Did you know that federally insured credit unions issued almost$500 billion in total loan volume during 2005? Of this total, firstmortgage and auto loans accounted for the large majority. This factalone exemplifies the tremendous opportunity for credit unions tocross-sell insurance products to their members.

You might be asking yourself, “How can loan volume generateinsurance income and other benefits for members?” The answer issimple, all home and auto lenders require borrowers to obtainadequate insurance coverage. This fact creates a uniquepoint-of-sale opportunity for credit unions. Insurance is arelationship-oriented industry and credit unions are in therelationship business.

Furthermore, the client database developed from the lendingprocess provides credit unions with powerful marketing data andadditional opportunities to provide their members with specializedinsurance products. Proper data mining of insurance policyexpiration dates and insurance carriers can provide credit unionswith invaluable marketing knowledge and the ability to isolatemembers for whom they can offer better insurance coverage at lowerrates.

We estimate that for credit unions with 100,000 members or more,a successful insurance venture should generate at least $1.5million in high-margin commission income annually. Thus, theinsurance operation is not only providing credit union members withadditional benefits, but also driving additional revenue andprofits for the organization.

Regional banks noticed this trend back in 1999. Since then,banks have aggressively and successfully entered the insurancedistribution arena by acquiring insurance brokerages thatspecialize in the distribution of property, casualty, and healthinsurance. From 1999 to 2004, there were approximately 1,300publicly announced insurance brokerage transactions. Banks andthrifts consummated approximately 31% of these deals. Publicbrokers were a close second, accounting for 23% of the total.Independent agencies accounted for 21%. Insurance companies and“other” financial services firms rounded out the list of acquirersduring the past five years.

In fact, as of Dec. 31, 2005, 25 of the largest 100 insurancebrokerages were bank-owned, 17 of which were in the top 50.

If your credit union does not currently offer insurance productsof any variety, there are two basic options available to you: (1)pursue a strategic alliance or (2) acquire an independentagency.

A strategic alliance is the most common alternative employedtoday, and for a credit union with less than 60,000 members, it ismost likely the better option. Forming a strategic allianceinvolves “partnering” with an outside vendor. The outside vendorwill be responsible for offering and servicing the insuranceproducts. In exchange, the credit union receives a referral fee.This alternative has a low cost of entry, and is best suited forsmaller credit unions that want to offer insurance products to itsmembers, but are not focused on generating meaningful revenue andprofits from the insurance operation. Numerous third-party vendorsexist in the marketplace for this purpose. These vendors oftenoffer an excellent low cost entry into insurance distribution.

A potential risk of allowing a third-party vendor to servicemembers is that the credit union cannot be certain that they arereceiving the highest levels of customer service available. Anothernegative of even greater concern, may be the fact that your serviceprovider may not be able to offer coverage to the majority of yourmembers. Often times, third-party vendors focus on a particularmember profile (i.e. high income, excellent driving record) andrefuse to offer competitive rates for members who do not fit theirpreferred profile. Another weakness of third party vendors is thatthey often offer a limited range of products. It is true that bycollaborating with an outside vendor you have made insuranceavailable to your members, but what if a member does not meet thecarrier's qualification criteria?

Because of these and other negative consequences surrounding thestrategic alliance, we have recently seen a number of credit unionsmove past their strategic alliances and instead acquire anindependent insurance agency outright.

This alternative is clearly the best option for larger creditunions that are well capitalized and have a substantial customerbase.

There are many benefits to agency ownership for a credit union.Primarily, a wholly owned insurance operation gives the creditunion the control needed to enforce the highest levels of customerservice.

Secondly, unlike a strategic alliance, where the vendor may haveaccess to only one or two insurance carriers, a wholly ownedoperation would usually have access to any number of insurancecarriers. In this way, the credit union can ensure that each membercan receive an offer of competitive insurance coverage.

Furthermore, a wholly owned operation enables a credit union tooffer a much wider range of products, as opposed to a strategicalliance. The credit union will no longer be constrained topersonal lines coverage, but rather, the credit union can branchout to cover the business risks and employee benefits if itchooses.

Another benefit of a wholly owned insurance operation is thefinancial rewards that it can generate. Unlike a strategicalliance, where a small referral fee may be exchanged, a whollyowned operation has the potential to create a material amount ofadditional revenue and profits, which in turn will benefit itsmembers via additional services and/or a dividend at year end.

In fact, based on internal research, the average anticipatedcash internal rate of return for a buyer of an independent agencywas 19.0% or greater.

However, this level of return does not come without costs. Infact, the buyer of an insurance agency should be prepared to spendanywhere from 6 to 16 months locating the right agency andnegotiating terms of the deal. Not to mention the capital requiredto secure the purchase, which can range anywhere from 1.25 to 2.5times the revenue of the acquired agency. If a credit union shouldchoose to pursue this option it is best to obtain the services of aqualified consultant knowledgeable in this niche.