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New Rules
As of July 1, the law allows banks to sell insurance if they train employees to become registered insurance agents or hire already-licensed agents. Over time, some banks are likely to begin underwriting policies and buying insurance companies. In the short run, however, industry observers speculate that banks will focus on partnerships with existing agencies that invite the banks to share in the proceeds of profitable insurance lines such as life and annuities. Look for a raft of deals between insurance agents and banks, savings and loans, and credit unions. "Banks will be looking for agents, and agents will be looking for banks," predicts Don Dowdell, general counsel for the Department of Insurance.
Some deals are already in the works. It took little more than a week after the law passed for a bank to approach Joe Arnall, the rules chairman for the Florida House of Representatives, who operates an independent insurance agency in Jacksonville. Arnall, who has been selling insurance for 30 years, received an offer -- after the legislative session -- from a community bank to accept insurance referrals in exchange for splitting commissions. He says he saw it coming: Banks have been salivating over the chance to use insurance sales to boost their profit margins since the courts began eroding the traditional barriers between banking and insurance. "I did what I could to protect insurance agents from being abused," he says.
The repeal of the law that kept the two financial service sectors separate came in part because some insurance interests wanted to get a jump on federal legislation that would bring similar changes nationwide. Citigroup, the bank holding company born of the merger between Citicorp and Travelers Insurance Company last year, hired insurance lobbyist Allan Katz, of the law firm Katz, Kutter, Haigler, Alderman, Bryant & Yon, to push a deal. "It ought to change the face of banking, as well as insurance companies, if it's done well," says Katz.
Florida's law now will allow Citigroup to gain a foothold in the state's huge insurance market as it awaits similar changes at the national level. Citigroup, of course, touts the benefits to consumers. "It means they'll be able to receive a greater array of products from their banks and from their insurance agents," says Timothy E. Campbell, senior vice president of state government relations for Citigroup. His company is already test marketing several products around the country and expects to do the same in Florida.
Erasing the law
With one swipe, the change in the law finishes erasing a regulatory scheme that evolved over the last 25 years to protect insurance agents against competition from the financial services industry. Florida's old law was considered one of the toughest anti-affiliation measures in the country until 1996, when the U.S. Supreme Court, in Barnett Bank v. Nelson, struck at a chink in the law's armor. The court upheld the right of federally chartered banks, like Barnett, to sell insurance in Florida in markets with fewer than 5,000 people -- a right that previously had been reserved for independent, small town banks.
Following the court's decision, the Legislature gave state-chartered banks the same right. The changes prompted state and national banks to buy banks in small towns. Those banks then bought insurance agencies or hired insurance agents so they could market insurance statewide through telemarketing and mass mailing. State regulators tried to impose heavy restrictions on bank insurance sales -- even designating how big the signs had to be in a bank lobby -- but judges threw out most of the rules in court. Meanwhile, the banking-insurance border continued eroding as State Farm and other property and casualty companies began offering mortgage loans and car loans.
As the walls continued to fall, only the largest banks could afford to set up in small towns and engage in the convoluted sales techniques spawned by the law, says Anthony DiMarco, vice president of government affairs for the Florida Bankers Association. By repealing the affiliation rule, lawmakers have opened the door for virtually "every bank to sell insurance if it chooses to," he says. "We've been on this road for a long time. This was just the last step in Florida."
Federal legislation
The chief catalyst for change was the fact that the insurance industry was running out of time. The proposed Financial Services Modernization Act now pending before Congress would repeal Depression-era laws that prohibit banks from affiliating with insurance and securities firms and allow them to sell any type of insurance from any location. In addition, it would prevent states from regulating the sale of insurance by banks, savings and loans, or credit unions unless the state had regulations already in place.
Such sweeping proposals concerned insurance agents, according to Herb Morgan, executive vice president, Florida Association of Life Underwriters and a former speaker of the House. The agents considered trying to stall one more year, but then decided it was better to enact protections now, rather than wait and see what the federal law would bring. "Competition is not a problem as long as it is fair competition," Morgan says.
So when House Speaker John Thrasher called lobbyists into his office midway through the last legislative session and the bankers offered insurance agents a deal, the agents agreed to support repeal of the affiliation rule in exchange for 13 protections that safeguard against unfair competition. For example, banks can't require insurance as a condition of an auto loan or mortgage. They will be required to tell customers they do not have to use the bank's insurance agent, remind them the insurance is not a bank product and inform them it is not insured by the FDIC. "Whether we like it or not, banks can sell insurance; it's a fact of life," Morgan says. "We got some reasonable consumer protections. If we had waited for the federal law, we would have gotten less."
Others say that insurance agents realized that changing the law wouldn't knock them out of the game: So far, competition from banks selling insurance in Florida has proven to be less threatening than they expected. "Banks understand they can't sell insurance in the same way they sell bank services," says state Sen. Tom Rossin, a West Palm Beach banking consultant who sponsored the bill. "It is a separate way of compensating their employees and a separate way of handling their customers. They really need people trained in the insurance business to do this and insurance agents realized banks were getting to know this. It turned out to be not quite as onerous as they had thought."
