The acquisition of multiple insurance agencies, pioneered by the likes of Norwest and BB&T, is on the cusp of spreading widely among banks as they become more comfortable with their first acquisitions. Now they’re seeking to expand that line of business, not just cross sell products to bank customers.

Union Bank in Ottawa, Ill., for example, is getting comfortable with the integration of the insurance agency it bought last year, and is now looking around to buy another.

Scott Grigsby, president and CEO of Union Bank, said the October purchase of the Mercier Agency was actually two agencies in one. Just before Union’s acquisition of privately-held Mercier, Mercier had acquired the Bryan Agency. The agency has been rechristened Union Financial Services, and has both insurance and brokerage services.

"We are looking at expanding," said Grigsby. "We’re in quite a few markets right now throughout Illinois and we think that acquiring different books of business in those markets might be an advantage." He added that the $625-million-asset bank took a year-and-a-half to two years to buy an agency because it took that long to find one it really wanted.

"You don’t just buy one insurance agency and be satisfied you’re in the insurance business. You grow it and get economies of scale. Get the initial base and build on that," said John Pottridge, who heads up his own bank consulting firm in Alexandria, Va. Pottridge has one bank client which is nearing the close of a deal to buy its fourth agency.

Pottridge said that the new movement is to buy the first agency and let it continue to run without immediately handing over the bank’s biggest asset: its customer base. The key to making the insurance business really work and meet profitability expectations is in developing a strategic plan to acquire insurance agencies over time in a way that makes sense for the bank, he said. The agencies should be chosen on the basis of what kind of insurance business the agency has and how well that blends in with or adds to the bank’s customer base. Another consideration is the location in the bank’s market. As the agencies are chosen and acquired, an integrated and fully developed sales and marketing plan must be implemented. Part of the plan is to have provisions for how the bank’s customer base will be used for the entire insurance organization as it develops. Too often, a bank will buy its first agency, and turn over the entire customer base to the single agency, which probably will not have the entire range of products the bank aims to offer, and that can be a mistake.

Pottridge explained that the downfall of many banks which bought an agency, and were disappointed when it did not prove to be the cash cow they envisioned, was a lack of coordination. Customers with auto loans were pitched auto insurance. Later, if they bought a house, they were pitched mortgage insurance. Pottridge said they should have been approached with a package of products that could be offered from the entire insurance organization, which might have been the merged entity of several agencies. "You can’t seesaw your bank customers. You’ll confuse them," he said.

Ken Reynolds, executive director of the Association of Banks in Insurance (ABI), agreed, saying Pottridge is "forecasting the next wave." But he cautioned bankers to make sure they had their first acquisition under their belt. "I would agree it makes sense once you’ve created the first successful model, figure out how to integrate it into your program. As your base of business supports additional agencies, it makes sense to expand," he said.

Norwest, the granddaddy of insurance-agency-owning banks, has been in the business of expanding for so long it has grandfathered abilities many other banks don’t. But an official at the Minneapolis-based bank recently merged with Wells Fargo said no matter how big you get, the strategy is the same: get a new insurance agency to get into a new market.

"A community we don’t have a presence in–a quick way to get in, better than a de novo, is to buy a good agency, well-run with top-notch talent. Otherwise, we’re not interested," said Charlie Hendrickson, executive vice president of Norwest Insurance Inc., soon to be called Wells Fargo Insurance.

In the debate over who should pay more to bail out the decade-old thrift debacle, recently revived by the American Bankers Association, America’s Community Bankers is fighting back.

ACB, which represents thrifts, is lobbying Congress heavily to stick to the original payment schedule for the Bank Insurance Fund and the Savings Association Insurance Fund. The issue was decided in 1996 when a deal was cut to have each industry pay a certain amount into the funds to cover the cost of the bailout. Those amounts o 6.25 basis points for thrifts and 1.25 basis points for banks–are weighted more heavily on the thrift side now, but amount to more money being paid by the bankers because that industry is larger.

Starting in 2010, each industry would pay 2.3 basis points, an increase for the bankers and a decrease for thrifts. Part of the deal was that the thrift and bank charters would be melded into one when the payments were equalized. The ABA cried foul recently when it learned that there is a possibility that may not happen, because new financial modernization legislation would not eliminate the unitary thrift charter.

The ACB’s message last week was that the 1996 solution was the correct one and it would be a futile "reopening of wounds" to rejigger the deal now. In a document entitled "FICO Obligation: The Real Story," obtained by Financial Modernization Report, the group outlined why it believes the deal did not "squeeze" banks and why it should stay in force. The document said ending the requirement that SAIF members pay higher premiums than BIF members would "risk heightening the premium disparity it averted in 1996" and "pull the rug from under the typical SAIF-insured institution that has paid at least 33 times more in premiums to the FDIC since 1996 than an equivalently sized BIF-insured institution."

Mike Krimminger is a Senior Policy Analyst with the Federal Deposit Insurance Corporation. The views expressed in this article are solely those of the author and should not be construed as representing the policies or views of the FDIC or other governmental entities. Part one of two. The second portion will run next week. A clear understanding of legal and contractual rights if your counterparty defaults on a derivative contract and becomes insolvent is critical to effective risk management, creditor strategies, and market responses in today’s turbulent financial environment. The importance of clear rules is illustrated by the questions surrounding the recent near collapse of Long Term Capital Management and the roiling of Asian and Latin American markets. Currently, while American rules for financial market bankruptcies are sound, there are variations between the bankruptcy laws for banks and non-banks and ambiguities in how those laws apply to some newer transactions. Clarifying and updating those laws is an important step to maintain American leadership in the financial markets.

