Bankers need an incentive to make insurance referrals, but the referrals aren’t always welcome. Four bankers share their experiences in overcoming such roadblocks.
By Steve Cocheo, executive editor,
Four banks that took different paths to success share what they learned along the way
2008 ABA NATIONAL CONFERENCE FOR COMMUNITY BANKERS REPORT
H. McCall Wilson, Jr., of The Bank of Fayette County, characterizes the gap between bankers and insurance people this way:
“Agents eat what they kill. Bankers want to eat somebody else’s kill.”When Wilson’s company went into the insurance business a few years back, it found that successfully integrating banking and insurance often depended on reconciling two very different ways of looking at compensation. But there was also a very different pair of mindsets arising from the two views.
Culturally, bankers still think mainly in terms of salary, while insurance agents think in terms of commissions. So, while referrals from one side of the house to the other are the ideal, insurance agents hate splitting their “kill” with other players. Yet the bankers need an incentive to get interested in referrals from their side.
But referrals aren’t always welcome, either, something that the Moscow, Tenn.-based institution’s bankers had to get used to. In February, Wilson explained during a session at the ABA National Conference for Community Bankers that bankers, attempting to make good on the synergistic hopes of joining banking and insurance under one organization, would dutifully make referrals to the insurance shop.
Sometimes, nothing would happen.
“Customers would get upset,” said Wilson, president and CEO of the bank. “They’d complain to the bankers that, ‘Your insurance agent never phoned me’.”
Time and again, when a banker tracked down the matter, the insurance agent involved would respond, quite bluntly, along these lines:
“I knew it was bad business, and I don’t have the time for that. I never called them back because I get paid for bringing in business.”
With community banks’ stock in trade being high customer service, a retort like that essentially says, “Don’t bug me with junk.” The bankers began to be reluctant to send referrals to the agent, until a better understanding developed.
But another panelist illustrated how the challenge of integrating two financial services cultures that long existed apart can be tricky in the other direction, as well.
Tom Kiral, executive vice-president at S&T Bank, and president of S&T Insurance Group, LLC, said that a prime focus for his organization, as it moved into insurance, was the commercial side, convincing business customers of the bank to entertain the idea of obtaining insurance services from the same company.
However, Kiral said that S&T found that commercial lenders often viewed their relationships with their borrowers as proprietary, and tended to keep them very close to the vest.
“‘It’s my customer’,” said Kiral, describing the typical lender’s attitude, “‘and you’d better do a good enough job at it so you don’t tarnish the relationship’.”
Turning this attitude into one of at least basic cooperation was a challenge, Kiral admitted, and meant getting pretty hardnosed with the insurance agents.
“We charge the producers from the first sale to gain the confidence of the referring party,” said Kiral, and this internal “sale,” made in the course of handling the external, actual sale, is taken seriously. “If they [the producers] don’t do it,” he said, “I question whether they are doing the right thing for a living.”
But Kiral added that it is important for bankers referring commercial accounts for possible insurance sales to understand that an agent truly has to see two things in a lead: potential and payoff.
“We [agents] work on stuff we have a chance to write,” Kiral explained. “The submission process for a commercial policy is labor intensive and expensive.”
Typical commercial policies are not cookie-cutter affairs, with much customizing and tailor-fitting involved. Kiral said that good agents try to avoid putting “square pegs in round holes.” Besides not wasting time and effort, he said, the intent is to avoid a situation that “is not a good experience for the customer.”
One point in common among all panelists was the belief that turning bankers into insurance sales people isn’t the best strategy. It is better to bring in experienced people who know insurance.
Barry Seigerman, president of Smithtown Insurance Agents and Brokers, Inc., East Setauket, N.Y., which is part of Smithtown Bancorp, capsulized this by way of a quip:
“What’s the difference between a good insurance broker and a great insurance broker? A good insurance broker is someone who knows the coverage. A great insurance broker is someone who knows the adjuster.”
Wilson, Kiral, and Seigerman were joined by Paul H. Cornell, deputy CEO for Spirit Bank, Bristow, Okla., and working out of the bank’s Tulsa office. Each presented their take on getting into the insurance business. The session was organized by ABA’s affiliate, the American Bankers Association Insurance Association, “ABIA,” headed by veteran ABA lobbyist Kenneth Clayton, ABIA managing director.
