Insurance Carriers Providing Policyholders With Bank Disclosures

Upon policy renewal, insurance carriers now have to ask some of their customers, "Do you remember where you bought that policy?"

Under Section 305 of the Gramm-Leach-Bliley Act, financial institutions have certain statutory responsibilities when offering insurance products or annuities through a bank-owned affiliate. First, they must notify credit applicants that the purchase of insurance is not a condition for receiving credit from the bank. Second, they must explain at the time of sale -- and renewal -- that insurance products are not FDIC-covered deposits and that some products involve investment risk.

In a February 28, 2003 letter to the American Bankers Insurance Association (ABIA), the FDIC absolved depository institutions from having to provide those disclosures upon renewal to existing customers with policies sold before October 1, 2001. Based upon ABIA feedback, the FDIC recognized that bank-owned insurance agencies would have "significant practical difficulties" in doing so, according to the letter. Accordingly, banks or their agents will not be required to gain existing customers' acknowledgement of these terms upon policy renewal.

But the notification provisions remain in force for new customers. The resulting compliance burden has fallen upon insurance companies, rather than on bank-owned insurance agents or their bank holding companies.

Although insurance agents help customers to find the right policies, the periodic renewal typically comes directly from the insurance carrier. "You could see where there would be a difficulty in the agency," said Valerie G. Barton, associate director of the ABIA. "Every six months, when your car insurance renews, the agent would have to send out this disclosure to you: 'Do you really understand that because we're owned by a bank, that you didn't buy this product in connection with a loan?'"

By contrast, the insurance carrier knows exactly when it's time to renew. Plus, since Gramm-Leach-Bliley went into effect, carriers also know the source of each new policy. "It's being identified as being sold through XYZ Bank, or through XYZ agency owned by a bank," said Barton. "The carriers know that the bank's book of business is there."

Indeed, insurance companies may know more about an insurance agent's relationship with a bank customer than does the bank itself. In accordance with strict privacy provisions, the parent bank of an insurance agency remains way out-of-the-loop. Although banks can refer customers to their insurance subsidiaries, they can do almost nothing in the way of follow-up. "The insurance subsidiary is no different than the credit card subsidiary, or the mortgage subsidiary," said Barton. "There are limitations to what information can go back and forth."

"The most that you can do, with the approval of the client, is to give that insurance entity a name, address, and contact information," added Barton.

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