By Dennis Pillsbury
The Independent Insurance Agents of America (IIAA) has released an important White Paper on Agency/Bank Joint Venture Considerations. The paper is authored by Edgar W. Armstrong, CPCU, ARM, Managing Director--Risk Management Services, Aon Specialty Group and Paul A. Buse, CPCU, ARM, Consultant. Following are excerpts from "Important Considerations for Agents Contemplating Joint Ventures with Community Banks."
The paper initially looks at alternatives facing banks, including starting an agency operation from scratch or outright purchase of an existing agency operation. It concludes that "the financial and reputational risk inherent in either of these alternatives will, we believe, cause a large percentage of community banks to consider an alternative....This alternative would be some form of partnership or joint venture with an independent agent. These joint ventures--which to date have been employed almost exclusively by the very largest banking organizations--can be mutually beneficial to the bank and to the agent with which they partner. They can allow the agent close access to the bank's customer base, valuable assistance in marketing the insurance products, ongoing feedback for product and service adjustment, and an opportunity to profit directly from the 'banks-in-insurance' movement."
Choosing and approaching the right bank partners
"Clearly the best bank partners will be those that are already profitable and progressive in their operations, that are marketing-oriented and not averse to incentive pay, and that have sophisticated customer databases." The paper goes on to point out that the president of most local banks is definitely the person to see because the president "has the best handle on the bank's long-term growth and marketing goals."
The paper warns against approaching the bank president "with the intent of merely renting or using the bank's customer list. This is the surest way to 'turn off' the banker. That customer list is close to 'sacred,' and the bank will not allow anyone to use it without a great deal of thought and investigation."
The report says the key is to approach the banker as a partner-- "not just as a vendor, not just as a seller of your business, and not just as someone who wants to use the bank's mailing list. Have a specific and detailed business plan, complete with pro formas and profit-sharing suggestions. Do your homework, and know what the bank's opportunities, competition, and growth plans are. Be willing to share profits and ownership, and think long term."
The paper includes sample pro formas for products and services. The pro formas are based on the experience of the authors that "indicates that banks will add 5%-10% to their after-tax profits if they aggressively pursue their insurance opportunities."
Important considerations
Different Cultures. "The independent agent is generally a proactive thinker, an entrepreneur, and sales-oriented. Banks' employees, on the other hand, have historically had customers come to them and are often reactive....This makes for a potential clash in cultures. It is important for the agent to carefully think through how his employees will be interacting with those of the bank, how the service and sales strengths of both can be best merged, and how the all-important sales culture can be made integral to the functioning of the insurance joint venture without causing hard feeling among the existing bank personnel."
Exclusivity. "This exclusivity issue is very important," the paper says, pointing out that both businesses are highly competitive. It is an issue that "should be carefully addressed in your proposal."
Confidentiality/Publicity. "It is critical...that you convince the banker early on that shared information will be kept extremely confidential, that there will be no publicity regarding the joint venture without the bank's formal approval, and that you are intent upon keeping this relationship and this joint venture in such a manner that it will only reflect very highly and well on the bank's professional stature in the community."
Allocation of Duties. "Typically, the insurance agent's personnel are better suited for telemarketing, personal sales, insurance-carrier-relationship development, and the like. The bank personnel have the initial customer contact and should be able to provide information, background, and referrals to the appropriate insurance sales person." The paper warns that this is "an area of potential misunderstanding and conflict" making it imperative that duties be carefully spelled out in any agreement.
Profit and Expense Sharing. "The most productive joint ventures are those in which the right profit incentives are present. Generally, we favor arrangements whereby each party to the joint venture performs those duties it is best equipped to perform and charges the expenses for performing those duties directly to the joint venture. It is then important to divide the profits based on the value of each party's respective input."
Indemnification/Errors and Omissions. "We believe it important that each party indemnify the other for losses arising from its operations, resources, and personnel. It is also important that errors and omissions coverage be purchased on behalf of both parties and most certainly include the joint venture operation itself."
Product Selection. "There should be a process developed by which either party can suggest new products but that those products will have to be approved by the other."
Producer Compensation. "It is important that there be some incentive compensation for an insurance-related joint venture to prosper. This will be a change for the bank employee. Be careful here, however, since it is a significant cultural change for many community banks, and insurance licensing issues can come into play."
Term/Termination. "The most difficult part of the agreement may well be deciding on termination provisions....[I]t is important to develop a definite minimum term for the partnership's operations with provisions for termination. We suggest there be joint ownership of renewals with a predetermined buyout provision for each party to the agreement."
The White Paper includes a number of charts and graphs, as well as sample agreements. Members of the IIAA would do well to avail themselves of this important resource and other future offerings the association has promised concerning the banking and insurance issue. *