What's New in Cybertalk?

By Jean Gora
November 2001

CyberTalk is a column that appears monthly in LOMA's Resource, the magazine for insurance and financial services management. To see more contents of the magazine and to see how to subscribe, click on RESOURCE MAGAZINE.

Insurers’ Internet Banking Features

Although U.S. banks are rapidly adding insurance features to their Web sites, U.S. insurers in general are moving into the Web banking arena much more slowly. The Gramm-Leach-Bliley Act passed almost two years ago gave U.S. insurers the right to affiliate with commercial banks. So far, this new power has had little direct impact on insurers apart from allowing the creation of Citigroup. One reason its has had so little impact is that insurers have been able to offer so many banking services through alternative regulatory structures. This generalization has been particularly true for the last five years, as the Office of Thrift Supervision has granted many insurers thrift powers—powers virtually identical in many respects to those of commercial banks. If insurers wanted to offer a number of banking services, as outlined in last month’s CyberTalk, they could. Furthermore, it they wanted to offer these features through their Web sites, they could.

An examination of the Web sites of the top 100 U.S. life/health insurers by 2000 premium income suggests that relatively few have done so. The results of the examination of the sites of the top 30 or so insurers are shown in Table 1. It is very rare—outside of well-known exceptions like Citigroup and USAA—to find a U.S. insurer-owned bank promoting checking services or offering home banking and/or online banking on their Web sites. It is even relatively rare for insurers to promote asset-accumulation deposit products like certificates of deposit (CDs) that share some of the characteristics of life insurance and annuities. It is even rare for insurers to market credit products online, despite the fact that insurers have been allowed to affiliate with some types of lenders—for example, finance companies and mortgage banks—without any significant barriers for decades.

Comparing Features
A comparison of the Internet banking features of the top insurers with their federal thrift powers reveals a variety of different insurer approaches to offering banking services, particularly checking and other closely related services. For purposes of this discussion, services closely related to checking are defined as Internet banking and bill payment. Although the following categories simplify reality and are based on less than complete information,¹ they represent a useful way of examining insurer behavior.

Insurers that remain uninvolved in providing banking services (no thrift charter, no evidence of other banking services on their Internet sites). These insurers include almost all below the top 30 life-health insurers ranked on the basis of 2000 life and health premium income. However, some very large insurers such as Aegon remain largely uninvolved. And among the lower 70, one finds selected insurers such as AAL and Lutheran Brotherhood and that are involved in banking.

Insurers with trust-only thrift powers (they offer no checking or closely related services on the Internet). These insurers include The Hartford, Nationwide, MassMutual, TIAA-CREF, Northwestern Mutual, and Guardian Life.

Insurers with trust-only thrift powers that also offer asset management accounts. These accounts enable them to provide functional equivalents to bank checking and closely related services on the Internet. Asset management accounts typically link a brokerage account with a money market fund that provides checking and card access. The account holder can write checks drawn on the fund; if the money in the fund is depleted, securities in the brokerage account can be sold to provide the cash needed to cover the checks. Insurers offering asset management accounts typically do so through brokerage subsidiaries. Insurers offering asset management accounts on the Internet include Prudential, Cigna, New York Life, and Axa (Equitable). Large securities brokers with their own insurance subsidiaries (Merrill Lynch, for example) do so as well.

Insurers—with general thrift powers—that offer checking and closely related services on the Internet. These insurers are setting themselves up to be direct competitors to established commercial banks, many of which do offer checking and closely related services on the Internet. In addition to Citigroup and USAA, these insurers include The Principal and State Farm. Aid Association for Lutherans and Lutheran Brotherhood,² which are combining, do so as well. Allstate’s plans for Internet banking services sound as thought it will adopt a similar approach. GE Financial, which just received a thrift charter, already offers functional equivalents to checking plus online bill payment; it too is likely to add full Internet banking services. MetLife, which has applied for and received approval to operate a financial holding company rather than a thrift, is likely to use the holding company’s powers to move to full Internet banking services.

