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As banks explore varied methods for distributing insurance products, one lesson stands out: know thy customer.

In this era of financial services convergence, the question of whether banks should sell insurance products has been settled in the affirmative. Annuities have taken their place alongside checking accounts and certificates of deposit in many banking retail outlets. And recent legal and regulatory liberalizations have prompted many institutions to add life, health, homeowners, and auto insurance to their product mix.

The question of how banks should distribute insurance, however, remains up in the air. As they attempt to incorporate unfamiliar insurance products, institutions are trying everything – independent agents, in-house specialists, licensed branch employees and direct marketing. Nowadays, says Kenneth Reynolds, executive director of the Association of Banks-In-Insurance, "You see almost every imaginable combination of products and delivery options."

Wells Fargo Insurance Inc., the largest bank-owned insurance agency in the country, illustrates the wealth of choices available. President Timothy J. King boasts that his company sells "about any type of insurance that you can think of," listing life, disability, credit life, health, variable universal, and property & casualty as a few examples. As for distribution channels, Wells employs a dedicated agent force for life policies. For simpler insurance products, it uses licensed branch personnel and mass-market channels such as the telephone, direct mail and the Internet.

Given its vast resources, parent company Wells Fargo & Co. can afford to try virtually everything. But even mega-banks must build solid business cases for their distribution strategies. And institutions below the mega-bank level need to craft focused strategies that make sense in light of their own size, location and customer base. The opportunity is appealing, since insurance products can bring valuable additional fee income into the bank. At the same time, managers must be on guard lest they dissipate resources and drive up costs by adopting inappropriate strategies.

Broadly speaking, insurance distribution strategies fall into one of two categories: personal channels and mass-market channels. The former incorporates a variety of individual sales representatives, ranging from independent agents to in-house specialists to licensed branch employees. The one thing these reps have in common is that they discuss insurance products one-on-one with the customer and earn a commission for closing the sale. As a rule, face-to-face selling works best with complicated insurance products, where an individual's needs are too complex or unpredictable to be sized up automatically. Banks surveyed by the ABI generally cite some form of face-to-face selling as their most effective marketing technique.

Closing the Sale

Mass-market channels, meanwhile, encompass everything from call centers to direct-mail packages to the Internet. The common ground here is that customers are solicited and sold products without face-to-face interaction, at least not initially. These channels are most appropriate for straightforward policies that don't require a lot of explanation, such as term life, homeowners, or auto insurance. Since these products are commodities with skimpy margins, it doesn't make economic sense for representatives to devote precious hours to selling them.

Clearly, the most fundamental decision bank managers must make involves the types of insurance products they wish to sell: high-margin policies with steep marketing costs or low-margin products with cheaper distribution requirements. Ultimately, the decision must turn on an analysis of the institution's customer base and the resources that can be deployed to meet those needs profitably.
A bank with an older, affluent clientele will almost certainly be better off using some form of the agent system to sell the more complex life insurance products face-to-face. A bank that caters to younger, more technologically savvy customers, on the other hand, might want to try direct marketing through call centers or the Internet. Institutions that consider themselves "full-service providers," like San Francisco-based Wells, will end up embracing the full spectrum of personal and mass-market distribution channels.

There are also some experts in the field who believe banks should take advantage of this new era of financial services convergence to entirely re-think the traditional models of insurance distribution. They advocate that banks leverage both their existing branch and non-branch infrastructure to sell directly to customers, cutting out the agent middleman. "Banks have a clean slate," says Kenneth L. Keith, chief executive of Nashville-based FISI Madison, a bank marketing firm and subsidiary of Cendant Strategic Marketing Group. "They don't have the legacy systems that the insurance industry has. Why tie yourself down to the traditional way of doing business unless it's the best way?"
Personal Contact

Somewhere between 2,000 and 3,000 U.S. banks now offer insurance products, including virtually all of the largest institutions, according to ABI, a trade group based in Washington, D.C. These banks are also selling a greater number of policies than ever before. In its most recently published annual survey, based on 1998 data, ABI found that premium revenues generated by banks for most insurance products (excluding annuities) grew by roughly 35% over the prior year. With annuity premiums included, the growth rate was 12%. This reflects the fact that annuities constitute a mature market for banks, which have been selling these hybrid insurance/investment products for many years. Annuities contributed nearly two-thirds of the $31.1 billion of insurance premiums earned by banks in 1998.