Starting from scratch in “P&C”
Insurance has been a learning experience for The Bank of Fayette County, $220 million-assets, which started its operation in 2004 by acquiring an agency. Fayette County Insurance is structured as a division of the bank.
Wilson characterized the bank’s experience as a series of lessons learned, with results about at breakeven if all costs are allocated to the insurance operation.
One lesson came in the area of compensation. Wilson said that at one point the bank experimented by bringing an agent into a bank-style compensation scheme. This attempt at integrating cultures failed, dismally, and he warned other bankers against this “dangerous” idea.
The agent stopped selling. Why? “Unfortunately, he was pretty happy with the salary and he lost his incentive to sell,” said Wilson. The bank backpedaled on that notion once this happened.
Another lesson came in the area of structure. The bank’s agency is an independent one in such areas as life and health insurance, but is a captive agency in the personal property and casualty business. The bank lost a key employee in the personal property and casualty operation and this cost it considerable momentum and profitability.
“It takes a long time to develop a revenue stream off of personal P&C,” said Wilson. Even with hiring an experienced P&C agent to replace the one who left, starting a book of business from scratch takes time.
In addition, Wilson said a captive operation has severe drawbacks, by its nature. When a bank makes an effort to grow a captive operation—and the bank has grown a nice piece of business in P&C, Wilson said—it is growing an asset that ultimately belongs to someone else—the carrier that the captive really belongs to.
“You can’t sell it,” said Wilson, “and the agent belongs to someone else.”
Wilson walked the audience through other lines, to share what his bank has learned. While the operation has produced revenue, he’d like to improve from the present $300,000 annual figure.
Take life insurance. “Life,” said Wilson, “is quick and you make a lot of money, if you work hard.” The bank offers both term and permanent life.
Consider group health. Wilson said this produces a decent revenue stream, one that “lasts forever, as long as you service the customers.”
Investment products, on the other hand, aren’t so good. “It’s a risky business, it requires a lot of certifications, and you have to do a lot of work for little commission,” Wilson said. Among such products offered by the bank’s agency are mutual funds, annuities, and various types of retirement accounts.
And personal P&C, besides the points made earlier, “is a lot of work for little commission, too,” he said. The bank offers homeowners coverage and also farm policies covering both weekend and full-time farmers, for dwellings, barns, equipment, livestock, farm products, and liability.
Wilson said his bank has found that synergy has to be exploited carefully. Tellers can pick up many kinds of leads that can turn into insurance business, for instance, but he said that tellers are expected, today, to have their radar up for many types of business opportunities. This is a great deal to put on their shoulders, and the bank has struggled to find the right balance.
Today, to encourage referrals by staff, the bank awards flat-rate commissions in the form of gift cards.
In light of the bank’s experience thus far, the bank is shopping now, not for an acquisition, but for a partnership with a large commercial insurance agency.
“We think we’ll have more success with that,” Wilson said. He said his bank is committed to making insurance work, but noted that some institutions, after his bank’s mixed beginnings, might have decided to exit insurance. He warned listeners to build in exit strategies from the start, such that a decision to bail out would be smooth. In his own bank’s case, many contracts and commitments have been made, reducing the bank’s flexibility if a strategic shift should ever be desired.
Spirit was willing, but agency was small
Spirit Bankcorp, Inc., Bristow, Okla., moved into insurance early, after passage of the Gramm-Leach-Bliley Act in 1999, in hopes of attaining diversification, complementing its community bank product lineup, and adding more profits. So the now $1.1 billion-assets holding company, which serves both rural and metro markets in its state, acquired a small insurance agency that had annual revenues of $250,000.
“It was not the agency to buy,” said speaker Paul Cornell, president of the holding company as well. There were ownership complications that made it less than an ideal choice, for instance. Nevertheless, said Cornell, “it was basically a vehicle to get started with.”
