After years spent locked in a regulatory battle over whether banks should be allowed to sell insurance, banks and insurance companies are recognizing that bancassurance—a French term for the selling of insurance by banks—is finally becoming a reality. Most players also recognize that the biggest untapped bancassurance opportunity is life insurance, because it is currently distributed through expensive agent salesforces and has yet to be purchased by many potential consumers. The question for both banks 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 meet an important set of consumer needs. Most large retail banks engender a great deal of trust in broad segments of consumers, which they can leverage in selling them life insurance. In addition, a bank’s branch network allows the face-to-face contact that is so important in the sale of life insurance. In France, for example, over half of all life insurance sales are now made through banks. In the rest of Europe, the proportions range from just 5 percent in Sweden to 33 percent in Spain (Exhibit 1).

Though a mere 1 percent of life insurance sales in the United States is currently made through banks, the American market is clearly poised for a wave of bancassurance activity. Here, life insurance is traditionally sold through independent agents. Since this 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 American households are underinsured.

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

Using the bank channel can also boost sales productivity. A strong life insurance agent, for example, might sell only one policy a week; a less effective agent, only one a month. To compensate for this low productivity, life insurers pay 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 premiums thereafter. Naturally, these commissions are for the most part passed on to the consumer in the form of higher premiums.

By successfully mining their customer databases, leveraging their reputation and 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 of insurance leads into sales and have achieved outstanding sales productivity of over four sales per week—more than enough to make bancassurance a highly profitable proposition (Exhibit 2). All told, we believe that the prospects for bancassurance as a channel in the United States are probably in the neighborhood of 20 to 25 percent of the life insurance market, equivalent to $9 to $15 billion in annual revenues and roughly $2 billion in profits by 2000 (Exhibit 3).

The hostile regulatory climate that used to prohibit a mix of banking and insurance is changing. Barnett vs. Nelson (1996) allowed national banks to sell insurance in towns of less than 5,000 people. In addition, a recent Office of the Comptroller of the Currency (OCC) ruling authorized national banks to use their small-town agencies to sell insurance products through any channel. The US Congress is currently considering a number of bank reforms including the presence of banks and insurance companies in the same holding company—a step that the major trade associations embrace, while recognizing that many details must still be worked out.

In their natural roles and with their current skills, neither banks nor life insurance companies could effectively 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 own proprietary databases that can be tapped for middle-market warm leads. In addition, they can leverage their name recognition and reputation at both local and regional levels. Strong players also excel at managing multiple distribution channels, cross-selling banking products, and using direct mail. However, most banks lack experience in several areas critical to successful bancassurance strategies: in particular, developing life products, selling through face-to-face "push" channels, underwriting, and managing long-tail investments (Exhibit 5).

Where banks usually fall short, a strong life insurer will excel. Most have substantial product and underwriting experience, strong "push" channel capabilities, and investment management expertise. On the other hand, they tend to lack experience or ability in the areas where banks prevail. They have little or no background in managing low-cost distribution channels; they often lack local and regional name recognition and reputation; and they seldom possess access to or experience with the middle market.

These skill differences suggest several forms of partnership between banks and life insurers. A bank can either be an arm’s-length provider of warm leads to a life insurer, or take control of bancassurance by moving into distribution, selling, or even product development and underwriting. By the same token, 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-length provider of product and underwriting expertise to a bank. Alternatively, banks and insurers could rely on a third party, such as a broker, to integrate their divergent skills (Exhibit 6). Combining these roles produces a number of models for bancassurance delivery. Below, we describe the three most promising:

Leveraged life distribution

Under this model, the life insurance company takes the lead in the partnership, while several banks provide access to middle-market leads.

The main protagonist under this scenario would be a large life company with a range of effective distribution channels (career agents, independent agents, low-cost middle-market agents). A number of banks would feed its channels with warm leads. The typical bank participant would be small to medium-sized (less than $20 billion in assets), with a strong local customer base but insufficient scale to justify a major investment in bancassurance distribution. The smallest banks of all, with up to five branches, might simply be approached by an individual agent who, armed with a proprietary bancassurance process, would work with them to mine their database.

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

Leveraged bank distribution

Under leveraged bank distribution, it is the bank that takes the lead in the partnership, while multiple life insurance companies supply products for its bancassurance efforts.

This model calls for a large bank with a range of effective distribution channels (branches, ATMs, trust salesforce, mail, phone). The bank mines its own customer base while playing off multiple life insurers against one another to garner the most advantageous products for its channels.

The life companies benefit by earning underwriting profits from the extra volume and investment profits from asset management. The bank captures distribution profits and leverages its existing channels more effectively. It may also be able to extract some rents from the life insurers.

NationsBank’s and First Union’s direct term insurance operations resemble this model. Among the life insurers that currently provide products to banks are CNA, Jackson National, First Colony, John Hancock, and a number of lesser-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 product and channel experience to develop a powerful new distribution model.

In this joint venture, the bank provides warm leads and its reputation and brand name, while the insurer brings products and underwriting and servicing expertise. The partners meld their individual excellences to forge a "best practice" bancassurance operation with tailored products, tailored distribution, a lead generation mechanism, and middle-market sales processes. Although the bank may ultimately take over the distribution channels, the life insurer will continue to benefit from the joint development through guaranteed product sales and/or profit sharing.

In this case, the life insurer and bank share equally in the earnings. And whatever opportunities they may lose by building a new channel rather than leveraging their existing ones, they more than make up for by building a new best-practice channel in which all elements—salesforce, products, and sales techniques—have been designed, built, and tailored to work with the middle market. Examples of such joint ventures that have been announced include United Jersey Bank (now merged with Summit Bank) and Western National, Banc One and Manulife, and Charter One and Jefferson-Pilot.