Prop. 103 Could Let Banks Enter Insurance Business

Proposition 103 could radically change the way Californians buy insurance by opening the door for banks to enter the insurance agency business and clearing the way for brokers to barter with consumers on the price of policies.

Some of the state’s largest and most aggressive commercial banking companies say they fully intend to take advantage of provisions in the initiative allowing them to sell complete lines of property, casualty and auto insurance.

The measure also allows brokers to rebate, or kick back, all or part of their commissions to customers.

If these provisions survive expected legal challenges, Californians--already considered relatively sophisticated consumers in their approach to finding insurance--will have even more ways to find lower prices and better service.

They will likely encounter a host of new sales gimmicks and payment schemes that could include direct and automatic payments from their bank checking accounts, according to bankers and agents.

The major insurance companies, which are embroiled in a legal battle over Proposition 103 before the state Supreme Court, are little concerned over these provisions and the changes in how their policies will be sold to consumers.

“Those provisions have never been a major issue for us,” said George Tye, a spokesman for the Assn. of California Insurance Cos.

But for the neighborhood agencies, where most Californians buy their insurance, these are among the most critical issues in Proposition 103.

And the agents are preparing legal challenges to block these obscure, but potentially far reaching, aspects of the landmark ballot initiative from taking effect.

For them, it’s a question of survival.

Thousands of agencies are expected to be closed or sold in the wake of Proposition 103’s passage, according to Jerry O’Kane, a spokesman for the Independent Agents and Brokers Assn. of California.

“There is no question that (Proposition 103) will have a drastic effect on the value of agencies and the profitability of the business,” O’Kane said.

If banks want to come into the post-Proposition 103 world of insurance brokerage, “they won’t have any problem finding agencies to buy,” he said.

The traditional neighborhood insurance agent will surely not vanish from the insurance landscape, he said, but Proposition 103 will certainly accelerate the downward trend in their numbers.

Already Fewer Agencies

In the last four years, the number of insurance agencies in California has dropped to under 50,000 from more than 65,000.

Independent agents typically represent several insurance underwriters. While some big California insurers, such as 20th Century and GEICO, sell directly to the public, most companies use independent agents who act as middlemen and are paid a commission to make the sale and service the account.

O’Kane said one association member’s recent letter was typical of the feelings among agents these days: “He said, ‘I want my dues back. I’m out of this business.’ ”

Proponents of Proposition 103 said the banking and rebate provisions were included to increase competition in the insurance business and therefore improve price and service.

A hungry agent will be a more responsive agent, said Carmen Gonzalez a spokeswomen for Voter Revolt, the proponents of Proposition 103.

But agents argue that the law will squeeze out those attempting to deliver a high level of service.

Commissions for independent agents range from 10% to 15% of auto insurance premiums and 10% to 20% of homeowners insurance premiums. Commercial insurance commissions can run from 1% or 2% up to about 15%, according to O’Kane.

The premium rollback provision of Proposition 103 alone would immediately reduce the commissions received by insurance agents by 20% to 40%.

Previous Commissions

For example, on a typical auto insurance policy of $600, the agent would have received a commission of $60 to $90 before the passage of Proposition 103. If rates are reduced, as called for under the ballot measure, by 20% from 1987 rates, the premium would be rolled back to $432 and the commission would be reduced to $43 from $60.

Susan Miller, an independent agent from Canoga Park, said that she anticipates that the average commission will actually be reduced by 28% to 45% from current levels.

While Proposition 103 would reduce her commission, it would not reduce her costs.

“I can’t tell my secretary to take a 30% decrease in pay or my landlord to take a 40% cut” in rent, she said.

The rollback makes it even more difficult for independent agents to give kickbacks to customers, Miller said.

Miller said she will not give a rebate on commissions, but she suspects that a handful of large agencies will drive many smaller ones out of business, leaving a group that would later raise rates.

Banks have been itching to get into the agency business for many years. The California Bankers Assn. has made that its No. 1 legislative priority for more than a decade, according to spokeswoman Nancy Sheppard.

Bankers want to get into the insurance business for two reasons: They want the ability to earn commission income and they want to have as many financial services as possible under one roof, in order to solidify their relationships with customers.

“Some bankers want to round out their financial services any way they can,” said Dan Williams, a banking analyst with the San Francisco investment firm of Sutro & Co. “Only time will tell if the economics make any sense.”

And just how many banks will embrace the new powers is unclear.

Both Security Pacific and First Interstate Bank--the second- and fourth-largest banks respectively in the state--are mapping plans to enter the market.

Bank of America and Wells Fargo, the largest and third-largest banks respectively in the state, said they are not currently interested in insurance brokerage.

Sheppard said membership studies indicate that upwards of a third of California banks are “very interested” in offering insurance products, although some experts say few of the state’s smaller banks are likely to do so.

“It will keep us competitive with other financial institutions,” such as brokerage firms, savings and loans and financial conglomerates like Sears, said Rick Horn, general counsel for Security Pacific Insurance Group, a subsidiary of the big bank holding company. “If you just stay as a bank, they’ll run all over you.”

Horn said Security Pacific has already been in contact with several major insurers and could be ready to file the necessary paper work with state regulators within a month.

He said banks would be able to offer less expensive and more innovative insurance products than independent agents.

Security Pacific customers, he said, could pay their premiums through the bank’s Visa cards or by a direct debit to their checking account. The bank could offer monthly payment schedules so that customers could pay their premiums over a period of months, Horn said.

Because Security Pacific could assure an insurance company of potentially thousands of customers, the company might be able to “leverage a lower price for our customers . . . or some added benefits,” Horn said.

Customers would be solicited through a blizzard of statement stuffers, “take-one” brochures in branch lobbies and direct mail advertising. Some banks may locate agents in the lobbies of high-traffic branches.

It is also likely that banks will solicit insurance business when they make car, home and business loans.

Independent agents say that practice would open the door for coercive business practices. Bankers, the agents say, could insist that customers buy their insurance in order to get the loan they want.

Horn and Sheppard dismiss those concerns, saying that there are no such horror stories in the 25 states where banks already are able to sell insurance.

And Harry Snyder, of the watchdog organization Consumer’s Union, said he is not immediately concerned about possible illegal tie-in arrangements because of existing consumer law.

“We fully support banks getting into the business,” Snyder said. “It’s a well-established consumer position.”

But there are legal challenges that agents are preparing that could slow, if not bar, banks from selling insurance.

Should a California bank attempt to sell insurance, “We will be at the court house door,” said O’Kane of the agents’ trade group.

Current federal regulations, he said, prohibit national banks from selling insurance. Despite the fact that 25 other states already allow the banks they have chartered to sell insurance, O’Kane argues that the prohibition should apply equally to state and federally chartered banks.

Bankers disagree, saying the federal ban only should apply to federally chartered institutions.

Security Pacific, which has a national charter, also owns a small one-office state-chartered bank in Orange County. It plans to use the state-chartered subsidiary to avoid the federal prohibition.