Office Of The Comptroller Of The Currency’s

Supervision Of

Banks Selling Insurance

OIG-00-098 June 27, 2000

Office Of The Inspector General

United States Department Of Treasury

Page 2

Please note that we modified slightly our recommendation 1-1

in response to your staff’s concerns with the recommendation

as presented in our draft report. Also, note that OCC did

not concur with several findings and recommendations

contained in the report. Following our standard procedures,

the findings and recommendations will be recorded into the

Treasury Department’s Inventory Tracking and Closure system

(ITC) noting your disagreement. Treasury Directive (TD) 40-

01 requires your office to submit a written reply to the

Deputy Secretary within 30 days after the report is issued

that explains the reasons for your lack of agreement. TD

40-01 also requires your office to simultaneously submit a

copy of your reply to the OIG. OMB Circular A-50 and TD 40-

03 requires resolution of your disagreement within six

months of report issuance.

We appreciate the courtesies and cooperation provided to our

staff during the audit. If you wish to discuss this report,

you may contact me at (202) 927-5400 or a member of your

staff may contact Benny W. Lee, Director, at (415) 977-8810

in San Francisco, California.

Attachment

cc: Laura L. McAuliffe, Director, Management Improvement

Comptroller of the Currency
TABLE OF CONTENTS

OIG-00-098 OCC SUPERVISON OF BANKS SELLING INSURANCE

EXECUTIVE DIGEST .......................................................................... i

INTRODUCTION............................................................................ 1

Background ...................................................................................... 1

Bank Insurance Activity Expected To Grow Rapidly ................................. 1

New Legislation Will Accelerate Financial Services Reform And Growth ........ 3

OCC Relies On State Supervision Of Bank Insurance Activities.................... 5

OCC Efforts To Prepare For Financial Services Reform............................. 6

Objective, Scope And Methodology ......................................................... 7

AUDIT RESULTS ........................................................................... 9

FINDING 1: OCC Over-Relying On State Supervision................................... 9

Not All States May Be Able To Provide OCC Assurance............................ 9

Complaint Driven Systems Are Not Always A Good Measure

 Of Compliance With Consumer Protection Laws .................................. 14

Signs Of Changing Relationship Between OCC And States ......................... 16

OCC Believed Continued Reliance On States Is Appropriate ....................... 17

Recommendation And Management Response ........................................ 19

FINDING 2: OCC Needs To Reassess Its Focus Of Bank Insurance Supervision .... 23

OCC Has Done Little To Prepare Agency For Impending Changes................ 23

OCC Needs To Better Prepare For Bank Insurance Activity......................... 25

OCC Believed Expanded Activities Pose Little Risk.................................. 29

Recommendations And Management Responses....................................... 31

APPENDICES

1. Objective, Scope And Methodology................................................... 36

2. National Bank Insurance Activities As Of February 1999 ......................... 38

3. 1997 Insurance Department Resources................................................ 39

4. OCC Memorandum To Examiners .................................................... 41

5. Management Response .................................................................. 45

6. Major Contributors....................................................................... 49

7. Report Distribution....................................................................... 50

CHARTS

1. State Insurance Department Staffing As Of December 31, 1997.................. 11

2. State Insurance Department Employees As Of December 31, 1997 .............. 12
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OIG-00-098 OCC SUPERVISON OF BANKS SELLING INSURANCE Page i

Results In Brief

The business of banking is evolving to include selling insurance

which traditionally has not been a banking activity. Although

national banks have long had authority to engage in insurance

activity, only a few have taken full advantage of this authority.

Instead, most offer insurance products that are closely related to

their lending activities. However, national bank insurance

activities are expected to grow rapidly with the impending reform

of the financial services industry. The recently enacted GrammLeach-Bliley Act of 19991

 will remove many barriers between

banking, insurance and securities and allow banks to expand and

grow their insurance businesses. In doing so, bank management

will encounter a new and different business environment that may

affect bank safety and soundness as well as consumer protection.

Given its supervisory stance and philosophy, it is uncertain

whether OCC is ready to respond to any major stress on the

National Banking System as a result of a rapid expansion into

insurance activities. OCC will need to better prepare for these

impending changes and address the expected increase in national

bank insurance activities. Although the new legislation

establishes the states as the functional regulator over insurance,

reliance on states may not be the prudent course of action when

determining the impact of insurance activities on bank safety and

soundness or compliance with consumer protection regulations.

As insurance activities become increasingly important to bank

viability, OCC will need to determine the reliance it can place on

state supervision, better define its supervisory role over insurance

activities and begin to address those issues in its organizational

structure, supervisory strategies and examination processes.

Objective, Scope and Methodology

The audit objective was to determine if OCC supervision of

national bank insurance activities adequately addressed bank

safety and soundness and protected consumers. OIG performed

its fieldwork between November 1998 and July 1999.

 

1 Pub. L. No. 106-102.
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OIG-00-098 OCC SUPERVISON OF BANKS SELLING INSURANCE Page ii

The OIG discussed with OCC personnel in Headquarters and in

the Western District the risks that banks face in expanding their

insurance activities and reviewed OCC supervisory efforts to

address those risks. The OIG also obtained the positions and

perspectives on future bank insurance activities from officials at

the Federal Reserve System, a state insurance regulator and

several bank and insurance trade associations. (See Page 7)

Detailed Results

Bank Insurance Insurance products and services provide banks an attractive low

Activity Growing cost source of fee income to replace declining income from its

lending activities. About 75 percent of all national banks currently

offer insurance products to their customers. However, most products

are closely related to their traditional role of credit intermediary and

offered through operating subsidiaries. Only a few are engaged in

higher risk activities such as underwriting and reinsurance.

Insurance activity by all banks was predicted to generate over $10

billion in premiums in 1998 and increase at a compound annual rate

of over 30 percent to Year 2002. (See Page 1)

The Gramm-Leach-Bliley Act of 1999 will dismantle decades-old

regulatory barriers separating banking, securities and insurance.

Although it does not grant banks new powers or significantly

increase the scope of national bank insurance products or

services, it is expected to significantly increase the volume of

bank insurance activities in the years to come. The new

legislation is also expected to accelerate convergence between

bankers and insurers. Both OCC and the insurance industry

agree bank insurance business is evolving and expect significant

change in bank business strategies, as well as insurance products

and services. (See Page 3)

Continued Reliance In the past, OCC relied heavily on the states to supervise the

On States May insurance activities of national banks. While OCC remains the

Not Be Prudent administrator of the National Banking System, the new

legislation established the states as the functional regulator of all

insurance activities. However, continued reliance on state

supervision of expanding bank insurance activity may not always

be the prudent course of action for OCC in the future. As

insurance activities expand, bank management will encounter new
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OIG-00-098 OCC SUPERVISON OF BANKS SELLING INSURANCE Page iii

and different business environments and operating risks that could

affect bank safety and soundness and consumer protection. These

insurance-related risks include measuring, controlling and pricing

accident risks and liabilities, litigating claims and investing

premiums.

States focus mainly on insurer solvency and market conduct and

may not adequately address the expanded insurance activities or

new risks as bank management ventures into new and expanded

insurance products and services. Furthermore, individual state’s

supervisory focus, philosophy and resources vary widely with

respect to insurance. Thus, some states may not be able to

supervise the expanding national bank insurance activities without

additional resources.

Some states may not be willing or able to fund the additional

resources needed to supervise the expanding national bank

insurance activities. Insurance revenues are a major funding

source for states. On average, only 7 cents of every insurance

dollar collected by states is used to regulate the insurance

industry. The remainder goes into the respective states’ general

revenue fund and is used to fund other obligations. (See Page 9)

OCC Needs to The OCC needs to recognize the risk that expanded insurance

Refocus Its activities can present to the National Banking System.

Supervisory Role Accordingly, OCC will need to address those risks through its

organizational structure, supervisory strategies and processes.

While OCC initiated several efforts to revise its supervision over

bank insurance activities, it continues to view the primary risks

associated with national bank insurance activities as consumer

protection rather than safety and soundness. As such, its

examination of bank insurance activities has often been limited to

general inquiries of management. (See Page 23)

OCC will need to better define its supervisory role and prepare

for the increasing importance of expanded insurance activities to

bank viability. Faced with increased competition and industry

consolidation, banks can no longer rely on loans to drive

earnings. Instead, banks will likely look for fee income from

such non-traditional products as insurance to enhance shareholder
EXECUTIVE DIGEST

OIG-00-098 OCC SUPERVISON OF BANKS SELLING INSURANCE Page iv

value. In doing so, banks will encounter strikingly different

cultures, business environments and new and unfamiliar products

and services that could impact bank safety and soundness.

(See Page 25)

OCC Believes Prior to the passage of the new legislation, OCC officials stated

Expanded Activities that continued reliance on state regulation was appropriate.

Pose Little Risk OCC officials were committed to enhancing supervisory efforts

and meeting the challenges relating to bank insurance activities

but respected the states’ role as functional regulator.

OCC officials also believed that insurance activities posed little

risk to bank safety and soundness because those activities were

only a small part of a bank’s comprehensive banking activities

and were conducted through state licensed and supervised

subsidiaries. As such, they believed OCC risk-based supervision

fulfilled its mission as administrator of the National Banking

System while honoring the tenets of functional regulation. Under

its supervision-by-risk approach, OCC examiners can assess the

impact of the bank’s insurance activities and work with state

supervisors, if necessary.

The OIG does not disagree that reliance on state regulation may

have served a purpose in the past. However, the degree to which

OCC can continue to rely on state supervision depends largely on

a state’s supervisory philosophy and resources. Such reliance

may be appropriate for some but not necessarily all states. While

the states are the functional regulator of all insurance activities,

the new legislation provides OCC authority to examine insurance

activities should those activities threaten bank safety and

soundness. This concept of selective reliance on state supervision

is not new and is currently used by Federal Deposit Insurance

Corporation (FDIC) to examine state-chartered banks.

