Raising Aspirations

By John Garabedian and David Taylor

Banks could reap great rewards by applying their own business model to insurance sales. But to get the full benefits, top managers must commit to insurance as a core product.

Imagine doubling customer profitability by creating a new business model. While most U.S. banks don't realize it yet, such opportunity actually exists in the area of life insurance. In fact, overseas players already are capitalizing on it in a big way. By efficiently marketing insurance through established bank distribution channels and simplifying products, leading European "bancassurers" have eliminated between 30% and 50% of typical insurance company distribution and administration costs while delivering greater value to consumers.

Some banking leaders on this side of the Atlantic are slowly awakening to the opportunity. However, a joint study by Bank Administration Institute and Boston Consulting Group finds that most U.S. banks continue to view insurance as an adjunct product, or incremental fee-generating activity.

The time has come to raise aspirations. If domestic banks are to unlock the full profit potential of insurance products, particularly life insurance, they must emulate some of the European bancassurers and set their sights on generating at least 15% to 20% of retail profits from insurance. New levels of commitment, strategic focus and execution will be required; half-hearted efforts will not do. We suggest managers aspire to sell life and/or personal insurance products to a fourth of current customers while raising the profitability of those customer relationships by 50%. Banks should also develop customized strategies for different customer segments and establish partnerships with select insurance companies.

This level of intensity is not appropriate for every bank, of course. Not all institutions possess the necessary resources and market position to become major insurance players. Those that do not can still generate incremental revenues by collaborating with partners to sell insurance to their customers.

But those institutions intent on aggressively growing retail profits certainly must look beyond traditional banking to new markets such as insurance -- banking's weakening profit dynamics and market share erosion leave them no choice. Customer profitability hurdles are becoming increasingly steep. The cost of acquiring new customers continues to rise even as banks lose share in some of their most profitable product segments to nonbank competitors.

The five-month BAI/BCG study, scheduled for publication later this year, explores the potential of both insurance and investments as expansion markets for banks. The analysis reveals that the size of the combined markets, defined by revenue, approximates 150% of the current retail banking market (or between 75% and 90% excluding insurance underwriting). Consider that a household earning between $50,000 and $100,000 generates $9,300 in annual retail revenue dispersed among the three categories: insurance, banking and investments. A bank confining itself to traditional products at best might capture only 39% of that total, or $3,600.

Between insurance and investments, however, the former offers relatively more opportunity for banks. The insurance market is large. Measured by revenue, the life and personal lines of insurance are roughly equal in size to the U.S. retail banking market. Our consumer focus groups found that customers are dissatisfied with the industry's products and services, presenting opportunities for more adroit providers. In addition, low product penetration rates suggest untapped demand. Finally, banks can create economic advantage by bringing down costs.

By contrast, opportunities in investments appear less compelling. While the investments, or money management, market is growing more rapidly than insurance, aggressive and capable nonbank players already occupy most of the high ground. Compared with insurance, the investments arena offers less potential for innovation and cost reduction. Conceptually, then, banks should view insurance as part of an offensive strategy, to enter new markets, while investments can be used defensively, as a necessary means to protect existing wallet share and drive incremental income.

Those banks wishing to pursue high-aspiration insurance strategies would do well to learn from the European bancassurers, who have decades of experience managing insurance subsidiaries. Some of them -- such as Lloyds TSB in the United Kingdom, Credit Agricole in France and Spain's Banco Bilbao Vizcaya -- are delivering outstanding results. These three banks have profitably sold insurance products to more than a fourth of their customers while generating more than a 20% return on sales.

Factors critical to the success of these bancassurers include senior management commitment to bancassurance as a core strategy; a well-trained generalist sales force tightly integrated with the branches; simplified products, which appeal to customers and reduce sales training; and a proper incentive structure for both branch managers and salespeople.

In essence, these banks view insurance as a natural extension of traditional customer relationships. They have simplified things to the point that buying insurance is nearly as easy as opening a checking account. The time is ripe for such an approach to be applied successfully in the U.S. as well.

