Critical considerations for banks in insurance
Seizing the opportunity: There continues to be potential for lending intuitions and insurance sellers to work together.
It’s been nearly two decades since the historic Gramm-Leach-Bliley Act (GLB) was passed, removing barriers for banks to enter businesses such as insurance.
But was it a good thing for banks and insurance agents and brokers to do business together? How has that been working out?
I wanted to know how people on both sides really feel about it. Is there truly a viable link between banking and insurance? How can banks and insurance folk help each other? Have those two types of businesses gained an understanding of each other’s business models and goals? Are either agents and brokers or those on the banking side fully taking advantage of the potential business possibilities?
I interviewed some prominent players on both sides, and I discovered that there are three critical points to consider:
- Banks remain highly interested in non-interest fee income: Should they consider partnering with an insurance firm to help?
- Many insurance agents and brokers are getting on in years, and many do not have succession and exit strategies in place: Is partnering with a bank a viable option?
- Banks and insurance firms both need to expand client relationships (retention) and have more cross-selling opportunities (revenue): Is “partnering up” the right move for them?
Vision yields success
Bradley E. Rock was chairman, CEO and president of Bank of Smithtown, a $2.4 billion community bank in Smithtown, L.I., in New York and was active with the American Bankers Association (ABA) around the time GLB was enacted. He became chairman of the ABA shortly thereafter.
Early on, Rock felt the insurance opportunities presented could be very beneficial to banks. In the early 2000s he decided to get into the insurance business by partnering with a multi-line independent insurance agency that was a bank customer, and whose founder, chairman and CEO was a member of Rock’s Board of Directors.
Because this was new territory for both the bank and the agency, they agreed to try it out first before doing an actual merger: They created a joint venture brokerage LLC partnership, owned 50% by each. (The LLC had the bank’s name.)
All insurance referrals were channeled to the broker LLC, but actually were handled by the insurance agency. This was a great opportunity for the bank to understand the insurance operation and for the insurance agency to learn how to work with the bank.
After two years, the joint venture proved successful for both parties, and in 2004, the bank acquired the insurance agency on a three-year earn-out basis and provided the principals, then in their mid-60s, with a viable exit strategy.
The integration was almost seamless: The agency CEO became the bank-owned agency president, remained a director on the bank board, and all other agency employees remained in place.
Rock’s story essentially provides a textbook blueprint of how banks can take advantage of insurance’s business potential.
“Loan officers and insurance producers should make joint client visits,” says Rock. “And insurance producers should be allowed the opportunity to grow their own income.”
Rock says it remains difficult for banks with traditional lines of business to be profitable, for example, auto loans and credit cards, so insurance income is a viable option for banks. Community banks, he adds, continue to be the best prospects to enter the insurance business, and present the best partners for brokers and agents. The venture can remain small-scale at first and not be smothered by corporate oversight.
Banks, he explains, should not try to start their own de facto operation to begin selling insurance. Instead, they should approach an existing successful agency to gauge interest in doing business together. Additionally, the bank’s entire board of directors should get to know the agency principals prior to any M&A transaction.
It takes leadership
Andrew C. Harris (CIC, CPCU, ARM, CRM, AIS), CEO of Liberty Insurance Association Inc. in Millstone Township, N.J., a seasoned insurance executive, knows more than a thing or two about banks and agents working together. A past president of the National Association of Professional Insurance Agents (PIA), Harris has been in the insurance business and served as vice chairman of a community bank.
“It has been profitable for agencies to partner with banks and it can potentially be more successful — but it will take leadership,” he says.
Harris believes it’s important for bankers and insurance people to understand their cultural differences instead of trying to change them. For example, most lenders see insurance as impediments, but this is where senior management or leadership can help bankers change.
Banks, he explains, should not try to “make insurance agencies into banks” because they are different business models: Banks are transactional, whereas insurance is consultative.
GLB has impacted banks more than insurance due to the compliance burdens banks now face with new regulations, Harris continues, and insurance people have to be sensitive to a banker’s compliance requirements.
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