Insurers' Expansion Into Banking: A Look at Operating Returns

Carolin D. Schellhorn and Nicos A. Scordis

Journal of Insurance Issues, 2002, vol. 25, issue 1, 1-23

Abstract: We investigate whether insurers can improve their operating risk-return profile by adding commercial loans, a banking product, in the traditional insurance product mix. This analysis is important for two reasons. First, the Gramm-Leach-Bliley Act of 1999 allows insurers to buy and operate banks. Second, existing research finds that banks can improve their risk-return profile by adding insurance products, but offers no guidance on whether insurers might benefit from an expansion into banking. We use individual product data to construct insurance-only portfolios of products and insurance-banking portfolios of products. Analysis of portfolio operating returns and their standard deviations indicates that insurer-banks are unlikely to outperform full- line insurers that have carefully selected their product mix. The mere expansion of an insurance firm into banking does not necessarily result in a competitive operating risk- return profile.

Date: 2002
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