The OIG believes non-traditional banking activities, such as

insurance, will become increasingly more important as banks

respond to an increasingly competitive world economy. Thus,

the operating environment and risk could change significantly as

bank management expands into different products and services.
EXECUTIVE DIGEST

OIG-00-098 OCC SUPERVISON OF BANKS SELLING INSURANCE Page v

The OIG believes these risks can be reduced but not eliminated if

banks conduct insurance activities through an operating

subsidiary. History has shown that excessive reliance on

individuals or affiliates with delegated authority to rapidly expand

into new and unfamiliar insurance products and services can

jeopardize a parent entity’s reputation, operation and capital

regardless of legal structure.

The OIG does not take issue with OCC that its supervision-byrisk concept will address national bank insurance activities, given

its supervisory stance and philosophy. However, it is uncertain

whether OCC is ready to effectively respond to any major stress

on the National Banking System as a result of banks’ rapid

expansion into insurance sales activities. The only guidance on

bank insurance sales activities available to OCC examiners could

not be used as an examination tool nor could it be used to report

violations or enforce compliance. As a result, OCC examiners

were viewing insurance sales activities as a compliance issue and

limiting their examination activities to general inquiries of

management. (See Pages 17 and 29)

With the passage of the new legislation, national banks may now

expand and grow their insurance business. To address the risks

related to the expanded insurance business, OCC will need to

begin to identify its workload and develop expertise, strategies

and procedures to address the evolving business environment and

risks relating to expanded insurance activities by national banks.

Recommendations

In this report, the OIG recommends certain actions it believes

will help OCC prepare for the impending reform of the financial

services industry. Specifically, OCC should determine the

reliance it can place on the states’ regulation over national banks’

insurance activities. The OCC should also maintain a universe of

national banks engaged in insurance activities, identify the

attendant risks, develop and expand agency expertise, formulate a

supervisory strategy and promulgate policies and procedures.

OCC concurred with 1 of the 5 OIG recommendations in this

report. It agreed with the need for maintaining a universe of
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OIG-00-098 OCC SUPERVISON OF BANKS SELLING INSURANCE Page vi

banks engaged in insurance activities and was taking action to

address the issue surrounding the recommendation.

OCC believed the 4 remaining OIG recommendations were

inconsistent with the functional regulation approach embraced by

the new legislation and were inappropriate in light of the limited

insurance activities permitted for national banks under the new

legislation. It believed Congress specifically directed Federal

bank and thrift regulators to defer to the state insurance

regulators and that the new legislation contained no provision for

Federal supervision of insurance activities or oversight of state

insurance regulators. As such, it stated those recommendations

would not be implemented.

The OIG is not recommending OCC regulate bank insurance

activities or oversee the work of state regulators. Instead, the

OIG is recommending OCC proactively determine when it can or

can not rely on the state regulators’ work. The authority is clearly

provided in the new legislation. To accept state regulators’ work

without determining its reliability would be tantamount to

abdicating OCC’ responsibilities as the primary supervisor over

the National Banking System.

Accordingly, the OIG believes OCC should evaluate state

regulators’ work in terms of independence, qualifications, scope

of inquiry as well as sufficiency, relevancy and competency of

the state regulators’ evidence and assertions. OCC needs to

develop the institutional knowledge over the insurance industry

before its personnel can effectively determine if it can or can not

rely on the work of state regulators. If it can not rely on that

work, it will need a supervisory plan and procedures to

effectively examine the functionally regulated insurance entity.

The OIG modified slightly its recommendation 1-1 that OCC

determine the reliance it can place on states regulators in response

to OCC official comments to the draft report. However, OCC

did not concur on the modified recommendation. As such, in

accordance with Treasury Directive 40-01, OCC is to submit a

written reply to the Deputy Secretary within 30 days of report

issuance explaining the reasons for its lack of agreement. (See

Pages 19 and 31).
INTRODUCTION

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 1

Background

The business of banking is evolving beyond just taking deposits

and making loans to include traditionally non-banking products

such as insurance. National banks have long had authority to

engage in insurance activity, but few have taken full advantage of

this authority. While many national banks now offer insurance

products to their customers, most only offer insurance products

closely related to their lending activities. These products have

provided banks a growing and increasingly important source of

income and required little capital.

However, the Gramm-Leach-Bliley Act of 1999 will dismantle

decades-old regulatory barriers separating banking, insurance and

securities services. As a result, the volume of bank insurance

activity, including that of OCC regulated national banks, is

expected to significantly increase. In expanding their insurance

business, national banks may encounter such operating risks as

measuring, controlling and pricing accident risks and liabilities as

well as litigating claims on new products and services offered to

customers.

In the past, national banks often conducted their insurance

activities in an agency capacity thereby minimizing the exposure

to liability and losses. As such, OCC viewed bank insurance

activities as posing greater risk to consumers than to bank safety

and soundness. Accordingly, OCC relied heavily on states to

regulate and supervise insurance companies and their associated

agencies and agents, as well as to protect bank customers. For

those banks venturing into new or expanded insurance activities

permitted under the new legislation, however, the associated risks

could impact bank safety and soundness and affect the degree to

which OCC can rely on state supervision of national bank

insurance activities.

Bank Insurance Activity

Expected To Grow Rapidly

National bank involvement in insurance is not new. In fact, their

authority to engage in insurance activities dates back to 1916.

This authority provides banks broad permission to act as agent

for insurance sales including that of a general insurance agency

soliciting and selling numerous types of insurance products and

services. However, banks have generally limited their insurance
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OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 2

products and services to those related to their traditional role of a

credit intermediary and offered them through bank operating

subsidiaries. National banks also have had authority to engage in

underwriting or reinsurance activities. However, an OCC survey

disclosed only a few national banks were engaged in those higher

risk activities and generally through an operating subsidiary.

The size of the banks’ insurance activity has been the subject of

speculation fueled, in part, by its recent growth, widely varying

bank strategies and the lack of monitoring by Federal regulators.

Neither OCC nor the Federal Reserve System routinely collected

data on bank insurance activities until recently.

In late 1998, OCC obtained insurance activity information that

showed about 75 percent of national banks (1,950 out of 2,600

surveyed) were reportedly involved in insurance, but only a few

were involved in underwriting or reinsurance. Most were

offering only credit related insurance products. OCC did not

include annuities in its definition of "insurance.”

The national banks reported insurance sales premiums of over $2

billion in 1997, mostly from credit life insurance, mortgage

insurance and other credit-related products. Only 20 national

banks were underwriting insurance and reported $2.7 million in

underwriting premiums. Only 22 were involved in reinsurance

and reported $43.3 million in premiums from reinsurance

assumed from other insurance companies. The banks reported

maximum contractual exposure from private mortgage insurance

reinsured of only $27 million.

The volume of bank insurance activities is expected to

significantly increase in the years to come. Insurance products

and services offer banks an attractive low cost source of fee

income requiring little or no bank capital. Management can keep

costs and risks to a minimum by offering insurance products in

an agency capacity and as an adjunct to traditional banking

products, such as loans and mortgages.

A trade association estimated sales for all bank insurance

products (excluding annuities) generated about $9 billion of

premium revenue in 1997, nearly twice that of the prior year.

Also, a consulting firm predicted bank non-annuity insurance

sales premiums would exceed $10 billion in 1998 and bank

insurance activities would grow at a compound annual rate of

over 30 percent until year 2002.
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OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 3

Summary information on national bank insurance activities as of

February 1999 is presented in Appendix 2.

New Legislation Will Accelerate

Financial Services Reform And Growth

On November 12, 1999, the President signed into law, the

Gramm-Leach-Bliley Act of 1999 which reforms the nation’s

financial services industry. Under this new legislation, national

banks may continue to sell insurance products and services

without any geographic restrictions. Banks would be prohibited

from acting in a principal capacity for underwriting insurance

unless OCC had approved those activities prior to enactment of

the legislation.

According to OCC, the new legislation also eliminated the

geographical restriction contained in 12 U.S.C. Section 92. This

provision essentially allowed national banks in communities of

5,000 people or less to act as an insurance agent for fire, life or

other insurance company. This change should not materially

affect banks because OCC ruled in 1986 that banks could use

small town branches to sell insurance throughout the country.

Although the new legislation does not significantly increase the

scope of national bank insurance authorities, products or services,

OCC expects the volume of national bank insurance activities to

significantly increase in the years to come. The new legislation

is also expected to accelerate financial industry convergence and

business arrangements between banks and insurers, such as the

merger between Citicorp and Travelers Group in late 1998.

While many banks now sell credit-related insurance products in

an agency and agent capacity, both OCC and the insurance

industry agree, the bank insurance business is evolving and they

expect significant change in bank business strategies as well as

insurance products and services.

Even though the new legislation does not affect OCC’s authority

to regulate national banks as contained in the National Bank Act

of 1864 (12 U.S.C.), it does establish the states as the primary

regulator over bank insurance activities. The new legislation

provides that the primary Federal regulator of a bank engaged in

insurance activity will be determined by its legal structure. If a

national bank conducts insurance activities through an affiliate of
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OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 4

a holding company, the Federal Reserve Board (FRB) will be the

primary Federal regulator for the affiliate. If a bank conducts

insurance activities through an operating subsidiary, OCC will be

the primary Federal regulator of the subsidiary.

The new legislation also provides that states shall remain the

functional regulator over all bank insurance activities regardless

of its legal structure or primary Federal regulator. It creates 13

“safe harbors” in which states may regulate bank insurance

activities even if their laws discriminate or significantly interfere

with a bank’s ability to sell insurance. These safe harbors do not

relate to safety and soundness issues but rather to market conduct

such as discrimination, prohibited practices, proper disclosure,

misrepresentation and separation of functions. Aside from the 13

safe harbors, the legislation prohibits states from preventing or

restricting a bank or an affiliate from engaging, directly or

indirectly, in any activity authorized under the legislation,

including insurance activities.

Any state law or action existing before September 3, 1998, that

prevents or significantly interferes with a bank’s ability to

conduct activities authorized under Federal law is preempted by

the legal standards set forth in the Supreme Court’s 1996 decision

in Barnett Bank of Marion County, N.A. v. Nelson.2 In that

litigation, OCC challenged state laws that restricted bank

insurance activities. The Supreme Court ruled the state laws

were preempted under the Supremacy Clause in the U.S.

Constitution. This clause stipulates Federal law generally takes

precedence over any conflicting state law.