In general, this premium growth comes from current account holders, since customers tend to be most receptive to insurance sales pitches from their own banks. "The obvious direction is to pitch to current customers and build off the bank's name," says David Galvin, vice president and co-manager of FirstFed Insurance Agency LLC, part of FirstFed America Bancorp, based in Swansea, Mass. Most banks see a lot of untapped opportunity here. Wells, for example, has sold insurance policies to just 2% of its bank customers.

For that reason, any successful distribution strategy must be rooted in a good, hard look at the existing customer base. A bank's marketing strategy should then flow from this analysis, says Kenneth Kehrer, president of Kenneth Kehrer Associates, a Princeton, NJ-based consulting and research company. For example, a mid-sized bank with a large trust department and a critical mass of affluent, older customers might want to hire estate planning experts to sell fairly complex, high-margin insurance policies like variable universal life. A similar bank with a clientele of mostly young families, by contrast, would be better off going the direct marketing route, selling term life policies through a toll-free number or direct mail, Kehrer says.

Bank insurance marketers consistently get their best results from personal contact, ABI surveys show, be it in-house or through third-party specialists. Impersonal distribution channels – telephone solicitation, direct mail and Internet – tend to be less effective in generating sales. "By and large," says James N. Ashby, CEO of Centura Insurance Services, "insurance is sold and not bought. It's pretty much done face-to-face."

For those banks that embrace personal selling, the next question is whether to train and license branch representatives to sell insurance along with other products, or to use dedicated insurance specialists.

Many institutions do both. For example, Centura Insurance, which is part of Rocky Mount, N.C.-based Centura Banks Inc., employs 22 independent insurance agents and has licensed a number of bankers to sell limited life products. FirstFed, which began selling insurance just over a year ago, also is using a combination of independent agents and in-house personnel. Galvin says the thrift includes marketing information in its statement stuffers and is selling insurance through branch offices. At Wells Fargo Insurance, King says insurance marketing is most effective when the company uses dedicated staff, either in-house financial consultants or life insurance agents.

Culture Clash

Using existing personnel generally appeals to banks concerned about cost. The typical strategy is to train and license some branch employees so they can sell insurance directly to customers and earn a sales commission in the 5%-10% range. This works particularly well when employees have developed longstanding customer relationships and can identify strong prospects among current account-holders. In a recent study, Kehrer found that those banks that used licensed bank staff to sell insurance were surprisingly effective, generating strong revenues at a reasonable cost.
However, this approach will only work for banks that have employees who are sufficiently talented and flexible to acquire skill in handling a dissimilar product set. Decision-makers need to ask themselves whether they're requiring employees to juggle too many competing tasks at once. Warns FISI-Madison's Keith, "If you ask staff to sell checking accounts, insurance, securities and automobile loans, some things may fall through the cracks."

Banks that decide against retraining existing personnel but still want to sell insurance face-to-face must find a way to amass an agent force. They can either work with independent agencies, or hire their own in-house specialists, or acquire existing agencies. The latter course is an increasingly popular strategy for smaller banks and new entrants to the insurance arena. Last year, banks and thrifts purchased 63 insurance agencies, up from 44 in 1998, according to SNL Securities LC, Charlottesville, Va.

The chief advantage of using agents is that it puts insurance marketing in the hands of specialists. Although agents must be amply compensated – making this the most expensive distribution strategy – banks with robust trust businesses or a high concentration of affluent customers have been delighted with the results of professional, highly trained life insurance agents working in the branches, according to Kehrer.

Before hiring insurance specialists, however, bankers should carefully consider whether their organizational cultures can accommodate the newcomers. Agents rely on referrals from the bank branches, and those referrals simply won't be forthcoming if bankers view the agents as interlopers trying to wrest control of their hard-won customer relationships. "The insurance departments set up by banks wind up isolated: No one will talk to them," says Basil Holder, a bank marketing consultant based in Black River Falls, Wisc. "The bankers who could help aren't going to sic an insurance salesman on their really good clients if 'insurance' is a dirty word to them."

