INTRODUCTION AND MOTIVATION
The enactment of the Financial Services Modernization Act (1) of 1999 (known as the Gramm-Leach-Bliley Act) promised the most fundamental reform in the U.S. financial services regulation in more than half century. The Gramm-Leach-Bliley Act (GLB) repealed the depression era laws and reflected the policy views of many competing political and business constituencies. GLB intensified competition in financial services industry by eliminating legal and regulatory barriers among different types of financial institutions. GLB permitted affiliations among financial entities and allowed banks, insurers, securities firms and other financial services institutions to engage in a complete set of financial activities, including commercial banking, insurance underwriting, securities issuance, merchant banking, brokerage, etc. With the same kind of choices as they do in other industries, financial services consumers could take advantage of GLB and benefit from one-stop shopping convenience.
When GLB was passed after a decade debate, almost no one doubted the potential for GLB to have a profound impact on U.S. financial markets. As the end of 2003--under the GLB Act--more than 600 companies operated as Financial Holding Companies (FHC) representing 78 percent of the total assets of all Bank Holding Companies (BHC). In addition, more than 1,300 FHCs/BHCs became engaged in insurance agency or underwriting business and more than 2,500 insurance companies, either through agents or risk bearing underwriters, were affiliated with commercial banks and thrift institutions (BHC Statutory Financial Report multiple years and Federal Reserve Report to Congress, 2003).
GLB opened the door for further consolidation and it was expected to spur waves of cross-sector mergers and acquisitions (M&As). However, massive cross-sector M&As did not occur. Instead, banks bought specialized securities firms and acquired insurance agencies and brokerages rather than acquiring insurance underwriting companies as had been predicted. Banks now control some of the largest insurance brokerages companies. Insurance companies applied for new thrift charters instead of commercial bank charters. (2)
GLB represents a sharp break with traditional policy in the U.S., and it has already produced radical changes in banking and insurance industry, and more is in prospect. However, the specific ways in which GLB has affected the financial system are still widely open to question, especially the extent to which formerly separate sectors of the financial services industries have combined to take advantage of the newly permissive activities under GLB through the integration across sectors.
The research questions we investigate are as follows: 1) How were insurers involved in banking, and how were banks involved in insurance prior to GLB? 2) What is the impact of GLB on banks entering insurance and vise versa? 3) To what extent have firms in the banking and insurance industries combined to proceed into each other's traditional lines of business under GLB? 4) What are the characteristics and performance of the firms that have chosen to go beyond their traditional product lines? The answers to questions like these will be invaluable to a variety of constituents as they will the need to make policy recommendations based almost solely upon anecdotal stories and survey data following passage of GLB.
The remainder of this paper is organized as follows: Section 2 discusses the history of U.S. financial integration and reviews GLB and its effects on banking and insurance industries. Section 3 reviews the literature and Section 4 describes the construction of dataset. In Section 5 we identify the domestic assurbanks and bancassurers. Sections 6 and 7 present the market analysis and discuss the results. Section 8 concludes the study.
HISTORY OF U.S. FINANCIAL INTEGRATION AND GLB ACT
Prior to 1999, U.S. financial services were statutorily separated into three broad sectors: banking, insurance, and securities. The securities sector was one area of the financial services industry that exhibited significant crossover with banks. The Glass-Steagall Act of 1933 established a wall between commercial banking and investment banking after the failure of 11,000 commercial banks during the Great Depression. The 1933 Act prohibited banks from principally engaging in underwriting securities. However, in 1986, Federal Reserve Board (FRB) eased these restrictions by raising the limits of bank-ineligible securities activities to less than 5 percent of BHC's total revenue. The revenue limit was raised to 10 percent in 1989 and to 25 percent in 1996. These securities subsidiaries are called "Section 20 companies."
Unlike affiliations between banks and securities companies, affiliations between banks and insurance companies have been highly restricted since the early 1900s. GLB totally lifted barriers which restricted competition across financial sectors. Because of the lack of data for security firms relevant to banking and insurance, this study focuses on the integration across U.S. banking and insurance sectors.
