What's New in Cybertalk?

By Jean Gora
September 2001

Note: 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’ Bank Activity

Over the next two months, CyberTalk will examine what U.S. insurance companies are doing on the Internet in the area of banking. The activities of insurers in the area of banking depend on two things—what powers bank regulatory authorities permit them and how they exploit these powers. This month’s article discusses what these powers are. Next month’s article shows how major life insurers are exploiting them on the Internet.

Major Findings
In general, insurers have long had the ability to affiliate with lenders. Their ability to offer federally insured deposit products has been more limited, acquired only within approximately the last five years through liberalized granting of thrift holding company charters by the Office of Thrift Supervision. And even as insurers have acquired full federally insured depository powers, they have only slowly entered the depository product business.

Once they have entered the depository business—typically by offering certificates of deposit or money-market deposit accounts—insurers have shown relatively little interest in offering checking accounts on a nationwide basis. To try to offer nationwide checking accounts is to try to play a major role in the payment business. If insurers understand the asset accumulation aspects of deposit products, they have little understanding of the payment/transaction business associated with checking accounts. When they have applied for thrift holding company charters, which can give broad depository and payment powers as well as loan powers, many have instead sought narrow charters confining them to the trust business. Because life insurance is frequently used in conjunction with trusts and because some kinds of employee benefit plans utilize trusts, these insurers that have clearly chosen to focus only on the aspects of banking most closely related to insurance.

On the other hand, some insurers that have acquired thrift holding company charters have gone well beyond these firms and begun marketing not only time deposits on the Internet but checking services as well. And of these insurers, some even offer online bill payment, the paramount Internet payment service. Thus, they have moved into areas of banking that are quite remote from their concerns as insurers. It is unclear whether these insurers are setting a standard other insurers will be forced to meet as time goes by.

Regulatory Authority
Here is an account of the regulatory authority under which insurers are entering the banking business. Next month, we will show which insurers have most exploited their authority on the Internet.

With the passage of the Gramm-Leach-Bliley (GLB) law almost two years ago, the major U.S. barrier to affiliation between banks and insurance companies disappeared. National banks and insurance companies can affiliate through financial holding companies regulated by the Federal Reserve. Although this law has led to few new affiliations between established banks and insurers, it has clearly served as a catalyst for greater involvement by banks and insurers in one another’s businesses.

One reason that the law has led to few new affiliations initiated by insurance companies is because insurers had already acquired many banking powers through other regulatory structures. Under these regulatory structures, some insurers already offered or promoted selected banking services on their Internet sites.

Depository and Loan Functions
A number of different types of institutions perform depository and loan functions that are generally considered to be banking functions. These depository functions include:

• Accepting demand deposits (or their functional equivalent) and offering check access to them.
• Offering interest-bearing savings (or their functional equivalent).

Functional equivalents to demand deposits and interest-bearing savings share many of the same features but escape regulations that apply to those instruments.

The loan functions include:

• Issuing credit cards.
• Making mortgage loans.
• Making other consumer loans.
• Making commercial loans.

The institutions that perform one or more of these functions include full-service commercial banks, savings banks and associations, credit unions, open-end investment companies, limited-purpose credit card banks, limited-purpose trust banks, mortgage banks, finance companies, and industrial loan companies.

Federal vs. State Regulation
Mortgage banks, finance companies, and industrial loan companies are regulated primarily at the state level. (Industrial loan companies operate only in some states, notably Utah.) The other entities are regulated at the federal level and in some cases at the state level as well. Where this discussion addresses the powers of these institutions, it refers to their powers under federal regulation.

As noted above, prior to the enactment of GLB, federal law barred affiliation between full-service commercial banks and insurance companies. In general, affiliations with credit unions were not—and are not—attractive because of the credit unions’ not-for-profit status and common bond requirements; credit union members must share a common bond—i.e., work for the same employer or belong to the same organization.