A recent benchmarking study by Kehrer bears out some of those reservations. Banks that employed insurance agents to sell lower-end policies within the branches weren't particularly satisfied with the results. This disappointing outcome may stem from the fact that some banks don't generate enough referrals to allow agents to earn their keep. Kehrer also suspects that the insurance agents hired by banks may not be the best and brightest, since the elite salespeople generally prefer working directly for independent insurance agencies.

Direct Approach
Despite the popularity of face-to-face selling, some bankers and advisors are rethinking the agent system. Financial services products are becoming increasingly commoditized, this argument goes, so why not embrace impersonal marketing channels for insurance as well?

Consultant Keith cites published statistics showing that less than half of Americans dealt with insurance agents in 1997, down from 75% a decade earlier. By employing such agents, or even retraining its own personnel to function as agents, a bank may be locking itself into a distribution system that's on its way out. A better approach, he says, is to emulate companies such as Geico Corp. and USAA, which rely on call centers as their main distribution channel. "You definitely need a few specialized agents to deal with the unique needs that some people have," Keith says. "But the majority of the population needs plain vanilla auto insurance and homeowners insurance, which are best sold on the phone or through the mail."

As Keith suggests, the decision to embrace direct marketing turns on the types of products sold. Nearly everyone agrees that direct marketing won't work with the more complex forms of insurance – universal and whole life, for instance. But it can be used for selling term life, a commodity product that is easily explained to customers. "The profit margin on term life tends to be so small that it can't carry the weight of dedicated personnel," says Reynolds at the ABI. "It has to be sold remotely."
Direct-marketing options include telephone solicitation, mail, and the Internet. Keith points out that calling a toll-free number is easier and less intimidating to busy customers than scheduling a meeting with a commission-hungry salesman. Direct marketing is also cheaper than face-to-face selling. Kehrer estimates that a glossy direct-mail package costs less than $10 per mailing and a statement insert as little as one cent per household, both options far less expensive than compensating a dedicated salesperson.

The most progressive and arguably least expensive impersonal channel of all is the Internet, although use of the Web as a sales tool remains in its infancy. At the beginning of this year, Huntington Bancshares Inc. introduced simplified, quick-approval term and whole life insurance policies at its Web site. The Columbus, Ohio-based company says these easy-to-understand policies are designed for lower- and middle-income customers; Huntington uses dedicated agents to sell more complex products.

Chicago-based Bank One Corp. takes a similar approach, essentially viewing the Internet as a supplement to other distribution channels. The Internet is most helpful in disseminating information to prospects, says Glen J. Milesko, chairman of Banc One Insurance Group, who notes that many customers would rather browse a Web site than endure telephone sales reps "calling them by the wrong name at dinner time."

Some experts deem all forms of insurance mass marketing by banks to be relatively ineffective. Mark Trencher, vice president of research at Conning & Co. in Hartford, Conn., argues that impersonal channels undermine banks' prime competitive advantage: close customer relationships. "Once you sell direct," Trencher says, "you're competing against everyone else who sells direct."
With brokerages and insurance companies hungrily eyeing those very same customer relationships, banks probably should regard insurance sales as another method of preserving their clientele base. That requires a personal touch. Holder suggests that bankers research what's in their customers' best interests and then provide the right insurance products at the lowest rates, preferably face-to-face.

Along those lines, the ABI's 1999 study of insurance marketing by banks says the most successful programs tend to avoid "off-the-shelf products." The ABI recommends that banks strive to tailor their insurance products to their customer base, as well as ally themselves with insurance companies or independent brokers who will collaborate with them to meet customer needs.
"Don't try to be all things to all people. Try to be something really significant to one group of people," urges Holder. "Instead of Wal-Mart, banks should be emulating Tiffany's."
Ms. Judd is a freelance writer based in Washington, D.C.
By Elizabeth Judd