For the first time ever, insurance companies are expecting their fiercest competition to come from outside the industry.

And just who might these nontraditional competitors be?

We asked 80 life insurance CEOs who their major competition would be over the next five years. Who is best positioned in terms of an effective distribution system and who is most likely to benefit from changes in the regulatory environment? Surprisingly, the answer to all three questions was the same: banks.

I say surprisingly because, like Macy's and Gimbel's of old, insurance CEOs are apparently not talking to bank CEOs.

And despite the definitive advantages banks would appear to enjoy in marketing and selling insurance products, they account for only about 1% of the $300 billion in annual premium revenue.

So why aren't more banks getting in on the act? Reticence due to an unclear and evolving regulatory environment is one reason. Then, too, many banks experimented with insurance in the late 1980s and didn't make much money.

Other frequent excuses we hear include protestations that bankers lack insurance expertise or that insurance products are not a "good fit" with bank products.

But emboldened by success in mutual funds and the brokerage business, some forward-looking banking institutions are testing the waters and finding they can derive as much as 10% of their pretax profits from insurance products.

One of the important lessons these institutions have had to learn is that selling isn't underwriting.

While a maze of state and federal regulations make it difficult for banks to underwrite insurance, they are allowed to sell it. And the core competencies of today's successful fee-oriented retail banking institutions make it easy to do just that.

In fact, a bank's infrastructure provides unique competitive advantages from several perspectives.

Banks already have access to a customer base and the kind of information they need to exploit that access. Their information systems are a gold mine of customer and household financial data.

Banks have their "leads" as well as the proven capability to assess risk. They have a sales force in place and the experience in targeting and marketing to likely customers. Mechanisms to qualify applicants and process applications are part of their standard operating procedure.

Unfortunately, bankers often feel they lack the necessary expertise to sell insurance products. Therefore, they turn to marketing people from traditional insurance companies, asking them to help set up a workable sales and distribution network.

Therein lies the reason for many banks' egregious failures. Insurance insiders duplicate what they know -- expensive distribution arrangements based on traditional agency sales.

In saddling banks with precisely the kind of system insurance CEOs are trying to get out from under, insurance marketing experts rob banks of their inher, ent advantages -- existing customer relationships (already paid for) and an infrastructure to capitalize on them.

In fact, it is the banks that begin without an elaborate agency sales network that succeed.

Look at Europe, and especially the U.K., where the originanon costs of insurance products in banks are only20% to 50% of those in the traditional agency distribution system. And bank salespeople sell four to five times as many products.

The last reason banks are not clamoring to provide insurance is: Bankers have their doubts. Can a bank really achieve significant market penetration in an industry so long dominated by a very different kind of financial institution?

One example should suffice to silence the skeptics. The Royal Bank of Scotland is now a major player in the automobile insurance market in Britain. A few years ago, it wasn't even in the game.

Can that sort of success be reproduced on this side of the Atlantic? Towers Perrin believes the time is ripe for banks to try.

The banking industry is in a strong position, profits are up and capital levels are high. As rates move up, banks will be shopping for investment alternatives to offset lower margins on fee-based business. Finally, regulators are easing up.

All told, we think a bank that is not looking for an insurance partner is not looking to the future.

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