Federal law, however, permitted (or did not explicitly forbid) affiliations between insurance companies and savings associations and savings banks, open-end investment companies (mutual fund companies), limited-purpose credit card banks, limited-purpose trust banks, mortgage banks, finance companies, and industrial loan companies.

Federal banking law treats full-service commercial banks as institutions that both:

• Accept demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties and others. These are covered by federal deposit guarantees.
• Make commercial loans.¹

Look at the depository and loan powers of U.S. financial institutions, and you will see that commercial banks are the only institutions that have both full depository powers and full loan powers. Thus, prior to the enactment of GLB, an insurer could aspire to affiliate with an institution that both collected insured deposits and made commercial loans on an unrestricted basis.

Insurance Affiliations
However, by seeking affiliations among the various other types of institutions, insurers could offer a menu of services that differed little from the menu of services offered by full-service commercial banks. Thus, although the passage of GLB enabled mergers between established banks and insurers (like the one that created Citigroup), it did not substantially increase the menu of banking services available to insurance affiliates.

The ability of insurers to affiliate with various types of lenders was particularly open, and insurers readily operated mortgage bank and finance company affiliates. A smaller number operated limited-purpose credit card banks and trust banks and industrial loan companies.

In the deposit area, insurers also enjoyed unfettered rights to affiliate with open-end investment companies (mutual fund companies) and securities brokers/dealers. By using their securities affiliates to link money market funds—offering check and card access—to brokerage accounts, they could offer the functional equivalent of interest-bearing checking accounts minus the federal deposit guarantees. A number of insurers such as Prudential and Axa-Equitable did so. These services were clearly targeted at affluent consumers.

Unitary Thrift Holding Companies
As insurers began to believe that legislation authorizing affiliation between full-service commercial banks and insurers would pass Congress, they realized that many of them were in danger of being acquired by commercial banks. They searched for a way to forestall — they hoped — such moves. They found it in the form of unitary thrift holding companies regulated by the Office of Thrift Supervision.

A unitary thrift holding company owns a single thrift institution (savings association or savings bank). From 1967 on, virtually any reputable commercial businesses, including insurance companies, could qualify as unitary thrift holding companies and operate institutions with powers very similar to those of commercial banks. Mutliple thrift holding companies have many of the same powers as unitary holding companies if they can pass the qualified thrift lender test (QTL). Under that test, mortgage and consumer-related assets must constitute 65 percent of the institution’s portfolio of assets.

One of the most attractive aspects of savings institutions from the point of view of insurance companies is that they can create "remote service units for the purpose of crediting savings or demand accounts, debiting such accounts, crediting payments on loans, and the disposition of related financial transactions." (12 U.S.C. 1464 (a) (1) (F). Under these powers, an insurer-owned savings institution can take deposits and make loans throughout the U.S. This structure has significant appeal to insurers with nationwide operations.

An Industry Tally
GLB put an end to the creation of new thrift holding companies by commercial firms after May 4, 1999. It grandfathered those in existence on that date. However, permitted the continued creation of new thrift holding companies by firms, including insurers, in other sectors of the financial industry. As of the beginning of 2001, there were about 170 holding companies within about 90 different corporate structures that are diversified thrift holding companies.

In a diversified holding company, the thrift’s activities represent less than 50 percent of the consolidated net worth and earnings on the enterprise. Of the diversified holding companies, 43 have principal subsidiaries engaged in insurance, 18 in securities firms, and 20 in commercial activities.

TABLES THAT ACCOMPANY THIS CYBERTALK:
Table 1 presents a summary of the depository powers of various types of U.S. financial institutions, and Table 2 offers a summary of loan powers of the same types of institutions. Table 3 shows a list of thrift holding company charters granted by the Office of Thrift Supervision since late 1997 to insurance companies.

NOTE:¹12 U.S.C. 1841 (c) (1) (B).

See previous issues of CyberTalk in the CyberTalk Archives.