Cracking the Code

By Elizabeth Judd

While banks are posting some success marketing life insurance to the affluent, penetrating the mass market has proven more elusive.

When Comerica Inc. began exploring selling life insurance through its branch system roughly 10 years ago, the Detroit-based banking company entertained the idea of becoming a mass-market provider of life policies. But it finally scrapped those ambitions after years of effort and today focuses almost exclusively on a completely different customer segment — affluent and business clients concerned with estate planning, tax and business-continuity issues.

Andrea Martin, president of Comerica Insurance Group in Detroit, says the bank learned through "trial and error" that its time was best spent on higher-margin products and the more affluent customers who can afford them. "If we were trying to sell a mountain of $200 term life policies, we'd be spinning our wheels all day long," she says.

The experience at Comerica, an early entrant into the life insurance arena, now is being played out more broadly across the industry as institutions take stock of strategies set in motion after the passage of the Gramm-Leach-Bliley Act of 2000, which made it generally easier for banks to enter the insurance business.

Going into it, banking institutions saw an opportunity to leverage their expensive branch distribution systems. And the cross-sell potential seemed obvious, given that many of the events and transactions that would prompt an individual to consider buying life insurance — everything from applying for a mortgage to opening a retirement account — are conducted within banks, which ideally enjoy a "trusted advisor" status among customers.

However, new entrants quickly were confronted by the challenge of generating the high sales volumes needed to succeed with low-margin products aimed at the mass market. "We used to discuss the idea of the under-insured middle market, and the notion was that banks could fill the gap through their branches and call centers. That never materialized the way it was envisioned," says James Campbell, a senior vice president at Reagan Consulting, Inc., an insurance and financial-services advisor based in Atlanta.

Instead, a number of institutions have found that the so-called "mass affluent" customer segment, or households with a net worth of between $100,000 and $500,000, offers the best opportunity to sell the most profitable insurance products. They have further discovered that it's not the branch distribution system per se that provides a competitive advantage, but rather the access to customer relationships established in the course of other banking activities.

The upshot is that for many banks, the first order of business with life insurance is to strengthen beachheads in the upper end of the market, specifically by cultivating referrals and assembling staff skilled in needs-based sales. "Viewing life insurance from the perspective of market demand, larger institutions have emphasized the mass affluent segment because those are the customers most likely to buy," says Belva Wallace, president of Bank of America Corp.'s insurance services group in Charlotte, N.C.

A further implication is that players should proceed carefully in the mass-market segment for life insurance. Along with targeting the customers most receptive to simpler offers, providers will have to build out sales, marketing and delivery capabilities in order to generate the sharply higher volumes needed to financially justify the exercise.

"Banks and life insurance should be a natural fit in theory, but banks haven't been that good at making the fit work in practice," cautions Michael White, chief executive of Michael White Associates, a Radnor, Penn.-based bank insurance consultant.

Mass-Affluent Market

The overall opportunity for banking institutions in life insurance seems enormous. Nearly half of all Americans and a fourth of U.S. households have no life insurance coverage at all, according to consultant White. The total value of unmet needs was pegged at $5 trillion several years ago, he says, "and the number of uninsured people and households has only grown since then."

Furthermore, at least 80% of insured Americans are dramatically underinsured, according to White. Life insurance consultants recommend a minimum of $230,000 per household, yet the median amount of life insurance coverage for all American adults is just $30,000. Only 16% have total life insurance coverage of $150,000 or more.

The edge for banks is that they have established relationships with throngs of customers who probably have life insurance needs. "It makes sense for banks to sell life insurance because there's less pressure on the customer. You don't have that agent coming into your house," says Joel Boncek, a vice president at New Haven Savings Bank in New Haven, Conn., which has been selling "savings bank life insurance" since 1979. "There's a difference when the prospect already knows and trusts the banker."

The catch, however, is that many customers have limited resources and receptivity. There are countless mass-market customers who at the very least need term life insurance, a form of coverage that provides benefits in the event of death or disability but has no investment value. Yet these prospects often skip insurance in favor of other consumption needs.

And term-life products have sharply lower margins, limiting the payoff from the deployment of relationship-intensive resources to this customer/product nexus. There's also plenty of competition. Simple term-life policies can now be purchased by phone or through popular insurance Web sites such as InsWeb, which offers comparison quotes and tools for do-it-yourselfers.

Little wonder, then, that major institutions have shifted their attention to the mass-affluent customer segment. Consultant Carmen Effron recently helped conduct a study for the American Council of Life Insurers on what constitutes a successful life insurance sales program for banks. She believes that the emerging affluent presents a particularly appealing opportunity, estimating that one in ten American households belongs in this group, which she defines as households having a net worth of $100,000 to $500,000. This market, she maintains, could be well served by banks with targeted life insurance programs.