Looking for Growth

Banks are attracted to insurance and investments for good reason: traditional strategies will not generate acceptable earnings growth. In the five largest bank deals of last year, bank acquirers paid an average of $2,500 per retail customer relationship -- more than double the price paid just five years before. To earn an acceptable return at these prices, banks need to generate from $150 to $250 of additional profits per customer -- a difficult proposition in the best of circumstances.

Meanwhile, bank market share is being whittled away by nonbank competitors, who have been particularly successful in garnering affluent customers. Banks' share of retail financial services account balances fell from 59% to 38% between 1981 and 1996. Another problem: between 60% and 75% of bank retail customers are unprofitable. Banks are using new data mining techniques to strengthen relationships with their most profitable customers, but they face a hornet's nest of issues trying to boost profitability among the lower tiers.

Fortunately, new opportunities are opening up. Regulatory barriers to offering insurance and investment products are gradually disappearing. As the proposed merger of Citicorp and Travelers Group suggests, the trend in financial services is decidedly towards convergence of the banking, insurance and investments industries. All of these industries, essentially, are competing for the same consumer dollars.

Banks possess some critical advantages when entering these new markets. Their branch networks, phone centers and other distribution channels allow unmatched access to current customers. They also possess more data about their customers than do competing nonbanks, enabling them to target prospects and market new products in a highly customized manner. Our research indicates that several under-served customer segments -- notably Generation X and novice female investors -- currently view banks as a logical source for both insurance and investment products.

On the other hand, banks historically have not excelled at entering new businesses. Incursions have mired in sands of fragmented commitment and poor execution. Nor have bank cultures done well at cross-selling new products, a feat that requires adopting different sales and compensation strategies. At most banks, cross-selling is largely incidental and not very profitable.

Untapped Demand

While all these challenges are real, we believe that the insurance market particularly offers banks compelling and realistic opportunities to improve growth and profitability. The life and personal lines of business generate $279 billion in annual revenue, equal to 108% of U.S. retail bank revenue. Our research also suggests a large pool of untapped demand; between 20% and 40% of households, for example, have no life insurance.

We use two approaches to quantify bank opportunities in this area. The first assumes the largest banks sell life insurance to 20% of their customers in specific states. Hypothetically, this places these banks among the top life insurers in those markets, generating between $300 million and $700 million in revenue in the largest states. We believe 20% is a realistic customer penetration estimate, given the even higher levels of customer reception realized in Europe and the early successes of a few North American institutions such as Chase Manhattan Corp. and Canadian Imperial Bank of Commerce.

The second approach assumes banks win 20% of the available market of consumers actively seeking to purchase insurance or investment products each year for five years. Under this scenario, banks capture between 10% and 20% of each insurance and investments market in a five-year period. This would generate substantial banking industry revenue: $23 billion in life insurance, $18 billion of auto insurance and $17 billion in mutual fund sales.

To understand the relative economic attractiveness of the insurance and investment markets, we looked at historical industry returns. Banking, insurance and investments have offered somewhat comparable returns on equity over the last five years: 14% for banking and life insurance; 12.5% for property/casualty insurance; and 18% for the more volatile brokerage business. These top-level metrics, however, mask the full opportunity for banks.

Banks potentially can double life insurance customer profitability by taking advantage of their comparatively lower customer acquisition and compensation costs and using well-developed branch networks. For example, an effective referral process can drive bank salesperson productivity to between three and five policies a week -- compared with one per week for the average life insurance agent. Banks in Europe have eliminated between 30% and 50% of typical insurance company distribution and administration costs while delivering greater value to consumers. Much as the direct auto insurance model has begun to alter economics in that market, banks are in a position to fundamentally alter the life insurance market.

The Bancassurance Model

Discouraged by regulatory restrictions, U.S. banks have viewed insurance primarily as a supplemental feature to existing products, such as credit insurance. They currently control less than 1% of the life and property/casualty markets.