One of the biggest hurdles to overcome was the initial hope that “if you build it, they will come,” according to Cornell. Getting the bank’s lenders to cooperate took time, for instance. And the expectation that the bank’s large mortgage volume would instantly translate into lots of homeowners and title insurance policies turned out to be unrealistic. Customers and others involved in the mortgage chain had many established relationships that would not be overcome overnight.
Cornell advised listeners to avoid over-promising early results to the bank’s board. “Be patient, and build that expectation with the board,” he suggested.
Since then, the company’s insurance efforts have evolved, and have come together, bit by it. Cornell said that the operation—an independent agency—today enjoys a $1.8 million commission stream and a 30% net profit margin. In financials shared by Cornell, revenues for P&C, employee benefits, and advanced financial planning have continued to rise over the 2005-2008 period.
The agency was acquired through a holding company subsidiary which, up until that point, had existed for the sake of sharing credit life insurance commissions. Today, the bank’s operation offers both personal lines as well as commercial lines.
The company took on staff with insurance experience, in hopes of avoiding other banks’ trouble that management has seen, where a bank employee designated to take on insurance would flounder about. However, over time, Cornell said, “we realized that we were a small fish. What worked for us was finding a partner.”
The partner that the bank found was part of a large agency—actually, a cluster of 13 agencies that, combined, form one of the largest independent agencies in the U.S. Initially, the bank’s operation essentially funneled sales to the back office of the larger partner group. The bank’s operation benefited from working with a seasoned operation that offered expertise, sales knowledge, infrastructure, and other factors that the bank lacked.
“This gave us the chance to be part of something big with a lot of buying power,” said Cornell. This partnership has evolved a great deal over time. For instance, the best approach to personal P&C turned out to be referring business generated in the bank’s operation to the partner agency, rather than writing the coverage directly. This enables the bank’s own insurance staff to concentrate on more profitable lines that benefit from more direct involvement. Personal lines of insurance have a comparatively lower profit margin, Cornell said, and it made sense to adopt a call-center approach for that aspect of the insurance operation. Leads for those aspects of the bank’s involvement come from the company’s mortgage operation and direct marketing.
“The bottom line is that it’s a partnership, where we have contract that gives them the ability to share in revenue for the amount of business they are servicing and for access to products they are providing,” said Cornell.
As the bank built its own back shop for insurance, it was able to attract a seasoned agency chief, and he in turn was able to draw experienced sales people. As the bank beefed up its own operation, the details of the partnership were renegotiated. The partner no longer needed to provide the same level of support that the bank had originally required. As the bank has built up, it has been able to convince insurance professionals that they can do well in the Spirit environment.
Commercial lines are one of the strengths of the bank operation, according to Cornell, because of the cooperation developed with the bank’s commercial lenders and business development officers. These bankers also provide strong leads for the employee benefits and planning product lines.
How was this cooperation achieved? Cornell said the bank found it best to let insurance staff develop its own book first.
“You can’t take someone, no matter how good they are and what their track record is, and say, ‘Here’s the superstar, send him all your customers’,” said Cornell. “That doesn’t work real well” with the bankers.
Instead, Cornell said, as the insurance staff succeeded, and began referring some of their clients over to the banking side, the banking officers began to see opportunities for cross-pollination.
Living together before marriage
Barry Seigerman started his insurance agency from scratch, with his wife, in 1975, and has 43 years experience in insurance sales. Understandably, he has a suspicion about hopes for instant success for banks in the insurance business.
Indeed, Seigerman said he never would have entertained the idea of selling his agency, but for the fact that he has sat on the Smithtown Bancorp, Inc., board since 1993. (The $1.1 billion-assets holding company is parent of The Bank of Smithtown, Hauppauge, N.Y., headed by ABA Chairman Brad Rock.)
Even so, when the company decided to try insurance, Seigerman didn’t just sell. His agency, Seigerman-Mulvey Co., Inc., joint ventured with the banking firm for three years, “to see if it made sense to get married or not.” The joint venture entity sold insurance products and services and financial investment services to bank employees and customers.
Results were encouraging enough for the “wedding” to be announced in mid-2004 and to take place in August the same year, the agency becoming Smithtown Insurance Agents and Brokers, Inc. The deal was structured as an “earn out.” That is, the holding company paid the principals $1 million at closing and agreed to pay them 120% of the agency’s net income for the first three years after acquisition. Since the acquisition, agency revenues and deposit service-charge income have been the bank’s two largest sources of noninterest income.