The President’s Working Group on Financial Markets, chaired by Treasury Secretary Robert Rubin, and with representatives of the Treasury Department, the Federal Reserve, the Office of the Comptroller of the Currency, the Commodities Future Trading Commission, the Securities and Exchange Commission, the Federal Reserve Bank of New York, and the FDIC has crafted statutory proposals that update and harmonize insolvency laws while reducing the risk of a system-wide disruption in the financial markets.

One year ago, Rubin submitted the proposals to Congress, where they won general agreement from the industry and key committees. A version of the Working Group’s proposal was included in the Financial Contract Netting Improvement Act of 1998, which was introduced by Rep. James Leach. Sen. Charles Grassley introduced similar legislation in the Senate. Although Congress adjourned before final action on the legislation could be completed, it is expected that the legislation will be reintroduced shortly. Discussion drafts of the bill are circulating on Capitol Hill now.

When Bank One started what turned out to be a year-long quest to be the first bank to move into the private mortgage insurance market under a new method of risk sharing, the obstacles did not come from the Office of the Comptroller of the Currency, they came from the states. Now that Bank One’s Private Mortgage Insurance Co., Inc. has been in business for a month after 6 blessing from Maine’s insurance regulator, the focus has shifted to the growth potential for the unit.

The OCC had approved other banks’ applications for reinsuring mortgage risk using the excess of loss method. By that method, the reinsurer gets a percentage of the premium from the primary insurer, usually around 20%, and the reinsurer will pay claims above a certain percentage, called the claims frequency rate, which is around 8% now.

But the quota share method, applied for by Bank One’s insurance subsidiary, is exactly the opposite. It is a pro rata sharing of both the premium and all the expenses of an insurance policy. The percentage can be split between the reinsurer and the primary insurer any way, but Bank One Insurance Group wanted to have a 50%-50% arrangement with the original insurer, also known as the fronting company.

Chuck Bennett, Bank One Insurance Group’s chief financial officer, said after just one month, it’s impossible to pinpoint how well the venture is doing, but that it is expected to be profitable in the first year. Bank One National Bank has contributed $8 million in capital to the business and hopes to see $2 million in revenue at the end of this year. Bennett said in addition to a section of the 125-employee Bank One Insurance Group that is focused on reinsurance accounting and risk, the bank is utilizing the resources of the fronting companies, and has hired an outside management firm in Vermont, American Risk Management, to help with coordination with the Maine department of insurance, and to keep Bank One "aware of the environment," Bennett said.

"It’s starting out small," he said, explaining that the private mortgage insurance division probably will account for around 3% of the $150- million-asset insurance company’s total business this year, although that percentage is expected to rise.

With quota share, although the reinsurer gets a smaller targeted margin than using excess of loss, it also gets a higher percentage of the premiums, and losses are a little more predictable. Plus, most important to Bank One, "It’s more of a true risk share," Bennett said. "It puts you in the same position the initial underwriter is in." Otherwise, he said, "You’re not true partners with your fronting company. They’re only concerned up to their risk level, but not after."

Bennett said the bank aims to have the private mortgage insurance division become a true profit center for the bank. "It tends to add to our control of the insurance products that are sold to our customers," he said. "It allows us to reach better conclusions for our customers."

While the OCC approved the application, several states gave Bank One the cold shoulder, citing the bank’s inexperience in the area, the mere fact that it was a bank and not an insurer, and worries about safety and soundness. Bank One officials believe the refusals came after successful lobbying by various insurance trade groups fearful of competition from the banking giant.

Vermont approved the quota share scheme, but said Bank One could only take 25% of the risk. Vermont is home to many mortgage insurance companies, which Bank One believes lobbied successfully to limit the amount of risk the new PMI company could take.

But even Maine, eager to become the home of a new kind of business, was not going to write Bank One a blank check. It set restrictions Bank One must live with while enjoying a 50%-50% split, including a 20 to 1 ratio of risk, more stringent than the industry standard of 25 to 1, and a capital requirement of $6 million. Although most states only require annual reporting for operations relatively small in size, as Bank One’s is now, Maine called for quarterly reports.

Bennett said the limit from Maine seemed strict given Bank One’s history of reinsuring other products, including unemployment and various life insurance products. He said on most products Bank One takes more than 75% of the risk, and unemployment insurance, for example, the bank reinsures at 100%.

Bank One’s venture in Maine is a partnership with two major insurers: United Guaranty and PMI. In Bank One’s arrangement, the consumer pays the premium, the original insurer books and processes the policy, then Bank One enters the picture and buys 50% of the risk from the insurer. Bank One pays the original insurer a processing fee of about 20%, Bennett said. If a claim occurs, the two companies split it down the middle.

The Milwaukee-based Bank One Insurance Group in total generates between $1.5 billion and $2 billion in insurance sales with a pretax profit of around $325

million.