Much like soccer, the concept of bank insurance or "bancassurance" enjoys a much higher profile outside the United States than within.While the idea of banks offering insurance products is not new, in much of the world, the practice is, and has only taken off in the past two decades. In parts of Europe, such as France, Italy and Spain, the adoption of bank insurance has grown steadily as consumers have become accustomed to their bank as a distribution channel for insurance products.
Here, the line between banks and insurance companies, segregated by the Banking Act of 1933 (more commonly known as the Second Glass-Steagall Act) have historically been more clearly demarked. However, in the 1990s a spate of mergers between banks and insurers began to blur the lines in the financial services industry. To address this changing landscape, in 1999 Congress passed the Gramm-Leach-Bliley Act (GBLA), which abolished many of the prohibitions contained in Glass-Steagall.
The rationale espoused at the time was that banks and insurers, once joined, could realize significant synergies and offer consumers the convenience of one-stop shopping. The largest manifestation of this thinking was the 1998 conglomeration of commercial banking giant Citicorp and insurance titan Travelers Group to form Citigroup.
When the high-profile marriage of Citigroup and Travelers ended in divorce in 2002, citing a lack of synergy, did the idea of a single institution cross-selling bank and insurance products perish with it?
"I don't know that it's been proven that the synergies are completely there," says Walter Grote, senior vice president, bond & financial products-financial institutions, for the Travelers Co. Inc., St. Paul, Minn.
Instead of merging entire operations in search of back office synergies, in recent years banks have been content to acquire insurance agencies in an effort to cross-sell financial services. "Banks might, within their own internal systems, leverage some efficiencies, but, at the end of the day, it's still the insurance industry that's issuing the policies and quotes," Grote says.
A 2006 study published by the Mamoneck, N.Y.-based Bank Insurance Market Research Group notes that banks continue to acquire insurance agencies at a rapid pace, and that commercial property/casualty is the dominant line. It predicts that by 2008 bank-owned insurance operations will account for 10% of property/casualty premiums.
"There seems to be a shift in the whole agency world," Grote says. "Some of them have been struggling because of size and technology issues."
The study also ranked the top banks in insurance according to their annual insurance brokerage revenues. The banks populating the top of the list included familiar names such as New York's Citigroup and JP Morgan Chase & Co. and San Francisco's Wells Fargo & Co. However, the move by banks into the insurance brokerage business is not limited to the giants. A trend of smaller and regional banks, acquiring agencies was also noted, particularly in the Northeast.
THE LEARNING CURVE
For a prime example of this regional trend, look to Lewiston, Maine. There, in August, Northeast Bank, through its subsidiary, Northeast Bank Insurance Group Inc., acquired its fifth independent insurance agency in less than a year. Northeast Bank President and CEO Jim Delamater says that creating a bank that would offer his customers access to every financial product and service, including insurance, had long been his goal, but it took some time for the correct regulatory environment to emerge. The passage of GBLA was especially important, he says. "Regulators are starting to embrace the concept more. It was a bigger challenge years."
However, the elimination of some regulatory hurdles by no means ensures banks a smooth transition into the insurance market.
Delamater says any bank that buys its way into the insurance market is in for a bit of culture shock. "None of us understood each other's business. So we didn't understand all the nuances and didn't realize how much work went into quoting an insurance customer properly. That was a big learning curve."
In addition to the cultural differences, the technological differences between the industries are profound, Delamater notes. The unique data needs of the insurance industry, coupled with a basic lack software compatibility, seem to dispel the notion that banks could easily leverage their transactional expertise to achieve significant back office synergies. "It was like stepping back into the Dark Ages. They did everything manually," Delamater says, recalling when Northeast acquired its first insurance agency. "I don't envy any bank on that road, having been on it myself."
Few people understand the challenges banks face entering the insurance space more than Craig Sargent, who, as president of Northeast Bank Insurance Group, is in the process of integrating the bank's five recent agency acquisitions.
"It's extremely easy to purchase something compared to how easy it is to integrate it into your own system after the purchase," Sargent says, noting that the bulk of the work comes when migrating data over to a common platform. "The conversion never gets easier. It's very time consuming and labor intensive, but it gives us the ability to do what we do, which is sell insurance."
