What's Driving Product Convergence

It didnt stop there. In the past two years, regulators finally acquiesced and codified most of the ground rules and regulatory structure for convergence by corporations. And, taking advantage of GLB, Chase Life and Annuity Company and others have started underwriting fixed annuities.

Now, although GLB paves a way for inter-sector convergence, it does not mandate the creativity that spawns new, hybrid products and product convergence. Instead, the products emerge as a result of people close to the market recognizing ways to eliminate inefficiencies, disconnects, and complexities they see in products and then moving to introduce better solutions.

Thats important to keep in mind, because the insurance industrys regulatory structure has been less affected than the banking and securities industries by GLB. Even so, convergent product innovation may well accelerate development of new models, particularly for the insurance industry.

There is precedent for that. Insurers ventured into joint manufacture of annuity products with banks a decade ago (in pre-GLB days). This broke down and redefined the respective roles of the players in new ways.

More recently, Bank of America superceded GLB altogether. It has substituted “debt cancellation” for “credit life insurance,” simplifying the solution to a marketplace need. Stepping back, this shift makes perfect sense. Given that banks have practiced the art of managing loan loss reserves (self-insuring for credit losses) literally for centuries, the bank executives must have asked at one point, why should we add an insurance product with its regulatory layer and resultant expense?

At its core, the insurance industry has historically provided guarantees and risk protection, and ancillary tax management benefits, too.

Meanwhile, ever since the Knights Templar traveled to the Crusades, banks have evolved Letters of Credit (LCs) into one of the most flexible vehicles in existence. These, too, provide guarantees and risk protection.

Over on the securities side of things, investment managers of both mutual funds and separate accounts have continued to push the product convergence envelope–by honing their services to manage taxes and tax strategies more effectively.

As you can see, product convergence marches forward in response to market demands, as interpreted by the marketing, sales, and product managers closest to the marketplace.

These demands do not respect historic roles, unneeded complication, or added layers of expense.

One might step back and ask, “How difficult could it be to offer a low expense, tax efficient portfolio service, wrapped in a LC customized to an individuals financial situation?” And then ask, “Who will take the first step? Will it be an actuary who can weigh and price risk, a corporate banker who understands the inherent flexibility of LCs, or the investment manager who can manage portfolios to drive down taxable events and exploit the lowest tax rate?”

J. Heywood E. Sloane is principal of Diversified Services Group and executive director of Bank Securities Association, both of Wayne, Pa. His 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.