Insurance and Employee Benefits What the banking overhaul means to insurance

The Financial Modernization Act passed in 1999 to create open banking in the U.S. has given insurance and financial services companies the marketing opportunity of a lifetime. The fruits of the legislation are being seen in a wave of consolidations. "Until 1998 we were the only industrialized nation that did not have open banking policies," said Ed Carpenter, chairman of Carpenter & Co., an Irvine investment banking firm that focuses on the banking industry. The prohibition on banks merging with non-bank entities or offering services such as insurance and stock brokerage dated back to the Depression era. The Glass-Steagall Act of 1933 followed the failure of banks that had been speculating heavily in the stock market. The Modernization Act now prompts a change in banking and brings the United States financial services industry in line with the rest of the world. "We are moving toward the European system of banking," Carpenter said.

Since the act was passed and signed into law, stock brokerages have acquired insurance companies, insurance companies have acquired banks, and banks have been acquiring both brokerages and insurance companies. The point is not just to increase assets, but to cross-sell products and services to newly acquired client lists and to offer a wider range of services to lure new clients. "They are looking for a marketing or distribution arm. It is a wonderful way to use a client list. For many it is not a bad way to go," said Gary Hanson, an executive vice president with Aon Risk Services. "To cross-sell, up-sell and cross-market, I do not see that as a negative," said Brian Horn of Costa Mesa-based GoApply.com, which supplies Internet-based services to the financial industry.

The $76 billion acquisition of Citicorp by Traveler's to form Citigroup is a top-tier example of the benefits of a consolidation of a bank holding company and an insurance conglomerate.

Citigroup's banking division now can offer insurance products to its millions of customers. At the same time, Traveler's insurance salesmen can go to their clients and talk about credit cards, stock trading, mutual funds and financial consulting services.

Other deals include: Lincoln National Corp's $1 billion acquisition of Aetna US's individual life insurance business; Dutch insurer Aegon's $9.7 billion acquisition of Transamerica Corp.; American International Group's $18.3 billion acquisition of SunAmerica; and The Zurich Group's acquisition of both Kemper Securities and Scudder Stevens & Clark Inc.

While some banks have acquired insurance companies, banking experts have said that it is better for earnings reports for the insurance company to be the acquirer. Insurance companies tend to be more capitalized, have a larger customer base and have a higher return on equity. "If a bank buys an insurance company, they will have a difficult time convincing analysts that earnings will increase," said Carpenter. Other insurance companies aren't waiting for someone to make an offer or go through an arduous acquisition and consolidation and are starting up their own banks or thrifts. Some insurance brokers are also entering relationships with bankers and CPAs for business leads. "Getting a good lead is expensive," Horn said. By creating networks of contacts, smaller firms can avoid the rigors of a merger or acquisition and still generate more business. The non-bank institutions are more interested in merging with banks than with other financial services companies. "The banking relationship is more important than the insurance or other financial services relationship," said Carpenter. Customers generally regard their bank as their primary financial center and thus the brokerages and insurance companies are searching for friendly ties with those institutions. And the banks have something to gain as well. Other financial institutions, especially the insurance companies, have much larger customer bases than the banks, even though with ongoing consolidation within the banking industry, the banks are now larger than ever. (The number of banks since 1980 has dropped from almost 15,000 to fewer than 9,000. The number of banks with assets of $10 billion or more has increased from 18 to 25 and those 25 account for almost half of total bank assets.) The merging of financial services has brought up customer-privacy issues, since client information is now available across different units of a diversified bank and financial services company, and marketers are willing to pay big money to get access to potential customers.

There is legislation to protect consumers from the abuse of their private information, creating barriers for marketing plans to barrage the consumer, but it still occurs. The Internet and other technologies have made it easier for companies to use client lists for marketing purposes. An insurance company database, which contains the most personal and telling information, including net worth, marriage status, health records, motor vehicle reports, number of children, and investments, have become easily accessible and marketable as a result of the Internet. "There will be abuse by companies that don't properly inform their customers. But it will be on a small scale. Big companies don't want to get into trouble," Carpenter said. n