banc assurance

126 THE McKINSEY QUARTERLY 1997 NUMBER 3

BancassuranceCould banks be a new channel to sell insurance?

Three partnership models

Dorlisa K. Flur, Darren Huston, and Lisa Y. Lowie

AFTER YEARS SPENT LOCKED in a regulatory battle over whether banksshould be allowed to sell insurance, banks and insurance companiesare recognizing that bancassurance – a French term for the selling of

insurance by banks – is finally becoming a reality. Most players also recognizethat the biggest untapped bancassurance opportunity is life insurance,because it is currently distributed through expensive agent salesforces andhas yet to be purchased by many potential consumers. The question for bothbanks and life insurers is how to organize to profit from this new opportunity.The answer, we believe, is for them to form partnerships.

Our research suggests that the sale of life insurance through banks will meetan important set of consumer needs. Most large retail banks engender a greatdeal of trust in broad segments of consumers, which they can leverage inselling them life insurance. In addition, a bank’s branch network allows the

Dorlisa Flur is a principal and Lisa Lowie is a consultant in McKinsey’s Atlanta oƒfice; DarrenHuston is a consultant in the Pacific Northwest oƒfice. Copyright © 1997 McKinsey &Company. All rights reserved.

FINANCIAL SERVICES

face-to-face contact that is so important in the sale oflife insurance. In France, forexample, over half of all lifeinsurance sales are now madethrough banks. In the rest of Europe, the proportionsrange from just 5 percent in Sweden to 33 percent inSpain (Exhibit 1).

Though a mere 1 percent oflife insurance sales in theUnited States is currentlymade through banks, theAmerican market is clearly poised for a wave of bancassurance activity. Here, life insurance is traditionally sold through independent agents. Sincethis is a very costly way to deliver the product, agents have tended to focus on wealthier individuals who know them, value their advice, and tend to buy policies with greater face values. As a result, the majority of Americanhouseholds are underinsured.

Of the 37 million households with an annual income of $35–75,000 that makeup the middle market in the United States, more than one-third possess no lifeinsurance whatsoever and most of the rest are underinsured, with only ameager policy provided through their workplace. Our research shows thatsuch consumers are favorably disposed to a “holistic” sell that addresses all oftheir asset accumulation needs: life insurance, annuities, and mutual funds.Middle-market consumers also prefer an institutional relationship with abank to a personal relationship with an agent.

Using the bank channel can also boost sales productivity. A strong life insur-ance agent, for example, might sell only one policy a week; a less eƒfectiveagent, only one a month. To compensate for this low productivity, life insurerspay agents a handsome commission on sales – sometimes as much as $1.30 for every dollar of the first-year premium, then 5 to 10 percent of annual pre-miums thereaƒter. Naturally, these commissions are for the most part passedon to the consumer in the form of higher premiums.

By successfully mining their customer databases, leveraging their reputationand distribution systems (branch, phone, and mail) to make appointments,and utilizing sales techniques and products tailored to the middle market,European banks have more than doubled the previous conversion rate ofinsurance leads into sales and have achieved outstanding sales productivityof over four sales per week – more than enough to make bancassurance a

THE McKINSEY QUARTERLY 1997 NUMBER 3 127

Exhibit 1

Bank penetration into life insurance market, 1994

Source: Datamonitor

Market size $ billion

Bank share of written premiums Percent

United States

France

United Kingdom

Germany

Sweden

Netherlands

Italy

Spain

235

76

76

44

20

18

10

7

1

55%

15

7

5

18

20

33

highly profitable proposition (Exhibit 2). All told, we believe that theprospects for bancassurance as a channel in the United States are probably inthe neighborhood of 20 to 25 percent of the life insurance market, equivalentto $9 to $15 billion in annual revenues and roughly $2 billion in profits by2000 (Exhibit 3).

