Since 1999, regulatory changes have encouraged financial institutions to surge into the property and casualty insurance business as the "next big thing." Over the past seven years, banks and credit unions have invested billions of dollars in buying, building or starting property and casualty insurance agencies.
The initiatives, however, have generated mixed results, to the shock and disappointment of many senior executives who jumped headfirst into these inviting waters. In fact, several of the early players are already exiting the business, divesting previously acquired agencies. Others-huge industry leaders among them-continue to struggle with alternative delivery models.
What's going on here? Our analysis of insurance referral data indicates these failures are a matter of a structural misalignment between the financial institution and its insurance agency. A few findings include:
* Selling auto, home and business insurance to credit union members is commodity driven.
* Most insurance agencies purchased by credit unions are relationship-driven.
* Credit unions have failed to research and understand the insurance needs of their members.
Can a credit union sell insurance to its member base profitably? Absolutely. But until management addresses the fundamental misalignments between the credit union and the insurance agency, the credit union-owned agency will fail to expand wallet share, fail to grow fee income, fail to drive market share, fail to promote member retention and continue to dilute earnings. Acquiring an insurance agency is simply not capturing the synergies between the credit union's member base and the revenue opportunities.
Several credit unions have tried and failed to leverage their acquired agencies into platforms to cross sell insurance to the credit union's core member base-retail households and small businesses-and the problem is misalignment. The agencies that these credit unions have acquired do not have a platform or business model that is designed to sell insurance to retail households or small commercial accounts, which together typically represent more than 100% of a credit union's membership.
Does this mean the entire pursuit was just one big misadventure for credit unions? Absolutely not. Unlike many credit union products, insurance is a permanent need of the entire membership.
The areas in the credit union that generate the highest number of insurance product referrals correlate with those areas of the credit union that have the highest levels of member contact-branches and the call center. In a recent study ProfitStars conducted examining 5,000 financial institution referrals, 50% did not lead to a quote. It's clear that credit unions can generate a very large number of insurance leads ... 100% of their members use insurance. The greatest challenge for the credit union and its insurance agency lies in managing the type and quality of those leads.
A credit union-owned agency has to be engineered to accommodate the referrals that the credit union makes. In order to drive the opportunity for the high margins and member retention, features of personal lines and small commercial lines insurance, the credit union needs a technology-rich agency platform that operates in a highly efficient environment.
The problem is structural, and credit unions will need to build or outsource an insurance solution for their core membership of retail households and small businesses. Independent agencies across America do not have the operational infrastructure required to profitably support the insurance referrals of a credit union, and they can't or won't build it.
Unless CU management adopts a new paradigm for their insurance business, it is unlikely that they will ever turn it into a profit center. The new paradigm must assume the following:
* The insurance needs of a credit union's member base are commodity products.
* A high percentage of credit union referrals will not be actionable.
Correcting the structural impediments to success means NOT trying to change the CU, the management or the referral filtering process. These activities will only dry up referrals.
Correcting the structural impediments means re-positioning the insurance platform to manage a high volume of referrals/quoting activity.
Once you've understood the structural misalignment plaguing your insurance business, you can actually work on making it better. And the bottom line is that there are powerful opportunities to do so. Credit unions are experts at capturing and analyzing member data-the very data that insurance agencies also need to do their work. Some of these opportunities will require technology developments and data integration that once in place will blow the doors off competitors when it comes to serving the credit union's membership.
The absolute "musts" for the successful CU insurance agency operating environment include:
* Focus referrals on quantity, not quality. Don't try to drive up the "referral to quote index" by learning how to identify and make a "good" referral. It doesn't work.
* Build front-end solutions that benignly dampen referral-processing expenses. Without asking staff to make referral quality judgments, you can build in soft hurdles to your referral processing to benignly screen out those who are nowhere near a purchasing decision.
* Clarify referral-reporting requirements. To improve productivity of the agency, the referral framework must be systematized.
* Develop electronic referral requirements. The only efficient way to manage the high volume of referrals generated is to place them in a highly automated environment.
As industry observers have noted, the rush to financial institution-owned insurance agencies show little sign of abating. The success of these partnerships and acquisitions, however, is by no means certain. Understanding the structural challenges of aligning these two disparate financial offerings-and creating operating environments, systems and processes to overcome them-is the key factor in how profitable these acquisitions are to the credit union that make them.
Jeffrey Chesky is the president of Insurance Agency Outsourcing Group of ProfitStars, a division of Jack Henry & Associates. He can be reached at jchesky<at>profitstars.com.