A Federal Reserve Board proposal would expand the banking industry's product arsenal by allowing the indirect underwriting of life insurance and annuities.
If changes to the Fed's Regulation K are adopted as proposed last month, offshore holding company subsidiaries could enter the reinsurance business, which means they could buy previously written policies and collect the premium payments.
"This is a back-door way to permit domestic insurance underwriting," said Karen Shaw Petrou, president of the industry consulting firm ISD/Shaw Inc. "If you are permitted to take a significant portion of the risk, then you are essentially underwriting the policy."
"It appears to be an opening to insurance underwriting," agreed James McLaughlin, director of regulatory and trust affairs at the American Bankers Association. "The Fed is publicly seeking views in this area. It means they have given some real thought to the authority within the current statute to allow this."
A Fed official who requested anonymity said the board is inclined to grant the new power after the comment period expires March 14. "If the board wasn't interested it would not have put it out for comment," the official said.
While Regulation K is usually in the news because the Fed is adjusting how foreign banks may operate in the U.S., this rule change would affect the overseas activities of U.S. banks.
If adopted, a bank could sell an insurance company's products. The bank's holding company would then buy back the policies and hold them in its offshore subsidiary.
Offshore subsidiaries of bank holding companies already may reinsure policies sold abroad to foreigners. The Fed said in its proposal that several holding companies have inquired about reinsuring domestic policies, but it did not identify the institutions.
The Fed said it would not permit an offshore subsidiary to underwrite policies directly.
Industry officials said the Fed's move would increase the competitiveness of banks. They also noted that insurance underwriters have been moving into the banking industry by applying for thrift charters.
"This is something a bank affiliate should be allowed to do," Mr. McLaughlin said. "It is all financially related."
"There is support for this among the big money-center banks," said Richard M. Whiting, general counsel at the Bankers Roundtable. "This is not a risky activity." Michael D. White, managing director of the Financial Institutions Insurance Association, said the ban on reinsuring U.S. policies has hampered the international competitiveness of existing, foreign-based U.S. underwriting units.
"If you are going to be a serious player in the international marketplace you have to be able to diversify geographically," Mr. White said. "Otherwise your ability to compete and grow will be severely limited."
Insurance groups oppose the proposal, though. "Banks shouldn't look for another loophole to circumvent state laws on insurance," a spokeswoman for the American Council of Life Insurers said. "Expanded insurance powers should be dealt with by Congress-not regulators."
Lawyers said they expect the final rule to be challenged in court, but predicted the Fed would prevail. "This is clearly within the literal terms of the statute," one lawyer said. "It is not prohibited by the part of the bank holding company act that affects domestic operations."
Banks first entered the insurance underwriting business abroad in 1986 when the Fed gave Bankers Trust New York Corp. permission to underwrite pensions in Chile.
The central bank approved several similar deals through 1991 when it amended Regulation K to permit separately capitalized holding company affiliates to reinsure life policies and annuities sold to foreigners living overseas.
The Fed went slightly further in April when it gave PNC Bank Corp. permission to reinsure policies-including those from the United States-that had been reinsured at least once.