Comment: Banks Have Come a Long Way Fast in Insurance Powers

Research of mine published in January 1995 established that most Americans live in states or demographically prescribed areas of others where they can legally meet their insurance needs by buying from state-bank insurance agencies.

Since then the number of free-market states has increased. Another 23 million Americans are free to buy insurance, and 43 million more are free to buy annuities from their state-chartered banks.

Fourteen states grant broad insurance agency and brokerage powers to state banks in towns with a population under a prescribed maximum size - generally 5,000, but 200,000 in Nebraska. Of the 57 million people who live in these 14 states, nearly 20 million, or 7.6% of the nation's population, live in nonmetropolitan or rural areas that state-bank insurance agencies are permitted to serve.

In 1994, states with 29 million residents, or 11% of the U.S. population, specifically permitted state banks to sell annuities.

After the U.S. Supreme Court's Valic decision in January 1995, more states began recognizing national banks' annuity sales powers. Indiana, which previously allowed banks to sell only property and casualty insurance, passed a law permitting banks and trust companies to sell annuities. Similarly, Arkansas and New Mexico passed laws allowing state- chartered financial institutions to sell annuities. Rhode Island and Vermont announced that their state-chartered banks may sell annuities.

A Florida appellate court affirmed the earlier decision by a lower court that state banks may sell annuities. The New Hampshire Banking Department made a similar declaration.

On April 16 of this year, Pennsylvania announced that state-chartered banks may sell annuities. On May 2, Connecticut's bank annuity bill was signed into law.

These "annuity-powers-only" states, combined with those that permit state banks to sell both insurance and annuities, represent a total 202 million Americans - nearly 78% of the population - with the recognized legal right to buy annuities from state banks. Eventually, all states with anti-affiliation statutes will acknowledge the Valic decision and extend annuity sales powers to their state-chartered institutions.

The Supreme Court's unanimous Barnett decision unequivocally affirmed that section 92 supersedes state laws that would limit a national bank's authority to sell insurance, and eliminates the prerogative of state legislatures to advance the protectionist interests of local insurance agents.

As a result, in states where state-chartered banks have no insurance powers or their powers are more severely limited than those of national banks, legislatures are coming under pressure to provide state banks parity with national banks.

We have already witnessed extensive action for parity after Valic. Likewise, the drive for parity and competitive equality has begun in Barnett's aftermath.

That drive began in Florida, where a bill exercising the state's parity provision for state banks - to give them the same insurance powers and the same regulations as national banks - was passed May 3, 1996. The new law goes into effect Oct. 1 and requires that any rules issued by the insurance department "shall be limited to ensuring that no insurance agency or agent is subject to more stringent or less stringent regulation than another insurance agency on the basis of the regulatory status of the entity that owns the agency or in associated with the agent."

In June, West Virginia's Board of Banking ruled that the "wild card" law giving state banks the same powers as national banks overrides the state's anti-affiliation statute and permits the same insurance-selling powers in towns of 5,000. The governor of Hawaii signed into law a bill allowing state banks to sell - and underwrite - insurance, beginning June 1, 2000. Texas regulators released interim procedures (to be in force until the state Legislature reconvenes in 1997) that will enable national and state banks to sell insurance in Texas towns of fewer than 5,000 inhabitants. And the affirmative drive for parity continues in other states, including Connecticut, Georgia, Louisiana, Kentucky, Maine, Mississippi, New York, and Vermont.

On April 15, Connecticut agreed that Fleet National Bank (formerly Shawmut Bank Connecticut) may own its insurance agency in a town of 5,000. The state continues to dispute the geographic scope of Fleet's power to sell insurance, maintaining that insurance sales are limited to sales of residents of the town of fewer than 5,000 in which Fleet operates its insurance-selling branch. Two U.S. Circuit Court decisions support the Fleet position that its power to sell insurance is not so limited. .

Following Barnett, the U.S. Supreme Court also vacated a lower court's decision that First Advantage National Bank of Louisiana could be barred from selling annuities generally and insurance in a town of 5,000. Briefs on reconsideration were filed June 25. The court declined to hear an appeal by the Kentucky insurance commissioner challenging the right of national banks to obtain insurance licenses to sell in towns of 5,000.

Georgia is expected to soon permit state-chartered banks to sell annuities anywhere in the state, not just in towns of 5,000. In May, Maine and Vermont decided to apply parity statutes to state banks to keep them competitive with national banks operating under section 92. On June 16, New York's governor circumvented a restrictive bill by declaring that existing state law permits state financial institutions to sell insurance via subsidiaries.

Not counting the pending changes mentioned above, 46 states now permit state-chartered financial institutions some level of insurance powers. Twenty-four states permit broad powers throughout the state. Fourteen permit broad powers within demographically-prescribed areas of their respective states, of which four also permit broad annuity powers throughout the state. Eight other states permit annuity powers only.

Even so, in Illinois, New Hampshire, New Jersey, New York, and Rhode Island agent associations have introduced restrictive bills that would roll back or severely impair banks' ability to serve the insurance needs of their customers. And there have been the federal threats to the Barnett and Valic victories in various bills that House Banking Committee Chairman Jim Leach has been pushing for more than a year.

Despite its victories in defeating recent attempts on Capitol Hill to rollback bank insurance powers and in attaining wider powers at the state level, the banking industry must remain alert. Eventually the public's need will secure the establishment and consistent application of an enlightened national policy of bank insurance agency powers.

Still, until that policy is universally and uniformly established, the bank insurance industry will maintain its vigilance so that protectionist forces do not surprise us at the last minute.

Bankers will continue opposing any new attempts to introduce a moratorium on the Office of the Comptroller of the Currency or impose restrictive limitations on bank insurance powers under the guise of making federal legislation "insurance-neutral."

They will keep scrutinizing efforts to enact parity-powers for state banks following the Valic and Barnett decisions, to ensure that new state laws and regulations do not interfere with the exercise of national banks' section 92 powers and the ability of their state-chartered colleagues to compete with them.

Mr. White, based in Radnor, Pa., is managing director of the Financial Institutions Insurance Association.

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