Insurance & Banking Focus Section I Insurance and Banking .............................................................................. 1 CHAPTER 1 Insurance Sales in Banks ................................................................... 1 Overview .................................................................................................................. 1 National Bank Insurance Powers ............................................................................. 2 Applicability of State Laws ....................................................................................... 2 BARNETT BANK OF MARION COUNTY v. NELSON, ___ U.S. ___ (1996) ....... 3 Insurance Law as Relevant to Financial Institutions and the Gramm-Leach-Bliley Act ............................................................................................................................ 4 I. The Barnett Bank Case, Including its Supporting Rationale, Defines when a State Law is Preempted. ................................................................................................... 5 II. The GLBA Codified the Barnett Bank Decision in its Entirety. ............................. 5 III. Federal Courts have Accepted a Broad Reading of Barnett Bank. ..................... 7 IV. Since Passage of GLBA, the States have been on Notice that Their Bank- Insurance Sales Laws are Subject to Preemption Under Barnett Bank and GLBA. 7 Summary .................................................................................................................. 8 CHAPTER 2 State Regulation and Safe Harbors ................................................... 9 State Regulation Safe Harbors ................................................................................ 9 Permissible National Bank Insurance Activities ....................................................... 9 Insurance Activities as Agent.............................................................................. 10 Insurance Activities as Principal ......................................................................... 10 Insurance Activities as Finder ............................................................................. 11 Bank Structures for National Bank Insurance Activities ......................................... 11 Bank Direct Sales ............................................................................................... 11 Investment in an Insurance Entity ....................................................................... 11 Operating Subsidiary .......................................................................................... 12 Financial Subsidiary ........................................................................................... 12 Non-controlling Investment ................................................................................. 12 Holding Company Affiliate .................................................................................. 12 Arrangements with Unaffiliated Third Parties ......................................................... 13 Distribution Methods .............................................................................................. 13 Agency Activities and the Role of the Insurance Agent ...................................... 13 Managing General Agency (MGA) and the Role of an MGA .............................. 14 Finders Activities and the Role of the Finder ...................................................... 14 Reinsurance and the Role of the Reinsurer ........................................................ 14 Regulation and Supervision ................................................................................... 14 Functionally Regulated Activities ............................................................................ 15 OCC Limits ......................................................................................................... 16 Regulatory Risk Assessment ................................................................................. 16 Applicable Legal and Regulatory Requirements .................................................... 17 Insurance Customer Protections - 12 CFR 14 .................................................... 17 Privacy Rule - 12 CFR 40 and the Fair Credit Reporting Act .............................. 17 Consumer Reporting Agency.............................................................................. 18 Federal Prohibitions on Tying - 12 USC 1972 .................................................... 18 Restrictions on Transactions with Affiliates - 12 USC 371c, 371c-1 ................... 18 Advisory Letter 96-8, “Guidance on Insurance and Annuity Sales Activities” ..... 19 i Risks ...................................................................................................................... 19 Transaction Risk ................................................................................................. 20 Compliance Risk ................................................................................................. 20 Significance of Complaints .............................................................................. 20 Strategic Risk ..................................................................................................... 21 Culture Club .................................................................................................... 21 Reputation Risk .................................................................................................. 21 High Anxiety .................................................................................................... 22 Credit Risk .......................................................................................................... 22 CHAPTER 3 Risk Management Processes .......................................................... 22 Program Management Plan ................................................................................... 23 Bank Risk Assessment .......................................................................................... 23 Risk Identification ............................................................................................... 24 Risk Measurement ................................................................................................. 24 Risk Monitoring ................................................................................................... 24 Risk Controls .......................................................................................................... 24 Adequate Policies and Procedures ..................................................................... 25 Effective Due Diligence Processes ..................................................................... 25 Processes for Identification and Selection of Third Parties ................................. 25 Guidelines for Written Contracts ......................................................................... 26 Guidelines for Qualifications and Training .......................................................... 27 Guidelines to Prevent Inappropriate Recommendations or Sales ...................... 28 Appropriate Employee Compensation Programs ................................................ 28 Risk Monitoring ...................................................................................................... 29 Ongoing Oversight of Third-Party Relationships................................................. 29 Customer Complaints ......................................................................................... 30 Compliance and Audit Programs ........................................................................ 30 CHAPTER 4 Insurance and Risk Review .............................................................. 31 RISK ASSESSMENT PROCESS ........................................................................... 31 Direct Examination of FRA’s ............................................................................... 32 Insurance Activities and FRA’s .............................................................................. 32 Preliminary Risk Assessment ................................................................................. 32 Additional Risk Assessment ................................................................................... 34 Quantity of Risk Assessment: Transaction Risk ..................................................... 35 Compliance Risk .................................................................................................... 36 Strategic Risk ......................................................................................................... 36 Reputation Risk ...................................................................................................... 37 Credit Risk ............................................................................................................. 38 Quality of Risk Management Assessment Policy ................................................... 39 Personnel practices. ........................................................................................... 40 Processes .............................................................................................................. 40 Personnel: Insurance ............................................................................................. 41 Control Systems: Insurance Activities .................................................................... 42 Risk Assessment of Insurance Activities;