Profit insurance Featured

5:51am EDT June 30, 2003
In the mid-'90s, many insurance company executives thought a new competitor -- banks -- would soon enter the crowded industry.

"The insurance industry felt that banks were poised to enter the industry in a big way," says Grange Insurance Group President and CEO Phil Urban.

The feeling was a result of pending legislation which would allow banks to offer insurance products. The Gramm-Leach-Bliley Act became law in November 1999, mostly eliminating restrictions on the products and services that insurance and banking companies could offer customers.

But that was OK with Urban, who, in preparation for the new law, had already opened wholly-owned subsidiary Grange Bank in May 1999.

"I feel the best defense is offense," Urban says.

By the following year, Grange Bank was fully operational in the six states where Grange Insurance had agents at the time: Ohio, Georgia, Illinois, Indiana, Kentucky and Tennessee. As Grange Insurance moved into Michigan and completed its affiliation with Integrity Mutual Insurance Co. of Appleton, it made its products available to agents in Iowa, Minnesota and Wisconsin.

But the bank served its customers from just one branch, located in Columbus.

"We have one branch, and I doubt if we'll ever have more than one," says Robert Mays, president of Grange Bank. "That's all we'll need."

The bank's primary distribution channel is Grange Insurance's independent agents. Agents' customers sign up for banking products through them and can receive 24/7 service through the Grange Bank Web site or through the agent during business hours.

Because the bank does not have branches, its overhead is low.

"With our overhead low, we operate at a low cost and we pass that on to our customers," says Urban, who also serves as chairman of the bank. "We generally offer lower interest rates on loans than other banks and pay higher rates on deposits."

Grange Bank is the first savings bank owned by an insurance company to be chartered to deliver full retail and commercial banking services primarily through an independent agency distribution system, and is only one of a dozen in the country that operates this way. So how well is this business model working?

Grange started four years ago with $7 million in assets and posted $137 million at the end of May this year, and Mays predicts the bank will hit $500 million in assets by 2005.

And it became profitable in 2002, a year ahead of schedule, Mays says.

Risky business?

Despite the company's willingness to jump into uncharted waters, it did not do so before testing them. Grange polled its agency base, which felt the bank would be a good fit for the business.

"They told us they would support it," Mays says. "I would guess that they were really not sure how it would fit into their business model as the actual product set, delivery methods, compensation models, etc., were really not developed until after they recommended we get into this business.

"As we have developed and our agency base has become more comfortable, the adoption and utilization rate has grown nicely but probably not as quick as we thought initially."

Of Grange Insurance's 1,200 independent agents, nearly 850 contracted to represent the bank. Once agents contract with the bank, they go to training to learn the skills necessary to provide service to bank customers.

"But we've worked to make it nonintrusive," says Mays. "Our agents don't want to be bankers."

While agent acceptance was the biggest concern, it wasn't the only one.

"There was nobody out there to copy," Urban says. "We were plowing new ground. We couldn't go to the 'Here's How We Did It' book. We stumbled along doing it ourselves."

And Urban is the first to admit the company didn't get everything perfect the first time.

"We changed technology partners since we started," Urban says. "But the basic systems we developed four years ago are still there."

Urban adds that the usual risks associated with a business start-up were also part of the equation.

"Do we have the right processes, the right people?" says Urban. "Did we have a business model that would work? Of course, there is some financial risk in any start-up venture, but in this case, the start-up costs were relatively modest."

Those risks have paid off, and in some unexpected ways.

"We imagined our bank customers would come from our insurance customers," says Urban. "But some agents use the bank to draw customers into the agency, and then sell them insurance products. It's worked differently than we thought, but in a pretty exciting way."

In addition, says Urban, since the company's agents can and usually do represent more than one insurance firm, offering banking services draws more agent business.

"When we went in to Michigan two years ago, there was no question in my mind that the bank helped us get agent attention," he says. "We have to win their business every day so that they think of us."

A leap of faith

Meanwhile, other banks began offering customers insurance, but according to Ken Reynolds, managing director of the American Bankers Insurance Association in Washington, D.C., not in the way insurance industry executives expected.

"Many banks are selling insurance to customers today, but they are selling them through carriers like Hartford or Allstate," Reynolds says. "They did not buy or start insurance companies, and they are not operating as the insurance company."

Reynolds says that the bigger the bank, the more likely it is to be offering insurance products.

"About 20 percent of small banks that have assets of $500 million or less offer insurance products," says Reynolds. "But about 95 percent of banks with assets of $10 billion or higher offer them."

Reynolds says on the insurance side, statistics are similar, with some larger companies offering financial products. But the real winner in this new environment, he says, is the consumer.

"All of this clearing of limitations was done with a view to improving competition," says Reynolds, "so people receive a wider range of services."

Combining the services only makes sense, he says.

"Banking and insurance industries are about relationships," he says. "With an insurance agent, you've already established a relationship. Why not take advantage of that relationship and sell as many products as you can?"

Urban agrees.

"The more product you sell to the customer, the longer the relationship will be," he says. "The bank allows us to build additional relationships."

And while Mays says the Columbus bank will continue to act as a traditional branch, the vast majority of its target market is still Grange Insurance agents and their customers.

"It's low-hanging fruit," Urban says. "Our agents are recognized business leaders and trusted advisers."

Despite the success of the Grange model, don't expect a lot more banks or insurance companies to cross over.

"I think there'll be some additional growth, but most big institutions have already started offering insurance," Reynolds says. "And the smaller community banks like to specialize in banking products."

Insurance companies face their own set of challenges, says Reynolds. He compares them to automobile manufacturers, selling to dealers, versus consumers. He says most insurance companies are not ready to change that mode of selling.

"For them to jump out of that mold is really quite a leap," he says. "If Grange can figure out and build a better mousetrap, that's what it's all about."

Joel Houston, chairman and professor of finance at the University of Florida in Gainesville, says Grange's model has some advantages.

"The advantage to this business model is you can economize on facility costs," he says. "I suspect that most customers today, while willing to do a lot of their business online, still like the option of having a physical location to conduct business."

With the agent's office acting as that location, customers get service delivered they way they want it.

But whether or not the threat of significant bank competition is ever realized, Urban says he stands by the decision to start the bank.

"Even though the bank threat didn't pan out, the bank has been profitable for 12 consecutive months now," Urban says. "It's been, and I believe will continue to be, an amazingly good investment for the company." How to reach: Grange Insurance Group, (614) 445-2900 or www.grangeinsurance.com; Grange Bank, (614) 445-2500 or www.bankatgrange.com