While the new legislation limits OCC’s supervision of national

bank insurance activities, it does not materially affect its

authority to supervise the safety and soundness of the National

Banking System. Federal regulators are to rely on state

supervision of bank insurance activities, to the extent possible.

However, the new legislation also provides Federal regulators the

authority to examine bank insurance activities if those activities

threaten bank safety and soundness.

To effectively supervise the impact of national bank insurance

activities on the condition of its banks, OCC, as an agency, will

have to evolve as the banking industry grows their insurance

business lines. To do so, OCC will need to address such

 

2

 517 U.S. 25 (1996)
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OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 5

operating risks as measuring, controlling and pricing accident

risks and liabilities, underwriting and reinsurance, investing

premium income and litigating claims.

OCC Relies On State Supervision

Of Bank Insurance Activities

Although OCC is the administrator of the National Bank System,

it has relied heavily on the states, as the primary regulator, to

examine and supervise national bank insurance activities and

protect customer rights. As a result, OCC examiners have

mostly limited their activity to general discussions with

management about their insurance activities.

In 1945, legislation commonly referred to as the McCarranFerguson Act,3

 was passed providing that states were primarily

responsible for regulating and supervising the insurance business

within their boundaries, including compliance with insurance and

consumer protection laws. Today, every state and the District of

Columbia has an insurance department responsible for regulating

the insurance industry and licensing insurance companies,

associated agencies and agents doing business within their

borders. Each state sets its own licensing and filing requirements

for insurance rates and policies. States can also revoke licenses

for illegal or unethical conduct.

To coordinate regulation of multi-state insurers, state insurance

regulators created the National Association of Insurance

Commissioners (NAIC) in 1871. It is a voluntary organization of

the chief insurance regulatory officials in the 50 states, the

District of Columbia and 4 territories. The NAIC provides its

members a national forum for working cooperatively on

regulatory matters, as well as varied support services. The NAIC

also has an accreditation program to ensure states maintain

minimum standards of conduct.

Generally, the primary function of state insurance regulators is to

ensure insurance companies are capable of meeting their financial

obligations (solvency). States are responsible for licensing

individuals (producers or agents) who provide insurance services

and for regulating insurance rates and policy forms. State

insurance departments also provide consumer assistance and

protect both insurance consumers and companies from fraud.

 

3

15 U.S.C 1011 et seq.
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Most insurance departments have historically performed solvency

monitoring and financial examinations. Each state primarily

focuses on insurance companies that are "domiciled," or legally

residing, in their state. States generally examine insurance

companies once every 3 to 5 years or when potential insolvency

exists. States also monitor insurer financial filings to identify

companies needing special attention.

The monitoring of non-domiciled companies (a foreign insurer if

domiciled in another state or an alien insurer if domiciled outside

of the United States) is generally delegated to the regulator in the

state of domicile. Consequently, each state regulator is heavily

reliant on other state regulators.

State insurance departments in the 50 states and District of

Columbia (DC) reportedly employed over 10,000 employees and

1,700 contract employees as of December 31, 1997. According

to the NAIC, some also used employees from other state

agencies. Their budgets for 1997 totaled $739 million.

OCC Efforts To Prepare For

Financial Services Reform

Recognizing that financial services reform legislation coupled

with the Supreme Court’s 1996 decision in the Barnett litigation

could significantly increase bank interest in insurance activity,

OCC initiated efforts to prepare for the impending changes.

In the past, OCC did not believe information on national bank

insurance activity was necessary because of the low volume of

insurance activities and the absence of any reported significant

problems. Instead, it relied on state systems.

In October 1996, the OCC issued an advisory letter providing

banks guidance on insurance and annuity sales activities. In early

1997, it surveyed 53 national banks that showed many banks

were already offering insurance products and services and

planned to expand and increase their insurance business. OCC

assessed the risks associated with this new and expanding

business and proposed changes to its supervisory processes.

In early 1997, OCC met with state insurance regulators to

establish communications and share information on insurance

supervision. In late 1998, OCC and NAIC completed a model

agreement for sharing customer complaint information. The
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OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 7

agreement was approved by the NAIC in June 1999 and OCC

hoped to execute agreements with all states by the end of 1999.

In April 1998, the OCC established a centralized customer

complaint system in its ombudsman's office. This system allows

OCC to collect, process and track complaint information. The

complaints are categorized into activities and products, with each

insurance complaint classified into 1 of 6 product types. The

complaint data is available to OCC examiners upon request

through an internal communications system.

The OCC also drafted policies and examination procedures

specific to supervising bank insurance activities that are to be

included in the Bank Supervision Process Handbook and

Insurance Activities Handbook. The handbooks had not been

issued as of July 29, 1999.

OCC officials acknowledged efforts to address bank insurance

activities were impeded by delays in the passage of financial

reform legislation and the priority given to identifying and

addressing Year 2000 problems. As a result, it continued to rely

heavily on state supervision of national bank insurance activities.

Objective, Scope And Methodology

The audit objective was to determine if OCC supervision over

national bank insurance activities adequately addressed bank

safety and soundness and protected consumers. OIG performed

its fieldwork between November, 1998 and July, 1999.

OIG also reviewed the proposed and final versions of the

financial services reform legislation. OIG discussed with OCC

personnel in headquarters and in the Western District the risks

banks can face in expanding their insurance activities and

reviewed OCC supervisory efforts to address those risks. OIG

also obtained the position and perspective on future bank

insurance activities from officials at the Federal Reserve System,

a state insurance regulator and several bank and insurance trade

associations.

The audit was conducted in accordance with the Government

Auditing Standards issued by the Comptroller General of the

United States and included such tests as were determined

necessary.
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A detailed description of the audit objective, scope and

methodology is presented in Appendix 1.
AUDIT RESULTS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 9

OCC needs to better prepare for the impending changes in the

financial services industry. Some states may not have the

resources or willingness to supervise the national banks’

expanding and growing insurance business. As such, over

reliance on the states to regulate national bank insurance activities

may not be the most prudent course of action.

OCC will likely need to better define its supervisory role over

national bank insurance activities and prepare the agency for the

expected growth in national bank insurance activities. This

growth may present risks to the National Banking System such as

measuring, controlling and pricing accident risks and liabilities as

well as increased litigation. OCC needs to recognize these risks

can affect bank safety and soundness as well as consumer

protection and that some state supervision may not adequately

address those risks. As such, it needs to begin to address those

risks through its organizational structure, supervisory strategies

and examination processes.

Finding 1 OCC Over-Relying On State Supervision

The degree to which OCC can continue to rely on state

supervision will most likely change when national banks

significantly increase their insurance activities. While this

reliance may have served its purpose in the past, there are signals

that such reliance may not always be in OCC’s best interests.

Wide variations exist between state supervisory resources and

philosophy. States focus on insurer solvency and consumer

protection and have a protracted examination cycle. Also, recent

legal actions may portend a subtle change in the relationship

between OCC and state regulators. Thus, it is unclear whether

state supervision will provide OCC with ready assurance that

increased national bank insurance activities will not affect bank

operations, capital and earnings or the rights of customers.

Not All States May Be Able

To Provide OCC Assurance

OCC reliance on state supervision over national bank insurance

activities assumes the quality and quantity of supervision is fairly

consistent and reliable from state to state. However, wide

variations exist among the states’ focus, philosophy and

resources. These variations call to question whether some states

are able or willing to provide OCC the assurance needed to
AUDIT RESULTS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 10

ensure national banks’ expanded insurance activities are

conducted in a safe and sound manner and in a manner that

protects the rights of national bank customers.

State supervision over the insurance industry generally focuses on

the solvency and conduct of the insurer and underwriter, rather

than on agencies and agents. Some states do not perform direct

reviews or examinations of agents. Instead, they rely on

insurance companies to address their agent problems. Therefore,

since most national banks now sell insurance in agency or agent

capacities, state regulators may not place high priority on

examining a national bank’s insurance activities.

Not all states may have the resources to adequately supervise the

expanding bank insurance activities. NAIC reported significant

variations in resources and supervisory efforts between state

insurance departments. 4

At December 31, 1997, state insurance departments (including

DC) employed about 11,800 employees, including 1,700 contract

employees. Individual state staffing varied from 27 to 1,314

employees and averaged 232 employees. However, 40 of 51 (78

percent) departments had less than 232 employees. State annual

budgets ranged from $1.2 million to $127.9 million.

As indicated in Chart 1, 43 percent (22) of the state departments

had 100 or fewer employees while another 49 percent (25) had

101 to 552 employees. There were significant differences

between the staffing of those 47 states and the staffing of New

York, California, Florida and Texas. Those 4 states each had

between 1,005 and 1,314 employees.

 

4

1997 Insurance Department Resources Report, NAIC 1999.
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Chart 1

State Insurance Department Staffing

As Of December 31, 1997

0 - 100 101 - 599 600 - 1,000 Over 1,000

22 25

0

4

0

5

10

15

20

25

Number of States

0 - 100 101 - 599 600 - 1,000 Over 1,000

Number of Employees

Source: NAIC

As indicated in Chart 2, only a relatively small portion of the

state staffing was involved in financial or regulatory services.

NAIC classified the state and DC insurance department

employees into 10 categories. The financial and regulatory

service category, which included financial examiners, market

conduct examiners, financial analysts/auditors and liquidation

employees, represented only 17 percent (1,761) of the 10,100

state employees, excluding contract employees.
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Chart 2

State Insurance Department Employees

As Of December 31, 1997

All Other 18%

Consumer Affairs / 

Media Relations

14%

Actuarial 8%

Administrative 2%

Licensing 4%

Research / 

Statistics 1%

Info. Systems /

Tech. Services 4%

Legal 4%

Supervisory / 

Support 28%

Financial / 

Regulatory 

Services

17%

Source: NAIC

The states also reported significant variances in their insurance

supervisory responsibilities for 1997. The number of licensed

insurers in each state ranged from 856 to 2,550, for a total of

78,583 nationwide. About 86 percent of the licensed insurers

were domiciled outside the states in which they were writing

insurance policies. In all, 49 states (New Mexico and DC did not

report) reported the number of individuals licensed (producers or

agents) to offer insurance services varied from 7,100 to almost

206,000, totaling over 2.5 million nationwide. About a third of

them were licensed to sell insurance in more than one state.

