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Banking On Insurance
Since They Got Into The Business Three Years Ago, Local Banks And Securities Brokerage Houses Have Already Snatched 5% Of The Local $5.4 Billion-A-Year Insurance Market. And Thats Only The Beginning.
By LUIS A. RAMOS
February 12, 2004
Consumers benefiting from financial institutions incursion into insurance business: Although insurance continues to be the kind of thing you need but dont want to use, the new players have given consumers a wider variety of insurance options in a competitive and convenient environment
Federal deregulation opened the floodgates in 1999. Since then, Puerto Ricos financial institutions have gone after a piece of the insurance-business pie with a vengeance.
Theyve made a pretty penny, and local consumers also have won big.
The Puerto Rico Office of the Insurance Commissioner indicates that between 2001 and 2002 (the latest years for which figures are available), local banks and other financial institutions produced close to $450 million in insurance premiums and $90 million in commissions (see chart on page 18).
It is estimated that in 2003, financial institutions as a group originated premiums at least equal to the amount in 2002, which would bring the total for the three years ended December 2003 to a whopping $715 million, according to industry sources.
This means that in only three years, banks insurance subsidiaries and securities brokerage firms have managed to secure 5% of Puerto Ricos insurance market, estimated at $5.4 billion annually. They already claim 10% of the market in the credit, auto, life, and property & casualty categories.
In the process, insurance subsidiaries of financial institutions have given birth to a new concept in the delivery of insurance products and services. Emerging bank-insurance agencies are using their hundreds of bank branches around Puerto Rico to offer insurance products. Consumers also now have easy access to insurance products through the networks of securities brokerage firms.
"Consumers have been the main beneficiaries of this bank-insurance trend. In one big swoop, they are getting a greater distribution of products and more competition among suppliers," said former Insurance Commissioner Fermin Contreras.
Fierce competition among suppliers is making the products menu more varied and available to a wider audience. Insurance outlets handling personal lines such as auto, house, and public liability products will be particularly affected by the new competition.
This industry reshuffling doesnt mean the traditional insurance players are down-and-out. On the contrary. Through new alliances with banks and other financial players, they are gearing up to accommodate a new way of doing business.
Both financial institutions and traditional insurance providers are poised to tap into Puerto Ricos growing insurance market, which soon will see the introduction or expansion of products such as second-to-die and long-term care, both of which are experiencing higher demand in the States. A reasonable explanation for this trend is the graying of America.
A legal decision that roared
Puerto Rico banks first attempted to jump into the insurance business after a 1996 Florida legal decision involving Barnett Bank. The decision allowed financial institutions serving communities with populations under 5,000 to offer, market, and sell insurance products and services to their designated markets, though the actual subscriptions would remain in the hands of insurance companies. Thus, financial institutions became intermediaries between consumers and insurance companies.
For Popular Inc. and Citibank Puerto Rico, the first financial institutions to enter Puertos Rico insurance market in 1998, the island municipality of Culebra was the underserved small community, and the big island of Puerto Rico was the target market.
However, it was the Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act, that formally opened the door for financial institutions to join the insurance industry. The new legislation did away with prohibitions dating back to the Glass-Steagall Act of 1933 that prevented banks from selling insurance, and insurance companies from entering the banking business.
Island banking regulations, accommodating the federal deregulation of the insurance industry, came in 2000. It was a transition year for most local banks, which set about obtaining licenses and otherwise preparing to enter the insurance field. Generally, banks and securities brokerage houses have integrated insurance products and services into their businesses.
Since Gramm-Leach-Bliley, all of the largest commercial banks in Puerto Rico (except the Bank & Trust) have established an insurance subsidiary. UBS of Puerto Rico has taken the lead among securities brokerage houses, creating a niche in fixed and variable annuities, which are the equivalent of investment instruments.
Statistics indicate that in 2002 alone, insurance subsidiaries of bank-holding companies generated $266 million in premiums and fixed and variable annuities. According to the Office of the Insurance Commissioner, 2001 and 2002 combined yielded close to $450 million in insurance premiums. This represents growth of 46%, when the local insurance industry as a whole grew by 7% (see chart on page 18). Insurance commissions earned by financial institutions reached $90 million during the same period, increasing 49% year-to-year.
Outfits such as FirstBank Insurance and Westernbank Insurance performed well in 2001 and 2002. These institutions posted premium gains of 169% and 354%, respectively, and improved earned commissions by 233% and 48%.
