Insurers' Expansion Into Banking: A Look at Operating Returns

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.