University of Arkansas at Little Rock Law Review Volume 20 Issue 1 Article 4 1997 Barnett Bank Brings the Business of Insurance to the Attention of Congress Jeffrey H. Thomas Follow this and additional works at: https://lawrepository.ualr.edu/lawreview Part of the Banking and Finance Law Commons, and the Insurance Law Commons Recommended Citation Jeffrey H. Thomas, Barnett Bank Brings the Business of Insurance to the Attention of Congress, 20 U. ARK. LITTLE ROCK L. REV. 129 (1997). Available at: https://lawrepository.ualr.edu/lawreview/vol20/iss1/4 This Article is brought to you for free and open access by Bowen Law Repository: Scholarship & Archives. It has been accepted for inclusion in University of Arkansas at Little Rock Law Review by an authorized editor of Bowen Law Repository: Scholarship & Archives. For more information, please contact [email protected]. BARNETT BANK BRINGS THE BUSINESS OF INSURANCE TO THE ATTENTION OF CONGRESS Jeffrey H. Thomas* I. INTRODUCTION The decision of the United States Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson' represents a significant victory for national banks in their struggle to dominate the financial services industry. Since winning a series of decisions which upheld Federal Reserve Board determina- tions that banks, bank holding companies, and their affiliates could engage in certain securities activities,2 banks have focused intently on the marketing and sale of insurance products. Encouraged by the Comptroller of the Currency and the Supreme Court3 and fueled by an increasing appetite for additional fee income,4 national banks have proved themselves to be powerful engines for marketing and selling of annuities.5 In fact, since banks have entered the annuities market over the past two years, variable annuities have become one of the most popular investment vehicles.6 * B.A., University of Arkansas (1984); J.D., University of Arkansas (1987). Mr. Thomas is a partner in the law firm of Mitchell, Williams, Selig, Gates & Woodyard in Little Rock, Arkansas. His areas of practice include corporate insurance and state insurance regulatory representation. 1. 116 S. Ct. 1103 (1996). 2. See Securities Indus. Ass'n v. Board of Governors of Fed. Reserve Sys., 468 U.S. 207 (1984) (holding that the Federal Reserve Board acted within its authority when it permitted the banking industry to engage in securities brokerage activities). Securities Indus. Ass'n v. Board of Governors of Fed. Reserve Sys., 900 F.2d 360 (D.C. Cir. 1990) (upholding a Federal Reserve Board determination that certain nonbank subsidiaries of bank holding companies may underwrite and deal in corporate equity and debt securities); Securities Indus. Ass'n v. Board of Governors of Fed. Reserve Sys., 839 F.2d 47 (2d Cir. 1988), (upholding a Federal Reserve Board determination that nonbank subsidiaries of bank holding companies could underwrite and deal in certain bank-ineligible securities activities). 3. See Nationsbank of N.C. v. Variable Annuity Life Ins. Co., 531 U.S. 251 (1995) (upholding the Comptroller of the Currency's determination that annuities are investments, not insurance, and may be sold by national banks pursuant to the "incidental powers" provision of Section 24 of the National Bank Act which authorizes national banks "[t]o exercise by its board of directors or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking .. "); 12 U.S.C. § 24 (1994). 4. See Dave McDaniel, BancassuranceAmerican Style: Opportunities in Partnerships, BEST'S REVIEW, July 1996. "Insurance revenue for banks will increase from 2% in 1995 to 15% of bank revenue in 2000 ..... Id. The value of total insurance premiums generated by banks is expected to increase from $23.7 billion in 1995 to $54 billion in 2000 with annuity premiums accounting for $21.1 billion and $42 billion respectively. See id. 5. See Ronald R. Glancy & Julianna Schulte O'Reilly, Insurance? Its in the Bank, NAT'L L. J., Aug. 26, 1996. "In 1994, for example, banks sold $16.4 billion dollars worth of annuities. According to Michael White, of the Radnor, Pa.-based consulting firm Michael White Associates, banks' share was approximately 36.9 percent of the entire annuity market." Id. 6. See Bridget O'Brien, VariableAnnuities Piggyback on the Bull, WALL ST. J., Jan. 28, UALR LAW JOURNAL [Vol. 20 Pursuant to the Barnett decision, national banks have the opportunity to participate in other areas of insurance, including the marketing and sale of the more traditional forms of life, health, and property and casualty insurance products. This represents a significant threat to the independent insurance agent as the lure of an almost unlimited area of opportunity for commissions to be earned by banks7 has caused a fierce territorial struggle! To a large extent, Barnett resolves preemption issues arising out of the conflict between Section 92 of the National Bank Act9 (Section 92), and certain state "anti-affiliation" laws which have generally prohibited financial institutions, including national banks, from being licensed as insurance agents or being affiliated with insurance agencies.' 