Reported total insurance premiums per state and DC ranged from

$1 billion to $73 billion, and averaged $15 billion.

Given the wide range of insurance activities confronting state

insurance departments, the quality and quantity of supervision

cannot always be consistent. Adjusting for liquidation

employees, less than 17 percent of state insurance department

employees were engaged in solvency monitoring and financial

examination. This, despite state insurance regulators' primary

function being to ensure the solvency of insurance companies.
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Furthermore, NAIC reported states generally examine insurance

companies only every 3 to 5 years. In contrast, OCC examines

the safety and soundness of a national bank every 12 to 18

months, depending on its size and condition.

The state financial examinations for insurer solvency focus on

accounting methods, procedures and financial reports. The state

market conduct examinations focus on agent licensing issues,

complaints, products, agent sales practices, proper rating, claims

handling and other aspects of insurer operations.

Individual states reportedly initiated from zero to 232 financial

and market conduct examinations in 1997, for a total of 2,759

examinations. However, the top 4 states in terms of staffing

ranked 1st, 3rd, 7th and 8th in the number of exams initiated.

The state with the 9th largest staff (316), supervised almost 1,800

insurance companies, 75,000 licensed producers and over $30

billion in insurance premiums. Yet, it did not initiate or

complete any financial or market conduct examinations in 1997.

The Year 2000 issue illustrates that some states have different

philosophies as to their supervisory responsibilities and may not

aggressively supervise the national banks’ expanded insurance

activities. The General Accounting Office (GAO) identified the

Year 2000 computer problem as an area where state regulators

should be actively involved because it can affect both the safety

and soundness of financial institutions as well as customer

protection. However, GAO testified before the U.S. Senate

Special Committee on the Year 2000 Technology Problem that

some state insurance departments had a weak regulatory presence

regarding the Year 2000 issue. 5 Most state regulators had not

provided insurance companies any formal guidance or their

regulatory expectations regarding Year 2000 readiness. Some

states took the position that it was not their role to supervise

companies, but rather to monitor them. Others noted they did

not have the expertise or resources to provide specific guidance.

Although the NAIC issued its insurance regulatory expectations

for preparing for Year 2000 in September 1998, GAO found

some states had not provided the information to its insurers.

Other states were not even aware of the NAIC guidance.

 

5

Insurance Industry Regulators Are Less Active in Encouraging and Validating Year

2000 Preparedness, GAO Testimony GAO/T-GGD-99-56, March 11, 1999.
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One insurance association official referred to the state insurance

departments as “cash cows” because they generate considerable

revenue for the states. The NAIC reported every state insurance

department generated revenues far in excess of its budget during

1997. The surplus revenues went into the states’ general revenue

fund and were available for other state programs.

There may be some merit to the association official’s comment.

States have historically committed only a small portion of their

insurance revenues to insurance regulation. States reportedly

collected almost $10 billion in total insurance revenues during

1997. Yet, they committed only $739 million of those revenues

to insurance department budgets, leaving over $9 billion for the

states’ general revenue funds. Overall, less than 7.5 cents of

every insurance dollar collected in 1997 was committed to

regulating the insurance industry. Between 1992 and 1996, states

reportedly committed an average of less than 7 cents of every

insurance dollar collected to regulate the insurance industry.

Detailed information on insurance department resources is

presented in Appendix 3.

Complaint Driven Systems Are Not

Always A Good Measure Of Compliance

With Consumer Protection Laws

Most states have comprehensive legislation to protect the

insurance consumer from unfair trade practices. Such legislation

often prohibits insurers from making inappropriate

recommendations or sales, discriminating, misrepresenting and

providing inequitable treatment to policyholders and customers.

While each has a mechanism for responding to and resolving

insurance consumer complaints, states generally expect insurance

companies to police themselves and their agents. Consumers can

file complaints with the insurer, the agent, the state insurance

department, the bank where a policy was purchased or OCC, if it

involves a national bank. Many states require that the customer

be advised at the time of purchase where complaints can be filed

and that complaints be forwarded to the state insurance regulator.

However, complaint driven systems may not always be a reliable

measurement of compliance with consumer protection laws.

Because insurance is such an “uneven playing field,” the

uninitiated consumers may not know a problem exists until they
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file a claim against their policy. In some cases, a claim might

never arise or, if it does, it could be long after the policy or

contract was issued. Sometimes, the claim may have to be filed

by beneficiaries who are not aware of the process or pitfalls.

State consumer complaint systems are also not always user

friendly or easily accessible by regulators to identify consumer

protection issues. For example, the OIG requested one of the

largest state insurance regulators to provide consumer complaint

information and encountered several problems.

First, the state could not easily identify all of the banks licensed

to sell insurance in their state or the types of insurance products

those banks offered. They were able to individually search for

each bank in their license and complaint databases. However,

they could not readily identify the licensed individuals affiliated

with a bank. State officials stated this was because banks were

not identified as registrants in the system. One official estimated

the state had issued about 1,000 licenses to banks or individuals

affiliated with banks.

Second, the state's system could not provide the number or

nature of the complaints relating to bank insurance sales. State

officials commented they needed the name of the licensee, case

number, officer name or date the case was opened or closed to

provide the information requested.

Finally, the state could not readily provide information on

insurance complaints filed against specific banks. For example,

the OIG requested information on all complaints where the

insurance policies had either been sold or written by a certain

very large bank. The state official found that insurance licenses

were issued to 4 different bank entities whose names had all or

part of the targeted bank's name. The system contained only 3

complaints against 2 of the entities and showed only that the

complaints were deemed unjustified and closed. State officials

commented they would have to review the case files to provide

further information.

Complaint driven systems are not always a good measure if they

are not used. From the inception of its new complaint system in

April 1998 through March 1999, OCC received only 190

complaints about insurance out of over 94,000 complaints. The

primary complaints were service related (151 or 79 percent) and

disclosures (26 or 14 percent). OCC generally forwarded each
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complaint to the bank involved and provided the bank's response

to the consumer.

In contrast, the NAIC reported the 50 states and DC received

over 391,500 insurance complaints in 1997. The number of

complaints ranged from a low of 193 in one state to a high of

45,824 in another. However, these complaints came from all

sources not just from banks. The NAIC could not determine

which complaints involved national banks.

Signs Of Changing Relationship

Between OCC And States

OCC’s authority to regulate nationally chartered banks is found

in the National Bank Act (12 U.S.C.). This Act establishes OCC

as administrator of the National Banking System with exclusive

authority to institute regulatory policy and enforce compliance

with banking laws, both Federal and state. The Gramm-LeachBliley Act of 1999 prohibits state laws that prevent or

significantly impair a national bank’s ability to exercise its

Federally authorized powers.

Prior to the passage of the new legislation, OCC officials

acknowledged that applying state laws to national bank insurance

and annuity sales presented difficult and complex supervisory

issues. Nonetheless, OCC expected to work cooperatively with

the states and recognized the states’ functional responsibility to

administer and supervise compliance with their respective

insurance laws.

Recent legal actions over national bank insurance activities may

signal a change in the relationship between OCC and the states.

The States of Mississippi, Connecticut, Massachusetts, New

York, Texas, Louisiana and Ohio filed lawsuits to enforce laws

that prevented national banks from selling insurance within their

boundaries. The banking industry and OCC both challenged the

states’ actions on the grounds these laws hindered or significantly

interfered with national banks’ authority to sell insurance. In

every instance, the courts agreed and ruled states did not have the

authority to prevent banks from selling insurance in their state

and their laws were preempted under the Supremacy Clause of

the U.S. Constitution.

Should national bank insurance activities significantly increase, as

expected, some states may not have the resources, capacity or
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willingness to expand their supervisory focus and efforts to

address the impact on bank safety and soundness or consumer

protection. This may be especially so, should states have to

divert insurance revenues from their general revenue funds.

OCC Believed Continued Reliance

On States Is Appropriate

The OIG conducted its exit conference with OCC in July 1999,

prior to the passage of the new legislation. At the meeting, OCC

stated it believed reliance on state regulation of national bank

insurance activities was appropriate. It stated that OCC retains

an important supervisory interest in all activities of national banks

impacting bank safety and soundness, including insurance, but

the states are primarily responsible for monitoring national bank

insurance activities.

The OCC officials at the exit conference stated that, as the

primary Federal regulator, OCC respects the responsibility of

states in their role as functional regulator to supervise the

insurance activities of national banks. The insurance activities

conducted by national banks and their subsidiaries are only a

small part of their comprehensive banking and financial business.

Furthermore, most conduct their insurance activities through state

licensed subsidiaries subject to the same supervision as other nonbank insurance agencies. They were uncertain why a national

bank’s insurance agency should receive more aggressive or

different supervision than a non-bank insurance agency.

OCC officials stated the recent actions against states involved

state laws that ran afoul of the Supreme Court’s ruling that states

may not prevent or significantly interfere with banks’ Federally

authorized right to sell insurance. These blanket prohibitions

against national bank sales of insurance did not constitute

“regulation” but rather were acts to prohibit the powers of

national banks.

They recognized national banks are subject to state insurance

regulations and states are the primary regulators of national bank

insurance activities. They recognized the role of states is to

administer and oversee compliance with their insurance laws

consistent with the Supreme Court decision in the Barnett Bank of

Marion Co., NA v. Nelson litigation. They also referred to a

proposed rulemaking published in the Federal Register specially

stating OCC does not object to state insurance regulators
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inspecting national bank records relating to insurance activities

regulated under state law.

The OIG believes that continued reliance on state regulators over

bank insurance activities, as those activities affect safety and

soundness and consumer protection, may be appropriate in some

but not necessarily all instances.

The banking industry is responding to market forces to remain

viable in an increasingly competitive world economy. Activities,

such as insurance, once considered adjunct to the core banking

activities, will become increasingly important to the viability of

the banking industry. Accordingly, the OIG believes bank

insurance activities will change significantly and that the new

legislation will only hasten the change. As national banks grow

their insurance businesses through new or expanded products and

services, they will encounter new operating environments and

risks with which they are not familiar or experienced. This

growth into new operating environments may affect the viability

of their institutions.

The OIG believes the expanded bank insurance activities could

also affect the relationship between state and Federal regulators.

