To Sell or Not to Sell,Bank-Owned Insurance Agencies May Be Wave of the Future

As far back as anyone now in the insurance business can remember, agents were fighting against allowing banks to sell insurance. That changed in 1996 when the U.S. Supreme Court decided that national banks selling insurance in small towns were subject to state regulation of insurance (Barnett Bank v. Nelson, 517 U.S. 25), but that state regulation could not unreasonably interfere with the insurance activities of banks.

That decision was enough to convince the Independent Insurance Agents of America (IIAA) that convergence was the wave of the future in financial services. “Historically up until the Supreme Court case on Barnet Bank, we believed that the laws were tilted and the playing field was tilted towards the banks,” said IIAA CEO Robert A. Rusbuldt. “That’s because the banks were able to use the power of credit and tie in insurance into their lending operation. They also had other advantages, FDIC insurance and some of those sorts of things.” Despite their belief that banks enjoyed a competitive advantage, the agents’ association adjusted to the reality that banks would be able to sell insurance in the future.

GLB opens the door
Three years after the Barnett Bank decision Congress made the IIAA prophecy come true by adopting the Gramm-Leach-Bliley Financial Services Modernization Act (GLB), tearing down the firewalls erected between the different sectors of the financial services industry during the Great Depression. The new federal law made it clear that insurance agencies would have to find a way to work with banks.

Agents now have three choices for dealing with the entry of banks into the insurance business. They can form a partnership or joint venture with a bank, they can choose to be owned by a bank or they can ally themselves with a non-traditional bank that will enable the agency to become a one-stop financial services firm by selling banking services to its customers. Each arrangement has its advantages and drawbacks, and agents need to understand what they are before making a decision.

Partnerships and joint ventures are easy to arrange and allow let the agency principals retain ownership of their agencies. The cost is low, and the arrangements are also easy to unwind if the parties find that they are not getting what they wanted or expected.

“The advantage from the banking side is the low cost of entry,” explains David L. Holton, president of Wachovia Insurance Services and president of the American Bankers Insurance Association (ABIA). “It just doesn’t cost a lot of money to get into the business. The other thing is it can oftentimes be unwound very quickly.”

Other features also make partnerships desirable to insurance agencies. “The advantage to the agency is that you can keep your agency,” Holton continued. “You don’t have to sell it, and you get access. What an agency typically wants is introduction to leads.”

Not always a bed of roses
It is hard, on the other hand, to find anyone who is truly enthusiastic about the success of partnerships between banks and insurance agencies. About the only thing they deliver is leads, and that does not appear to be enough. On the down side, partnerships have historically had short lives, and that creates serious problems. ABIA’s Holton points out that banks want to own the client relationship, the renewal rights that are so important to agency principals. “That’s one of the real flaws in the partnership arrangement,” he commented.

Rusbuldt sees the problem as one of commitment, incompatible culture and divergent expectations. “The partnerships, the joint marketing arrangements, historically have not worked well,” he said. “There’s a very different culture between bankers and independent insurance agents.” He noted that the independent insurance agent’s outlook is very entrepreneurial whereas bankers take a more corporate view of business. He believes that those divergent mindsets make a clash of cultures inevitable. The arrangement the principals of the bank and the insurance agency work out, he believes, gets lost in the shuffle when the bank cannot create a compensation arrangement that rewards effective referrals by bankers who do not hold insurance licenses.

You won’t get any argument on that point from Thomas Sharkey, Jr., president and CEO of Fleet Insurance Services, the largest insurance agency in New Jersey and owned by the largest bank in New Jersey. “Everyone tends to overvalue their contribution to the sale,” he explained. “The bank in these joint ventures is always looking for a hefty chunk of the commission revenues. Producers don’t want to take a big haircut on their commissions because it doesn’t necessarily mean that there’s a lot less work to do because the bank referred it in.”

Sharkey believes that the rate of return most insurance agencies earn is insufficient to support the expectations of both parties in a partnership or joint venture between an agency and a bank.

The biggest problem with partnerships may be motivating bankers to make a meaningful contribution to the partnership. State laws on sharing commissions for insurance sales raise serious impediments because they prohibit rewarding bankers directly for the behavior a successful venture demands. “Most of these bankers will not be licensed,” Holton points out, “so paying them a commission is absolutely out of the question. You’re going to have to set up some kind of bank sponsored management incentive program to encourage them to do the right behavior.”

Holton added that one obvious solution does not do the job. A bank can legally share in the agent’s commissions by obtaining an insurance license. This permits equitably sharing revenue between the bank and the agency, but Holton maintained that it does not solve the problem of rewarding unlicensed bankers for referrals that are profitable to the insurance agency. What the law does allow—a finder’s fee that is not dependent of making a sale—does not give bankers sufficient incentive to promote the insurance agency’s services to their banking clients. The linkage it creates between performance and reward is tenuous at best, and it offers equal compensation to ineffective behavior and outstanding performance.

Mutually beneficial arrangements
Owning an agency is the way banks prefer to enter the insurance business. That sounds like bad news for agency principals, but the arrangement is often just what the agency is looking for. Selling out to a bank delivers the same access to leads that a partnership or joint venture does, and it solves other problems that face many agencies. Access to capital and perpetuating the agency are two prominent examples.