The experience of European bancassurers strongly suggests more can be done domestically. While many dismiss bancassurance success stories in Europe on the grounds that market differences render them inapplicable to the U.S., our view is that the differences have less to do with the environment than many suspect. Europe does differ from North America in terms of regulation, bank sector concentration and the consumer view of banks, but most lessons are transferable. Feedback from top executives at some of Europe's most successful banks makes it clear that strategy and execution are the key drivers of success.

The bancassurance concept originated in the mid-1980s and involves the sale of insurance and investments products as a fully integrated addition to the core banking product line. Among the banks we interviewed, bancassurance generates between 20% and 30% of retail banking profits and delivers between a 20% and 30% return on sales. What is more, several banks realized this success within relatively short time frames of five to eight years.

What empowers the concept is senior management commitment to bancassurance as a core strategy. Strategists must not view insurance as just an add-on product. Rather, they need to transform their organization's culture to sell insurance and make sure that adequate shelf space is provided for that product in the retail delivery system.

Lloyds TSB, Credit Agricole and Banco Bilbao Vizcaya each exemplify some of the strategies and tactics required for a successful bancassurance operation. Lloyds TSB, for example, experimented with several different approaches to the market before achieving the current level of success.

To reiterate, the fundamental ingredient in the Lloyds TSB formula was full support from top management for the bank's transformation into a bancassurer. The CEO clearly communicated to all employees his commitment to insurance and investments as core businesses. Necessary resources were provided to build those businesses, including development of a well-trained sales force that was then fully integrated with the branch network. This integration allows the bank to leverage sales leads from the branch platform.

Lloyds TSB experimented with sales force configurations and finally took a bifurcated approach, adopting the generalist model for the mass market while retaining specialists for the affluent market. This approach offers the lowest cost base, since it uses the existing distribution network. It also generates the highest productivity, fostering a smooth sales process that leveraged branch customer relationships.

Bancassurers also benefit from simplified products that can be easily understood by consumers and their own salespeople. Banco Bilbao Vizcaya, for example, offers a term life policy with simple premium payments and a clear contract that is designed to be sold, issued and signed at the point of sale within 15 minutes. This appeals to customers and shortens sales training cycles.

Banco Bilbao Vizcaya uses its own brand and offers a limited product menu. This stands in distinct contrast to U.S. banks, which tend to co-brand with several insurance providers and offer a confusing array of choices. The Spanish bank also has an appropriate incentive structure for branch managers and salespeople. The latter receive salary plus a bonus equal to one to two months' salary. This provides necessary incentives while managing costs more effectively than a typical agent force.

Finally, successful bancassurers have transformed the economics of the business. Credit Agricole, the second largest life insurer in France, with $11 billion of premiums in force, employs only 170 people in its insurance subsidiary. Credit Agricole is able to limit overhead by harnessing the bank's existing resources and capabilities.

U.S. banks still face regulatory restrictions not encountered in Europe. More explanative of their relative lack of success, however, is tentative commitment and poor execution. Few U.S. banks have gone beyond the "rent the list" approach, which consists of providing customer names to a partner and realizing commission revenue on sales executed by the partner. This strategy does not build a business; it simply generates modest fee income with limited upside -- and creates brand risk for the bank.

Building a major insurance business, as the European bancassurers demonstrate, takes time and effort. Managers must set high aspirations and then develop customized strategies for different customer segments. Partnering with select insurance companies can help change the economics of the business. And successful managers will focus on execution at each stage, from product design to customer fulfillment. Ultimately, banks must go beyond getting each element right; they must ensure that all the pieces fit together to form an integrated system.

Mr. Garabedian is a vice president with Boston Consulting Group and Mr. Taylor is an executive vice president at BAI. Also contributing to the article were Bob Morette, Mike Marcus and John LeMay, respectively vice president, vice president and manager at Boston Consulting Group.

Copyright © 2003 by Banking Strategies, published by BAI.

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