“Cross-selling is a pipe dream. Every bank has failed, and it will never work.”

Sound familiar? Conceding that financial institutions have failed so far to realize their initial cross-selling penetration goals, bank insurance distribution is still evolving. Leading banks will make it work, while many others may be doomed to failure. What separates the two resides in strategic focus and commitment.

Leading banks in insurance continue to realize strong financial and operational insurance brokerage performance. Financial success for these leading bank-owned agencies has become almost a certainty and is led by strong growth figures.

After weathering a sea of change over the past seven years, leading banks are well positioned to capitalize upon competitive advantages of acquisition capital, a diverse inventory of insurance products and services and thousands of core clients to build upon. For these select banks, insurance brokerage is not a losing proposition, as many would like to believe, but instead an integral and profitable product offering consistent with the institution’s objectives.

Unfortunately, hundreds of bank-owned insurance platforms nationwide find themselves relegated to insurance purgatory, either unaware of actual performance or uncertain about future direction. This article will discuss the reasons behind such failing initiatives. Much of it has to do with underperformance in acquisition strategy, integration and using available leverage.

Acquisition Strategy

Many banks failed to establish a definitive strategic plan with quantifiable goals when entering insurance distribution. Eased regulations sparked widespread nirvana during the early 2000s, and financial institutions became victims of their own unquenchable thirst. See the illustration below for a historical look at publicly announced agency-broker acquisitions by the most active buyer segments.

Bank-agency acquisition activity has been declining since 2002 for two main reasons. First, many banks rushed into the buying frenzy, instead of simply partnering with an agency. They often lavished money on the first willing seller and ended up with short-term leadership, a service-oriented organization and huge reinvestment obligations due to a lack of agency capital. At the same time, these banks offered no commitment, direction or resources for growing insurance.

In the early years, however, banks were complacent with the new insurance product offering as initial financial performance was bolstered by the hard rate environment. Inevitably, the market softened, growth flattened, earn-outs were completed and noncompete agreements expired. Based on average bank acquisition structures and growth rates, bank CEOs expected approximately 7.2% annual earnings growth.

The years 2004 and 2005 proved to be the first the average bank-owned insurance operation fell short of earnings targets, realizing under 6% growth. While peak performers have experienced stellar financial performance, the average acquired agency has served simply as an underperforming stand-alone investment.

Second, leading banks in insurance identified the same insurance issues but systematically committed corporate resources toward refining the insurance strategy. As such, they were determined to add insurance successfully as a new aisle in the overall bank supermarket of products. Now, two years later, 88% of leading banks in insurance plan to acquire another insurance agency over the next 12 months, and 71% of those same banks report acquisitions are attaining the base level of profitability they expected at the acquisition’s closing.

Integration

It took several years and a softening premium rate environment for banks to understand the differences between the banking and insurance cultures (see chart).

After identifying potential problems with the existing bank-insurance platform, leading banks took a step back to digest more fully the intricacies of the insurance operation, learn from experiences and reposition themselves for future success. One such area of change has been the banks’ gradual migration toward consultative sales and servicing capabilities–in large part through the expansion of the insurance offering. This enhanced trusted-advisor positioning remains a huge opportunity for bank and insurance platforms.

On the other hand, there are substantially more bank-insurance platforms that have not been fully integrated, and progress remains at a standstill. Bank integration failures can be summarized by the following characteristics:

1.Lack of bank chief executive commitment to insurance;

2.No executive-level oversight or accountability;

3.Inadequate internal relationship-building among bank and insurance personnel; and

4.Failure to integrate agency technology and operations into the bank.

Leverage

The best performing banks generate only 2% to 4% of prior year’s insurance commissions via bank referrals in a given year. For 2006, many are setting more aggressive targets, in the 7% to 10% range. Hundreds of other banks, however, still do not have an executable plan for managing insurance, let alone guiding cross-selling performance.

Many underperforming banks do not understand how to cash in on bank-insurance cross-selling opportunities. Some of the challenges that have impeded cross-selling success include the following:

Underperforming banks were quick to promote high-volume, low-margin insurance products to bank customers that are not in the core competency of the agency.

Bankers directed referrals, assuming that a good credit risk would be a good underwriting risk.

Only 3% of underperforming banks maintain an electronic referral form-database for tracking referrals.

Less than 10% of these banks use joint sales teams when cross-selling, and even fewer have established goals.

Banks without small-business units maintained an organic insurance growth rate of around 3.1% in 2005. In contrast, their leading bank counterparts with small business units saw organic growth of 12.6%.

The bank-insurance cross-selling journey is no different than the years agencies spent trying to make group health and commercial lines cross-selling a reality. Persistent and dedicated agencies made it work when they realized success is predicated upon time, commitment, and internal trust and communication. Internal referrals between group and commercial producers never materialized until each became comfortable with the sales and service capabilities of the other. Today, bankers and insurance producers are undergoing the same type of journey.

There was no single recipe for bank-insurance success at the outset of the Gramm-Leach-Bliley Act, which dropped barriers to banks selling insurance. All financial institutions learned together. Where there is a difference between successful and failing banks in insurance, it’s that leading banks have made necessary changes. Failing banks have not.

Banks are here to stay in insurance. Cross-selling success for leading banks is not a function of “if” but rather “when.” The extent to which the masses of financial institutions are eventually deemed successful remains to be seen.