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Three facts are more and more evident. First, an ever increasing number of banks, regardless of their size and type, see the addition of financial services products as a complement to their existing marketing efforts. Second, an ever increasing number of insurance agents and companies, regardless of their size and type, see opportunities with and through banks as a complement to their existing sales efforts. Third, no single product, service or strategy appears ready to be named 'the best.'
'Financial services' include securities underwriting, money management, personal financial counseling and insurance. However, property, casualty and life insurance play the largest role in most banks strategic thinking. Since insurance, particularly credit life and creditor motivated property and casualty insurance, has been sold and underwritten profitably by banks for more than half a century, this fact should not be surprising. When one adds to the historic activity the impetus gained from the amount of annuities sold in the past decade by and through banks, it is obvious why insurance sales appear attractive to bankers and banks appear attractive to insurance agents and companies.
All this activity has not gone unnoticed by the insurance industry. While agency associations fight a finger in the dike battle to limit competition, their members, in increasing numbers, are joining forces with banks in one way or another. No longer so quietly, insurance companies, too, are moving to establish relationships with those banks perceived as showing an interest in selling insurance products. We believe that the movement will continue. In fact, we expect it to gain momentum as the barriers to joint participation are broken down or clarified.
As one might expect, the movement involves participants of many shapes and sizes. On the banking side, the participants range from large money center commercial banks through the ranks of regional bank holding companies to local, privately owned entities. All forms of commercial, savings, stock and mutual institutions are represented. What continues to surprise us is the diversity of strategic emphasis. This ranges from the simplicity of contracting with a third party to capitalize on an available customer base, through development of quite sophisticated, internally managed, sales organizations to actual underwriting of the risk whether on its own paper or by means of sophisticated financial reinsurance agreements. Interestingly, more and more often the targeted customer is not even a present customer of the bank and in a few, well managed situations banks actually see other banks as their principal prospects.
Although we are aware of instances where large national insurance companies have courted banks and are supporting their sales efforts, the broad mass of insurance companies do not yet appear to have a determined, let alone a defined, strategy for supporting the expansion of banks into either the distribution or underwriting of insurance.
With such diversity of approach, it can be expected that there are as many instances of success as there are tales of woe. For both sides some lessons have become apparent.
At this stage, the biggest winners appear to be those who control, or are effective at, the distribution or selling of insurance. A number of life sales organizations have developed that have been successful in marketing products, especially annuities, through banks. While several efforts have been attempted to mirror this success on the property casualty side, we are not aware of any organizations that have been similarly successful on a wide geographic basis. On the other hand at the local level, the number of agency acquisitions by banks and the number of 'joint ventures' appears to be increasing steadily. Out of this movement have come a number of issues worth considering.
First, although agent/bank relationships take many unique forms, generally to comply with the prevailing regulatory environment, most fall into one of three categories. These are 1) an outright purchase and sale; 2) a legal Joint Venture typically involving a new and separate entity; and 3) the trading of services in exchange for a sharing of the commissions. Each structure involves issues peculiar to the business entities involved; thus, the only legitimate advice we can offer is to involve professional counsel experienced in insurance to participate in the negotiations.
Second, it is our experience that the initial enthusiasms have a way of bringing about early discontent. When agents and bankers sit down together, each has a way of seeing a lot of green on the other side of the fence. The result is unrealistic expectations on both sides. When these expectations are not realized early on, both the agent and the bank quickly express disappointment, if not blame, at how slow and how small are the results that follow the consummation of their relationship. Frankly, both parties overlook the fact that the bank's customers already have insurance and, in fact, very often have very good insurance, sold and serviced by strong, competent competitors. A merger, by whatever means, of two supporting complementary organizations does not assure success and very seldom results in significant immediate accomplishments. Thus, a big challenge is to make sure that initial expectations are reasonable and, without sacrificing long-term potential, are planned at achievable levels.
A third caution arises from the bank's lack of understanding about insurance combined with the insurance agent's or company's lack of knowledge about banking. If either party has failed to understand the other, the result is usually a poor match. If both parties lack an understanding of the other, you have a formula for a considerable disaster. Significantly, agents and insurers prove to be the greater losers when a match goes wrong because they are more likely to have restructured or expanded their operations. For this reason, understanding the bank's customer base, the quality of contact and type of service rendered to it, how the bank plans to approach the sale of insurance and, above all, the type of commitment the bank's most senior management are prepared to make become barometers of success.
If the agent doesn't sell his operation to the bank, several issues arise that need careful thought and a carefully drawn agreement. Without suggesting this as an exhaustive list, they include:
Who 'owns' the expirations derived from the sale of the bank's customers or leads? Is the answer any different if the initial lead was for product 'A' and the agent, on his/her own initiative, subsequently sold other lines? Or, if customer 'A' referred customer 'B' to the agent but not the bank? To whom does customer 'B' belong? In this latter situation, how do you ever keep track?
What is expected of each party and her/his employees? If the bank's employees are to become active (in our judgment the only way in which truly significant sales results are to be accomplished), who will train, license, supervise, motivate and critique them?
Who is responsible for E&O premiums, losses and procedures?
How will an appropriate sharing of commissions be calculated? What about contingents, overrides, expenses allowances and other supplementary compensation be brought into the equation?
Interestingly, the problems are as numerous and knotty if the agent sells his/her agency to the bank.
What is 'Fair Value?' Happily for the agent, both sides are usually so optimistic about the mutual benefits of a merger or acquisition that pricing is often negotiated at levels well above normal ranges. Thus, a good, retail agency is worth about five to six times its pro forma pretax profits, possibly a little more in a sale to a public company enjoying a public multiple. More important than the valuation, however, is the structure of the transaction. A good price is too often negated by poor terms or a poor transaction structure.
The most difficult negotiation is usually that of agent compensation. Most agents are used to compensation and benefits well above the levels of local bank executives and owners. Thus, the structure of pro forma financials, the negotiation of employment terms, the introduction of future incentives and the extent of benefits and perquisites has been a sticking point for many agent/bank transactions.
Our work with independent insurance agents, insurers and banks has convinced us that the legal and regulatory barriers will continue to come down. As a result we believe that the trend toward integrated sales will accelerate. When the proper parties come together to execute an appropriate strategy, all parties really can be winners - but success is neither assured nor easy.
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