“Ownership perpetuation was quite a challenge, despite the fact that we were a family controlled company,” Sharkey said. ” It was divided up amongst brothers and sisters, so we would have been forever doing leveraged buyouts on ourselves trying to buy out other stockholders.”

Access to capital is another advantage bank ownership gives an insurance agency. Fleet Insurance Services started the New Year by embarking on an aggressive expansion plan. The objective is to build on the agency’s solid base in New Jersey and the Philadelphia suburbs by purchasing agencies in the remainder of Fleet Bank’s service area from Long Island to Boston. That would not have been possible without the bank’s capital.

Job security can be a big concern for agency principals who are thinking about selling out to a bank, but history suggests that it is not much more of a problem than in a merger between two insurance agencies.

ABIA’s Holton explained that banks are not looking for a revenue stream. Their goal is to purchase the expertise of the agency’s producers. “I would question why that would be an issue,” he said. “Most banks that I know don’t have any expertise at all in the insurance area, and my guess is they should be acquiring human capital as well as the revenue stream.” He added that all the key personnel of the agencies Wachovia Bank has acquired are still in place.

Acquisition by a bank, on the other hand, does not give agency principals an ironclad guarantee of future employment. Agency principals who cannot successfully adjust to the bank’s corporate culture can and do find themselves looking for employment elsewhere. Sharkey indicates that the first insurance agency Summit Bank acquired, several years before its merger with Fleet Bank, left the bank with “a stomachache.” The agency principals simply did not fit into the bank’s management style. Although they eventually left, Sharkey related, all of the other producers who worked for the agency have remained.

Keeping balance in a merger
Although fitting into a new environment and adapting to a new culture are considerations agency principals face in any merger, the problem may be more difficult when a bank acquires the agency. Principals need to curb the entrepreneurial spirit that has been the key ingredient of their success and channel it toward meeting the bank’s corporate objectives. This often requires modifying the way they manage their businesses, and not all agency principals can make the adjustment.

Control and autonomy is another issue that agency principals can address in negotiations for a sale. Except for a more rigorous compliance regimen and human resources policy, Sharkey reported that nothing changed in the transition from Meeker Sharkey to Fleet Insurance Services.

The agency’s position in the bank’s insurance operations can be an important determinant of the degree of control agency principals maintain after an acquisition. Although it was the last of four agencies the bank acquired, Meeker Sharkey became the centerpiece of the bank’s insurance operations. That is exactly the position Sharkey wanted, and it was an important factor in his choice among acquisition offers from competing banks. The agency that is the bank’s lead acquisition in the insurance field is likely to remain in control of its own destiny, and that does a lot to ease the adjustment to new ownership.

Identity can also become a problem when a bank buys an insurance agency. Rusbuldt said that IIAA prefers to see the agency retain its identity.

Sharkey, on the other hand, has found the Fleet brand to be a very valuable asset to his business. “We were very interested in trading off of Fleet’s powerful brand image,” he said. The size of the bank’s advertising budget, he added, has also helped to ease the transition.

Agency principals who are considering a sale of their business to a bank need to know what banks are looking for. The prime targets for acquisition are agencies that are financially strong and whose staff will not go anywhere after the sale. If there is a financial need to sell the agency or the principals see the sale as a vehicle for funding retirement, banks are not likely to be interested.

Maintaining independent status
One thing agency principals who are considering a sale to a bank do not have to worry about is alienating themselves from the independent agency community. Rusbuldt points out that IIAA has been dealing with insurance agencies owned by banks for almost a century. “In some of the Midwestern states, 30 percent of [the] membership of our state associations are owned by banks,” he said. The agencies have remained members of the “Big I,” and the association has always supported them. Rusbuldt promises that the association will continue to support independent agencies, no matter who the shareholders may be.

An alliance with a non-traditional bank is another way to transform an agency into a one-stop financial services firm, but it has not yet matured. IIAA is in the process of rolling out its own affiliate, InsurBanc.

The plan is to offer full service banking to agency customers, but at this stage, InsurBanc is offering its services only to state associations, employees and member agencies in a few states. Rusbuldt described it as an effort to level the playing field and eliminate what IIAA perceives as a competitive advantage that banks enjoy in the insurance marketplace.

The National Association of Mutual Insurance Companies (NAMIC) has also launched a federally chartered thrift, Assurance Partners Bank, to give agents a vehicle for selling banking services. There is no plan for these banks to have traditional branches, but they are already offering a full array of banking services—from deposits and checking accounts to auto loans and home mortgages.

What remains to be seen is whether consumers will accept this business model as the preferred way to conduct their banking business, and whether agents can succeed in selling banking services.

Joseph F. Mangan, CPCU brings more than a quarter century of experience in property and casualty underwriting to his current position as consultant, author and editor. His columns appear regularly in leading insurance trade publications. Mangan has authored four textbooks on commercial lines underwriting, and contributed to textb ooks on personal lines insurance and insurance operations. In addition to his extensive experience as a line and staff underwriter, he served for ten years as assistant professor of insurance at The College of Insurance in New York City.

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