The hostile regulatory climate that used to prohibit a mix of banking andinsurance is changing. Barnett vs. Nelson (1996) allowed national banks tosell insurance in towns of less than 5,000 people. In addition, a recent Oƒficeof the Comptroller of the Currency (OCC) ruling authorized national banks

BANCASSURANCE


Exhibit 2

Conversion rates of leads to sales

100

90

80

70

60

50

40

30

20

10

0

Appointments and sales per 100 leads

Sales

Leads

Appointments

Yield

Average insurance

agent

1%

Bank

25%

Excellent insurance

agent

11%Sales per week<1 41

Exhibit 4

Steps to a bancassurance start-up

Develop the product

Build distribution*

Generate sales lead

Sell the product

Process the policy

Administer the policy

Develop actuarial assumptions and product specifications

Create product illustrations, needs analyses, and prospectus

Obtain regulatory approval

Select partners (if any) and determine ownership structure and responsibilities

Install infrastructure (technology and staff) if needed

Train sales managers, agents, and bank staff

Monitor ramp-up

Develop or modify mechanism for transforming bank information into sales leads

Solicit leads through multiple means (branch referral, mail/phone, cold calls)

Develop or modify sales processes to maximize close rate

Sell products through appropriate channels (direct via phone, mail, or Internet; face-to-face in branch; face-to-face at home)

Underwrite prospective sales through bank’s or insurer’s underwriting department

Process sales through back office(s) of bank and bancassurance partners

Review service policy (eg, annual updates, policy loans, change in beneficiary, toll-free number)

Manage assets to maximize returns

Monitor feedback on policy performance

Learn

* One-time step

Exhibit 3

Projections for US bancassurance

Bancassurance

* Actual figures; 1996–2010 are estimates

1995* 1996 1997 1998 1999 2000 2010

4.65.2

6.06.6

7.5

8.5

18.5

2.0

4.2

1.20.90.50.20.08

Estimated life market after-tax profits, $ billion

to use their small-town agencies to sell insurance products through anychannel. The US Congress is currently considering a number of bank reformsincluding the presence of banks and insurance companies in the same holdingcompany – a step that the major trade associations embrace, while recog-nizing that many details must still be worked out.

In their natural roles and with their current skills, neither banks nor life insur-ance companies could eƒfectively mount a bancassurance start-up (Exhibit 4).Collaboration is the key to making this new channel work.

Banks bring a variety of capabilities to the table. Most obviously, they ownproprietary databases that can be tapped for middle-market warm leads. Inaddition, they can leverage their name recognition and reputation at bothlocal and regional levels. Strong players also excel at managing multipledistribution channels, cross-selling banking products, and using direct mail.However, most banks lack experience in several areas critical to successfulbancassurance strategies: in particular, developing life products, sellingthrough face-to-face “push” channels, underwriting, and managing long-tailinvestments (Exhibit 5).

Where banks usually fall short, a strong life insurer will excel. Most havesubstantial product and underwriting experience, strong “push” channelcapabilities, and investment management expertise. On the other hand, theytend to lack experience or ability in the areas where banks prevail. They havelittle or no background in managing low-cost distribution channels; theyoƒten lack local and regional name recognition and reputation; and theyseldom possess access to or experience with the middle market.

These skill diƒferences suggest several forms of partnership between banksand life insurers. A bank can either be an arm’s-length provider of warmleads to a life insurer, or take control of bancassurance by moving into distri-bution, selling, or even product development and underwriting. By the sametoken, a life insurer may choose either to take control of bancassurance using multiple banks as sources of warm leads, or to be an arm’s-lengthprovider of product and underwriting expertise to a bank. Alternatively,


BANCASSURANCE

Exhibit 5

Natural roles for partners in a start-up

Develop the product

Build distribution

Generate sales lead

Sell the product

Process the policy

Administer the policy

Learn

Bank

Life insurer

Broker

Natural role Possible role extension

banks and insurers could rely on a third party, such as a broker, to integratetheir divergent skills (Exhibit 6).

Combining these roles produces anumber of models for bancassurancedelivery. Below, we describe the threemost promising:

Leveraged life distribution

Under this model, the life insurancecompany takes the lead in the part-nership, while several banks provideaccess to middle-market leads.

The main protagonist under this scen-ario would be a large life companywith a range of eƒfective distributionchannels (career agents, independent

agents, low-cost middle-market agents). A number of banks would feed itschannels with warm leads. The typical bank participant would be small tomedium-sized (less than $20 billion in assets), with a strong local customerbase but insuƒficient scale to justify a major investment in bancassurancedistribution. The smallest banks of all, with up to five branches, mightsimply be approached by an individual agent who, armed with a proprietarybancassurance process, would work with them to mine their database.

Under the terms of the leveraged life distribution contract, the life insurerwould pay the banks a fee for each lead or ultimate sale. As an additionalincentive to banks, agents mining their middle-market customer base wouldalso take on a portfolio of bank products to cross-sell to the customers thatthey contact. For its part, the life insurer earns profits from underwriting,asset management, and distribution – and benefits by better leveraging itsdistribution system. The current partnerships between Metropolitan Life andGlendale Federal Savings and ITT Hartford and Norwest Corporation (andothers) resemble this model (Exhibit 7).

