Time to jump back into insurance?

Passage of the Gramm-Leach-Bliley Act in 1999 set off a wave of bank acquisitions of local insurance agencies. Some of these worked out. But many banks ended up selling those agencies at a loss because they suffered “post-acquisition-integration-failure,” says Jeffrey Chesky, founder and CEO of Insuritas. The Connecticut-based company enables financial institutions to outsource agency operations.

Part of the reason for the integration failure, says Chesky, is that when a bank bought an agency—the brick and mortar plus the agent—all too often the agent didn’t mesh well with the bankers. Beyond that, the business model of the property and casualty (P&C) business for consumer and small-business clients has gradually, but dramatically, changed.

No selling in the kitchen, thanks

“Selling insurance for households and small businesses,” says Chesky, “is no longer a belly-button to belly-button business.” Like so many products and services today, he says, these customers want it now, they want it in a frictionless environment, and they want it from a trusted source. They still do want access to an agent, says Chesky, “but they don’t want to sit with him in their kitchen. They want to be able to call him, text him, email him—connect with him digitally whenever they have a need.”

For many years the insurance carriers resisted changing their distribution model—with good reason. Local independent agents, after all, were the distribution platform for over 100 years. But over the last five to seven years that model has largely collapsed, says Chesky. Carriers began to state publicly that they needed a new generation of distribution platforms.

Also, banks are beginning to get over earlier disappointments in insurance sales. Some banks have been in the business for decades. And some have very strong local agencies that specialize in certain types of insurance. The opportunity, says Chesky, lies in having a digital agency mainly for consumer and small business P&C lines of business.

“What the banks are figuring out is that insurance is the only financial product that 100% of their customers are going to buy from somebody every year,” says Chesky. “Whereas a fraction of their customers are going to take out a loan or open a new DDA account.

Marrying digital and people

In the model used by Insuritas, the bank owns the agency, but outsources most everything to the Connecticut company. Its employees—the agents—respond to calls, live chat, or emails in the name of the partner bank. The company has a stable of carriers it relies on. Chesky, who founded the company in 1999 under a different name, long before the term “insuretech” was coined, says that it currently has about 180 financial institution clients, 70 of which are banks.

While his company fits under the insuretech banner, Chesky makes a point of distinguishing his business from a pure tech play.

“Fintech and insuretech firms believe the role of an agent is just one quick app away,” he says. “Insurance isn’t like buying a flat-screen TV, however. Insurance customers want to talk with a licensed agent before they hit the buy button.”

Chesky says small business insurance is the most underserved insurance segment in the U.S. today.

“The independent agents that are left can’t afford to call on a company with ten employees and under $10 million in annual sales,” he says. But that’s a key market for almost every bank in the country.

“Just over 60% of the small business owners we quote for business insurance will buy from their bank agency,” says Chesky. “It’s because they trust the bank brand and because the bank already has so much underwriting data about the customer.”

Chesky discusses this synergy in more detail in the following edited excerpt from our interview with him.

Shared interest in data

Banking Exchange: Why is there such a good fit between banking and insurance?

A. Years ago, the lowest hanging insurance sales opportunity for banks was offering quotes to borrowers before they funded a car, mortgage, or business loan. But with the data that the banks have on all of their customers, not just their borrowers, they can deliver that customer data to insurance carriers through “API pipes” [application programming interface] and get instant quotes for all of their customers when they have an insurance need.

So rather than focusing on the 10-15% of customers that may be in repayment on a loan, the bank looks at 100% of its customers.

Because of data and analytics it’s a two-way street. The banks are getting better at extracting data that helps a carrier prepare to price claims risk, and the carriers have made huge advances in taking data about a customer from a bank and delivering pricing back instantly.

When you think about it, bankers are underwriting repayment risk and the carriers are underwriting claims risk—they’re both underwriting character and collateral, so they have a shared interest in the same set of data to do their business. And now these secure pipes we’ve built take data from the bank and deliver it to the carrier.

Banking Exchange: Who chooses the carrier?

A. We do. We describe our business as managing the “insurance aisle” in the bank’s store, so we’re responsible for managing all the products on the shelves of that aisle.

Every bank’s customer base is diversified. Some customers are problematic—“C or D paper” in banking parlance—so you have to have carriers that will underwrite substandard risk, standard risk, or preferred risk and compete for the customer’s business. The customer wants somebody they trust to shop for them—which is the bank. They just don’t want to be meeting somebody over the kitchen table.

Not a lead-gen model

Banking Exchange: The carriers you represent don’t contact the customer, correct?

A. That’s exactly correct and one of the reasons I believe that the banking vertical will end up being one of the largest distributors of P&C insurance in the U.S., just as it has become the largest distributor of mutual funds and annuity products.

The power of banks’ position as distributors is that they don’t have to do lead generation—no cold calling, no direct mail. They don’t have to bug a customer like Geico does with ads eight times a day. That’s because they know whether a customer is paying an insurance bill online, or that the customer will need insurance before they can close on a loan. They also know the general underwriting characteristics of their customers.

We call all this the “instant of interest,” and no business vertical in the world is in a better position to offer insurance to a consumer or to a business than a financial institution.

Banking Exchange: You make it seem like banks are in a much stronger position than they realize—stronger than fintechs—in terms of insurance sales.

A. Banks have spent decades building up trusted relationships with massive addressable markets where they provide critical risk management and life planning capabilities. For a fintech to believe they’re going to build that same massive addressable market and that trusted relationship and replace the bank I think is a fool’s errand—at least over the next few decades.

One of our new clients, Wisconsin’s Associated Bank, has an extraordinarily successful in-market, brick and mortar agency complex. It has agents that handle high-end commercial risks, employee benefits, and life insurance sales related to complex family wealth transfer and tax-mitigation issues—things that aren’t conducive to online or over-the-phone work. But now they will bring up a digital platform to handle the needs of their million households and their thousands of small businesses that don’t want to meet with agents, and for which the cost structure would be prohibitive. So now these customers will be able to buy insurance at night if they choose, and can do it by call, click, or chat.

Claims, the moment of truth

Banking Exchange: Is Insuritas involved in handling policy claims?

Yes, and the moment of truth is around claims. The unique risk about a bank owning an agency is this: If the claim isn’t handled well, the bank doesn’t just lose the policy, it may lose the deposit, the loan, etc. So we say to our carriers, you’ve got to be particularly sensitive to providing a great claims experience for bank customers.

We have a stable of carriers who understand that the downstream exposure for a bank around a claim is significantly different than for a local agency. But we also monitor them. We also take 100% responsibility that the carrier executes flawlessly on the claims experience.

Overall, I believe banks will continue to scale as a formidable distribution platform for insurance because underwriting repayment risk is almost exactly the same as underwriting claims risk, and because they have very substantial brand equity. It’s a natural extension of their business.