Whether product convergence is “happening” depends on how one defines this term.
For some, convergence is the anticipated corporate consolidation of heretofore separate financial services providers–banks, brokerage firms, investment managers and mutual funds, and insurance carriers–resulting from the 1999 enactment of the Gramm-Leach-Bliley Financial Modernization Act. In this sense, convergence means transformation into financial supermarkets having inexhaustible cross-selling potential.
For others, convergence is more academic. It means the combining of insurance and capital markets, the process of moving towards union and uniformity, or separate markets performing the same functions. Here, convergence may mean the securitization of insurance risk, or the “insurancization” of financial risks.
Both types of convergence-watchers are probably right. Convergence fits the Supreme Court Justices famous remark about another activity: “I know it when I see it.”
Previously, for example, the debuts of proprietary insurance products by insurers and banks were heralded as convergence products.
More recently, a product rollout by two household names in investments and banking is widely seen as a convergent development. (I am referring here to JPMorgan Chase announcing that its affiliate, Chase Life & Annuity Company of New York, has launched a fixed annuity. As described by senior management, the product draws upon the banking and investment know-how of JPMorgan Chase, and “is a logical extension” of the firms branded products following on the heels of its mutual funds.)
Meanwhile, there are other financial products that have been around for a while that are actually convergence products but have not been generally recognized as such.
One example is the guaranteed minimum income benefit rider offered with many variable annuities. These riders seem to have all the defining characteristics of “insurancization” of financial risks, in that they combine insurance and capital market hedging techniques.
Also, the growing use of insurance contracts as hedges in other contexts, because of their greater efficiency and lower costs, can wear the convergence label proudly.
And, although not usually discussed as such, equity indexed annuities are the prototype convergence product for consumers, in that they link insurance needs, safety through the guarantee of principal, and upside potential for the credited interest rates.
Adding to confusion over the “is it happening?” question is a second question. That is, are the other necessary things happening to make convergent products happen? Such “other things” include technology, culture, and regulatory accommodations.
The quick answer to the technology question is yes. Just visit all of the Web sites that are either devoted to or have significant material about technology solutions for convergence.
The culture question is more problematic, since cultures of various financial services providers vary significantly. Many banks selling insurance–and their employees–generally dont see themselves as insurance people. Similarly, many insurers and their employees dont see themselves as providers of a broad array of products serving different savings, retirement and investment goals.
Can that change? Yes, a greater focus on the needs of the investing, insuring public could bridge the culture gap. For example, asking product developers and champions to stand in the shoes of the public can provide the necessary perspective.
As briefly noted above, there are some old and new signs that the various financial institutions are doing that. The more this happens, the faster convergent products will arrive.
But real convergence cannot and will not happen without regulatory pressures.
Regulatory considerations may add yet another meaning to the word convergence. The various mandates of bank regulation, market conduct, and suitability standards all have to be addressed.
When convergent products are marketed, the concepts of market conduct and suitability gather momentum.
For instance, multi-line agents, to avoid regulatory problems, need an expanded understanding of insurance risk management and the workings of financial instruments. Simply put, where there is a convergence of issuers and products, there needs to be a convergence of knowledge.
In addition, convergent products and convergent-oriented product arrays raise important compensation issues. For example, the convergence of products and issuers may give rise to greater “convergence” of distribution and compensation structures, with an emphasis on fee-based compensation rather than commissions. Further, if multi-line agents are compensated differently or in a manner promoting sale of one product over others, issuers and agents face regulatory scrutiny.
As posited above, the real challenge to meaningful convergence is not who the issuers or distributors are, but whether the products and the manner in which they are sold address the potential purchaser as a whole person with converging investment, insurance, savings, and retirement income needs.
Creating a generation of “convergence agents” requires the convergence of these institutions’ cultures. The first entity that identifies this need and trains its agents to understand the relative merits and purposes of its various products may well prove to be the convergence success story.
Joan E. Boros, Esq., is a partner in the Washington, D.C. law firm of Jorden Burt, LLC. Her e-mail is: [email protected]
Reproduced from National Underwriter Life & Health/Financial Services Edition, May 27 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.