INSURANCE FOR THE WEALTHY: NORTHERN TRUST EYES LIFE SALES TO BOOMERS

Blue-chip wealth manager Northern Trust Corp. is mulling a move to peddle life insurance to its select base of well-to-do customers. If it decides to push ahead, it would either build its own insurance sales force, form alliances with existing insurers or buy an insurance agency

The initiative is expected to be discussed when Northern Trust’s seven-member management committee meets next month. If it is approved, the Chicago institution would become the latest in a parade of banks to sell insurance as they seek to boost fee income through a broader array of financial planning services.

However, instead of the mass-marketing approach others have used, Northern Trust would target younger, well-heeled customers.

“Everything in our history shows that the more things you do with a client, the stronger the relationship is,” says Mark Stevens, president of the bank’s personal financial services unit. “At a time where banks are seeing their traditional lines of business become tighter and tighter, it’s also an opportunity for us to broaden our stream of revenue.”

Another likely motivation: countering the risk of losing coveted customers to competitors.

Banks like Citicorp, Fleet Financial Group and Banc One Corp. are mass-marketing a wide menu of life, health, and home and auto policies to time-stressed customers, but with limited success. Northern Trust would focus on selling life policies — and perhaps disability and health coverage — to young affluents through its network of 66 offices in seven states.

Mr. Stevens also notes that its targeted customers in their 30s and 40s are still working but have estate-planning and asset-management needs. “It would be complementary to what we are trying to do to have products that hit clients at different stages of their life,” he adds.

Northern Trust’s models project that the venture could generate returns on capital in excess of 17%, but Mr. Stevens says he’s not sure the bank can produce sufficient sales volume to justify the attempt.

He’s right to worry. Though banks have been successful in shouldering their way into the annuities business — they now generate 16% of annual sales — there is no clear successful model of banks as sellers of life insurance.

Savings banks in some states have long sold term life policies, called savings bank life insurance, but the margins are low.

‘A lot of promise’

Commercial banks sell less than 1/2 of 1% of life policies, according to Limra International, the life insurance industry’s marketing research group.

“The concept has a lot of promise,” says Dorothy Murray, a senior Limra research consultant. “But we haven’t seen banks pulling the promise off,” she adds.

For example, Wells Fargo & Co. stopped selling new life policies 18 months ago after officials concluded the effort wasn’t justifying its costs. The bank continues to serve existing customers.

Fleet Financial Group of Boston shuttered a 50-member insurance telemarketing group in October after less than two years. It now pitches insurers’ products through statement inserts and direct mail solicitations in exchange for a smaller cut of commissions processed by its insurance partners’ agents.

European banks have had much stronger results. Banks like Lloyds TSB in Britain, Credit Agricole in France and Banco Bilbao Vizcaya in Spain sell insurance to more than a fourth of their customers and generate returns of more than 20% on sales, according to a soon-to-be published joint study by the Bank Administration Institute and Boston Consulting Group. Boston Consulting’s John Garabedian says the European success suggests banks can double per-customer profitability.

Many banks’ efforts to expand into insurance are prompted by their eroding share of retail financial services. Between 1981 and 1996, Boston Consulting reports, banks’ share of household financial assets slipped more than 35% — to 38% from 59% — as consumers migrated to mutual funds, financial planners and mortgage and securities brokers.

But some banks are also in discussions with life insurers to form offshore reinsurance joint ventures that would allow them to skirt federal law that prohibits banks from owning insurers or underwriting policies. One bank thought to be considering such an arrangement is Columbus, Ohio-based Banc One. Glen Milesko, chairman and chief executive of Banc One Insurance Group in Milwaukee, declined to comment on the unit’s plans.

The mechanism would be similar to one used by many large corporations that form subsidiaries allowing them to assume part of the risk of claims against employee health, property and casualty policies. About a third of Fortune 500 companies insure themselves using this structure, notes analyst Adam Klauber with Cochran Caronia & Co. in Chicago.

‘you can see it working’

Thrifts and mortgage companies are also starting to use this mechanism to assume some of their own mortgage insurance risks, instead of giving the business to mortgage insurance companies. Banks have shared in the underwriting risks of selling credit life insurance policies for decades, by forming subsidiaries.

“I’m sure people are thinking of this because you can see it working,” says Bruce Miller, head of corporate planning and development for Northwestern Mutual Life Insurance Co. of Milwaukee, which is also seeking an alliance with a major trust company (InvestmentNews, Aug. 24). “Once the regulatory environment changes, these offshore arrangements will give way to big banks buying an insurance company and controlling sales and underwriting.”

Congress is unlikely to pass financial reform legislation in the current session.