As the industry evolves to become more competitive in the world

marketplace, conflicts may arise as to varying state requirements

that could affect core banking operations, increase the cost of

doing business and impede commerce, especially in the

international marketplace. The OIG believes the recent legal

challenges by states over the authority of national banks to sell

insurance in their states could be precursors of a changing

relationship between OCC and state regulators. The potential

impact of the new legislation on that relationship is unknown.

The degree to which OCC can continue to rely on state regulation

over national bank insurance activities depends largely on an

individual state’s resources and willingness to address and

supervise the risks expected from this paradigm shift in the

industry. For example, states focus on insurer solvency and

market conduct and generally examine national bank insurance

activities only once every 3 to 5 years. Will this examination

scope and frequency adequately address the operating risks

national banks will face as they grow their insurance business?

Will it continue to provide OCC the assurance it needs? If not,

OCC will have to carefully consider what reliance it can place on
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state supervision with respect to the impact insurance activities

have on the condition of a bank.

The concept of selective reliance on state regulation is not new.

It is also incorporated into the new legislation. The Federal

Deposit Insurance Corporation Improvement Act (FDICIA)6 of

1991 permits a Federal banking agency to alternate its

examinations with state supervisory authorities, provided the

Federal banking agency determines that the state examination

carries out the purpose of a full scope, on-site examination. At

the FDIC, managers are required to review each state

examination report to ensure the state identified all risks to the

deposit insurance fund, took appropriate corrective actions and

assigned an appropriate rating to the bank. If a state meets the

criteria, FDIC will accept the report for examination purposes.

If not, FDIC will not use it to meet its examination requirements.

This approach provides FDIC the basis for an informed decision

on the quality and reliability of the state supervision over state

chartered banks.

The OIG believes the concept of selective reliance coupled with

the authority to examine bank insurance activities could provide

OCC a basis for determining the degree of reliance it can place

on state supervision of the expanding national bank insurance

activities. A major concern is whether a state examination every

3 to 5 years will adequately address the risks associated with

national banks’ expanding insurance activities.

Recommendation

Recommendation 1-1:

The Comptroller of the Currency should determine the degree of

reliance OCC will place on state supervision of consumer

protection and safety and soundness issues related to national

bank insurance activities.

Management Response and OIG Comment

OCC did not concur with the OIG finding or recommendation.

With respect to the OIG concerns relating to the consistency of

state insurance supervisory efforts, OCC believes Congress was

 

6 Pub. L. 102-242.
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aware of the states’ insurance regulatory framework when it

mandated that the states would regulate national banks’ insurance

activities in the same manner as other insurance providers. OCC

believes the new legislation contains no provisions for Federal

supervision of insurance activities or for Federal oversight of

state insurance regulators. It also believes Congress specifically

directed the Federal bank and thrift regulators to defer to the state

insurance regulators. As such, the OCC stated it would not

implement the recommendation.

The OIG is not recommending OCC regulate insurance activities

or oversee the work of state regulators. It is recommending OCC

be proactive, rather than reactive, in determining when it can rely

on the work of state regulators on activities that could affect the

safety and soundness of a national bank.

The new legislation directs the OCC to rely on the state insurance

regulators “to the fullest extent possible”. It does not direct

OCC to rely entirely on state insurance regulators. This would

be tantamount to abdicating its responsibilities as primary

supervisor of the National Banking System.

The OIG believes a prudent course of action would be to

determine the reliability of state regulator information and reports

before using them for examination and supervision purposes,

similar to what the FDIC does with the state banking regulators.

The new legislation provides Federal banking regulators authority

to examine bank insurance activities when they can not rely on

the work of the functional regulators. Sections 111 through 115

clearly provide OCC authority to examine national bank

insurance activities under the following conditions. First, OCC

must believe those activities pose a material risk to the safety and

soundness of the bank. Second, it must believe an examination is

needed to evaluate the risks threatening bank safety and

soundness. And last, it must believe, after reviewing functional

regulator reports, the bank is not complying with the laws that

OCC has specific jurisdiction to enforce.

The OCC agrees with the above interpretation, but believes

exercising that authority would be unusual rather than routine.

The OIG agrees exercising that authority may be the exception

rather than the rule. However, OIG also believes OCC needs to

know and understand the quality, timeliness and scope of the

state regulators’ work when deciding to accept the states’ work

for examination purposes or examine the functionally related
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entity. Given the wide variances in state resources and

responsibilities, accepting states’ reports on face without testing

for sufficiency and relevancy would not be prudent.

The OCC also stated that the insurance agency activities

authorized under the new legislation do not involve significant

safety and soundness risks for national banks for a number of

reasons. First, the new legislation does not authorize new types

of insurance activities. Second, it requires national banks to

conduct their insurance activities in a financial subsidiary and

restrictions protect the bank from risk.

The OIG agrees the new legislation does not authorize new

insurance activities for national banks and requires banks to

conduct their activities through a subsidiary. However, the

consensus is that the volume of bank insurance activities will

increase significantly under the new legislation. While it does

not authorize new insurance products and services, these products

and services may be new to management of banks first entering

insurance or expanding existing activities and legal structure may

not always be an adequate safeguard over that liability and risk.

More importantly, however, the OIG believes the ramifications

and risks associated with the new legislation are only just

beginning to be realized. For example, the new and expanding

insurance sales activity could present off-balance sheet risks.

Will banks be required to capitalize those risks similar to other

off-balance sheet risks, such as derivatives? If so, how will this

affect the bank’s competitiveness or capital structure?

In April 2000, the Under Secretary for Enforcement of the

Department of the Treasury stated in a public speech that his

office suspected money-laundering vulnerabilities in the

operations of financial services providers, such as the insurance

industry. The Under Secretary spoke of a review to see if it was

appropriate to expand suspicious activity reporting requirements

under the Bank Secrecy Act (BSA) to those providers.

The obvious question is how much reliance can the Treasury

Department and OCC place on state regulator solvency and

market conduct examinations, conducted every 3 to 5 years, to

determine if a national bank insurance subsidiary is complying

with the BSA and not involved in suspected money laundering

activity? And, if it can not rely on those examinations, what

then? Being implicated in money laundering activities could
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seriously impair a bank’s reputation, divert management focus

and energies and subject bank assets to seizure and forfeiture.

In January and April 2000, OCC provided examining personnel

direction on evaluating national bank insurance activities. In

those memorandums, OCC commented the new legislation did

not change the OCC core mission of ensuring the safety and

soundness of the National Banking System and it did not change

the need to understand and assess all risks affecting the banks.

OCC directed examiners to evaluate the consolidated risk of the

national bank, including risks originating in or resulting from

functionally regulated subsidiaries and affiliates.

The direction in those memorandums clearly states that examiners

have the authority to examine an affiliate or subsidiary of a

national bank and can request information directly from the

affiliate if the state regulators’ reports are insufficient for

examination purposes. It’s possible that examiners, if

knowledgeable in the insurance industry, could determine if a

given report was relevant, but it is unlikely they would be able to

evaluate a state regulators’ independence, qualifications, scope of

inquiry or evidence. A copy of the OCC April 2000

memorandum is included in this report as Appendix 4.

While the direction provided by OCC in those memorandums

seems compatible with the intent of the OIG recommendation,

OCC stated in its comments to the OIG report that it was

required under the new legislation to defer to state regulators and

would not implement the OIG recommendation.

Given its non-concurrence, OCC will need to refer the matter to

the Deputy Secretary of the Department of the Treasury for

resolution under TD 40-01.
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Finding 2 OCC Needs To Reassess Its Focus

Of Bank Insurance Supervision

The OCC needs to better define its supervisory role and prepare

for the expected expansion of insurance activities by national

banks. To do so, it needs to recognize that bank management

may not be familiar with many of these new and expanded

products and services or the attendant risks that can affect

national bank safety and soundness. As such, OCC needs to

begin to address these risks though its organizational structure,

supervisory strategy and examination process.

OCC Has Done Little To Prepare

Agency For Impending Changes

OCC efforts to address the impending changes have not dealt

with the potential impact of expanding national bank insurance

activities on its supervisory strategy and examination approach.

Although it initiated several efforts in recent years, these efforts

have produced little substantive change. Instead, OCC

supervision of national bank insurance activities remains heavily

reliant on state supervision that focuses on insurer solvency and

consumer compliance rather than safety and soundness issues.

The October 1996 OCC advisory letter providing bank

management and examiners guidance on insurance and annuity

sales activities was only a "best practices" guide. It was not a

regulatory requirement that OCC could use for reporting

violations and enforcing compliance. In its advisory letter, OCC

indicated it would develop examination guidance and identify key

indicators of bank insurance problems. OCC officials at the exit

conference expected to publish and release the examination

policies, guidelines and handbook soon, but none had been issued

as of July 29, 1999.

Although the 1997 survey disclosed bank insurance activities

were expanding and growing, OCC did not identify the universe

of banks engaged in insurance activity until receiving a

Congressional request in November 1998. The 1997 OCC

survey disclosed most banks were selling credit life as well as life

and disability insurance. Most large and mid-sized banks

reported they planned to expand within 5 years into higher risk

activities such as property and casualty, title and private

mortgage insurance, reinsurance, insurance company affiliations,
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underwriting, insurance premium financing and payment

processing. Nevertheless, OCC concluded bank insurance

activities were not a safety and soundness concern.

The 1997 survey also resulted in several recommendations to

improve supervision of bank insurance activities. These

recommendations included (1) drafting a bank insurance

examination handbook, (2) obtaining insurance expertise,

(3) collecting information on bank insurance activities and

(4) tracking complaints on banks selling insurance. As of

July 29, 1999, OCC had only implemented tracking of

complaints.

According to an OCC official, the information collected on bank

insurance activities will be entered into the new OCC Examiner

View System. It will provide an initial universe of bank

insurance activities, and OCC plans to establish a policy for

maintaining updated information. OCC expects its new

Examiner View System to be fully implemented in Year 2000.

OCC implemented a centralized customer complaints system

called REMEDY in its ombudsman's office in April 1998.

Complaints are categorized according to activity and product.

Complaints in the insurance category are classified into six

product types. OCC examiners can request this information from

its Customer Assistance Group through internal e-mail. This

group can also provide examiners standard and customized

reports, including the number and type of complaints per bank,

the status and resolution as well as trend analysis by complaint

type. However, one OCC official told the OIG that examiners

were probably not using this insurance complaint information

because of their limited examination of bank insurance activities.

