Finance Online: Financial services integration – banking and insurance – Fortune or Fiasco?

8 mins read

Financial Services Integration, Fortune or Fiasco? December 9-10, 1999, Georgia State University, Atlanta

A central theme in my professional development plan to qualify as a Fellow Society of Actuaries was  a better understanding of crossover of roles & products between banking and insurance segments. The financial integration symposium, held at Georgia State University provided a comprehensive review of “the state of the world” and the transitions expected in the next few years in products, customer, markets, competitive and regulatory environment. Its unique international perspective provided a wide range of analogies from regions where these transitions have already occurred or are in the process of being recorded.

But the real plus was a chance to finally meet Professor Kenneth Black and Harold Skipper in real life. The authors of Fundamentals of Life and Health Insurance, the course 200 text book that had decrypted the fundamentals of life insurance business for me.

Speaker Title Organization
Harold D. Skipper, Jr Professor Center for Risk Management & Insurance Research, Georgia State University
Allen N Berger Senior Economist Board of Governor, Federal Reserve Board
David Cummins Professor of Insurance and Risk Management Wharton School, University of Pennsylvania
Martin F Grace Professor of Risk Management & Insurance Center for Risk Management & Insurance Research, Georgia State University
Robert E Carlson EVP Northwestern Mutual Life Insurance
Robert E Stein National Director, Financial Services Ernst & Young
Marla B. Lewitus SVP Citigroup
Jean Pierre Daniel CEO Vigie, France
Ian R Harper Senior Associate Allen Consulting Group, Australia
Robert St. Jacques Senior Consultant Tillinghast Towers Perrin, Canada
Joseph M Belth Professor Emeritus Indiana University
Ravi S. Kalakota Professor Center for Digital Commerce Research, Georgia State University
Michael Thom Insurance and Pension funds Division Internal Markets & Financial Affairs, Directorate General, European Commission
Larry D Wall Research Officer Federal Reserve Bank of Atlanta
Ross J Davidson Jr. VP, Industry Affairs USAA        Session 1 – Financial Services Integration world wide, Promises and pitfalls.

This was the overview session that touched upon financial intermediation trends & current state, financial integration, environmental and economic drivers and a review of largest international banks, brokers and insurance companies.

Key takeaways for me from this session were

  • The different types, modes and forms of financial integration
  • Important demographic, environmental & industry trends and their expected impact on financial services internationally
  • Economic drivers, operational and management issues, regulatory & conflict of interest problems that different regions are facing as they deal with the blurring of boundaries between banking, brokerage and insurance industries
  • A review of the results of financial integration movements in Asia (Japan) Europe (UK, Germany, Netherlands, France, Spain) & North America (Canada, USA) and the related safety and public policy concerns

The great thing about this session was Professor Skipper’s use of comparative movements in other parts of the world and based on that data his assessment of the issues and problems that financial services integration is bound to experience in United State. The session was closed with a few words on the role of actuaries in a financially integration business organization and the challenges, which, individuals in specific and the profession in general faces in the future

The accompanying paper for the session was extremely comprehensive and explored in greater depths the ideas touched in his presentation        Sessions 2 – Financial Services Integration: Where are the efficiencies? Allen N Berger

What is the basis for efficiencies, where do they exist and how are they being realized in the real world. This was the theme for this session presented by a well respected Economist from the Federal Reserve Board

In his session, Professor Skipper touched upon scope, scale, production, operational & x-efficiencies. Berger’s session presented & reviewed results of research on how significant potential and actual realized efficiencies were in each of these categories, what were their basis (origin), their implications and additional research required to reach firm conclusions

Berger presentation looked at simple, complex, cross border (international) & product integration within financial services, tabulating results for cost-scale, revenue-scale & x-efficiencies. The key idea here was that with larger portfolio, higher diversification allowed financially integrated organizations to enjoy a better risk – return tradeoff compared to their non-integrated counterparts

The better risk return trade off resulted from a lower cost of capital & diversification of informationally opaque assets (assets with little or no available information problem, resolved by financial intermediation) reducing the over all risk profile for the organization.

The discussion on the session looked at the implication of Berger’s presentation on the insurance, brokerage and reinsurance industry with a review of M&A trends & actual realized profit efficiencies. Berger presented his analysis of efficiencies within the insurance industry stressing that a narrowly focused strategy in selected markets with vertically integrated distribution systems was the most likely route for realizing integration efficiencies.

