Academic journal article Review of Business

Insurers' Expansion into Banking: Thrifts and Benefits from Integration

Academic journal article Review of Business

Insurers' Expansion into Banking: Thrifts and Benefits from Integration

Article excerpt

This article investigates whether insurers that acquire thrifts and add banking products to the insurance mix will improve their operating risk-return profile. The authors do not conclude that insurer-bank integration improves operating returns. Managers should look for potential advantages from integration elsewhere -- such as future benefits from strategic positioning


Insurance firms have been engaging in banking-like activities for many years. For example, as early as 1987 insurers issued securities backed by fees generated by their insurance policies and by loans to policyholders. And there are plenty of other recent examples of insurers acting as bankers: one insurer guaranteed the value of a conglomerate's divested units in Britain, and another promised to supply a Canadian grain trading outfit in Manitoba with operating cash if grain volumes drop. Also, many insurers have taken advantage of the loophole in U.S. banking law (just before its closure by Title IV of the Gramm-Leach-Bliley Act of 1999) that allowed the establishment of a single thrift subsidiary by non-banking firms. Forty-five insurers have applied for a thrift charter during the period January 1997 to December 2001.

According to the Office of Thrift Supervision, of the insurance firms that applied for a thrift charter during this five-year period, 64% of them received one. Of these thrift charters, 73% have general thrift-powers, and three of them also have the ability to issue checking accounts. Insurance firms with loyal affinity markets, such as the Polish National Alliance and the Aid Association for Lutherans, as well as insurance firms catering to the insurance needs of households, such as State Farm and Allstate, have chartered thrifts with the ability to issue checking accounts. According to the insurance industry press, for insurance firms that already have a nationwide network of offices, the thrift charter provides the opportunity to offer banking products through their existing distribution channel.

It is not clear, however, whether or not an insurer-bank will be successful in cross-selling insurance and banking products. Consumers exhibit different purchasing behavior for insurance services and banking services, according to Beckett's (1) study of consumer behavior in financial services. Berger's (2) comprehensive review of the banking and insurance literature on financial services integration reveals that benefits of integration from size, scale or scope, if they exist at all, are hard to find. Katrishen and Scordis (3) find that the advantages a large, diversified insurance firm may enjoy are offset by the increased costs of operating a more complex organization. An analysis of insurance and banking operations by Saunders and Walter (7) and Santomero (6) reveal substantial differences between banking and insurance operations. For example, the operating cost structures of insurers and the effective spread they earn places them at a disadvantage to depository institutions. In addition, insurance firms h ave developed an expertise in managing actuarial risk, while banks manage financial risk. For the integrated firm, the problem of financing overall risk exposures depends less on the statistics of actuarial risk and more on financial risk pricing.

Potential Benefits from Insurance-Bank Integration

The challenge for insurance firms that enter the banking business is how to fuse the best practices of insurance and banking management. An insurer-bank, at its most developed, would integrate the manufacture and retailing of insurance, commercial banking and investment banking products in a seamless organization (4). Yet this type of seamless organization is not permitted under the Gramm-Leach-Bliley Act of 1999 (GLB). It continues the historical practice of relegating the regulation of traditional insurance products to the states, and the regulation of separate account insurance products to the Securities and Exchange Commission, while the Federal Reserve receives umbrella authority over the financial holding company. …

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