Definition of Assurbanking and Bancassurance
A financial conglomerate is commonly defined as any group of companies under common management control that provides services, predominantly in two or more of the three major financial services sectors (Skipper & Kwon, 2007, p.p. 656). We differentiate between bank-initiated and insurer-initiated financial conglomerates and, therefore, define bancassurance and assurbanking as follows: Bancassurance is the process of a bank selling insurance products manufactured by insurance subsidiaries that are owned by the bank, either through its own distribution channels or through outside agents. Assurbanking is the process of an insurance company selling banking products manufactured by banking subsidiaries that are owned by the insurer. Instead of focusing on distribution and cross-selling, our definition focuses on the manufacturing of cross-sector financial service product, and encompasses integration of production, management, and controlling rights.
Insurance Involvement in Banking Pre-GLB
Insurance companies have been highly constrained in their ability to penetrate the banking market compared to the access of their banking counterparts. In the early 1900s, in New York (and a few other states), policies restricted the ability of insurance companies to invest in common stocks. Insurance companies were required to divest themselves of bank stocks and were prohibited from acting as underwriters for securities or engaging in securities syndications. In competition with banks, insurance companies in the 1950s began entering the home mortgage market and made commercial loans. In the 1960s, a series of M&As occurred in the insurance industry, which sometimes involved non-insurance businesses including banks and thrifts. In response, the National Association of Insurance Commissioners (NAIC) approved a model insurance holding company statue to impose restrictions on companies intending to acquire insurers and on target companies the insurers intended to acquire. The model statue was subsequently adopted by most states. Under the model statue, state regulators had the power to oversee the activities of an insurance holding company and its non-insurance subsidiaries.
Prior to GLB, in an effort to meet bank competition, insurers found ways around the Bank Holding Company Act (BHCA) prohibition of affiliating banking and insurance activities. The most popular strategy involved insurers acquiring unitary thrift holding companies, non-bank banks, and limited purpose trust companies. The Savings and Loan Holding Company Act (SLHCA) of 1967 (3) provided that a company owning only one single thrift was a unitary thrift holding company and was not subject to any restrictions on other activities undertaken. Therefore, an insurance company or its holding company could legally purchase one and only one thrift institution. A second strategy allowing insurers to enter banking was to operate non-bank banks. The BHCA of 1956 defined a bank as an institution that "both accepted demand deposits and made commercial loans." Insurance companies exploited this definition by establishing a non-bank bank that either accepted saving deposits but not demand deposits, or one that made consumer loans not commercial loans. (4) A third strategy was to establish a limited purpose trust company, which was not considered a bank if it accepted only trust funds (not demand deposits) and did not offer FDIC insurance on these deposits.
Bank Involvement in Insurance Pre-GLB
From a historical perspective, BHCs, national banks, state-chartered banks and thrift saving banks have long possessed federal and state permission to engage in a range of insurance activities. (5) In 1916, Section 92 of National Banking Act (NBA), (6) the first time, prescribed the legislative scheme for giving national banks the authority to sell insurance. National banks were empowered to locate and sell insurance in any place with no more than 5,000 in population--the famous "place of 5,000" provision. During the Great Depression era, banking and securities activities were separated, and affiliations between commercial banks and securities companies were highly prohibited by the Glass-Steagall Act of 1933.
For BHCs, Section 4(c)(8) of the Bank Holding Company Act (BHCA) of 1956 (7) permitted BHCs to engage in activities of a "financial, fiduciary or insurance nature," which included insurance agency activities. However, FRB still did not approve general insurance underwriting for BHCs during 1950 to 1970. In 1971, FRB first promulgated a list of permissible non-banking activities for BHCs, including permissible insurance activities in what was known as Regulation Y. However, a decade later, Congress passed the Garn-St. Germain Act (GSGA) of 1982 (8) that rolled back Regulation Y...