In late 1998, OCC drafted and presented to each state and the

District of Columbia an agreement for sharing insurance

complaint information on national banks. The NAIC approved

the draft agreement in June 1999. As of September 15, 1999, 16

states and the District of Columbia signed agreements, another 3

were expected to sign in the near future and OCC was negotiating

with several other states.

OCC continues to view the primary risk associated with bank

insurance activities as consumer protection rather than safety and

soundness. OCC safety and soundness supervisors and examiners

generally do not address bank insurance activities. Instead, OCC
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examiners are instructed to limit their supervisory activities to

general discussions with management about the bank’s insurance

activities and to consult with OCC supervisors if they discover

insurance activities jeopardize a bank's safety and soundness.

OCC officials acknowledged they had made little or no changes

to supervisory and examination processes and were continuing to

rely on states to supervise national bank insurance activities. In

March 1999, an OCC Western District official stated the district

had not established routine contact or interaction with officials

from the California Department of Insurance. OCC headquarters

officials stated they were waiting for passage of financial reform

legislation and had given priority to Year 2000 examinations.

OCC Needs To Better Prepare

For Bank Insurance Activity

While current bank insurance activities are mostly limited to

selling credit-related insurance products in an agency and agent

capacity, both OCC and the insurance industry agree that bank

insurance activity is an evolving business line and expect

significant changes in bank business strategies as well as

insurance products and services.

OCC surveys clearly showed national banks intend to grow their

insurance business through new and expanded products and

services. As they do, bankers will face strikingly different

business cultures and environments with new and unfamiliar risks

that could impact bank safety and soundness.

An article in an independent banking journal described the impact

of and reasons for the reform of the financial services industry. 7

The author states that, with the removal of legal barriers, banks

are very likely to actively pursue insurance products. Likewise,

insurance companies, in an effort to increase profits, will very

likely supplement or replace their distribution systems with better

bank systems.

The author points out that the banking industry is under stress

from increased competition, an altered perception of what

constitutes acceptable lending risk and industry consolidation. As

a result, bankers are encountering a sharp increase in the cost of

 

7Raymond A. Guenter, Bank Insurance Powers – Yesterday, Today, and Tomorrow, 17

Annual Review of Banking Law 351, Boston University, 1998
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their deposits, a more expensive lending process and a decrease

in profitability. Consequently, they can no longer rely so heavily

on loans to drive earnings and must look to fee income from the

sale of products such as insurance to enhance shareholder value.

According to the author, bankers are now more driven to take

advantage of their insurance authorities and a significant segment

of the insurance industry is receptive to permitting them to do so.

One of the greatest advantages banks have over insurance

companies is banks can create and operate their own distribution

systems. Also, bankers generally enjoy a more positive

reputation than their competitors. As a result of competitive

pressures and the shortcomings of their own distribution systems,

many insurers are receptive to using the banking industry as an

alternative distribution channel. This is especially so for life,

health and disability insurance products which may offer the

greatest potential for growth.

However, the bank insurance powers will be of little use if the

cost efficiencies of the banks’ distribution systems are nullified

by legal restrictions. Congressional action may be needed to

draw an acceptable line between what states can and can not do in

regulating national bank insurance activities.

The author states that as the legal restrictions over bank insurance

activities recede, banks will need to reassess their business plans,

earnings expectations and compliance structure. Being successful

will require more than just deciding to “do insurance.”

Regardless of the way bankers get into the insurance business,

failure to meet customer expectations when claims arise could

cost more in customer loyalty than is earned from insurance.

Banking and insurance are very different businesses. For

example, where bankers tend to avoid or minimize risks in

managing their banks, insurers tend to embrace risk and profit

from uncertainty, catastrophes or events that can threaten their

institutions. Bankers can thrive and never make a bad loan. But

few insurers could sell insurance policies if customers never filed

claims on their policies or if insurers did not pay those claims.

Some bankers may not have the experience, exposure or

information systems to recognize and manage the risks associated

with their insurance products. A recent article in a national

banking publication contrasted the differences between insurance
AUDIT RESULTS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 27

and banking products, workflow characteristics and management

information systems. 8

For example, most life insurance products today are investments,

with term life insurance playing an important role. Although

familiar with individual life insurance and investment products,

large banks’ familiarity diminishes quickly with group life or

disability insurance products. It vanishes altogether with health

insurance products that have transformed into managed care and

bear little resemblance to financial services.

Property and casualty insurance products pose considerable risk

to banks. These products focus on accident risk and on property

characteristics and costs, not credit risk or repayment capacity.

Half of the business is liability related which, in commercial

insurance lines, means business survival revolves around

intelligently measuring, controlling and pricing risk. The

insurance industry uses reinsurance as a lender of last resort to

reduce unwanted excessive risk. But, no property and casualty

insurer can avoid risk as evidenced by Hurricane Andrew which

cost the industry $15 billion and made the entire property and

casualty industry unprofitable in 1992.

The author also pointed out the differences between insurers’ and

bankers’ workflow characteristics. For example, insurance is an

infrequent complex purchase often involving independent agents,

the likes of which banks have little experience. Key to the

insurance industry is underwriting because low margins drive the

need to mass-market products. As a result, profits mostly come

from investing premium revenue rather than underwriting

policies. Policy processing is the backbone of the insurance

business. Insurance policies are not payment accounts like bank

accounts. Insurance transactions are fewer but far more complex

requiring customer contact, proof of need (a claim) before

drawing funds, data entry and individual processing in a

inherently antagonistic and often litigious situation. Often times,

insurance risks and costs are not known before the workflow

begins, especially when involving bodily injuries.

And last, the author points out differences in the bankers’ and

insurers’ management information systems. While they use

similar hardware and systems software, most applications are

 

8 Diogo Teixeira, Banking and Insurance Very Different Businesses, American Banker,

March 17, 1999.
AUDIT RESULTS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 28

different. Insurance systems focus on tabulating and reporting

losses, catastrophic events and actuarial tables, the results of

which are much different than bank financial reporting systems.

The author concluded there were deep historical reasons for the

uniqueness of the insurance industry, and only those totally

dedicated to the business have survived - while those who forget

this lesson may regret it.

In the late 1980s, the Subcommittee on Oversight and

Investigations of the Committee on Energy and Commerce

investigated four insurance company failures in the United States

that were expected to cost taxpayers more than $5 billion, and the

near-failure of two other companies. The Subcommittee found

state regulation over insurance company solvency was seriously

deficient and believed the industry was vulnerable to the same

mismanagement and fraudulent activity that led to the failure of

the savings and loan industry. The Subcommittee reported many

common elements among the insolvent and problem insurance

companies, including rapid expansion, over reliance on managing

general agents, extensive and complex reinsurance arrangements,

excessive under pricing, reserve problems, false reports, reckless

management, gross incompetence, fraudulent activity, greed and

self dealing.9 The Subcommittee concluded state regulators and

independent audit firms had failed to identify, report and correct

such problems before they got out of control.

As banks expand and grow their insurance business, OCC will

need to reconsider its current consumer compliance perspective

towards bank insurance activities. It will need to begin to

develop expertise and incorporate into its supervisory strategy

certain examination procedures to address these new products and

services. It will need to recognize that state supervision is

limited and to become more discriminating as to which states are

able and willing to supervise the national banks’ new and

expanded insurance business.

The OCC 1997 survey results and recommendations provide a

good foundation for implementing the necessary changes. From

its 1997 survey, OCC identified the risks in the bank insurance

activities as those relating to reputation, compliance, strategic and

 

9

 Staff of House Subcommittee on Oversight and Investigations, Committee On Energy

And Commerce, 101st Cong., 2d Sess., Failed Promises: Insurance Company

Insolvencies (Committee Print 1990)
AUDIT RESULTS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 29

transaction risk. Reputation risk relates to business losses from

adverse publicity. Similar to reputation risk, compliance risk

relates to losses from violations of law or ethical standards.

Strategic risk relates to losses when business decisions do not

coincide with bank goals, are not supported by due diligence or

are poorly implemented. Transaction risks relate to losses due to

not delivering timely and efficient products and services.

The recommendations resulting from the 1997 survey were

fundamentally sound. Basically, the recommendations were to

measure OCC's workload and risk, formulate a supervisory

strategy, develop agency expertise and promulgate policies and

procedures. These recommendations appear relevant today

considering the expanding national bank insurance activities, the

impending reform of the financial services industry and the

changing relationship between OCC and state supervisors.

OCC Believed Expanded

Activities Pose Little Risk

OCC officials at the exit conference in July 1999 stated they were

committed to continuing and enhancing OCC supervisory efforts

to meet the new challenges relating to national bank insurance

activities. They agreed the financial services industry would

continue to evolve and offer new challenges to those involved and

that the volume of bank insurance activities will increase

significantly in the years to come. However, OCC officials

believed they were taking appropriate steps to prepare for the

increased bank insurance activities.

OCC officials stated its risk-based supervision approach allowed

it to fulfill its mission as primary national bank supervisor while

honoring the basic tenets of functional supervision. Under this

approach, OCC examiners identify the risks and focus on

management’s policies, procedures and controls over that risk.

Where insurance activities are housed within a bank subsidiary or

affiliate, OCC examiners were instructed to assess the risk and

impact of insurance activities on the national bank. If the

insurance activities impact bank safety and soundness, examiners

were instructed to notify the primary supervisor (state or FRB)

before requesting reports, making inquires or directly examining

the insurance entity. The new legislation requires OCC to rely

on state examinations to the extent possible and to first direct

information requests to the states.
AUDIT RESULTS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 30

The OCC officials also inferred that bank insurance activities

pose little risk to bank safety and soundness for a number of

reasons. First, insurance activities conducted by national banks

are only a small part of the comprehensive banking and financial

business. Second, most national banks conduct their insurance

activities through operating subsidiaries. Third, insurance

activities were neither new nor unfamiliar because national banks

have had the authority to engage in insurance activities for years.

