Bankers eager to sell insurance, but insurers see it as bad policy

Bankers trying to turn their businesses into a financial supermarket don't see insurance as a gourmet item. It is as basic as milk and eggs, they say, and banks ought to be able to offer it.

As bankers view it, insurance is an added convenience for consumers who want ''one stop'' financial shopping. It would also keep banks competitive with other financial institutions.

But insurance executives disagree. The ''little guy'' in insurance and banking will be hurt by the competition, they contend. And the large banks themselves may not come out unscathed.

On Wednesday, the Senate Banking Committee began hearings on a banking deregulation bill introduced by Sen. Jake Garn (R) of Utah. Among other things, the bill would allow bank holding companies to engage in insurance underwriting and brokerage.

Some banks, however, aren't willing to wait around for Congress:

* Last week Bank of America announced a test program with Capital Holding Corporation. Under the plan, Capital insurance agents will be able to sell automobile, homeowner, and life insurance to consumers inside certain bank branches in Bakersfield and Santa Barbara, Calif. Capital will pay the bank a fee for office space - the only income the bank will receive from the venture.

* Also last week, a state commission in New York recommended that state-chartered commercial banks be allowed to sell and underwrite insurance and own insurance companies. This includes banks like Chemical Bank, Manufacturers Hanover, and Morgan Guaranty Trust Company (Citibank and Chase are federally chartered and not included).

''We are frustrated at the federal level,'' says James Murphy, executive vice-president of the New York State Bankers Association, which represents commercial banks. ''In the meantime, the Lord helps those who help themselves. There are options under state law to do this, and we are pursuing them.''

Mr. Murphy adds that if banks are let in on the insurance market, consumers will benefit. ''I think customer service and pricing can be very aggressive. There are economies of scale related to this.''

The advantage to consumers, says Robert Sherrett, senior vice-president of Bank of America, is convenience. ''It's all right there.'' Customers can go one place and take care of many needs.

But some lines of insurance, especially property and casualty insurance, have been money losers over the last few years. So why are banks so eager to get a piece of the action?

Foremost, banks want insurance because it is just one more product in the whole lineup of new financial services they hope to get into. It would complement other services, like real estate and securities brokerage, that are expected to come with deregulation.

''If we are going to be a financial superbank, we have got to offer insurance ,'' Mr. Sherrett says. He goes on to say that without a complete stock of financial products on the shelf, banks won't be able to compete with ''the Sears , the J.C. Penneys, and all the others who want to become financial centers.'' Of course, he adds, ''if you take on a product, it certainly has to be profitable.''

When bankers state their case, profits are last on the list of reasons. (This is perhaps because banks are trying to win a legislative battle and so are arguing theory first). Anyway, bankers and analysts say, the banks will approach insurance with caution, sticking to dependable moneymakers, like life insurance.

But Lowell Beck, president of the National Association of Independent Insurers, sees danger signs:

''I am not saying that in the long run banks should not be involved in insurance. I'm just saying that at this point, there are many questions that need to be answered about the long-term implications.''

He is concerned, for instance, about customers being ''coerced'' by bank loan officers eager to make a loan and sell insurance at the same time. This kind of practice is already against the law, but Mr. Beck says it is hard to enforce. So he questions whether banks should ''even be in the position of offering insurance.''

His big concern, however, is the risk in underwriting insurance. As an agent , a bank would simply sell insurance that some other company has underwritten. As an underwriter, however, it would be responsible for actually paying a claim. Over the long run, warns Beck, insurance, especially property and casualty insurance, is a volatile business; banking, on the other hand, is a stable business. He is concerned that mixing the two could result in financial disaster.

''We just can't afford to see the insurance reserves invaded to pay for the difficulties of other aspects of a (banking) institution,'' he says. ''We seem to be getting into the mold of thinking that it is in the public interest to merge everything into one. That's absurd. In the public's mind, a loan, depositing money, getting insurance - they're all a financial transaction, all the same thing. And yet they require entirely different approaches.''

But the various banking deregulation bills in Congress (there are three of them) try to protect against this crossover of business by making insurance a separate subsidiary of bank holding companies. It would make insurance an entity of its own, and not allow asset switching - or any kind of switching - between the two lines of business.

Besides, bankers say, a number of banks are already involved in insurance. In the Midwest, especially, many states allow state-chartered banks to act as insurance agents or operate insurance subsidiaries. Bank holding companies with assets under $50 million or with headquarters in towns with fewer than 5,000 people can also sell insurance. ''When we look at the charges about potential abuses, some of us are aghast,'' says William Bosies, attorney of the American Bankers Association. ''The banking community has been doing this for years, and nothing has ever happened.''

Analysts say banks must be cautious. Consumer insurance can be grasped by banks, says Allerton Cushman Jr., a principal of Morgan Stanley.But commercial insurance ''represents a process technically more complex.''