Banks wishing to enter the insurance business often think that a partnership with an agency in some kind of joint venture might be a good way to begin. And it can be.
It's easy to see why the prospect is attractive: Start-up costs are low, for instance. An agency has employees who know how to sell insurance, so you don't have to worry about retraining, and its people understand insurance products - not to mention insurance regulation.
The first step is picking the right partner. It must, of course, be licensed to sell insurance in the states where you operate and must be technically competent. It also should have strong market relationships with excellent insurance companies and, moving beyond the basics, be as willing as you are to invest in marketing and product development. A track record of creative responses to other customers' insurance needs would be very attractive.
In the long term, your partner should have a perpetuation plan for the agency so that you know it will be there for you as long as you need it. If the venture goes well, the partner may be willing to discuss a closer relationship or even selling itself - but you want to make sure it has no plan for a sale to anyone else while its deal with you is getting under way.
Sharing customer lists. The most common and least complex of formal joint ventures, sharing customer lists, is relatively low-risk. Still, since you're releasing some of your most valuable information - your customers' names - you need a contract. Most such agreements allow for sharing of commissions, but a lot depends on your state's law. Someone in the bank usually must be licensed to sell, even though not doing actual selling, if agency commissions are to be shared. And someone in the agency may have to be licensed to sell financial products, if you use an agency customer list to find prospects.
Whatever route you take, give it time to work. Any joint venture goes through several stages of growth before it matures into success, so make sure the agreement's expiration date is far enough out to allow for good results. The fact that the contract expires gives you a way out if the venture falls short, but it also can undermine commitment if both parties consider the arrangement only temporary.
Lease agreements. This one looks simple, but because of state laws' vagaries, it can be the knottiest of all. The agency pays rent, under a lease agreement, for space in the bank. The agency is still controlled by the owner, but it's now at a crucial point of purchase, the place where your customers often have an immediate need for insurance.
In addition to the usual hold-harmless, indemnification, and insurance requirements, the lease should specify who will own the business generated from your customers when the lease ends. It should also specify who will draw up a procedure manual for all employees - bank and agency - because all must be thoroughly trained. A bank employee's poor grasp of insurance regulation can hurt the agency and the bank.
More state law restrictions exist on this option than on almost any other. Some states don't allow it at all.
Joint marketing. In the basic joint marketing agreement, the agency makes insurance available to the bank's clients. In exchange for a share of commissions, the bank agrees to provide marketing support. This option takes more time and effort to adopt, but it can be very attractive if your bank prefers not to make the capital investment needed to buy or start an agency.
Even before you go searching, there's work to do. The first thing is to profile your customers. If most have personal accounts, you will want an agency partner that can offer such property and casualty products as homeowner insurance, excess liability, flood, and coverage for recreational activities ranging from mobile homes to jet skis. Your customers may also need life and wealth protection - not just life and annuities but also disability and long-term care. If you have a strong commercial base, your customers may need the usual commercial property and casualty packages, plus employment practices liability coverage, workers' compensation, and group benefits.
Once you know what your customers are likely to need, you can shop for a partner. Look for an agency that has strong, long-term agreements with good, solid insurance companies. These companies don't have to have national names; some of the best, most reliable companies, like Cincinnati Mutual, National Grange, and Hanover, operate only regionally. An agent who represents a number of companies will find it easier to place insurance for your customers who have more complex needs. You probably do not need to team up with an agent that works exclusively with one company because you could go partners with the company directly.
A joint marketing operation is often set up as a separate venture. The agreement should stipulate percentages of ownership and buyout provisions in case of termination before the agreed date.
In drafting the agreement, address questions such as: Who will own the joint marketing operation? Will you and the agency be co-owners? Will you own it and give the agency a management contract? How will both partners' customers be handled? Should there be product and territory exclusivity?
The agreement needs to cover money as well, especially if there's joint ownership. Do you want a commission split, or a split of profits? Will profits be distributed as dividends? As interest payments? Are you going to invest up-front in people, or hire as the need arises? Who gets the insurance business after the agreement ends?
Some of these considerations arise in other joint venture options, but in this case you must take into account trade secret issues and client confidentiality (especially, for instance, where you make referrals to the agency from the trust department). If your employees are going to be discussing insurance before referring customers to the agency, will they need licensing? Will someone need to be licensed for the bank to accept commissions? Again, a manual would be useful, but you also must allocate responsibilities from the start by dealing with questions like this when you work out the agreement.
Keep in mind that joint ventures have a life span: Once your customer base has been mined, growth opportunities tend to disappear. Try to structure the agreement to deal not only with ownership of accounts but also with how the expenses of winding up the agreement will be handled and how to avoid conflicts of interest on the part of the agency partner.
Mr. Pottridge is president of Pottridge & Associates, an Alexandria, Va., firm offering strategic advice for banks getting into the insurance business.
