Insuring for life: an overview of why banks should add insurance sales--plus how they can enter the business and market products effectively.

• Author: Vandenberg, Edward H.
• Position: Fundamentals

There are many reasons why banks should consider selling insurance. First, insurance is a good fit for financial institutions. Second, compared to other sources of bank income, insurance sales have relatively low risk. Insurance, for example, has no affect on capitol and no interest-rate risk. Third, insurance fees produce a regular cash flow, which is always helpful. Lastly, banks have a competitive advantage over insurance agencies in that financial institutions have more information about their customers--enabling them to identity insurance needs and target potential customers more efficiently.

In light of the attractions of the insurance market, this article will examine the basic steps that financial institutions have to take to enter the insurance market and market insurance products.

Feasibility

The initial step is to assess the feasibility. This assessment, done prior to the creation of a business plan, should gather relevant information and project revenue under a set of assumptions about the prospective operations and the available market. There are three major things that need to be done.

Measure the qualified and available market for a basket of insurance products. General insurance products--like homeowners, auto and small business--are the most common needed by the bank's existing customers as well as other prospective customers in the market. The qualified and available market for property and casualty coverage tracks closely with the number of households and businesses in a target area. There are several ways to further qualify the market potential based on the data in your MCIF or a simple count of your bank products. For example, your current individual and commercial accounts are likely to be your best prospects. A thorough approach would break down the available market by line of coverage for both property and casualty, and life and health. The insurance needs of your own employees may contribute to this market potential as well.

Quantify the revenue associated with the available market. Here, some estimating of premium rates and commission is necessary. Bankers can gain insights into this data through industry publications or by simply asking a knowledgeable insurance agent or insurance company representative in the area. However, the feasibility study is a critical step in confirming your revenue opportunity. It is important to get accurate and comprehensive data by product line and to adjust the data for your bank's account base.

Estimate the market share you could reasonably expect. Market share encompasses some best guesses about competition, the scope of your operations, and how much of your time, energy and financial capital you intend to devote. Though this is a bit of a "chicken and egg" story, it is an important step as you begin to set goals for your future enterprise and gain the support of your board members.

Other competitive factors contribute to this analysis. Ideally, insurance services in your current market area are fragmented, with no dominant insurance agency. The basis may be growing, with the number of households and businesses increasing--creating a bigger overall market. For most banks, the opportunity is attractive simply due to the size of the available premium in the market area. It's time to be optimistic--with ever-growing pressure on traditional income sources and the poaching of customers from bank competition, this may be the best use of management and bank equity...