Banks can act as insurance agencies and sell insurance policies. Insurance sales is a common activity for banks because insurance sales pairs very well with extending secured loans. Collateral needs to be protected. Most of the time, this means the borrower must get insurance for the collateral. Since the customer is already dealing with the bank for a loan, the insurance quote is a simple and effective cross-sell. Not quite a simple as “would you like fries with that?” but the same idea. The bank can earn a commission on the sale of the insurance policy.
This niche banking op will exist, regardless the number of competitor insurance agents. This is because the bank is the first to know of the insurance need and because the bank already has a relationship with the customer.
Maybe this is an obvious tactic since banks have been selling insurance for at least a hundred years, but plenty of banks have not taken advantage of this opportunity. Insurance sales checks a number of important boxes for banks. Commission income is non-interest income. The capital investment to start is low. The risk profile is low if properly managed. There are also overlapping skill sets in the sale of insurance and the sale of financial products like loans.
Strategy for Structuring Insurance Activities
Below are some of the ways banks can structure new and existing insurance activities.
A national bank is authorized to act as an insurance agency directly. Texas and many other states authorize their state banks to act as insurance agents directly. The advantage of this format is that licensed bank employees can offer quotes, referrals, sales support, and the bank may pay commissions and referral fees directly to licensed employees. Where the agency is an affiliate or subsidiary, the cross-sell may be less seamless. Referral fee programs for employees may also be limited or restricted where the bank is not acting as an insurance agency handling the policy.
A national bank can create or invest in a subsidiary that acts as an insurance agency. Texas state banks and many other state charters can do the same. A bank holding company can also invest in a subsidiary insurance agency as a sister corporation of the bank. Structuring the agency as a subsidiary or affiliate may be a means of bringing in outside expertise and investment to start the agency. This may also be a means of acquiring an existing book of business from an established insurance agency. Separating the insurance agency activity may offer the bank some liability protection from the insurance sales activity. Affiliate transaction limitations play a role in deciding whether an insurance agency should be a bank or bank holding company subsidiary. More on this in another post.
Some large insurance organizations are aware that banks have a unique opportunity for offering insurance products to their customers and offer turn-key insurance agency solutions to banks. With this strategy, the insurance organization handles quotes, onboarding, most of the sales activities, and all of the back-end operations. This setup allows a bank to earn commissions income on the sale of insurance without needing to get into the weeds of licensing and training. More on this strategy coming up in a later post.
Regulatory Matters
Licensing
States regulate the business of insurance. By and large, states license insurance agencies who sell policies and insurers who underwrite policies separately. If the bank engages directly as an insurance agency, the bank will need to obtain an insurance agency license. We’ll cover bank affiliates as insurers in a separate post. States may vary in how they handle licensing for agencies and agents or in how they handle compensation and referrals.
In Texas, employees who sell insurance must also obtain an individual license to sell insurance and must have adequate training. In Texas, an employee must hold a license to give quotes, discuss coverage, and give details on the terms of an insurance policy. Non-license holders may point out that the bank offers insurance and may point an interested customer toward a licensed agent for further information. Texas permits a bank to pay a non-license holder a nominal referral fee if the fee is not conditioned on the sale of insurance.
Anti-Tying
Banks generally may not tie insurance products to loans. That is, they may not require a customer to obtain an insurance policy from the bank as a condition of obtaining a loan. The bank may be required by state or federal law to deliver an anti-tying notice to the customer at the time of a loan application if the bank intends to solicit insurance in connection with the loan.
RESPA
If a bank will be referring a customer to an affiliated insurance agency in connection with a federally-related mortgage loan, the bank must provide an affiliated business arrangement notice to the borrower before making the referral. Where the insurance agency is an affiliate, compensation for any referral should not be paid from the affiliate to bank employees. The only compensation the affiliate may provide the bank is by way of a bona fide dividend if the affiliate is a subsidiary of the bank.
FDIC Insurance Disclaimer
If insurance products and deposit products are offered in a branch location where deposit products are offered, the not-not-not insurance product disclaimer must be shown at stations where insurance products are offered.
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