U.S. fin-reform focuses CEO strategy planning

The repeal of the U.S. Glass-Steagall legislation toward the end of last year has opened what many in the property and casualty insurance industry see as a “Pandora’s box”. The legislation was replaced with the Financial Services Modernization Act of 1999, which effectively allows for integration of business ownership across the financial services sectors. While many in the industry believe the reform legislation will not necessarily see a wave of bank acquisitions of p&c companies, there is an overwhelming sense that insurers will be prompted into strategic marketing alliances with the banks. The changed legislative landscape is also expected to see increased competition from non-traditional suppliers, particularly through electronic product delivery — the result being that the competitive gloves will definitely be taken off in the year ahead.

While the new U.S. reform legislation of financial services is not expected to have an immediate impact on Canadian property and casualty insurers, it is expected to be held up as an international standard on free competition when the next round of regulatory reviews is opened up by the federal government in three to five years from now.

A range of sector spokespeople from the Canadian market (see our cover feature article for further details) believe that the passing of the U.S. Financial Services Modernization Act will have some influence on future Canadian government regulation of financial services. Similar to the U.S., the Canadian concern with integrated financial services is that the major banks will capture the lion’s share of personal lines insurance through branch retailing. The sector most affected in such an event would be independent intermediaries (brokers and agents), although carriers also share a concern of being bought out wholesale-style, or muscled out from underwriting due to unfair price competition.

Ironically, a survey of U.S. senior p&c executives at the recently held Joint Industry Forum (which is sponsored by a host of national organizations such as the Insurance Information Institute (III) and the National Association of Independent Insurance Companies (NAIIC) shows less than a third of respondents believe the new U.S. legislation will see a surge in merger and acquisitions between banks and insurers. More importantly, all of the respondents expect strategic and marketing alliances will occur between banks and carriers in the year ahead. Around 90% of the survey respondents also expect further consolidation in the primary and reinsurance company sectors, partly due to increased performance expectations resulting from the new legislation.

Opinions abound

The recently held annual meeting of the Casualty Actuarial Society (CAS), which sponsored a panel of industry analysts to provide their views on the likely impact of the U.S. reform legislation, produced a fairly dour view of the future. Robert Dibblee, the senior vice president of government relations at NAIIC, believes the legislation will result in “unintended consequences” which will eventually force the legislators to review the bill. The California Department of Insurance financial analysis chief, Woody Girion, expects the new playing field will see the major banks buying up smaller companies across the financial services board. Steve Lash, a partner at Ernst & Young (U.S.), confirms significant bank interest in selling insurance directly and promoting the “one-stop-shop” concept of financial service retailing.

The CAS panel members appear, however, to be in the minority camp of opinion based on feedback from several other insurance organizations. Most importantly, a survey conducted by Tillinghast — Towers Perrin of U.S. and Canadian financial services CEOs, suggests that the banks may not that interested in acquiring p&c interests. The main focus of the banks will be on investment products, namely the life side of insurance, and although the banks will look at branch-style retailing of insurance, the real challenge of who controls marketshare of underwriting and product development will depend on innovation, cost-effective delivery, and integrated distribution modes.

This view is backed by the latest A.M. Best Review, which notes that life insurers are likely to be most affected by the U.S. financial services modernization legislation. The rating agency expects that, overall, p&c companies will continue to be pressured by the existing global pricing competition within the sector. The commercial lines side of the business will likely feel further pressure from the growing alternative risk transfer (ART) sector while personal lines insurers will feel the pinch from electronic commerce and new Internet-based competitors. “Though most [insurers] in this segment [p&c] will remain reliant on captive and independent agents as their primary distribution source…personal lines products will become even more commoditized as the Internet and direct sales methods provide increased transparency of price and distribution costs,” the Review states.

Strategic positioning

The consensus of the Tillinghast — Towers Perrin CEO survey is that insurers will have to focus their strategies in the year ahead. The report also suggests that the passing of the U.S. legislation has focused the business drive on Internet selling and the “financial supermarket” concept of integrated products.

The survey points out that 75% of insurance executives (life and p&c) still see the Internet as a customer service tool while the same percentage of banking and investment management believe that online selling will become a major distribution channel. Interestingly, both banking and insurance executives expect the growth in Internet distribution will work against the “one-stop-shop” concept in that more information and transaction transparency will be available to consumers from a greater number of sources. Other key findings from the survey include:

All sectors agree that “hybrid” or integrated approaches to customer acquisition and development — in which the consumer is offered a variety of ways to connect with a financial services provider — will grow the fastest;

The role of “advice” is expected to grow in all sectors except the p&c business;

All sectors have witnessed a significant increase in the number of companies offering “non-traditional” product lines. It is expected that the number of banks offering life, health and p&c insurances will more than double by 2002 from current levels. At the same time, the number of insurers offering banking and investment type products is expected to rise dramatically over the same time period.

Richard Berry, a co-author of the survey report, and a principal at Tillinghast, says the technology deregulation pressure being exerted on the U.S. financial services market is not unlike what other industries are experiencing. “The financial services industry is facing the same issues that converging industries of all types face — uncertainty, combined with a great deal of integration activity. But with the added pressures of deregulation and continuing distribution challenges, it will likely be some time before clear winners emerge.” cu