Banks Are Finding Fee Income In Reinsurance Joint Ventures
Reinsurance joint ventures are increasingly attractive to large banks as a way to get a piece of the insurance action beyond fees and commissions, says Hans L. Carstensen, chairman, president and CEO of CGU Life Insurance Company, North Quincy, Mass.
Speaking at the recent Financial Institutions Insurance Association’s fall conference here, Carstensen said reinsurance is the newest element in CGU Life’s efforts to add value to its insurance products for banks. Such joint ventures, in which the bank accepts some of the risk of covering the life policies they sell, can cover term, whole life and universal life products offered by CGU, he said.
Generally, CGU enters into such agreements with wholly-owned reinsurance subsidiaries of large banks, such as HSBC Bank USA, based in Buffalo, N.Y. HSBC is the U.S. subsidiary of the U.K.-based bank, which Carstensen noted has itself entered into reinsurance joint ventures with CGU’s own parent in England, CGNU plc.
Under a reinsurance joint venture, a bank places the risk not retained by CGU with a reinsurer.
“The risk assumed by the bank can be tailored to the bank’s needs,” he said. “The bank doesn’t need to take on more than it’s comfortable with.”
Such joint ventures are a profit opportunity for a bank that has capital to back up the policies, enabling it to share in the profit as well as the risk of manufacturing insurance. That makes it a way to align the economic interests of the bank with those of CGU, he observed.
While acknowledging that reinsurance is complicated, Carstensen said it’s a much simpler way for banks to take a direct stake in insurance than actually manufacturing its own insurance policies.
“It lets the bank get some exposure through an insurance product,” he said. “It’s profitable for both the carrier and the bank.”
CGU, which began selling life policies through banks in 1997, now has 33 bank relationships in the U.S. Of CGU Life’s bank business, 54% is term, with an average face amount of $85,000. Whole life constitutes the remainder, carrying an average face amount of $35,000.
Reinsurance joint ventures are only part of those sales. The carrier also sells through banks using third-party administrators, typically information technology firms with the ability to handle customer service and other elements, Carstensen said.
More commonly, the bank partner simply refers customers to the insurer’s own sales force. Carstensen noted that this method is a quick, simple and relatively low-cost approach to insurance sales for the bank. All the risk is assumed by CGU in these arrangements, and the bank needs only to train its staff to generate leads for follow up by CGU Life salespeople.
Another type of partnership is one where the bank’s sales force sells CGU policies, sometimes carrying a joint bank/CGU brand. As with similar arrangements between U.S. banks and life insurers, the bank earns commissions on sales, while the insurer provides marketing, product design and other support.
Regardless of which model the insurer pursues with any given bank, there are a number of factors critical to the success of the partnership, Carstensen said. There has to be a shared vision and philosophy for development of insurance. There must be a commitment by management to a long-term relationship with the insurance partner. And the bank must ensure that it undertakes regular progress review meetings at the branch level as well as bank-wide to keep sales goals on target. Appropriate reward structures for remunerating bank personnel involved in insurance sales and thorough skill-based training are also essential, he said.
CGU itself is thoroughly committed to selling through banks, Carstensen said.
“The mortality and lapse experience we have seen with life products sold through the channel is far better than we expected and far better than with other channels,” he added.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 15, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.