The bank-insurance business boomed in 2003. Industry estimates pin the amount of insurance premiums generated by bank-insurance subsidiaries at approximately $300 million.
The largest local player, Popular Insurance, placed close to 120,000 policies, amounting to $102 million in insurance premiums for 2002, which increased to $128 million in 2003. High-volume mortgage lenders Doral and Home & Property Insurance Corp. (R-G) also had impressive performances, with respective premiums of $33 million ($7 million in commissions) and $32 million (about $8 million in commissions).
Citibank, one of the pioneering banks in the local insurance business, jumped from $11.3 million in premiums in 2002 to $17.5 million in 2003. The company reported a 500% increase in life insurance and a 300% gain in annuities over 2002.
Most industry sources believe the bank-insurance business will continue to expand. Citibank, for example, is projecting a 35% growth for 2004. "The insurance market is going to continue to grow because of the improved distribution system offered by the banking sector. Although the insurance business in general has grown, bank-insurance subsidiaries contribution isnt totally clear yet," said Popular Insurance President Angela Weyne.
Statistics reveal the Puerto Rico market is seven times larger than the principal Latin American markets, based on premiums per capita. Yet, no more than 10% of the local population has insurance coverage other than the standard mortgage, auto, and health products. This clearly indicates the potential for cross-selling efforts by bank branches and brokerage firms throughout the island.
A new business format
Banks and consumers alike have benefited from the new insurance order. Banks have tuned into a new format that allows them to further diversify their business, while consumers have been put in more direct contact with a full line of insurance products and services. This has been accomplished through the vast network of bank branches around Puerto Rico.
Industry experts say it is only a matter of time before other financial institutions, such as savings-and-loan cooperatives, start pursuing a piece of the insurance-business pie. Even traditional insurance providers (agencies and brokers), apprehensive at first about the industry realignment, have started to comprehend and welcome the changes by partnering with larger players.
"Bank-insurance can be expected to propel structural changes in the industry over the next few years. It is expected that certain traditional players will seek new niches in order to stay competitive. The new order will require adapting to a redesigned delivery system," said Puerto Rico Insurance Commissioner Dorelisse Juarbe.
Local financial institutions have become agents, general agencies, or both to tap into the insurance business. Popular Insurance (Popular Inc.), FirstBank Insurance (FirstBank Corp.), and Santander Insurance (Santander BanCorp), for example, operate as general agencies, accepting in-house referrals from their own businesses and outside placements from independent agents. General agency CitiSeguros (Citibank) puts less emphasis on outside placements.
Other banks, among them Doral Financial Corp. and R-G Financial Corp., have leveraged their mortgage-loan business to expand in the insurance arena, providing title, hazard, and home insurance, among other products. Brokerage firms such as UBS of Puerto Rico also have their own insurance agency.
"We are in a mergers & acquisition period because of the developing order in the bank-insurance sector," said Cary Diez, president of CitiSeguros Puerto Rico Inc. "You can expect to see movement among insurance entities seeking to align themselves with the new bank-insurance players, which are bound to dominate the distribution system. Banks customer bases and branch networks are at the core of that system."
Financial institutions and brokerage houses have acted fast to create the infrastructure needed to offer insurance products. Besides handling the institutional licensing process, bank-insurance subsidiaries have emphasized personnel development through recruitment, training, and expansion of technological systems.
Bank branches are providing customers of every business sector with on-demand insurance offerings. CitiSeguros, for example, has trained and licensed 85% of its branch officers in insurance sales.
Banks have also had to ensure they remain in compliance with regulations of the financial and insurance industries. "In entering the insurance sector, bank-holding subsidiaries have injected a value-added distribution component for the brokering of insurance services, which still must abide by insurance and financial compliance regulations," said Juarbe.
Traditional insurance methods were generally unfamiliar to customers and physically detached from a common point-of-sale outlet. Now, the modern financial entity acts as a one-stop shop, capable of satisfying customers insurance needs in a single visit.
Although insurance continues to be the kind of thing you need but dont want to use, the new approach offers consumers a wider variety of insurance options in a competitive and convenient environment.
Distributing insurance products through the financial system has helped to expand the market. Judging by the premiums generated by bank-insurance subsidiaries in the past three years, consumers are reacting positively to the diversity and accessibility of the new delivery system.
