an industry consultant says. Earlier this month, the high court endorsed banks' sales of annuities, and also opened the door for sales to expand into life insurance and other insurance products.
The case, commonly referred to as Valic, pitted NationsBank and the Comptroller of the Currency against Variable Annuity Life Insurance Co. Will banks seize opportunities that the decision supplied? William M. Arnold, who specializes in banks and insurance as a principal with Towers Perrin in Atlanta, says financial institutions can't afford not to.
Mr. Arnold, 50, who spent over a decade with AmSouth Bancorp. before joining the New York-based consulting firm in 1987, expounded on his views for the American Banker.
Q.: Can banks really use Valic to revolutionize the way insurance is sold in the U.S.?
ARNOLD: Insurance agents are not going to be able to turn back the tidal swell of bank participation in insurance. Valic, along with several other decisions, has created a trend that supports banks.
Banks win for several reasons. First and foremost, they will be able to sell more insurance products directly, instead of relying on intermediaries that hold insurance licenses. This will improve banks' profit margins on these products. Banks will also solidify access to life events like a birth, home purchase, or divorce, which commonly lead customers to buy insurance. This will improve banks' ability to cross-sell products.
Q.: Will banks dive right in?
ARNOLD: Most banks are lemmings. While they should have been planning for their participation in the insurance business, they have been sitting on the sidelines waiting for Congress and the courts to direct them. Well, guess what? They now have the go-ahead.
You will see a ground swell of banks looking at all types of insurance products. More banks will participate, and those that already have their toe in the water will increase their depth of participation. They recognize that this is an area they should be in.
Q.: What about threats by insurance agents to have Congress block banks?
ARNOLD: Any action by Congress will only be to ratify what the courts, regulators, and the marketplace have already determined.
Banks and insurance companies should not expect Congress to pass any near-term legislation. However, banks should expect the courts and regulators to accelerate decisions permitting broader bank participation in all types of insurance.
Q.: Some state insurance departments have practically made it a crusade to block banks' efforts. Will they now defer to Valic?
ARNOLD: No. Insurance regulators in most states that have direct prohibitions will continue to fight. But Valic sends a clear signal that courts do not see banks as evil insurance players.
Q.: Any winners besides banks?
ARNOLD: Consumers. They will enjoy advantages that banks in virtually every other country provide. Product costs will go down, convenience of purchase will improve, and customers will have a player that they trust more than the traditional insurance delivery process.
Insurance companies will also win. The insurance industry is in trouble in terms of costs and returns on equity. A big portion of this problem relates to their exceedingly high cost of delivery. Most major U.S. insurance companies are looking at alternative means of delivery, and banks are a critical channel.
Q.: Where does this leave insurance agents and investment product marketing companies that were acting as intermediaries for banks?
ARNOLD: Insurance agents will lose big time if they stay with their traditional approach to the business, because that business will decline. There will now be other players with significant importance.
The Valic decision will also make investment marketing companies take a real hard look at what value they can add to banks, beyond the licensing that permitted many banks to sell insurance products.
Survivors among these firms will demonstrate that they provide expertise and knowledge that banks lack. These companies will have to become more consultative in areas like compliance and planning and marketing.
It's hard to say if they will become less profitable. If they offer new services and add true value to the system, banks will recognize this.