The OIG does not take issue with OCC’s comment that OCC

supervision-by-risk philosophy will address the expanding

insurance activities of national banks. The concern is that current

examinations of national banks may not be adequate to detect or

address the potential impact of significant increases in those

insurance activities. The OCC Advisory Letter 96-8 guidance

was not intended as an examination tool. Rather, it was to help

bank management identify and manage their insurance risks.

Because it is not a regulatory requirement, the letter can not be

used as a basis for reporting violations or enforcing regulatory

compliance. While OCC officials stated the examiners have

authority to examine bank insurance activities if they present a

risk to the bank, the OIG was told that examiners were generally

viewing bank insurance as a compliance issue. As such, they

were limiting their activities to management inquiries.

The OIG also agrees, in the past, insurance activities have not

resulted in any known problems to national banks. However, the

risk could change as banks grow their insurance business and it

becomes increasingly important to bank competitiveness and

viability.

The OIG also agrees that risk is reduced when banks conduct

their business through operating subsidiaries or holding company

affiliates. However, the OIG does not agree the legal structure

completely removes that risk. For example, the Subcommittee

on Oversight and Investigation reported on the failure of a

insurance company, a wholly owned subsidiary of a large

insurance company. Its failure was averted when its parent

company contributed over $250 million to keep the affiliate

solvent. The parent company was not legally obligated to assume

the affiliate’s losses but choose to do so because it recognized its

responsibility to protect the policyholders and public from the

consequences of the affiliate’s inadequate controls.
AUDIT RESULTS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 31

A central issue in the Subcommittee’s investigation was excessive

reliance on individuals with delegated management authority

from those wishing to expand or enter the insurance business.

These individuals include managing general agents, brokers and

other companies. The Subcommittee reported these individuals,

if not monitored and controlled, can place an institution at great

risk in periods of rapid expansion, especially into unknown

product lines.

The OIG agrees national banks have long had the authority to

engage in insurance activities and that few have even taken full

advantage of those powers. However, the OCC survey disclosed

while most banks have limited their activities to familiar creditrelated products, they intended to grow their insurance businesses

into new products and services in the near future. As they do so,

bank management may be dealing with a rapid expansion into

product and service lines with which they are not familiar or have

little or no experience.

Given its supervisory stance and philosophy, it is uncertain

whether OCC is ready to effectively respond to major stress on

the National Banking System as a result of this rapid expansion

into insurance activities.

Recommendations

The OIG recognizes the role of the Federal Financial Institution

Examination Council in promulgating uniform examination

procedures among Federal regulators. The following OIG

recommendations are made with the understanding that the new

legislation does not materially affect OCC’ role as administrator

of the National Banking System and that OCC will, to the extent

necessary, coordinate with other Federal regulators when

addressing the OIG recommendations.

Recommendation 2-1

The Comptroller of the Currency should establish, maintain and

make available to OCC personnel a universe of national banks

engaged in insurance activities, including the types of products

and services, to identify the agency’s risks, manage its workload

and identify staff development needs.
AUDIT RESULTS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 32

Management Response and OIG Comments

OCC concurred and is taking action the OIG believes will address

the issues surrounding the finding and recommendation. It has

begun to collect information about national bank insurance

activities. It expects to maintain the universe data in “real time”

and have it available to its examiners by year-end.

Recommendation 2-2:

The Comptroller of the Currency should further develop and

expand the agency’s level of expertise and knowledge in the

business of insurance as it affects national banks.

Management Response and OIG Comments

OCC did not concur with the finding or recommendation. As

discussed under Finding 1 Recommendation 1, OCC believes the

recommendation is inconsistent with the functional regulation

approach embraced by the new legislation and is inappropriate in

light of the limited insurance activities permitted for national

banks under the new legislation.

The OIG believes OCC personnel will need good working

knowledge of the insurance industry and its business practices

and risks to determine if the state regulator’s reports and

information can be used for examination purposes and to examine

the functionally regulated entity, if necessary. While the

preponderance of new national bank insurance activity may be in

sales, the OCC survey showed at least 20 national banks were

engaged in underwriting insurance in 1999.

In its January and April 2000 memorandums to examining

personnel, OCC stated it expected examiners to evaluate the

consolidated risk profile of banks including understanding and

assessing all risks affecting national banks, including those

originating in or resulting from, functionally regulated

subsidiaries or affiliates. It stated this assessment may involve

greater reliance on the work of other agencies, especially as it

relates to the functionally regulated entity. It stated that if

examiners find the functional regulator’s reports insufficient, they

are authorized to seek information directly from the functionally

regulated entity or to examine it, provided the three criteria

discussed in Finding 1 Recommendation 1 are met.
AUDIT RESULTS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 33

The OIG questions whether OCC examiners can perform as OCC

expects without a good working knowledge of the insurance

industry. The differences between insurance and banking are

great. Yet, OCC has not implemented its own recommendations

to develop a bank insurance examination handbook and obtain

insurance expertise.

Lacking a working knowledge and basic understanding of the

insurance industry practices, reports and risks, examiners may

find it very difficult to evaluate the sufficiency of state regulator

reports in terms of scope of inquiry and sufficiency, competency

and relevance of the evidence and assertions. Furthermore, being

unfamiliar with the industry practices, products and reports,

examiners may not know what information to request from the

insurance subsidiary or affiliate or how to interpret and use it.

As such, the OIG believes OCC needs to acquire, push down or

make available working knowledge of the insurance industry if

examiners are to perform as expected.

In its April 2000 memorandum, OCC directs the examiners to

contact a senior advisor in OCC Headquarters for further

information and guidance. The OIG believes that relying on such

limited, concentrated and distant knowledge may not be workable

or prudent.

Given its non-concurrence, OCC will need to refer the matter to

the Deputy Secretary of the Department of the Treasury for

resolution under TD 40-01.

Recommendation 2-3

The Comptroller of the Currency should develop a supervisory

strategy over national bank insurance activities that addresses not

only consumer protection but also safety and soundness issues

associated with the expanded insurance activities.

Management Response and OIG Comments

OCC did not concur with the finding or recommendation. As

discussed under Finding 1 Recommendation 1, OCC believes the

recommendation is inconsistent with the functional regulation

approach embraced by the new legislation and is inappropriate in

light of the limited insurance activities permitted for national

banks under the new legislation.
AUDIT RESULTS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 34

The OIG believes the OCC needs to be more proactive, rather

than reactive, in recognizing and dealing with the potential risks

expanding insurance activity could pose to the safety and

soundness of the National Banking System. The two OCC

memorandums and the universe of bank insurance information

should heighten the examiners’ awareness of bank insurance

activities and put examiners on notice of the agency’s expectation

of them. However, these efforts do not define and provide

examiners with the goals, objectives and priorities in examining

or supervising national back insurance activities without which,

their efforts could become unfocused, misdirected or lost.

The OCC memorandums were a step in the right direction and

seem compatible with the intent of the OIG recommendation.

However, OCC stated in its response to this report that it

considered the recommendation to be inappropriate and that it

would not implement it.

Given its non-concurrence, OCC will need to refer the matter to

the Deputy Secretary of the Department of the Treasury for

resolution under TD 40-01.

Recommendation 2-4

The Comptroller of the Currency should develop supervisory and

examination procedures to ensure adequate, consistent and

uniform coverage over national banks’ insurance activities.

Management Response and OIG Comments

OCC did not concur with the finding or recommendation. As

discussed under Finding 1 Recommendation 1, OCC believes the

recommendation is inconsistent with the functional regulation

approach embraced by the new legislation and is inappropriate in

light of the limited insurance activities permitted for national

banks under the new legislation.

The OIG believes OCC needs to provide examiners better

direction if they are expected to evaluate the sufficiency of state

regulator reports, request and use relevant information from the

state regulator or insurance subsidiaries and affiliates or to

examine a national bank insurance subsidiary or affiliate. This is

especially so if OCC expects those activities be on an exception

rather than routine basis. The need for such direction is also
AUDIT RESULTS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 35

exacerbated by the examiner’s lack of working knowledge over

the industry and the agency’s lack of a supervisory plan or

strategy over national bank insurance activities.

In its April 2000 memorandum to examiners, OCC stated it was

establishing a process for determining when and how to make or

respond to requests for functional regulator information or how to

conduct examination activities involving functionally regulated

entities. It stated it would issue specific procedures “shortly.”

While the OCC direction seems compatible with the intent of the

OIG recommendation, the OCC stated in its official comments to

this report, that it considered the recommendation to be

inappropriate and that it would not implement it.

Given its non-concurrence, OCC will need to refer the matter to

the Deputy Secretary of the Department of the Treasury for

resolution under TD 40-01.
OBJECTIVE, SCOPE AND METHODOLOGY

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 36

Appendix 1

Page 1 of 2

The overall objective of the audit was to determine if OCC supervision provided

adequate coverage of safety and soundness and consumer protection issues relating to

national bank insurance activities. The OIG focused on current bank insurance

activities but also considered increased activities expected in the future because

financial reform legislation removes many barriers between banks and insurance

companies. The audit did not include annuities among the insurance activities.

The audit was conducted in accordance with the Government Auditing Standards issued

by the Comptroller General of the United States and included such tests as were

determined necessary.

The OIG researched and reviewed the proposed and final versions of the financial

services reform legislation to determine the impact on national banks as well as OCC’s

supervision of bank insurance activities. The final legislation was passed into law in

November 1999, subsequent to OIG’s fieldwork but before issuance of the final report.

The OIG conducted its audit fieldwork between November, 1998 and July, 1999.

Fieldwork was performed at OCC headquarters in Washington, D.C., the Western

District in San Francisco, California, and at the Ombudsman's office in Houston,

Texas. The OIG also performed fieldwork at several additional locations in

Washington, D.C., including the Board of Governors of the Federal Reserve System

and the following industry groups: American Insurance Association, Association of

Banks-in-Insurance, American Bankers Association, and the National Association of

Insurance Commissioners (NAIC). The OIG also met with officials of one of the

largest state insurance regulators.

At the start of the audit, the OIG asked OCC and the other organizations for universe

data identifying banks and their insurance activities. Information was not available

until the OCC collected it in response to a November 1998 Congressional request.

OCC provided the information to the OIG in March 1999.

