Is Your Credit Union Maximizing its Insurance Distribution Potential?
Did you know that federally insured credit unions issued almost $500 billion in total loan volume during 2005? Of this total, first mortgage and auto loans accounted for the large majority. This fact alone exemplifies the tremendous opportunity for credit unions to cross-sell insurance products to their members.
You might be asking yourself, "How can loan volume generate insurance income and other benefits for members?" The answer is simple, all home and auto lenders require borrowers to obtain adequate insurance coverage. This fact creates a unique point-of-sale opportunity for credit unions. Insurance is a relationship-oriented industry and credit unions are in the relationship business.
Furthermore, the client database developed from the lending process provides credit unions with powerful marketing data and additional opportunities to provide their members with specialized insurance products. Proper data mining of insurance policy expiration dates and insurance carriers can provide credit unions with invaluable marketing knowledge and the ability to isolate members for whom they can offer better insurance coverage at lower rates.
We estimate that for credit unions with 100,000 members or more, a successful insurance venture should generate at least $1.5 million in high-margin commission income annually. Thus, the insurance operation is not only providing credit union members with additional benefits, but also driving additional revenue and profits for the organization.
Regional banks noticed this trend back in 1999. Since then, banks have aggressively and successfully entered the insurance distribution arena by acquiring insurance brokerages that specialize in the distribution of property, casualty, and health insurance. From 1999 to 2004, there were approximately 1,300 publicly announced insurance brokerage transactions. Banks and thrifts consummated approximately 31% of these deals. Public brokers 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 acquirers during the past five years.
In fact, as of Dec. 31, 2005, 25 of the largest 100 insurance brokerages were bank-owned, 17 of which were in the top 50.
If your credit union does not currently offer insurance products of any variety, there are two basic options available to you: (1) pursue a strategic alliance or (2) acquire an independent agency.
A strategic alliance is the most common alternative employed today, and for a credit union with less than 60,000 members, it is most likely the better option. Forming a strategic alliance involves "partnering" with an outside vendor. The outside vendor will be responsible for offering and servicing the insurance products. In exchange, the credit union receives a referral fee. This alternative has a low cost of entry, and is best suited for smaller credit unions that want to offer insurance products to its members, but are not focused on generating meaningful revenue and profits from the insurance operation. Numerous third-party vendors exist in the marketplace for this purpose. These vendors often offer an excellent low cost entry into insurance distribution.
A potential risk of allowing a third-party vendor to service members is that the credit union cannot be certain that they are receiving the highest levels of customer service available. Another negative of even greater concern, may be the fact that your service provider may not be able to offer coverage to the majority of your members. Often times, third-party vendors focus on a particular member profile (i.e. high income, excellent driving record) and refuse to offer competitive rates for members who do not fit their preferred profile. Another weakness of third party vendors is that they often offer a limited range of products. It is true that by collaborating with an outside vendor you have made insurance available to your members, but what if a member does not meet the carrier's qualification criteria?
Because of these and other negative consequences surrounding the strategic alliance, we have recently seen a number of credit unions move past their strategic alliances and instead acquire an independent insurance agency outright.
This alternative is clearly the best option for larger credit unions that are well capitalized and have a substantial customer base.
There are many benefits to agency ownership for a credit union. Primarily, a wholly owned insurance operation gives the credit union the control needed to enforce the highest levels of customer service.
Secondly, unlike a strategic alliance, where the vendor may have access to only one or two insurance carriers, a wholly owned operation would usually have access to any number of insurance carriers. In this way, the credit union can ensure that each member can receive an offer of competitive insurance coverage.
Furthermore, a wholly owned operation enables a credit union to offer a much wider range of products, as opposed to a strategic alliance. The credit union will no longer be constrained to personal lines coverage, but rather, the credit union can branch out to cover the business risks and employee benefits if it chooses.
Another benefit of a wholly owned insurance operation is the financial rewards that it can generate. Unlike a strategic alliance, where a small referral fee may be exchanged, a wholly owned operation has the potential to create a material amount of additional revenue and profits, which in turn will benefit its members via additional services and/or a dividend at year end.
In fact, based on internal research, the average anticipated cash internal rate of return for a buyer of an independent agency was 19.0% or greater.
However, this level of return does not come without costs. In fact, the buyer of an insurance agency should be prepared to spend anywhere from 6 to 16 months locating the right agency and negotiating terms of the deal. Not to mention the capital required to secure the purchase, which can range anywhere from 1.25 to 2.5 times the revenue of the acquired agency. If a credit union should choose to pursue this option it is best to obtain the services of a qualified consultant knowledgeable in this niche.