1996 marked the year in which lending institutions and banks gathered enough steam to roll vigorously into the insurance marketplace without much retrenchment. For the most part, the engineer of this financial services train has been federal bank regulators, primarily the Comptroller of the Currency. In addition, technological advances, namely the Internet, provides the rail which is laying the way for significant changes in the way consumer access information and purchase products and services, including financial services.
Expansion of Bank Insurance Agency Powers
In March of 1996, the U.S. Supreme Court in Barnett v. Nelson unanimously struck down a Florida statute which was more restrictive than the exemption under the National Banking Act, which permits federally chartered banks to sell insurance in a "place" with a population under 5,000. As a result, many other states with similarly over restrictive laws must amend them to conform to this ruling. Although the Barnett decision reaffirmed the power of these banks to engage in insurance sales under this exemption, the Court noted that states may continue to regulate such sales through agent licensing requirements. Accordingly, many state insurance departments, which have dodged this issue for many years, have had to acknowledge formally bank insurance agency powers by promulgating regulations for licensing their employees, who are insurance agents, and independent insurance agents who affiliate with banks.
1996 also saw state insurance departments adopt similar regulations following the 1995 Supreme Court decision in NationsBank v. Variable Annuity Life Insurance Company, which held that, for purposes of incidental banking powers, annuities are not insurance. From the banks’ perspective, this is not such a big deal. The licensing of sales agents for banks is not new. Bank employees who sell securities are already accustomed to the licensing requirements of the NASD and state securities commissions.
The real turf war for bank insurance sales lies in the application of the "place of 5,000" exemption. This war has already been declared. States will likely take the position that this means a bank must have its main office in a small town and can only sell within the town’s limits. However, the Comptroller of the Currency, being the expansive champion of federal banks, has already stated a very broad interpretation of their insurance powers. In October 1996, Comptroller Eugene Ludwig announced, in an advisory opinion rendered by the OCC to First Union National Bank, that national banks may sell insurance as follows:
- The bank must have a "bona fide" insurance agency in a place of 5,000 which is managed from such location.
- The bank may solicit and effect sales of insurance policies outside the place of 5,000-effectively anywhere within a state.
- The bank may originate direct mail from outside the place of 5,000.
In December 1996, the Comptroller reiterated his position in Atlanta at the Winter Meeting of the National Association of Insurance Commissioners (NAIC) , where, in an unusual gesture, the NAIC invited the Comptroller and his chief counsel to attend a meeting of the NAIC Special Committee on Bank Sales of Insurance. Regrettably for the insurance industry, the Insurance Commissioners who convened at this meeting, ostensibly to query the Comptroller’s views, failed to ask him what meaning, if any, would be left to the "place of 5,000" exemption if federally chartered banks could essentially compete with insurance agents in any geographical area within a state. Unless the NAIC and the insurance trade associations better mobilize their forces to curb the legal solidification of the OCC’s current position, they may see a runaway train of expansion of bank insurance powers with the result that banks become a true competitor of insurance companies, rather than merely another distribution system for insurers.
The Internet is a Dimension of Expansion of Bank Powers
As if the OCC’s charge into the insurance arena were not enough, state insurance regulators are also grappling with the difficult issue of the use of the Internet by insurance companies and their agents. Could the Internet’s use by banks to sell insurance make the Barnett jurisdictional issues moot?
The NAIC initially reacted to the use of the Internet by insurance companies and their agents in its usual fashion- it’s new and it involves the sale of insurance; therefore, we must find a way to police it. The NAIC, which has a sophisticated site of its own on the world wide web like many state insurance departments, has not made a determination of its own view of the impact on the authority of state insurance regulators. The NAIC and the insurance industry in general is still in the learning process (like many other industries, including banking)
Despite insurance regulators’ apprehension of the Internet in terms of consumer protection, state insurance departments already regulate a similar medium - television - through which, in the case of cable t.v., bytes of textual and audio information relating to insurance is disseminated for sales purposes. As the Internet moves from the personal computer to the television, through devices designed by such companies as WebTV and ViewCall America, marketing insurance interactively, without face-to-face agent contact, could become a major method of transacting business.
The banking industry has a large presence on the Internet, and in some respects, may be more advanced at effective customer use of the Internet than the insurance industry. The growth of on-line computer personal banking services being offered to bank customers presents the opportunity for even stronger customer loyalty between banks and their patrons and the possibility for conventional financial institutions to become known as players in the marketplace for insurance products. If, in the near term, banks become adept at Internet sales of insurance, the banking/insurance turf war could move to cyberspace prior to a resolution of the open issues under Barnett.
Are We Seeing the Development of a True Financial Services Company?
What the Comptroller of the Currency is really saying to Congress is that the separation of the banking and insurance industries created by the Glass-Stegall Act is outdated and that the McCarran-Ferguson Act no longer has a place in today’s world. With the advent of insurance products akin to investment vehicles, like variable and indexed insurance products, consumers are beginning to accept "one stop shopping" for financial services. Further, competition for global market share militates in favor of a combination of traditional banking and insurance services. Therefore, the insurance industry should expect continued aggressive behavior from federal bank regulators.
A Potential Catalyst for Federalization of Insurance Regulation
Under the Supremacy Clause of the United States Constitution, the authority of the federal government (e.g., the OCC) preempts state authority. The aggressive action by the OCC to expand the authority of national banks is unlikely to be met by substantial state-based opposition due to this preemptive authority. In effect, the OCC is "holding all the cards." This fact alone undermines any effort in state legislatures to oppose the expansion of bank insurance authority.
In the post Barnett environment, there is really no effective governmental authority capable of counteracting the OCC’s expansive agenda other than the Congress. However, in the near term, there is only a very remote chance for Congressional action. While the banking industry is very much in favor of the Comptroller’s actions, the insurance industry is at this point, split. While the insurance agents’ organizations are vigorously opposed to expanding bank insurance authority, there are some elements within the insurance industry that would welcome (at least tacitly) bank marketing of insurance products. Until the insurance industry can achieve a unified position, there is no reasonable possibility of Congressional action.
All of the above means that the OCC will be able to continue its crusade. By the time Congress can act, bank marketing, and perhaps, underwriting of insurance, will be a fait accompli. At this point, banks selling insurance will no longer be a state regulatory problem. It will be a national problem that the states cannot handle.
The result will be the demand for Congressional action not only by the insurance industry but by the banks, as well. Federal regulation of banking insurance authority, could, in this manner, erode the state regulation of insurance and open the door for federal regulation of other aspects of the business of insurance.
© Morris, Manning & Martin, L.L.P. 1997.