Publications: The Risks and Returns Associated with the Insurance Activities of
Foreign Subsidiaries of U.S. Banking Organizations
by Gary Whalen
Abstract
In late 1999, U.S. banking organizations were granted permission to indirectly
engage in insurance underwriting by affiliating with insurance companies in a
holding company framework. To date, however, few such combinations have occurred
and so little empirical evidence on the actual benefits of this sort of merger exists.
Most of the available empirical evidence on the risks and returns of bank involvement
in insurance activities is drawn from studies examining only hypothetical mergers of
banks and insurance companies. Although some U.S. banks have begun to sell insurance
products domestically in recent years, there have been virtually no studies of the
actual risks and return of this activity because banks are not required to report
information on this individual line of business.
But U.S. banking organizations have been permitted to sell insurance and
underwrite life insurance outside the U.S. through foreign subsidiaries and
file financial statements for each of these subsidiaries with the Federal
Reserve. The primary aim of this study is to use these data over a 13-year
time span (1987-1999) to generate evidence on the risks and return actually
associated with bank controlled insurance operations. This exercise should
provide needed insight on the likely effects of an increase in domestic
insurance activities by U.S. banks.
Although the results are somewhat sensitive to the aggregation method employed,
the evidence is basically consistent with the findings reported in previous work
where only hypothetical bank-insurance combinations were analyzed. When ROA is
used as the measure of returns, the mean and median returns earned in insurance
activities exceed banking returns as well as the returns earned in other nonbanking
activities by a substantial margin. When ROE is used to measure returns, the
pattern is more mixed because equity-asset ratios in insurance activities are
much higher than they are for the two benchmark activities. The evidence
generally shows that when viewed on a stand-alone basis, insurance activities
are slightly riskier than banking but less risky than the other nonbanking
activities BHCs have been permitted to engage in. The results of an analysis
of simple two-asset portfolios (banking and insurance) suggest banking
organizations can improve, or at least not unfavorably alter their risk/return
opportunities by engaging in both banking and insurance activities.
Disclaimer
As with all OCC Working Papers, the opinions expressed in this paper are those of the author alone, and
do not necessarily reflect the views of the Office of the Comptroller of the Currency or the Department of the Treasury.
Any whole or partial reproduction of material in this paper should include the following citation:
Whalen, "The Risks and Returns Associated with the Insurance Activities of
Foreign Subsidiaries of U.S. Banking Organizations," Office of the Comptroller of
the Currency, E&PA Working Paper 2000-8, September 2000.
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