Seigerman warned bankers interested in expanding into insurance against expecting his business to behave like lending did (until recently), with volume rising from quarter to quarter. He says that while insurance sales expense is pretty much a constant, insurance sales volume can fluctuate from month to month, and the reasons for a shift can sometimes defy identification. This up and down doesn’t please stock analysts—Smithtown Bancorp is publicly traded—but it is a fact of life in the business. Or, as he said he tells Brad Rock, “I don’t know why, sport. Tell me, why did kamikaze pilots wear crash helmets?”
This can make projections of volume and flow difficult to project from previous business levels, according to Seigerman, something that goes against some bankers’ instincts. At one point he showed the audience a pie chart of the agency’s sources of income, by type of insurance. Commercial lines accounted for nearly 45% in 2006, with personal lines coming in second at 20%.
Seigerman explained that 2006 was a banner year for commercial insurance, though “we don’t consider personal lines a stepchild at all.” Also, customer payment patterns differ from year to year.
Seigerman gave some tips for starting.
One is to understand where money is made in insurance. “Commissions are the main source of income, but not the only one,” said Seigerman. There are various fees, for instance, and more and more work on the commercial lines involves risk-management consulting, rather than sales. In a related vein, Seigerman pointed out that the ideal strategy for building agency earnings is to maintain existing customers and to build new ones. He compared this to building a pyramid from the top down, such that the base of the agency’s business grows wider and wider. Because commissions are billed annually, the wider the base, the more revenues.
“That’s unique to insurance,” he said.
Another recommendation is to find the right way to enter the business. There are different ways to set up an insurance operation and Seigerman recommends setting up some type of joint venture rather than jumping in with both feet. This helps the bank test both it’s potential partner/acquisition and the way it is entering the business.
One last warning Seigerman had for bankers was not to expect more than 15% of an agency’s growth to come from bank referrals, with the remainder coming from organic growth. Right now his organization has been seeing a 12% rate. “My expectation is that we will never see 40%,” he said.
Keeping expectations real
Indeed, if there was a theme for the entire discussion, it was that banks attracted to insurance must be realistic. S&T’s Thomas Kiral said that bankers should think of bank referrals as a supplement to an agency’s internal growth, though the numbers he shared were much higher than Seigerman’s. And Kiral considers his organization rather successful at exploiting synergies, mind you. The key to it, he said, is constant communication between the banking and insurance operations.
But volumes do tend to swing. Kiral presented the following results, the amount of business referred by the bank to the agency, expressed as a percentage of written new business: 2003, 18%; 2004, 23%; 2005, 54%; 2006, 35%; and 2007, 47%.
Kiral is an insurance veteran and spent many years in the field prior to coming to his bank and its agency in mid-2001. He had spent 16 years as a vice-president and producer for a large independent agency.
S&T Bancorp, $3.4 billion-assets and based in Indiana, Pa., acquired Evergreen Insurance Associates, Inc., a multi-line insurance agency, in 2002. Kiral said that the agency, which had specialized in commercial lines property and casualty policies made additional agency acquisitions in 2005 and 2006, using Evergreen as the “platform agency” for S&T Insurance Group, LLC, the bank subsidiary. The acquisitions were folded into Evergreen.
Kiral believes that granting an insurance agency subsidiary broad but balanced autonomy is very important.
“Always recognize,” he warned, “that the agency is first and foremost a sales organization.” Producers are expected to come up with plans, each year, for increasing their business, with each being responsible for a piece of the overall agency sales goal.
Kiral reports directly to the president of the bank and the holding company and makes his own periodic updates to the board of directors.
Taking advantage of the bank connection, for Kiral, means having producers spend a good deal of time with lenders, to see which customers really represent decent opportunities. In 2007 the agency achieved a ratio of 60% of quotes made turning into sold business—the “hit ratio”—and insurance producers clearly want to keep their own ratios up.
“We can’t be everything to everybody,” said Kiral. BJ