According to the Office of the Insurance Commissioner, however, the majority of insurance requests are still limited to property & casualty (commercial and personal lines) and life & disability (life, health, and annuities products). "Insurance products will remain basically the same with certain variables," said Weyne. "It is the realignment in the distribution of insurance services that will affect the sector forever. Consumer demand, however, will dictate new offerings as the sector becomes more sophisticated."
Puerto Ricos distribution of insurance premiums mirrors that of international markets, where they are concentrated on life & disability (65%), including health, and property & casualty (35%). According to the Office of the Insurance Commissioner, the health & disability segment represents 54% (see chart on page 17) of the local market when separated from life and annuities products, which have 11%. The wide disparity is a reflection of the health plans provided by the local government through contracts with private insurers.
Unlike Puerto Rico, markets such as Japan and Europe use life insurance products as savings accounts, complementing government pensions in retirement planning. In the U.S., property & casualty has matched life & disability in market share. Observers say this is because the litigating environment has created a need for higher-risk coverage.
Annuities (fixed or variable) are a hybrid insurance product that has attractive investment and retirement attributes. This product, which has been available from brokerage firms for years, is expected to break out once Congress passes a bill later this month limiting dividend-income liabilities on annuities.
As mentioned earlier, UBS of Puerto Rico has elected to concentrate on selling annuity instruments. UBS and Universal Insurance have designed products for the local annuity market, whose value they put at $500 million. Among the banks, Westernbank and Oriental have been particularly active in promoting annuities.
"There is growing demand for annuities here and in the States. This trend may or may not continue, but it has a multimillion-dollar market," said Diez.
Bank-insurance sales are changing the composition of premiums on the U.S. mainland. The American Bankers Insurance Association indicates that in 2002, the largest portion (68.6%) of written premiums corresponded to the annuities segment (see chart on page 20).
Sources in the insurance industry say a variety of insurance products, combined with an aging population concerned about retirement, is causing a shift from life and property & casualty products. Nevertheless, written premiums from property & casualty insurance increased by $260 million on the island, representing 71% of the total industrys growth in 2002.
Puerto Rico can expect to see many new insurance offerings arrive from the States. Products such as second-to-die and long-term care have been rising in popularity on the mainland, with sales increasing 47% and 56%, respectively, between 1998 and 2002. The sale of benefits products, meanwhile, increased by 49%.
"We are following U.S. trends very closely and are planning to pursue nontraditional products such as long-term care. Market growth is expected to come from low- and middle-income audiences and from employees in the manufacturing and government sectors. Our Citipro program will play a key role in that process," said Diez.
No doubt, banks incursion into the insurance arena has affected consumers and traditional insurance providers, which have attempted to adapt to the new order and to the higher demand. Given the integration process between the traditional insurance sector and the bank-insurance sector, structural differences will arise from the multitude of products reaching customers from a single sales base.
The general insurance industry has been seeing consolidations and acquisitions amid globalization. Also, catastrophic events, such as 9/11, have had an adverse effect on the insurance industry.
These situations present both challenges and opportunities for the industry. In Puerto Rico, financial entities new capability to sell insurance, thus appealing to a wider audience, has contributed to accelerating their income growth and expanding the traditional distribution system.
For a long time now, the insurance distribution system has comprised three main categories: producers (insurance brokers and independent agents), agencies (general insurance agencies and in-house insurance agencies), and insurance companies (local, local with U.S. affiliations, U.S. companies with local offices, and foreign) (see sidebar on the right).
While insurance brokers are supposed to represent the consumers, and independent agents the insurance companies, both can sell insurance policies directly to consumers. Pending legislation proposes fusing brokers and agents into one category, called producers. Of the U.S. states, 48 have already taken this step.
Experts say the insurance industrys realignment will have the greatest impact on personal lines (auto, home, and public liability) because of increased competition among financial entities. Traditional insurance outlets are expected to continue dominating commercial lines because risk evaluation and expertise isnt easily substituted. Nevertheless, financial institutions are making advances in both areas.
Q&A Corner with Fermin M. Contreras
What were your main regulatory challenges as insurance commissioner?
To promote the evolution of the industry in light of legislative and market changes, and to steer the Office through its changing role within the new financial services scenario.
What do you consider your most important legacy to Puerto Ricos insurance consumers?
