What can be expected

Rough Notes, Feb 1998

The OCC will most likely preempt state laws that restrict which bank employees can sell insurance and where in the bank the insurance can be sold. Both banks and the insurance industry recognize that tie-in sales are both bad business and illegal. A tie-in sale is one where, for example, a car loan is promised if the customer also purchases the auto insurance. To discourage the tie-in sale a few states want laws that say that a loan officer cannot be licensed to sell insurance and that insurance must be sold in a separate and distinct area of the bank. Other states have enacted a simple prohibition of the tie-in practice along with a mandatory written consumer notice, but do not impose any device to separate the loan officer from the sale of insurance.

What will motivate the consumer to purchase insurance at the bank? Convenience, need, and price. It may be more convenient for the consumer to purchase both the auto insurance and the loan at the same time. If the price is right and service by the existing agent isn't superior or important, convenience may win out. A consumer with a good driving record but a poor loan history may give the bank the auto insurance business at any price, simply because the consumer wants the loan. The wealthy consumer with lots of deposits on hand who has a son with a poor driving record might visit the bank in order to influence the loan officer into accepting the auto insurance. Since banks can't underwrite the insurance, the consumer doesn't know that the bank most probably will not take on a marginal loan because there is more revenue in the form of auto insurance commission. The same proves true with the consumer who has a large portfolio at the bank, but a poor driving history.

Agents often can persuade the insurance company that in spite of a difficult exposure the whole account should be written. The loan officer cannot do this with products that come from different sources. The consumer does not understand this.

Perhaps the income stream from all this convenience and consumer psychology is one reason why some of the agent associations now suggest that agents form marketing alliances with the banks. Know, too, that loan officers most probably do not want the headaches of another set of underwriting rules. Should the loan be acceptable and the insurance not, convenience disappears and the psychology of doubt that the bank can do the whole job will enter the consumer's mind.