"PERSPECTIVE ON the US BANK INSURANCE MARKET and FUTURE OPPORTUNITIES" Summary

Transcription

1 "PERSPECTIVE ON the US BANK INSURANCE MARKET and FUTURE OPPORTUNITIES" Maria Thomson USA Summary For a few decades, the availability of life and health insurance coverage to the average American has been on the decline. There has been a steady shift of offerings to the most affluent segments of American society, including large companies, with a corresponding withdrawal from the rest of the market. This paper documents this trend, the reasons for it, and the corresponding effect it has had on America s traditional agency distribution systems. The most significant exception to the above trend has been with annuity products. There has been tremendous growth in deferred annuities (essentially a tax-preferred investment product) in the last 2 decades, largely driven by the success in selling them in banks and wirehouses. Many insurers also have their own mutual fund companies or are part of mutual fund companies. The success of these products in the mass market has led to a trend for insurers to emphasize investment products: mutual funds, deferred annuities and single premium life products (which are sold more as tax-preferred investments than as insurance coverage). All of these products sell very well in banks, and have led to a large expansion of bank investment/insurance sales operations. Banks are now embracing both personal and commercial casualty products. They are acquiring casualty agencies at a rapid pace, and after annuities, casualty products are the most widely sold insurance products in banks. This paper analyzes bank investment/insurance sales operations as they exist in America today, and the reason they have developed in the way they have. It concludes with a discussion of future developments that might be expected.

2 Perspectiva en el mercado EEUU de Bancaseguros Maria Thomson USA Resumen Por varias décadas, la disponibilidad de seguros de vida y salud al americano promedio ha venido disminuyendo. Ha habido un cambio continuo de ofertas a los segmentos más pudientes de la sociedad, incluyendo compañías grandes, con una disminución correspondiente al resto del mercado. Este articulo documenta esta tendencia, los razones de esto, y el efecto correspondiente en los sistemas tradicionales de distribución de seguros. Un excepcion más significantes a esta tendencia han sido rentas privadas. Ha habido un crecimiento tremendo en rentas privadas diferidas (un producto de inversión con impuestos diferidos) en las ultimas dos décadas, en parte a causa del éxito de los bancos han tenido vendiéndolas. Muchas aseguradoras tienen su propia compañía de fondos mutuos o son parte de compañías de fondos mutuos. El éxito de estos tipos de productos en el mercado ha empezado una tendencia de las aseguradoras de enfatizar los productos de inversión: fondos mutuos, rentas privadas diferidas, y vida de prima única (cuales son vendidos más como inversiones impuesto - preferido que como cobertura de seguro de vida). Se venden todos estos productos con mucho éxito en bancos, y han llevado a una gran expansión de operaciones de bancaseguros. Los bancos están también entrando en ramos de daños, ambos individual y comercial. Los bancos están adquiriendo agencias rápidamente, y después de rentas, los productos de daños son los productos más exitosos de bancaseguros. Este articulo analiza las operaciones de bancaseguros como existen en EEUU hoy, y los razones que han llevado a su desarrollado. Concluye con una discusión de lo que podemos esperar en el futuro. 2

3 "PERSPECTIVE ON the US BANK INSURANCE MARKET and FUTURE OPPORTUNITIES" Maria Thomson USA Background on the US Market Life & Health Insurance Sales Focused on the Affluent In the United States of America, unlike many other parts of the world, life and health insurance has become targeted primarily to the large corporate and affluent market. This is mostly due to insurer s highly expensive sales agencies. Insurance agents personally seek prospects for their products and make a face-to-face sales pitch. Partly due to the difficulty in finding good prospects, sales compensation is very high, and agency management is expensive. An additional factor is the underwriting process. This has become very elaborate and time consuming, so it typically takes 4 6 weeks to get individual policies issued. There is a very high cost attendant to this. Insurers have utilized more limited underwriting approaches for sales of products to the mid-market, but the resulting claims cost is so high that the premium rates are not highly attractive on such products. As a result of these factors, the production of underwritten insurance policies has become so expensive that it is only profitable for insurers to sell large individual policies. On the group side, large corporations are favored because insurers can get a good spread of risks on coverage that is usually provided to all employees without health screening. Investment Products Become Popular with Most Americans A major mutual fund company, Fidelity Investments, successfully pioneered sales of mutual funds to average people in the 1980s. They accomplished this by running newspaper ads that asked people to call to place their order. Soon after, it was discovered that deferred annuities (essentially a tax sheltered savings product) sold well in banks and stock brokerage firms. Banks began adding mutual funds, and sometimes even stock brokerage capabilities, to their sales offerings thus providing them with an investment sales operation. Today, most bank insurance is annuities sold through these investment operations. The rapid expansion of annuity sales in banks and brokerage firms was largely made possible by intermediaries called third party marketers (TPMs). These firms introduced banks and brokers to annuities, set up their insurance agencies, and provided them with sales people or trained their sales people. The TPMs also contracted with insurers for the portfolio of products that their clients sold. In the 80s, insurers had no distribution agreements with other financial institutions, and did not know how to work with them. Conversely, banks & brokers did not know anything about the sale of insurance company products. Thus, TPMs were instrumental to the rapid growth of annuities through these channels. Before the 1980s, deferred annuities weren t a very significant product line for most insurers. The success banks and stockbrokers were enjoying with annuity sales led insurance agents to 3

