Banks selling insurance are running into a problem with what should be a slam dunk: selling homeowners’ insurance to customers who have just taken out a mortgage. Solving the quandary is one of the main goals for the industry, sources said.

The problem arises when a bank turns to its insurance carrier to underwrite a policy and the underwriter cannot write any more policies for a particular area. Similar to a quota system, insurers do not want more than a certain amount of coverage in specific geographical areas, because significant coverage could mean financial ruin in the case of a natural disaster. The industry learned this lesson back in the early 1990s after Hurricane Andrew ripped through South Florida, causing hundreds of millions of dollars worth of damage.

To ask an insurer to write more policies in an area than it deems inappropriate, a bank would have to be able to balance the insurer’s exposure in danger-prone areas by bringing more production in non-danger areas. Today, the party who is protecting the primary insurer, the reinsurer, charges the insurer more than it would be worth to take on the extra business. Because the primary insurer has committed to the secondary insurer to fix the concentration of losses, the primary insurer must pay a hefty fee to go over the limit. So, in this situation, the bank’s insurance agency must find another underwriter to write the policy–and it may also be at capacity for that area.

Sources said now the only thing to do is work to appease insurance carriers by bringing more business in other areas. But that has not proved easy.

"That is the one thing banks hope to be able to do, especially ones that operate in many states. They can help insurance companies keep their ratio limits in line to help balance out coverage in less attractive areas. I haven’t seen many cases where they can make that work. It’s very early in these programs and they haven’t generated performance to show how much volume they’ll be able to generate. It’s hard to convince (insurance carriers) you can bring value," said bank consultant Frank Caccione, of the Mitchell Madison Group.

Jeff Huff, manager in sales for property and casualty for one of the bank-in-insurance industry leaders, BB&T, said the problem of insurance companies struggling to make the homeowners’ insurance line profitable is a tricky one. If a bank’s insurance unit has enough contractual relationships with enough carriers, he said, a policy can usually be found; it’s just that it will not be at a sellable price in the market. This is because some giant carriers that distribute only to their own agents, such as State Farm or Allstate, will probably have lower prices. But, at the same time, Huff said, "The bigger the bank and the more spread they have, the harder it is to have the right company for all the opportunities that it would have to provide insurance. Most banks are having some heartburn over this. How do you be all things to all people, but do it efficiently with as few carriers as possible? This is getting a lot of tension now as the industry consolidates."

He said BB&T has tackled the problem by trying to work with all of its carriers to understand their strategies, weaknesses and strengths. "We try to direct business to companies’ strengths as best we can. We hope they’ll look favorably on us and allow us to carry the banner into new territories for them. You just feel your way through the thing," he said.