There are two. The first was the establishment of new, firm, efficient, and constant overseeing methods; and stricter licensing requirements for the industry. The second was building bridges between the office and consumers. This was accomplished with the emergence of a new service-oriented culture within the office and the creation of a Consumer Services unit that focuses on prompt dispute resolutions through mediation and alternate dispute resolution methods.
How do you perceive the islands current realignment of the insurance distribution system?
This is very positive for everybody involved: the consumers, the producers and the insurance companies. The realignment fosters competition among producers that results in better service; it expands the offering of new products; and it results in more premiums being written. Both public policy and private-sector initiatives should pursue the continuing development of new channels of distribution of insurance products. There is room for more and for more people.
What do you perceive could be the growth potential of the evolving financial insurance sector?
It will depend on the services rendered and consumer perception. As long as consumers feel they are better served through the one-stop shopping provided by financial services, insurance will continue to become a bigger part of the financial-services industry. By the same token, if consumers perceive they have become numbers, they are going to continue to do business with independent producers. Puerto Ricos insurance consumers are wise; they do not rely solely on convenience; they demand good service.
A macro look at the insurance industry
It is still too early to make a call on the bank-insurance activities in Puerto Rico, but the sector seems to be in full bloom in a strong insurance industry.
Indeed, the insurance industry represents a large portion of the islands economy. It constitutes 12% of the gross domestic product, and has achieved an average annual growth rate of 10% over the past 10 years (see chart below), according to the Puerto Rico Office of the Insurance Commissioner.
Worldwide, the insurance industry averages 7.8% of the gross domestic product. In the U.S., it accounts for 7% of the gross national product. Within Latin America, Puerto Rico is considered the fourth-largest insurance market, after Argentina, Brazil, and Mexico (see first chart on right).
"Puerto Ricos insurance industry is emerging as a significant contributor to the improvement of the quality of life of our people," said former Puerto Rico Insurance Commissioner Fermin Contreras. "It is also playing a central role in the economic integration initiatives for Latin America. We can expect to hear continuous vibrations from the financial modernization and globalization of the insurance industry."
The U.S., with a more mature industry, saw premiums generated by banks increase by 26% from 1998 to 2002 (see second chart on right). Categories such as commercial lines (up 30%), annuities (up 29%), and personal lines (up 22%) led the growth. The credit category declined (down 11%), the result, it is believed, of consumers repaying their debt through mortgage loans.
Data for 1998 vs. 2002 also indicate consumers changing preference for particular products (see third chart on right). Second-to-die, long-term care, commercial products, title, and benefits experienced the highest sales gains during that period. In general, the bank-insurance sector in the U.S. averaged a 44% increase in sales from 1998 to 2002.
In Puerto Rico, implementing changes to accommodate the new order in the insurance distribution system will no doubt require cooperation between the financial institutions offering insurance and the Office of the Insurance Commissioner. Whereas the bank-insurance sector will pursue growth strategies, the Office of the Insurance Commissioner will foster the development and competitiveness of the overall insurance industry as an economic tool for Puerto Rico.
The insurance industry has the responsibility to protect and care for lives, health, property, and economic stability. The bank-insurance sector has given signs that it will meet that challenge as the newest industry player.
Distribution of Written Premiums By Lines of Business for 2002
In millions of U.S. dollars
Health & Disability: $2,934 54%
Property & Casualty: $1,889 35%
Life & Annuities: $568 11%
Source: P.R. Insurance Commissioners Office
Bank-Insurance Premiums Composition in the U.S.
Commercial Lines 16.6%
Personal Lines 7.2%
Individual Life & Health 4.0%
Source: American Bankers Insurance Association
Total Premiums Written in Puerto Rico
1992 to 2002
In billions of U.S. dollars
Revised: 2001 data eliminated DTF funds component from annuities & miscellaneous deposits.
Source: Puerto Rico Insurance Commissioners Office
Growth of Bank-Produced Premiums on the U.S. Mainland
Source: American Bankers Insurance Association
Sales Growth of U.S. Bank-Insurance Products
1998 vs. 2002
Term Life 35%
Whole Life 39%
Second to Die 47%
Accident & Health 16%
Long-term Care 57%
Commercial Property & Casualty 55%
Personal Property & Casualty 46%
Source: American Bankers Insurance Association
This Caribbean Business article appears courtesy of Casiano Communications.