The Wealth Effects of Allowing Bank Entry into the Insurance Industry
Posted: 26 Apr 2001
Abstract
The term bancassurance labels the delivery of insurance products through banks. With the recent Supreme Court decisions, in 1993, 1995, and 1996, upholding the rights of U.S. banks to sell annuities and insurance, the U.S. banking industry took the first steps toward the effective implementation of bancassurance. I analyze the returns surrounding the OCC and Supreme Court rulings that provide banks with the opportunity to sell annuities and other insurance products. Overall, insurance company stock returns are negative. Consistent with contestable market theory, the overall negative returns for the insurance industry show that the rulings, removing entry barriers to the insurance industry, significantly reduced the value of the insurance industry.
Barriers to bank entry provided greater protection to some segments of the insurance industry than others. Stock price returns differ by industry segment. Insurance companies with insurance agencies and life/health insurance companies have the most negative stock returns, but insurance companies that market their products through a brokerage system have a more positive price reaction. The findings imply that banks may benefit brokerage firms that underwrite bank insurance sales; however, the sale of insurance by banks will increase competition for sales made by insurance agencies and life insurance companies. If the insurers have lost value, do banks gain this value? No, the average stock price of banks did not change surrounding the rulings that have allowed banks to enter the insurance sales market. The findings imply that investors anticipate that the value of banks entering the insurance market will not exceed the value of existing bank investment opportunities (zero long-term economic profits).
Keywords: Bancassurance, Deregulation, Insurance, Banking
JEL Classification: G21
Suggested Citation: Suggested Citation