Insurers—with general thrift powers—that do not offer checking and closely related services (or functional equivalents of them) on the Internet. Two insurers fall into this category: ING and Jackson National, the U.S. subsidiary of Prudential U.K. ING markets savings accounts and certificates of deposit plus credit products on the Internet, but does not offer checking. Prudential U.K., which owns Jackson National and operates Jackson Federal, very likely offers the full array of checking services through its branches. It has not yet added any Internet banking services although it promotes CDs on its Web site. Given the success of Prudential U.K.’s egg direct banking service in the U.K., the company is likely to try to use Jackson Federal to offer a similar service in the U.S.

Strategic Options
Do these differences matter? Insurers have a number of strategic options with respect to providing banking services, and each of the above approaches can be justified.

Remaining uninvolved in providing banking services. Some insurers will remain outside of banking because their plates are full. They have other strategic priorities. Some major insurers that had acquired thrift charters either allowed their approvals to expire or withdrew their applications. These insurers include CNA, Conseco, and Fortis. (However, Conseco still retains involvement in banking through its industrial loan bank. Fortis has a major banking presence in Europe and elsewhere but not in the U.S.) They may prefer to concentrate on core competencies. Aegon, for example, is well known in Europe for concentrating on insurance rather than diversifying into banking as ING and Allianz have done. There is much to recommend this approach.

Trust-only powers. These powers take insurers into an aspect of banking that is very closely related to their present services. Many banks use their trust powers to offer group pension products in direct competition with insurers. The core activity of a trust business is asset management; many insurers have invested heavily in building up their asset management businesses. Life insurance sales made in conjunction with estate planning may involve the creation of trusts; hence insurers have reason to perform that task themselves, rather than playing others to perform it.

Trust-powers plus asset management accounts. The affluent are the major users of both personal trusts and asset management accounts. Hence, if an insurer targets the affluent and has a brokerage subsidiary, offering both services makes sense. By offering asset management accounts, insurers essentially cream off the most attractive checking customers without having to incur the costs of serving the less profitable masses.

General thrift powers plus checking and closely related services on the Internet. As noted earlier, insurers who select this strategy commit themselves to compete directly against established banks in offering checking and Internet banking and bill payment services. Insurers that appear to be following this strategy include some large personal lines auto insurers that target middle class Americans and that have diversified into the life insurance business (State Farm and Allstate). It also includes insurers that have loyal affinity markets (USAA, AAL, Lutheran Brotherhood). Finally, it includes at least one insurer—The Principal—that has both a group business and a mortgage banking business. This strategy is the most ambitious, and here is why:

Any bank that offers checking, Internet banking, and Internet bill payment is seeking the day-to-day transaction activity of households. Typically, Internet banking and bill payment services are used in conjunction with bank checking accounts. The funds in bank checking accounts typically turn over rapidly as households receive compensation for their labor and pay their living expenses. The key to running a successful checking business is attracting deposits. If there in no easy way for households to put their money in a particular institution’s checking accounts, they will not use those accounts for their main transaction business. The way established banks attract retail deposits is by deploying branches in locations near where people live. Although insurers can use their agents to "sell" bank services, agents cannot operate as bank branches and collect deposits in person themselves. Therefore, insurers that wish to succeed in the checking business have to provide households with deposit methods that are as convenient as branches. Insurers may have a hard time doing so. Here are some services insurers might offer to facilitate deposit collection:

• Direct deposit of payroll. However, the employer—not the employee—is the buyer of a direct deposit of payroll service. It is unrealistic to believe that an individual employee will be able to persuade his or her employer to establish such a service so that the employee can use it to fund his primary checking account. However, insurers that provide group benefits to employers may be able to use this relationship to offer checking services to employees. Checking services represent, in effect, voluntary products.
• Retained asset accounts. If the insurer deposits the benefits of a matured policy in a checking account, the sum may be large enough for the beneficiary to use it to fund his main checking activity for years to come. An agent calling on consumers who have not received the benefits of insurance policies has no realistic way to arrange this situation.
• Automatic transfer from an existing account. This practice would allow funding of the insurer-provided checking account on a regular basis. However, the funds going into that account must come from another account, presumably a checking account held by the same customer at another bank. If the customer already has a checking account at another bank, he or she has little need to establish one at the insurer’s bank.