4 develop an interest in the product line. They began selling annuities aggressively also, so that today insurers produce more premium from annuity sales than life sales. In summary, today just 20 conglomerates dominate the life insurance industry writing over 80% of the premium 1. These top insurance conglomerates all sell a great deal of investment type products, such as mutual funds (they all own mutual fund companies), deferred annuities, and single premium variable life. The protection products that they continue to sell are all geared to the affluent those with lots of assets or high income the top 10% of the population. Banks Profit Margins Being Trimmed On the banking side, the growth of banks through mergers, and offers of bank products and services on the internet, has led to increased competition across state lines. This in turn has led to diminishing profit margins. Thus, banks have increasingly felt the need to supplement their traditional income sources with the fees that can be generated from the sales of investment and insurance products. The US Bank Insurance Situation Today Products Being Sold 78% of banks have sales operations, all of which include annuities. Only 48% of these also include sales of other insurance products 2. The table below shows the premiums being generated by banks, split by product. In the last few years banks have been buying casualty agencies at a rapid rate, leading to the sudden growth in casualty premium production shown below. While 95% of the banks that sell insurance protection products are offering life or health insurance, they have not been very effective in this endeavor, as very little premium is being generated from these efforts. Bank Premiums By Product (in billions) The Sales Operations Product % Change Annuities $18.8 $ Credit Commercial Casualty Personal Casualty Life/Health Other NA.3 NA Total $27.8 $ Source: 2000 Association of Banks-In-Insurance Study, p.2 Insurance and investment sales operations are usually not well integrated with other bank operations. In other words, the sales specialists do not generally promote the bank s traditional products. Some banks have also trained and licensed their customer service representatives to sell insurance products. Customers are made aware of the availability of the products being sold 4

5 in a variety of ways, such as: referrals by bank personnel, advertisements included in bank statements, direct contacts from the sales personnel. 2/3 of banks with sales operations do provide their bankers with incentives to provide referrals to their sales areas 3. Very few banks are using a financial planning, or needs-analysis approach to selling as a device for having a single sales person offer the full range of the bank s products to the customer. Many banks have multiple sales operation that do not work well together, such as: investment sales, insurance sales and customer service representatives that sell insurance. Initially, most of bank s sales operations were staffed by personnel supplied by or recruited by the TPMs. Later, banks bought existing sales operations or developed their own from the ground up. Smaller banks are now setting up investment sales operations, and they are frequently using TPMs as they cannot afford to establish their own operations, nor do they have the expertise to do so. Legal Barriers Have Faded Until recently, many states forbade or severely restricted the sale of insurance by banks. Now, all states permit it. Additionally, with the passage of the Gramm-Leach-Bliley Act by the federal government, which took effect in the year 2000, insurance companies and banks can now be owned by the same holding company. The legal impediments to bank insurance that remain are surmountable. Future Opportunities The sales of casualty products are growing rapidly because there is a lot of demand for these products, and banks have learned that they can leverage their relationships with their loan customers to make these sales. Demand is high for personal lines products because most consumers are required by law to have auto insurance if they drive, and are required by lenders to have homeowners insurance before they are given a mortgage. On the commercial side, all employers must have coverage for workers injuries, and most have property coverage and general liability as well. With just 7.5% of their sales in these products, banks have plenty of room for growth in this area. Both banks and life insurers also have a great deal of interest in life & health products for small business. There aren t many insurance agents dedicated to addressing small business insurance needs. Generally, small businesses get their coverage piecemeal, through various associations they belong to. Thus, there is a market opportunity. Many banks, particularly regionals, find their most profitable customers to be small businesses. They also develop personal relationships with their small business customers. They can capitalize on these relationships to provide their small business customers additional products and services. On the carrier side, many insurers have small business areas that they d like to expand upon. But, growth is severely impeded by distribution limitations. The access banks can provide is much coveted. As a result of these factors, I expect this to be a growth area. The opportunities in individual life and health insurance will be most difficult for US insurers to pursue, since they are not geared for quick and cheap production of underwritten products, nor do they have a good selection of streamlined products priced for the mid-market. New, rapid underwriting tools are being explored, with the development of databases that insurers can access via the internet being the most promising. These databases are: MIB (Medical Information Bureau, which insurers use to share insurance application information), MVR (Motor Vehicle 5

6 Records), credit history, and prescription medication history (becoming available later this year). A number of software tools, designed to make the sales person s job easier, are also arriving on the market. Some of the features being offered are: Electronic application Electronic underwriting questionnaire and automated expert underwriting Electronic access to underwriting databases Electronic appointment facility for paramedical exam Simplified needs-analysis software for the mid-market customer. The sale of life and health insurance products to the mid-market may present a more immediate opportunity for foreign bank insurance companies. Many countries have far more advanced and integrated bank insurance companies than the US, and may thus be in a better position to rapidly develop productive bank life insurance operations in the US than the native firms. 1 B. Dennis Catanzano, 2VP of Lincoln Life and former LIMRA consultant at the Session on Future of Agency Distribution at the SOA s June 2000 Meeting 2 Study of Leading Banks-In-Insurance, October 2000, published by The Association of Banks-In-Insurance, p.1 3 ibid., p.19 6