Sargent stresses the human element of the agency acquisitions as much as the technological. "Technology is clearly an enabler, it just shouldn't be looked at as a cure all," he says. "It still goes back to the person. We're hugely interested in the talent pool."
In addition to people, these acquisitions also give access to news lines of business. "When we did our most recent acquisition, we wanted it as much for the accident, health and life and disability potion of their book as we did for the P&C," he says.
HEALTH AND LIFE
Indeed, many see the move by banks to sell P&C policies as a sideshow to the health and life sectors. Robert Booz, vice president and analyst for the Financial Services research team at Stamford, Conn.-based Gartner Inc., says there has been interest by banks and financial services companies in the insurance space for some time.
The enabling legislation around health savings accounts gave rise to a greater interest in financial services companies to the health insurance space, in particular, Booz notes. Banks and financial services companies, by leveraging their expertise in pass-through funding, hope to make money on the management of medical claims and payments, he says.
"Once they looked at it more closely, they realized that a lot of health insurance is non-risk bearing and is transaction-based," Booz says. "It's a core competency of transactions that they already have."
What's more, the advent of business process outsourcing (BPO) has enabled new entrants to concentrate solely on core competencies, and to leave more specialized tasks to third parties. "It used to be that to operate in the health insurance space, it required specialized knowledge of medical management," he says. "With the growth of BPO in insurance, it's possible for a bank to assemble a health insurance operation from the BPO parts bin."
BUY A TOKEN
While this use of third parties has enabled banks to encroach on the insurance space, it has also eased the entry of traditional insurers into banking.
Use of application service providers (ASP) enabled New York-based Metropolitan Life Insurance Co. (MetLife) to make a quick and successful entry into banking, launching the MetLife Bank in 2001. After only six years in operation, the bank has $7.2 billion in assets and ranks among the top 130 commercial banks in the United States.
Mark LaPenta, chief technology officer, operations at MetLife Bank, says the use of ASPs was crucial for MetLife to make a quick entrance into, and, if necessary, exit from, the banking market. "Our core platform for banking is outsourced in an ASP model. It's a viable model in today's world," LaPenta told INN. "Why build a bus when you can buy a token?"
Among the advantages of the ASP model, LaPenta says, is the ability to know the unit cost of technology per customer, and the ability to target capital investment where it is needed most. "We've built out Web services to make sure the our data can be populated from the ASP back into our MetLife systems."
Despite the many advantages of the ASP model, LaPenta says the company actively seeks to leverage MetLife's existing enterprise capability. "Where it has made sense, since early 2004, we've been selectively insourcing things back into MetLife, such as our call center solutions. We now leverage MetLife Inc.'s contact center."
It is a perceived lack of that type of leverage that has some people questioning the future of an integrated banking and insurance model, at least in the near term. "While some banks may have brokers or agents within their operations, they are not integrated with the operation, they are not leveraging cross-sell or up-sell opportunities," says David West, research area director, insurance, for Needham, Mass.-based TowerGroup Inc. "It's just not as strong as it could be."
LaPenta says that many cross-sell opportunities are stymied by regulations. While GBLA gave regulatory relief in one factor, he notes, it hasn't translated down into all the regulatory rulings that financial services companies live by. Privacy regulations, in particular, limit the amount of information banking and insurance units within a financial services company can share, he says.
"Our agents would love to have more information about the customers we introduce them to from the bank, but we can't," LaPenta says, adding that attention to the law and investments in technology have allowed the company to leverage some cross-sell opportunities. "When the bank first started, evidence of cross-sell was anecdotal, now it's hard fact."
As always, it seems the final word on the intersection of banking and insurance will rest with consumers.
West says that while the new regulatory and technological climates may have opened the door to integrated banking and insurance operations, there's no guarantee that consumers are going to stride through that door.
"What's driving the lack of adoption in the United States is consumer perspective," West says. "People don't think of their banks or credit unions as the place to go for insurance. They still think of the traditional insurance agent as the place to go."
In Maine, Northeast's Sargent has a different perspective, and says that unified model of financial services is the future. "We don't see this as a short-term trend," he says. "We see that there is an irreversible change going on within the financial services industry in America."
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