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Life Health > Life Insurance

Strategic Options For Banks: Build, Buy Or Outsource

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Insurance Distribution?

To build, buy or outsource are the most frequently discussed strategic options facing a bank looking to enter the insurance distribution business or expand existing programs. One of the few things they have in common is they all need the talents of experienced agents.

Within the three broad options are hybrid alternatives. For instance, a bank might arrange a strategic alliance with an insurer or develop a referral relationship with a local broker or agency. Thanks to the passage of the Gramm-Leach-Bliley Act, large banks can also buy an insurer.

The integration of multi-product lines with different sales, back room and administrative functions is a challenge facing a number of banks that have been in the insurance distribution business for many years. The most successful programs are based on knowing how and what the banks customers buy.

No decision should be made without first analyzing the customer database thoroughly. Banks should expect to sell insurance first to existing clients, then via referrals from existing clients and thereafter to people who are not current clients–just as any agency does. The major advantage the bank has over traditional insurance agencies is the ability to cross-sell more easily.

An “expectation of revenue” or “opportunity” model has the specific purpose, as the name suggests, of determining potential by garnering the right information. In my experience, this is best built on a series of penetration models of the bank’s customer database.

The types of information to review include a methodical assessment of the business lines the bank is writing today. Does the bank specialize in the small-business customer, residential mortgages, or consumer or commercial loans? How many branches exist, how strong is its Internet or PC banking presence and how active is the bank call center?

A customer profile, at a minimum, should divide retail customers by age and level of affluence. For the commercial side, customers should be profiled by annual sales volume and size, in terms of number of employees and geographic distribution.

The bank’s technological capability is another key consideration in deciding whether to build, buy or rent.

Once you have this data, determine which insurance products could most easily be sold to bank customers as a companion to existing products or services, either at the time of sale or as a subsequent purchase.

Another question to answer: What are the expected gross revenues from insurance, and what amount of commission is built into the desired insurance product?

After an expectation-of-revenue model is built covering a five-year period, evaluate the bank’s internal resources to determine if it has the talent and appetite to build the insurance operation entirely or partially in-house, which product lines to outsource or whether it is necessary to purchase the needed expertise by buying an agency.

Senior management must also assess its reasons for entering or expanding the business, as it will influence the strategy chosen. Other than adding non-interest fee income, the reasons can range from leveraging the existing client base, to positioning the bank as a full-service financial institution, to adding the clients of an insurance agency to the banks client base.

The route taken will obviously affect the percentage of commission received, the net revenue, the risk-adjusted return on capital and the economic value analysis.


There are five key drivers that lead to the decision to purchase an agency:

1. The best opportunities for cross-selling are in the commercial arena, both for property and casualty and high-end life insurance products, such as corporate-owned life insurance (COLI) or employee benefits.

2. The bank will allow the entrepreneurial spirit of the agency to thrive.

3. The bank embraces a pay-for-performance attitude.

4. The ability and capital is available to acquire quality agencies.

5. The ability to define the potential acquisition candidates with serious profile and search criteria.


Five key drivers that lead to the decision to build an agency in- house are:

1. The best opportunities for cross-selling are in the life and health arena.

2. The bank has a good history of cross-selling, and has or can develop the technology, referral procedure and reward programs to support the effort.

3. There is a good match between the products desired by the bank’s customers and the banks ability to work with carriers to provide them.

4. Proven channel management exists in introducing new products.

5. Management chosen to lead the effort has successful start-up experience.


Five key drivers leading to the decision to outsource are:

1. Management wants to take a pilot approach to the business or is not sure it can support the cost of expanding into a specific line of business.

2. Internal technology support is limited.

3. Little capital is available to develop insurance.

4. It is necessary to import a sales culture and training.

5. There are few, if any, agencies that cover the same geographic area as the bank, or there is a lack of understanding or ability by the local agent in managing large-scale marketing and sales efforts.

Each of these strategic distribution options, some used in combination, have been successful in a number of banks.

What is most important is making the decision with all the facts at your disposal and revisiting that decision periodically as you expand into new markets or product lines.

Carmen F. Effron is president of C. F. Effron Company, Westport, Conn., a bank-insurance consulting firm. Her email address is
[email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 22, 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.

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