For The Typical Bank, Profits From Life Insurance Sales Are Slim

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Life insurance sales add only 60 cents per customer household to net income for the typical bank, finds a new study for LIMRA, Windsor, Conn., by Kenneth Kehrer Associates, Princeton, N.J.

That contribution pales in comparison to the profitability of bank investment sales units, says Kenneth Kehrer, who heads the research firm that did the study.

Last year, for instance, the typical bank retail broker/dealer generated a contribution to pretax profit of $10.76 per bank customer household, 18 times the payoff of the typical bank life insurance sales program, he notes.

The profit margins of bank life insurance sales programs average 8%, only one-fourth the level of the typical bank investment sales program.

Overall, profits from life sales amount to only 0.11% of the entire net income of the typical bank selling life insurance. In contrast, bank sales of annuities and mutual funds contribute 2% of the banks bottom line.

The LIMRA-Kehrer studies do not count annuities in insurance sales.

In-house agents are the least profitable bank channel for insurance, Theodore Johnson, director of bank marketing for LIMRA, notes.

“Basically, they seem to be overpaid,” he says. “The conundrum for banks is, life agents are used to making money. So for a bank to draw them in, it must pay them more than it does to a financial consultant.”

Profit margins vary widely by distribution method, Kehrer found.

Advanced agents–those who concentrate on selling insurance to their banks wealthier clientele–produced a margin of 25% of sales.

Financial consultants in banks showed a far higher margin for insurance: 40%.

But only about 3% of the sales of banks financial consultants are from life insurance, Kehrer found. The rest is from investment products such as stocks, mutual funds and annuities.

“Its an interesting trade-off,” Kehrer notes. “Advanced agents provide more revenue but at lower margins. Financial consultants provide less insurance revenue but higher profits.”

The study did not gather data on the profitability of retail agents in banks or of insurance-licensed bankers.

The main point of interest of the latest study is that it looks at banks customer penetration for life/health insurance in terms of profitability. This provides a way to compare the success of banks and credit unions of different sizes.

Net income from insurance is much higher in super-community banks (with $2 billion to $7 billion in retail deposits) than in other banks, the LIMRA study found. Super-community banks have three times the profit penetration of regional and super-regional banks that have similar revenue penetration per household, on average.

Community banks with retail deposits of less than $2 billion have lower sales revenue penetration, but their average profit per customer household is almost as high as super-regional banks (those with retail deposits in the $12 billion to $30 billion range).

Life insurance profitability also seems to improve as banks gain more experience.

Average annual profit per customer household is 62 cents in the fourth through seventh years following a banks initial sales of life insurance. Thats 3.4 times the profit penetration during the first three years.

Per-customer profit penetration is $2.14 a year after the seventh year, or 3.5 times the average annual profit of banks in years four through seven, LIMRA found.

“The average life sales program is only 4.5 years old, about half the age of the typical bank investment sales program,” notes Paula Nelson, CEO of Transamerica Financial Institutions, Inc., a member of the AEGON Group and a co-sponsor of the study.

“This research clearly points to certain distribution methods as best practices, such as switching from retail agents to licensed bankers as an efficient way to reach the middle retail market customer,” says Betsy Cosgrove, senior vice president marketing for Liberty Life of Boston, another study sponsor.

Sales compensation consumes almost half the revenue in the typical bank life insurance sales program, 10% more than in the typical bank investment sales program.

Bruce Abrams, president of AIG Annuity, another study sponsor, says compensation expenses in bank investment sales programs are reduced by the more widespread use of licensed banker sales forces than is the case with life insurance sales programs.

Some banks do quite well with life insurance, however. Twenty-five percent of the banks able to provide expense detail reported profit margins in excess of 53%.

Also, 25% of these banks reported sales compensation expenses of less than 31% of revenue.

Matt Riebel, president of Nationwide Financial Institutions Distributors Agency, another study sponsor, notes such a low compensation cost would triple the profit margin of the typical bank life sales unit.

“The keys to program success are efficiency and commitment,” says Riebel. “The best programs apply the industrys best practices and have given the program time to mature.”

The study carries a few lessons for banks that want to improve the profitability of life sales, says Johnson.

Lesson no. 1 is, be patient. “It usually takes five to six years to show significant results,” Johnson notes.

Banks should also pick the two or three distribution methods that make the most sense, he suggests.

“Small adjustments may get you to the point that insurance profitability is quite noticeable,” he says. “Some institutions do extremely well in using platform and advanced sales agents. The least profitable is the in-house agent, because of high compensation.”

To cut back compensation costs, banks might stop or reduce commissions paid for referrals to in-house agents from their financial advisors, he says.

But thats not likely to go over well with advisors, Johnson acknowledges.

The latest Kehrer-LIMRA Bank Life Sales Study is based on 51 financial institutions that accounted for 59% of all life premium sold through banks in 2000, Kehrer says.

A Kehrer-LIMRA study last year found that life insurance accounts for about 20% of the typical banks income from all insurance sales.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 21, 2002. Copyright 2002 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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