Can Insurance Brokerage Keep Revenue Afloat? the Answer Depends on Whether Banks Commit or Dabble. Community Banks Stand to Benefit the Most but Have to Clear Three Hurdles

[ILLUSTRATION OMITTED] In the late 1990s, as banks were wading into the insurance brokerage business, they were motivated by two objectives. One was to grow non-interest The other was to capitalize on what seemed to be a rich cross-selling opportunity. Both objectives were significant motivators, but the latter was the more compelling. Today, these objectives have reversed. The American Bankers Insurance Association (ABIA) recently conducted a survey of 113 banks that sell insurance products. Nearly two-thirds (63%) of the surveyed banks responded that their primary objective for selling insurance is to non-interest income. By comparison, only 27% responded that their primary objective is to cross-sell (see Exhibit 1, p 34). These results are statistically consistent with those of a 2008 ABIA survey, indicating that positions on this issue are stabilizing. This shift in objectives is due in part to the sobering realities of cross-selling. Many banks have struggled to crack the code for selling insurance products to their customers. And though some cross-selling success has been achieved, it has generally not been at the lofty levels expected. Double squeeze The larger reason for this shift, however, is more fundamental to the banking business. Over the past 15 years, the industry has experienced steady erosion in its net interest margin, resulting in a total margin decline for many banks of 50 to 100 basis points, or more. To offset the declining net interest margin, banks have sought to increase non-interest And they have succeeded. According to an SNL Financial index of U.S. banks, the ratio of non-interest income to operating revenue increased from 35.1% in 1995 to 45.8% in 2009. However, most of this gain was achieved by larger banks. Specifically, the non-interest income ratio for banks with assets greater than $10 billion increased substantially over this period, while the ratio for banks with assets of less than $10 billion barely moved. Although smaller banks have struggled to grow non-interest income, they have at least enjoyed relative stability in these income sources. Conversely, as larger banks have expanded their non-interest income portfolios, they have become exposed to greater volatility. Trading account gains and fees, for example, contributed more than 10% of 2007 noninterest income for banks larger than $10 billion, but plummeted to a negative contribution the following year. As this and other income sources collapsed, total non-interest income for larger banks fell dramatically in 2008. Meanwhile, non-interest income for smaller banks, anchored in less glamorous but more predictable sources, remained relatively constant. Today, however, non-interest income, especially for smaller banks, may be destabilized by regulatory change. Deposit account service fees, including overdraft charges, are the leading source of noninterest income for community banks. But changes to Regulation E, which became effective July 1, take direct aim at this As a result, many community banks are forecasting a 10% to 20% reduction in non-interest The pressure on community banks is significant. Their net interest margin has been squeezed and their non-interest income is about to take a hit. Can the insurance brokerage business help community banks ease the pressure by providing an additional source of non-interest income? The answer is yes, but the banks that will benefit are those prepared to navigate three challenges: 1. the relevance challenge, 2. the capital challenge, and 3. the knowledge challenge. The Relevance Challenge According to the 2010 Michael White-Prudential Bank Insurance Fee Income Report, nearly two-thirds of U.S. bank holding companies participated in the insurance brokerage business in 2009. In fact, more BHCs sold insurance products last year than sold mutual funds, annuities, or securities. …