Thus, insurers that follow this strategy may be able to offer very attractive Internet banking and bill payment services; they will have a harder time attracting the deposits necessary to fund routine household payment activity.

It is possible that some insurers offering Internet banking and bill payment are doing so without intending to attract a lot of household business. They may instead confine themselves to attracting the business of their agents and employees by depositing respectively their commissions and salaries in the insurers’ own banks. Such an approach may allow them to generate some additional revenue, but the growth potential of such services is obviously limited.

General thrift powers but no Internet checking and bill payment activity. General thrift powers allow insurer-owned thrifts to market certificates of deposit (CDs), money market deposit accounts (MMDAs), and savings accounts, as well as checking accounts. If the insurer focuses its Internet banking activity on CDs, MMDAs, and/or savings but not on checking services, it is clearly making an attempt to attract long-term deposits—in effect, deposits that behave like insurance cash values. A well-known and trusted insurer is likely to find it easier to attract a household’s single lump sum for a CD than to persuade the household to funnel the routine deposits required to fund its monthly checking activity. The costs associated with holding CD money are significantly less than those associated with providing checking services. Therefore, this strategy, which appears to be that of ING, makes good sense.

Another strategy that makes sense is to acquire an existing thrift with several branches, use the agency force to distribute the thrift’s long-term deposit products and loan products, and make no attempt to offer Internet banking and bill payment, which are needed primarily for checking services. The Internet plays little role in this strategy. It is a viable strategy for many insurers.

Thus, insurers are approaching the world of banking in diverse ways, testing the waters rather than plunging dramatically. There appear to be strong business cases for a number of different approaches. If additional Citigroup-like combinations of big banks and insurers occur, the strategies outlined here may become obsolete rapidly. Competitive pressure may dictate more aggressive approaches.

Early Year 2001 Assets of U.S. Thrifts Owned by Insurers
Table 2 shows the early year 2001 assets of thrift institutions apparently owned by insurers, groups that own insurers, or entities closely related to the insurance industry. Asset figures in most cases represent results at the end of the first quarter of the year.

As this exhibit suggests, most thrift institutions with close ties to the insurance industry are small. Three institutions—Citigroup, Household, and USAA—with long-standing thrift operations significantly surpass their competitors, many of them recently chartered, in size. However, major banks dwarf even the largest thrift institutions with ties to the insurance industry. For example, although Citigroup has close to $40 billion in thrift assets, the Citigroup organization as a whole had $902.2 billion in assets at the end of 2000.

If the three institutions named above are excluded, the two largest U.S. insurer-owned thrifts are operated by U.S. affiliates of two major insurance conglomerates: ING and Prudential U.K. ING runs a major banking operation outside the U.S. and a direct Internet bank in several countries. Prudential U.K. operates a successful direct bank in the U.K. called egg. The leadership position of these two organizations in the insurer-owned thrift market may be the result of accidents rather than deliberate efforts to build a large U.S. bank presence. ING got two thrifts when it acquired Reliastar and Aetna Financial. Prudential U.K., through U.S. subsidiary Jackson National Life, acquired a functioning thrift institution that already had assets. As suggested in CyberTalk, many insurer-owned thrifts are trust operations, not full-fledged institutions permitted to offer a broad range of banking services.

The size of insurers that own thrifts ranges between the very large and the very small. Many insurers that have received thrift charters told the Office of Thrift Supervision that they plan to use their agents to distribute thrift products. As most potential insurance customers live in locations well served by bank branches, it will be very interesting to see how successful agents are at this activity.

NOTES:
¹Some insurers may be involved in providing banking services through legal structures other than federally chartered banks and thrift institutions. For example, some may offer such services through state-chartered banks or thrifts. If these insurers mention these services on their Web sites, this analysis may take them into account. If not, it won’t. No attempt has been made to identify insurer-owned institutions apart from those with federal financial holding company or thrift charters.
²Neither AAL nor Lutheran Brotherhood was among the top 30 life/health insurers in terms of 2000 premium income.

See previous issues of CyberTalk in the CyberTalk Archives.