0 This holding also highlights the accelerating trend of convergence in the financial services industry." Barnett lays the groundwork for further federal regulation of the "business of insurance," which Congress specifically delegated to the states when it enacted only five years ago. During the first nine months of 1996, the total market value of funds invested in variable annuities increased to $320.1 billion ...up significantly from $262.1 billion for all of 1995. By comparison, at the end of 1991, assets in stock mutual funds were $412 billion...." Id. 7. See, e.g., National Ass "nof Independent Insurers, GREENBOOK, 1996. Property and casualty insurance companies reported premiums earned for the first six months of 1996 totaling in excess of $125 billion. Id. 8. It appears, however, that the battleground is shifting. On January 16, 1997, the Independent Insurance Agents of America, Inc., a trade organization representing 300,000 member agents, held a news conference to announce the adoption of a new policy supporting federal legislation allowing affiliations between banks and insurance entities so long as state insurance regulation and consumer protections are part of the bill. See Robert H. Gettlin, IIAA to End its Struggle With Banks, Will Support Affiliations Legislation, BEST WEEK, Jan. 20, 1997. 9. 12 U.S.C. § 92 (1994). 10. See National Association of Insurance Commissioners Compendium of State Laws on Insurance Topics: State Laws Regulating Banking and Insurance Relationships. As of November 1995, there were twenty-four states which had laws that in some way restricted the ability of financial institutions to sell insurance products, including: Alaska, Arizona, Arkansas, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Mississippi, Nebraska, Nevada, New Hampshire, New Mexico, New York, Pennsylvania, Rhode Island, Tennessee, Vermont, and West Virginia. Id. 11. See Street Fight: The High Stakes Struggle to Survive in a Converging Market, BEST's REVIEW, Jan. 1997. "An emerging global financial marketplace is forcing U.S. regulators and legislators to allow combinations of banks, insurers and investment firms sooner than previously thought." Id. 1997] BANKING AND INSURANCE the McCarran-Ferguson Act. " This article will focus on the preemptive aspects of Barnettand responses of the various interested parties to its implications. II. SECTION 92 Section 92 was originally enacted in 1916 when the Comptroller of the Currency urged Congress to allow national banks in "small communities" to act as insurance agents. The reason for the Comptroller's proposal was to stem the tide of failed national banks in small towns by providing additional sourcesof revenue to augment the return made on their typically small deposit base.' 3 The law, as amended, provides in relevant part that: 12. 15 U.S.C. §§ 1011-1015 (1994). In 1945, Congress intended for the McCarran- Ferguson Act to clarify the authority of the states to regulate the business of insurance. See Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205 (1979). This was necessitated by the Supreme Court's decision in United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533 (1944) (holding that insurance was interstate commerce which in turn implicated federal jurisdiction). South-Eastern Underwriters brought a near-chaotic condition to state-run systems of control which were established under prior Supreme Court rulings and had received the approval and cooperation of the insurance industry for over seventy-six years. See Hooper v. California, 155 U.S. 648 (1895) (holding that insurance is not commerce); Paul v. Virginia, 75 U.S. (8 Wall.) 168 (1868). 13. The legislative history of Section 92 is reported at 53 Cong. Rec. 11,001 and consists almost entirely of a letter written by the Comptroller to the Chairman of the Senate Banking and Currency Committee. The letter, dated June 8, 1916, provides in part: For some time I have been giving careful consideration to the question as to how the powers of... small national banks might be enlarged so as to provide them with additional sources of revenue and place them in a position where they could better compete with local State banks and trust companies which are sometimes authorized under the law to do a class of business not strictly that of commercial banking.... My investigations lead me respectfully to recommend to Congress an amendment to the national bank act by which national banks located in [small towns]... may be permitted to act as agents for insurance companies .... It seems desireable from the standpoint of public policy and banking efficiency that this authority should be limited to banks in small communities. This additional income will strengthen them and increase their ability to make a fair return to their shareholders, while the new business is not likely to assume such proportions as to distract the officers of the bank from the principal business of banking.