Now Is The Time For Adjusting To The Convergent Playing Field

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Much has been said about the Gramm-Leach-Bliley Financial Modernization Act of 1999 and what it means for banks, insurance companies, and securities firms.

But there has been little talk about the effect of GLB on products offered by these institutions. In particular, there has been minimal discussion of so-called “product convergence,” or the blending of products from the three financial sectors impacted by GLB. We will address some reasons why in this article and what may lie ahead.

Perhaps the lack of buzz about product convergence has something to do with the fact that, thus far, the product offerings after GLB look very much like those offered before. And, in the insurance sector at least, many of those pre-GLB products already combined elements of insurance, banking, and securities.

For instance, annuities were sold through bank channels for many years prior to passage of GLB. (CD annuities even sound like bank products.)

In addition, insurance companies have a long history of selling contracts that compete with banks and brokerages. For instance, along with annuities, ordinary life insurance has the ability to accumulate earnings on deposits/premiums. Also, variable products offer all the equity exposure of mutual funds and stocks bundled with insurance features. And for consumers wanting a savings account feeling along with their variable contracts, variable insurers offer a fixed account option.

It is easy to see, then, that to meet accumulation needs, insurers already have contracts that can compete with CDs and demand deposits of a bank, and/or also respond to investment needs.

What about banks wanting to offer insurance or respond to the insurance needs of their customers? Here, the story is a little different–but it, too, reveals why there has been little talk about product convergence, as of yet.

Attempts at bank sales of insurance thus far have focused on selling existing insurance products via bank representatives or newly hired agents. Some banks have done well making such sales–in particular, in sales of annuities.

Even so, anecdotes indicate that, on a national basis, penetration rates for bank insurance sales have not reached the levels hoped for or expected.

Product complexity may be a key factor in these smaller-than-anticipated sales by banks.

After all, the insurance industry has historically developed wave after wave of ever more complex insurance products. Traditional cash value life insurance, for instance, now shares its stage with variable life and universal life. Generic deferred annuities have given way to a fixed versus variable grouping, with numerous subtypes of each. And variable annuity marketers, in their constant effort to differentiate their products, have unveiled a wide array of policy guarantees.

Banks, on the other hand, have found they need to simplify their insurance product offerings, not make them more complex.

There are several reasons for this. For one, platform representatives who sell inside banks are not comfortable explaining all the features of complex insurance products. Complicated crediting strategies and policy mechanics make for a tougher sale.

In addition, banks have found that, to keep the learning curve flatter for the bank sales force that is moving into insurance sales, they need to offer a smaller–not more expansive–portfolio of products.

Whats more, some have found that the traditional underwriting practices of life insurance products introduce delays in receipt of sales commissions. Banks are not accustomed to such payment delays.

Finally, not all bank clientele who express interest in buying insurance at the bank branch want the complexity that many of todays insurance products offer.

What can be done to help banks overcome these hurdles and move closer to convergent selling, if that is their preference? The answer is to introduce greater simplicity in insurance products sold by banks.

Consider: The key types of successful bank-sold products include annuities with simple crediting strategies–ones that enable customers to knows exactly what they will earn over the course of the contract.

Similarly, life insurance policies that use only simplified underwriting seem to be meeting with success in bank sales. That is understandable, since such products lead to faster completion of the sale.

Going forward, banks may want to consider expanding on the efforts of the few who are now offering single premium insurance contracts of various kinds. The appeal there is the simplicity of the single payment.

Perhaps product simplicity will prove to be a turning point in helping banks improve their insurance sales. In turn, that may be the trigger that will stimulate greater convergent thinking in that sector and in the other financial providers serving that sector, whether of insurance or securities orientation.

In the securities sector, some of the same hurdles, regarding increasing insurance sales, are much in evidence, so simplification of insurance contracts may work there as well. Certainly, the idea is worth exploringespecially for securities clients who fall into the middle income category. (The high net worth clients naturally need more complex instruments.)

As comfort increases with convergent thinking and convergent sales, financial product developers wont be far behind, offering various kinds of convergent products and services. But for now, the convergent businesses need to concentrate on adjusting to the Gramm-Leach-Bliley playing field.

, FSA, MAAA, is an actuary with the Indianapolis office of Milliman USA. E-mail him at rob.stone@milliman.com.


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.