Effron, who runs her own bank-insurance consulting firm in Westport, Conn., notes that banks "don't have to redefine their processes" for their private client and trust businesses, and they've therefore been most adept at selling into these segments.

Life insurance can meet the complicated needs of upscale customers. For one thing, it provides a mechanism for creating sufficient liquidity to pay estate taxes. And it's often woven into business partnerships: life insurance proceeds can be used to buy out a spouse should one partner die. "There's no other product that creates the instantaneous liquidity of life insurance," says Holton.

Enter the Specialists

One requirement is a nucleus of staff skilled in consultative selling of the more sophisticated life insurance products. The advantage of dedicated salespeople, or specialists, is that they typically have a far better understanding of the range of life insurance products than a branch rep who might have received supplementary training but isn't steeped in insurance. Experience has always mattered in selling life insurance. Dedicated salespeople can add value to the transaction beyond what a customer could get at a branch, on the Internet or at a call center.

Wachovia Corp., for example, has roughly 30 dedicated life insurance professionals serving its wealth management teams, which are stationed throughout its East Coast territory. A single agent may serve two or three cities or a few separate teams within a single city like Charlotte. David Holton, head of Wachovia Insurance Services, which is based in Winston-Salem, N.C., says life insurance revenues at Wachovia have grown by double digits year over year, although he declines to provide specific numbers.

New Haven Savings Bank likewise has shifted toward a dedicated agent approach. The 31-branch thrift, which has roughly $2.4 billion in assets, now has three insurance specialists employed full time, as well as about 45 branch employees who sell life policies when the opportunity arises. Despite their modest numbers, the specialists now account for about 55% of life policy sales at the company, with the branches selling the remaining 45%, Boncek says.

At BofA, financial advisors with specific training in life insurance make the life sales. Of the banking giant's 1,050 financial advisors in the wealth management arena, Wallace says, 95% are licensed to sell life insurance.

Another key ingredient is a robust referral system that keeps the pipeline loaded for the specialists, which means incentives need to be aligned properly. At Wachovia, employees are partially compensated according to their team's ability to cross-sell the full services of the bank. "This encourages everybody to try to solve the full range of client problems in the best way," Holton says.

At Comerica, Martin attributes some of the recent improvement in life sales to a "connectivity" initiative launched in 2002, which rewards employees for cross-selling. She also credits the steady progress made by Comerica's four Michigan life agents in gaining the confidence of their bank peers. "They've slowly converted, one by one, the people that they work with into believers that they've got a valuable product for their banking clients," explains Martin. "The bankers needed to trust the insurance agents."

Keys to the Mass Market

While many institutions necessarily have gravitated toward near-term opportunities in the mass-affluent segment, the goal of penetrating the mass market for life insurance remains important. "Many competitors have reached a similar point of wanting to crack the code" on the mass market, says BofA's Wallace.

In the early going, one mass-market requirement that has become clear is the need for large numbers of licensed bankers who can generate the higher sales volumes needed for the success of lower-margin products.

A 2003 study of bank life insurance sales by Kenneth Kehrer Associates and LIMRA International showed that although licensed bankers individually compare quite poorly with the sales performance of other types of agents, their collective contribution can be quite respectable. Large numbers of bankers can be recruited into this process, and their commission rate is lower than for more highly trained representatives. Moreover, there are indications that licensed bankers can visibly elevate their performance as they gain experience.

The Kehrer-LIMRA study also found that simplifying life insurance products and the process of acquiring them is of great help to mass-market customers and the bank representatives who serve them.

These factors, combined with the need for tailored marketing and broad-but-efficient platform distribution, imply that a separate, complementary strategy will be needed to unlock the mass market for bank life insurance sales. This is one more priority that will have to be woven into the daily lives of branch staff and will blossom only with time.

And while an institution hypothetically could deploy up to five different types of distribution methods concurrently, great care must be taken so that various channels — such as advanced agents, outside agents and brokers, retail agents, licensed bankers and financial consultants — don't conflict with each other and confuse customers.

Putting all of this together, it probably will take longer than many people thought for banks to grow life insurance sales, yet the odds for long-term success are rising as the requirements for specific market segments become clearer.

In the meantime, this particular revenue stream likely won't be a significant factor in overall banking performance. Martin points out that if all of Comerica's insurance sales were combined and the total rounded up, this business line would comprise less than 1% of the bank's revenues for a single year — and this is after a decade of effort. Clearly, banks have their work cut out for them if they are ever to make a growth proposition out of life insurance sales.

Ms. Judd is a freelance writer based in Washington, D.C.

Copyright © 2004 by Banking Strategies, published by BAI.

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