The OIG discussed current bank insurance activities with OCC, Federal Reserve and

other organizations visited, along with associated safety and soundness and consumer

protection issues and risks. In addition, the OIG asked each for their perception of

future bank insurance activities and risks from the impending financial reform.

At OCC headquarters, the OIG interviewed personnel from Core Policy, Bank

Supervision Operations, Licensing Policy and Systems, Legislative and Regulatory

Activities, Securities and Corporate Practices and Large Bank Supervision to identify

the supervisory roles and responsibilities over national bank insurance activities. The
OBJECTIVE, SCOPE AND METHODOLOGY

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 37

Appendix 1

Page 2 of 2

OIG also discussed OCC enforcement policy and practice with personnel from the

Enforcement and Compliance Division.

The OIG interviewed OCC personnel in the Ombudsman's office to identify OCC's

complaint process and the complaints received relating to bank insurance activities.

The OIG also interviewed a bank examiner in OCC's Western District to discuss the

district's supervision procedures and insurance activity of banks within its district.

The OIG met with the Federal Reserve, several banking and insurance organizations,

the NAIC and a large state insurance regulator to gain external parties’ perspective on

financial services reform. These discussions were wide ranging, and included business

overviews and regulatory roles and responsibilities in the banking and insurance

industries. The OIG obtained detailed statistical information on state insurance

departments from the NAIC including the information in Appendix 3 of this report.

The OIG also met with officials of a state insurance department to discuss its regulatory

and supervisory approach, including interaction with OCC, licensing, level of banks'

insurance activity, complaints and enforcement processes. The OIG selected the state

insurance regulator because its staffing and budget was among the largest in the nation.
NATIONAL BANK INSURANCE ACTIVITIES

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 38

Appendix 2

NATIONAL BANK INSURANCE ACTIVITIES

AS OF FEBRUARY 1999

1. Total number of national banks engaged in insurance: 1,950

2. National banks insurance activities:

No. of Banks Directly Engaged No. of Bank Operating Subsidiaries

Type of Insurance Sales Underwriting Reinsurance Sales Underwriting Reinsurance

Credit Related Life Insurance 1,906 12 2 54 7 9

Private Mortgage Insurance 220 0 0 18 0 11

Other Life Insurance 164 0 0 104 1 0

Accident and Health Insurance 715 0 0 94 0 0

Property/Liability Insurance 61 0 0 89 0 0

Other Insurance 61 0 0 45 0 0

3. Number of national banks contracting insurance services Sales 152

 from independent contractors or agents: Underwriting 4

Reinsurance 12

4. National banks 1997 insurance direct sales premium revenue: $2.1 Billion

5. National banks 1997 insurance underwriting premium revenue: $2.7 Million

6. National banks 1997 reinsurance assumed: $43.3 Million

7. National banks 1997 at-risk reinsurance of private mortgage insurance: $27.0 Million

SOURCE: Office of the Comptroller of the Currency
INSURANCE DEPARTMENT RESOURCES

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 39

Appendix 3

Page 1 of 2

1997 INSURANCE DEPARTMENT RESOURCES

50 States and District of Columbia

(dollars in millions)

State Contract Total Department Insurance Premium Exams Licensed Consumer

State Staff Staff Staff Budget Revenues Volume Initiated Producers Complaints

1 New York 865 449 1,314 $95.0 $921.7 $68,719 232 137,751 45,824

2 California 1,135 56 1,191 $127.9 $1,346.0 $72,978 134 205,960 28,269

3 Florida 1,043 87 1,130 $55.2 $465.9 $33,293 190 156,966 42,340

4 Texas 1,003 2 1,005 $43.2 $770.5 $52,473 108 144,394 24,958

5 Illinois 353 199 552 $22.8 $208.9 $41,247 161 93,551 14,081

6 Louisiana 261 261 522 $21.8 $189.2 $10,828 62 28,420 4,099

7 New Jersey 402 76 478 $37.2 $321.3 $25,137 38 78,700 14,012

8 North Carolina 388 19 407 $29.4 $288.0 $20,137 53 86,757 10,100

9 Ohio 248 68 316 $18.6 $384.3 $30,611 0 75,000 8,105

10 Pennsylvania 274 30 304 $18.2 $224.1 $46,204 216 113,039 21,305

11 Maryland 249 17 266 $14.3 $182.5 $11,950 72 62,612 18,461

12 Arizona 138 84 222 $4.4 $159.7 $12,349 160 42,839 6,034

13 Missouri 210 0 210 $11.7 $186.1 $15,066 140 77,890 4,735

14 Connecticut 164 33 197 $12.4 $222.7 $13,977 101 49,280 10,311

15 Virginia 190 3 193 $15.3 $249.9 $17,824 68 71,003 8,227

16 Kentucky 174 1 175 $11.4 $155.7 $8,742 45 13,130 6,756

17 Georgia 168 0 168 $17.5 $444.7 $18,677 64 66,511 12,290

18 Washington 164 2 166 $11.1 $229.6 $14,469 21 41,965 7,923

19 Massachusetts 163 2 165 $8.0 $26.7 $27,586 30 47,761 3,375

20 Kansas 155 2 157 $7.7 $140.1 $5,811 24 33,262 5,781

21 Michigan 127 15 142 $16.3 $194.1 $33,934 35 63,742 4,993

22 Wisconsin 122 8 130 $8.0 $104.2 $15,600 65 59,398 9,169

23 Delaware 67 61 128 $4.3 $57.8 $3,109 48 21,328 6,985

24 Mississippi 114 14 128 $4.7 $113.9 $4,471 25 45,839 7,000

25 Oklahoma 122 1 123 $6.0 $138.8 $6,229 59 39,276 6,236

26 Minnesota 121 0 121 $7.0 $170.0 $15,332 15 52,771 3,792

27 Colorado 95 21 116 $6.3 $117.2 $13,114 44 45,177 8,041

28 South Carolina 107 4 111 $5.7 $103.9 $7,406 40 49,056 4,093

29 Arkansas 102 0 102 $5.6 $114.9 $4,971 21 35,288 2,981

30 Oregon 99 1 100 $6.1 $89.8 $8,193 23 29,250 4,748

31 Tennessee 91 8 99 $5.8 $278.0 $15,835 28 56,000 4,013
OCC MEMORANDUM TO EXAMINERS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 40

Appendix 3

Page 2 of 2

1997 INSURANCE DEPARTMENT RESOURCES

50 States and District of Columbia

(dollars in millions)

State Contract Total Department Insurance Premium Exams Licensed Consumer

State Staff Staff Staff Budget Revenues Volume Initiated Producers Complaints

32 Iowa 90 8 98 $5.8 $121.4 $7,078 59 43,292 2,525

33 Nevada 65 30 95 $3.7 $103.9 $4,169 50 22,855 2,377

34 Nebraska 93 0 93 $5.7 $54.2 $4,608 47 30,630 2,733

35 North Dakota 46 46 92 $2.7 $27.5 $1,878 11 14,250 795

36 New Mexico 77 14 91 $3.5 $85.2 $3,232 9 n/a 1,700

37 Alabama 69 17 86 $7.8 $160.7 $13,330 18 49,000 193

38 Indiana 84 2 86 $4.0 $141.2 $16,290 43 100,874 5,278

39 Utah 72 4 76 $3.6 $74.1 $5,114 15 26,684 1,056

40 Maine 72 3 75 $6.1 $47.0 $3,654 6 13,496 1,333

41 West Virginia 72 3 75 $4.1 $105.1 $3,466 5 25,820 2,695

42 Idaho 65 6 71 $4.9 $52.9 $2,546 5 17,196 1,507

43 Dist. of Columbia 62 2 64 $4.8 $47.2 $3,679 16 n/a 856

44 New Hampshire 51 13 64 $3.1 $59.9 $2,758 28 20,332 1,418

45 Rhode Island 53 10 63 $3.1 $47.3 $3,692 15 12,786 806

46 Alaska 50 3 53 $4.8 $33.5 $1,572 7 7,122 559

47 Hawaii 47 5 52 $4.4 $80.1 $4,541 19 8,868 1,950

48 Vermont 49 0 49 $3.5 $31.9 $1,962 71 10,633 840

49 Montana 43 2 45 $1.9 $37.6 $1,675 5 17,968 1,927

50 Wyoming 24 6 30 $1.2 $12.1 $1,027 2 8,826 524

51 South Dakota 24 3 27 $1.3 $39.4 $2,004 6 15,212 1,438

Totals 10,122 1,701 11,823 $738.9 $9,962.4 $764,547 2,759 2,569,760 391,547

Source: National Association of Insurance Commissioners
OCC MEMORANDUM TO EXAMINERS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 41

Appendix 4

Page 1 of 4
OCC MEMORANDUM TO EXAMINERS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 42

Appendix 4

Page 2 of 4
OCC MEMORANDUM TO EXAMINERS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 43

Appendix 4

Page 3 of 4
OCC MEMORANDUM TO EXAMINERS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 44

Appendix 4

Page 4 of 4
MANAGEMENT RESPONSE

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 45

Appendix 5

Page 1 of 4
MANAGEMENT RESPONSE

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 46

Appendix 5

Page 2 of 4
MANAGEMENT RESPONSE

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 47

Appendix 5

Page 3 of 4
MANAGEMENT RESPONSE

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 48

Appendix 5

Page 4 of 4
MAJOR CONTRIBUTORS

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 49

Appendix 6

Benny W. Lee, Director, Program Audits

Kenneth F. Wicklander, Audit Manager

Anthony J. Putzulu, Auditor

REPORT DISTRIBUTION

OIG-00-098 OCC SUPERVISION OF BANKS SELLING INSURANCE Page 50

Appendix 7

U.S. Department of the Treasury

Office of the Assistant Secretary of the Treasury for Financial Institutions

Office of the Assistant Secretary of the Treasury for Management / Chief Financial Officer

Office of Strategic Planning and Evaluation, Departmental Offices

Office of Accounting and Internal Control, Departmental Offices

Office of Budget, Financial Management Division, Departmental Offices

Office of the Comptroller of the Currency

Comptroller

Deputy Comptroller, Core Policy

Director, Securities and Corporate Practices

Director, Management Improvement

Assistant Director, Legislative and Regulatory Activities

Senior Advisor, Bank Supervision Operations

Office of Management and Budget

OIG Budget Examiner