Leveraged bank distribution

Under leveraged bank distribution, it is the bank that takes the lead in thepartnership, while multiple life insurance companies supply products for itsbancassurance eƒforts.

This model calls for a large bank with a range of eƒfective distributionchannels (branches, ATMs, trust salesforce, mail, phone). The bank mines its

BANCASSURANCE


Exhibit 6

Partnership models

Leveraged life distribution Multiple banks provide prospects

Life salesforce sells product to prospects

Bank/life joint venture Bank and life insurer create low-cost agency

Split agency/ underwriting profits

Broker-driven sales Broker develops and owns proprietary model

Brings multiple banks and life insurers together

Leveraged bank distribution Bank leverages own salesforce/ distribution

Sells multiple life products

Bank

Leader

Arm’s-length (warm leads/

reputation only)

Life insurer

Leader Arm’s-length (product only)

own customer base while playing oƒf multiple life insurers against one anotherto garner the most advantageous products for its channels.

The life companies benefit by earning underwriting profits from the extravolume and investment profits from asset management. The bank capturesdistribution profits and leverages its existing channels more eƒfectively. It mayalso be able to extract some rents from the life insurers.

NationsBank’s and First Union’s direct term insurance operations resemblethis model. Among the life insurers that currently provide products to banksare CNA, Jackson National, First Colony, John Hancock, and a number oflesser-known names.

Bank/life joint venture

The third and final type of partnership brings a large bank with a well-developed customer database together with a large life insurer with strong

BANCASSURANCE


Exhibit 7

Early movers in US bancassurance partnerships

Leveraged life distribution

Leveraged bank distribution

Bank/life joint venture

Glendale Federal Savings

Norwest Corp and others

KeyCorp

First Union

NationsBank

Banc One

Charter One

Metropolitan Life

ITT Hartford

John Hancock, Travelers, Progressive, Nationwide, ITT Hartford, and others

Jackson National, First Colony, AIG, and others

Various

Succession Planning International (subsidiary of Manulife)

Jefferson- Pilot

Direct Quote

MetLife agents targeting middle-market customers sell their full portfolio of individual life products from leased space in the lobby of Glendale branches, with roughly 1 agent for every 2 branches

Partnership model

Banks Life insurers Other players

Description

ITT Hartford created separate sales unit to sell individual life products through banks. Developed tailored variable life products to appeal to bank customers. Works with private banking and trust departments to target affluent customers

Large and expanding KeyCorp salesforce distributes life products from a variety of insurers as well as cross-selling bank products. Bank uses customer information to identify the skills agents need in particular regions

KeyCorp offers term life via a toll-free telephone number, and plans to extend offerings to its customers via direct mail

First Union currently offers term life to its middle-market customers via a toll-free telephone number, direct mailings, and the Internet. In addition, a salesforce of insurance specialists sells a full range of life products

NationsBank currently offers term life to its middle-market customers via a toll-free telephone number and the Internet, and sells whole life through direct mail. Plans to begin selling life products through its brokerage subsidiary

450 Succession agents work part time in selected Banc One branches to sell life policies to affluent customers selected from the bank’s corporate lending, trust, and private banking information. Banc One owns a minority share in Succession

Charter One established a dedicated insurance agency (consisting of sales reps and marketing assistants) to offer J-P universal life products (and eventually term and whole life products)

product and channel experience to develop a powerful new distributionmodel.

In this joint venture, the bank provides warm leads and its reputation andbrand name, while the insurer brings products and underwriting and servicingexpertise. The partners meld their individual excellences to forge a “bestpractice” bancassurance operation with tailored products, tailored distri-bution, a lead generation mechanism, and middle-market sales processes.Although the bank may ultimately take over the distribution channels, thelife insurer will continue to benefit from the joint development throughguaranteed product sales and/or profit sharing.

In this case, the life insurer and bank share equally in the earnings. Andwhatever opportunities they may lose by building a new channel rather thanleveraging their existing ones, they more than make up for by building a newbest-practice channel in which all elements – salesforce, products, and salestechniques – have been designed, built, and tailored to work with the middlemarket. Examples of such joint ventures that have been announced includeUnited Jersey Bank (now merged with Summit Bank) and Western National,Banc One and Manulife, and Charter One and Jeƒferson-Pilot.

BANCASSURANCE


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