Two Myths About the Bank Insurance Marketplace

By Michael White

Nearly 20 years have passed since the Gramm-Leach-Bliley Act became law and removed the last barriers to bank insurance sales, and the bank insurance marketplace done very well. In 2017, two-thirds of 596 large U.S. bank holding companies engaged in insurance sales activities. These companies grew insurance brokerage fee income to $5.46 billion, up 2 percent from 2016.

And it’s not just large banks active in the bank insurance market. More than two-fifths of commercial banks and savings institutions reported that insurance brokerage revenue climbed 5.2 percent to $3.79 billion in 2017; these earnings comprised about 64 percent of BHCs’ $5.35 billion in insurance fee income reported in 2017.

Since 2001—just 14 months after GLBA’s enactment and the first full year for which we can measure insurance revenues—year-end BHC insurance brokerage earnings have more than doubled, soaring 129 percent and achieving a 16-year compound annual growth rate of 5.33 percent. When combining those 17 years of annual earnings, BHCs added over $100 billion in insurance revenue to their noninterest income. (If we include income from sales of annuities, another form of insurance, the insurance product line provided $142 billion to banks’ top-line revenue since passage of GLBA.) In 2001, three-quarters of BHCs generated $2.38 billion in insurance brokerage fee income. By 2006, year-end brokerage earnings almost tripled to $6.88 billion.

By 2011, bank insurance brokerage earnings had climbed 9.9 percent over 2006 earnings to $7.56 billion, despite the financial crisis and ensuing recession. At the time, many banks found insurance revenues helped counterbalance increasing regulatory and compliance costs from implementation of the Dodd-Frank Act, decreased lending, lower interest income and increased loan losses and loan loss reserves.

However, over the next five years, BHC insurance brokerage fee income fell 29.3 percent from $7.56 billion in 2011 to $5.35 billion in in 2016. These figures lead some observers to say things like “There, bank insurance revenue is declining, right?” and “Aren’t banks selling their insurance agencies and getting out of the business?”

Yes, the banking industry has experienced declines in insurance revenue each year since 2011, except for this past year when both participation and earnings rose. Looking closely, however, each year’s decline was largely attributable to the movements of one or more of eight large BHCs: American Express, Bank of America, Citigroup, Discover, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and Wells Fargo.

Collectively, since 2011, these eight BHCs accounted for $4.42 billion in total annual declines in insurance brokerage income, accounting for a net decline of 63.2 percent in their own insurance brokerage income (see figure 1). That represented a compound annual rate of decline of negative 18.12 percent.

Meanwhile, the remaining BHCs grew their aggregate insurance income to $3.5 billion in 2016, up 37.9 percent from 2011 and achieving a CAGR of 6.63 percent during that five-year period—24 percent greater than the industry’s CAGR of 5.33 percent from 2001 through 2017.

As for the question about banks selling their agencies, yes, every year banks divest insurance agencies. But acquisitions far exceed divestitures. From 2000 through 2017, acquisitions were five-and-a-half times greater than divestitures, as banks acquired 879 insurance agencies and divested 161. Seventy-two divestitures, nearly half the total since 2000, occurred between 2007 and 2011 during the Great Recession, when a difficult economy and capital constraints hindered agency acquisition by banks.

Very few banks divested insurance agencies because they failed; most were profitable. Some were sold because they were unable to “compete internally for capital and other resources” to properly scale their insurance operations through acquisition. Most sales of agencies related quite specifically to each financial institution’s particular circumstances and exigencies—for example, a bank’s need for more capital, its preparations to sell the bank or a strategy of raising capital to purchase its own shares.

Acquisition remains a compelling strategy for generating immediate and meaningful growth in insurance income.

Bank insurance’s relevance

To determine the scale and relevance or significance of a bank insurance program, measure its concentration ratio—that is, insurance as a percentage of noninterest income. Among the largest banks, leaders in concentration in 2017 included BancorpSouth Bank, Tupelo, Miss., with a ratio of 44.9 percent, Eastern Bank, Boston, at 44.3 percent, BB&T, Winston-Salem, N.C., with 39.4 percent, and Associated Bank, Green Bay, Wis., at 24.4 percent. These banks determined insurance brokerage is a good business and chose strategically to build scale by repeatedly and systematically purchasing more agencies.

The mean insurance concentration ratio among the top 50 bank leaders in program concentration in 2017 was 74 percent (see figure 2). The top 500 banks by insurance concentration averaged a ratio of 22 percent, demonstrating the state of the bank insurance industry is much better than some bankers think. One just has to look beneath the surface to discover the facts that prove it.

Future opportunity of bank insurance

Insurance brokerage is among the least risky, steadiest, more profitable and most widely needed financial services. One begins each year with virtual certainty that 90-95 percent of the prior year’s business will stay on the books. With the application of sound criteria in selecting and pricing acquisition targets, percent of pretax profit and return on equity can be excellent, not infrequently exceeding those of a bank.

More bankers in the insurance business—and those who are considering it—should understand that acquisitions are not a one-off activity. While both leading bank and non-bank insurance brokers strive for organic growth, they also constantly, consistently search for additional acquisition targets. Banks continue to consider consumers’ frequent choice of insurance for financial risk protection; recognize their customers’ widespread insurance needs; and reap the rewards that selling insurance can have on their banks’ financials and their futures.

Michael White is president of Michael White Associates in Radnor, Pa., which helps banks implement insurance programs. This article is excerpted from a forthcoming white paper published by the ABA Bank Insurance Council, which can be accessed at aba.com/bankinsurance.