Opportunities for Growing Today’s Bank-Insurance Business

By Marilyn Kennedy Melia

The basic case for banks in insurance is this: by offering insurance products to protect their customers from risk, banks also shield their own bottom line from the vagaries of interest rate cycles and credit risk.

In today’s stubbornly low rate environment—and with rate cuts anticipated this year—profit margins are suppressed, and banks can rely on non-interest income to take up the slack. Besides increasing customer loyalty through additional product relationships, insurance can provide a consistent stream of fee-based non-interest income.

Since banks won insurance powers two decades ago, there hasn’t been a straight, linear progression of banks scaling up insurance operations, notes Michael White, who runs the website BankInsurance.com and has authored one of a series of white papers commissioned by the American Bankers Association. For one thing, he explains, some banks bought agencies, but not all have made the most of cross-selling opportunities with their own customer base.

Learn more about bank-insurance strategy and connect with banking peers and insurance professionals at the ABA Insurance Distribution Exchange, Sept. 23-26 in Austin, Texas. Learn more and register at aba.com/exchange.
While some well-known banking names have exited the business, giving the impression that insurance hasn’t lived up to the hopes that it would provide a steady fee income stream, there’s more to the story. Using a “concentration ratio” devised by dividing a bank’s total non-interest operating income by insurance generated fees, White finds that the banks running successful operations are rewarded with healthy fees: the top 300 banks achieve a 33 percent concentration ratio, with the top 100 earning 59 percent. Banks with weak concentration ratios tend to let their agency subsidiary languish, with minimal efforts to market through their own bank channels, he notes. This lack of focus can be a missed opportunity for income to the bank.

Maintaining a webpage on the bank’s site detailing insurance information helps reach more bank clients, says Andrea Heger, SVP at Franklin Madison, a Tennessee-based third-party insurance marketing and administration provider whose life, accident and hospital insurance programs are endorsed by ABA. ”Most banks have good data analytics,” Heger adds, with the ability to target candidates appropriately.

Today, banks are leveraging their built-in advantages to assist their customers with several key needs: property and casualty coverage, life insurance and long-term care planning.

P&C coverage for businesses and consumers

It’s the business of First Mid Bank and Trust’s commercial banking officers to have a deep familiarity with each client’s business, identifying risks that could threaten their viability, says Clay Dean, CEO of First Mid Insurance Group. He likes the term “cross-pollination” to describe how bankers make refer business clients for protections against threats like cyber crime or professional liability.

The cross-pollination efforts yield a side benefit for the $3.8 billion bank based in Mattoon, Ill. With their risks reduced, the businesses are more credit-worthy, and the commercial loan portfolio is strengthened. What’s more, says White, commercial P&C generates relatively large income, and it’s also constantly evolving to best meet current needs like cyber protection.

In 2002, First Mid acquired a 100-year-old independent insurance agency with a stellar reputation, explains Dean. Still, “it takes time to build credibility from the internal stakeholders.”

The licensed agents visit the branches to cultivate cooperative relationships with commercial bankers. That’s nothing new for First Mid, says Dean. At a bank-wide level, “we distinguish First Mid in our team approach and breadth of services,” he adds. “Experts we can introduce from within our own ranks regularly conduct training for other department staffers.”

First Mid relies on the same cooperative strategy for growing its personal P&C business, which is primarily focused on selling homeowner coverage, says Dean. The First Mid approach has been to fully leverage its extensive branch network in Illinois and Missouri. However, many banks without a geographically concentrated branch network achieve growth by acquiring additional agencies, Heger says.

Life happens

Throughout the past two decades, many banks have entered insurance through purchases of P&C agencies, says White, adding that firms specializing in both life and P&C are relatively rare. An advantage of P&C is the consistent income stream from the time of sale through subsequent years, while life tends to offer a large front-end fee that steadily decreases over time, explains White.

When banks gained insurance powers, “many felt life insurance sales . . . would ultimately show success similar to what other countries have experienced with their ‘bancassurance’ models,” says Pat Leary, corporate VP at research group LIMRA. However, banking sales overall haven’t lived up to those initial expectations, he adds.

While P&C coverage is required for car owners and mortgage borrowers, many consumers still haven’t been introduced to life products. Recent LIMRA research found that two-thirds of Americans recognize the need for life coverage but either don’t have it or have in adequate amounts. And most consumers surveyed report they’d be more likely to buy if it didn’t involve a lengthy underwriting process.

Given the range in life coverage, from high-net-worth clients needing six- and seven-figure coverage, down to low-cost coverage for end-of-life expenses, First Mid uses an “omnichannel” strategy to reach varied segments, says Dean, including in-branch signage, direct mail and email and personal contact from one of the licensed agents.

Referrals from bank staffers are also a key component, he adds. Since their performance reviews are dependent, in part, on their propensity to refer customers to other bank divisions, bankers learn to listen for insurance-related cues, Dean says. For example, a customer who says he’s opening a savings account to have a cushion for the expenses of a new baby, or an elderly client mentioning his fear of burdening family with final expenses, can lead staffers make a referral to the agency.

Insurance’s role in wealth management

Banks’ affluent customers need custom solutions and service, including tax and estate planning strategies, business succession plans and asset protection. Insurance is a key part of that mix. That’s why Jackson, Miss.-based Trustmark relies on its Fisher Brown Bottrell Insurance subsidiary working alongside its private banking and Trustmark Tailored Wealth division business lines to comprehensively serve its “tailored wealth” clients, says Scott Woods, president of insurance and wealth management at Trustmark.

“Every product must fit a strategy,” he says, adding that “we’ve been changing our model [within wealth management]to focus more on financial planning.” Planning starts broadly, asking clients how their finances are fitting their current needs, and what they anticipate their life to look like in the future.

One increasingly common concern Tailored Wealth is now hearing from its baby boomer clients, even though they’re well-heeled, is the fear that their health needs will eventually consume assets that they’d rather preserve, says Woods. Long-term care insurance has evolved from traditional annual premium polices with the addition of hybrid-type policies where life or annuity features are incorporated into the LTC policy. In the case of an LTC policy with a life insurance option for example, unused LTC benefits can end up being a death benefit to a beneficiary.

The financial planning emphasis naturally flows into the “orchestrated approach” of the entire Tailored Wealth division, says Woods. In insurance-related matters, a Fisher Brown Bottrell licensed agent can be called in to assist other members of the Tailored Wealth team to explain how insurance product options fulfill a needed strategy.

Indeed, it’s the orchestrated or team approach that underlies any successful bank-insurance sales, says White. It’s human nature to “stick to your knitting,” he explains. Employees must be coaxed out of their “silos” to contribute to a profitable, over-arching insurance pursuit.

Marilyn Kennedy Melia is a freelance writer in Chicago and a frequent contributor to ABA Bank Marketing.