This was followed by David Cummin’s comments on the reinsurance industry. His conclusion was that in the reinsurance market, integration efficiency was a function of average firm size, efficient firm acquiring in-efficient firms and well-capitalized firms, acquiring under capitalized firms.        Session 4 – Right for some, wrong for others. Robert Carlson, Robert Stein, Marla Berman Lewitus

Robert Stein’ session looked at demographic and industry trends & converging products. Stein also looked at the impact of unbundled products on balance sheet, cash flows, distribution & operations. One of the key conclusions presented was about future M&A activity between banks and insurance companies. In Stein’s assessments there was a higher probability of banks buying banks and insurance companies buying insurance companies versus a bank-insurance or an insurance-bank transactions.

Marla Lewitus session was about Citigroup, the Citibank, Travelers merger, the rational behind the deal and its impact on the two organizations before and after the deal was finalized. Marla touched upon the challenges that the new organization faced wrt compliance, Chinese walls, customer privacy, regulatory and cross marketing issues. She then moved on to presenting the global & standardized approach Citigroup developed to address these issues across institutional and regional boundaries

Mr. Carlson’s presentation focused more on a mutual insurance industry take on the financial integration movement. In contrast to the first two speakers he took a “what consumers want” point of view by emphasizing that even though business models and product mixes may change, business fundamentals like servicing customer “needs” do not.        Session 5 – Lessons, Lessons & more lessons. Jean Pierre Daniel, Ian R Harper, Robert St Jacques

Probably the best session in the whole seminar, featuring an overview of financial integration from the Australia, EU and Canada.

European Union

Jean Pierre Daniel spoke about trans national sales Integration, national regulation & the doctrine of separate supervision (Banking and Insurance). European Union is unique in the sense that beyond the challenges faced in reconciling the differences between two supervisory regulations applied when a product regulated by one is sold by an institution regulated by another, there is also a cross border issue. Homogenizing regulations for the whole region is not feasible in the short or medium term but is a definite longer-term goal.

The effective compromise is the domicile-country (home state rule) that allows an organization to be licensed in one member country and sell and have a presence all across EU without applying for individual country licensing. Another effective transitory compromise is multi tiered layered supervision comprising of specialist supervisors (responsible for single line of business (banking, insurance, and brokerage)) and principle supervisors (responsible for the whole organization)

Jean Pierre then moved on to a review of M&A transactions in Europe in the financial services sector, primarily driven by scale efficiencies and a desire to reach critical mass. During the review the success of banks came up in growing, controlling and developing the banking life insurance distribution channel in France and Itlay. As of 1999, in France banks controlled more than 60% market share in life insurance. According to the speaker, a primary reason for this success was the suitability and unsuitability doctrine – when a product is presented as a natural extension of the channel through which it is being sold its a success – when it’s not it’s a failure. Primary reason why banks can couple life insurance with mortgages but insurance companies cannot connect credit lines with assurance /savings products. Jean went ahead to quote the innovative example of Axa-credit, which positioned credit products in a claim/insurance context in front of customers and created a runaway success


Ian Harper took on the same themes of financial convergence, institutions, drivers, regulations and speculation about the future from an Australian and Asia Pacific context.

He started with an overview of the financial sector (Banks, Non-Bank Financial Institutions, Fund managers, Insurers) in Australia. Evolution as well as convergence was initially driven by a desire to benefit from regulatory arbitrage between heavily regulated traditional banking companies and lightly regulated Non Banking Financial Institutions. This ultimately led to the present day financial supermarket where all financial products are sold under a single conglomerate umbrella.

Ian also highlighted the role of the shift away from bank-based savings to retirement-based savings scheme supported by mandatory government regulation and favorable tax treatment. This resulted in excess capacity in banking infrastructure, further exacerbated by the deployment of technology and automation solutions.

Prudential regulations in Australia began with the lead regulator system that evolved into the council of financial supervisors and ultimately to the Australian Prudential Regulation Authority (APRA) and Council of Financial Regulators.

The advantages of an integrated prudential regulatory system were improved regulation, facilitation, competitive neutrality & scale efficiencies in the regulatory function.


Robert St. Jacques revisited the same theme above from a Canadian perspective.

The breakdown of Canadian financial services market shows the existence of oligopolies or Bank dominance in most financial services sectors with insurance being the only exception. It also shows a relatively smooth and slow transition over the last 30 years from a 4 pillar (banks, brokerage, trusts, insurance) system to s broad-line, full services, financial institutions based environment.

Robert concluded that in a Canadian context:

  1. Ownership does not lead to integration,
  2. Customer focus, and affordable usable customer information is key in making integration work
  3. Barriers are generally internal (legacy distribution channels, discomfort with alliances and the politics of protecting traditional thinking and compensation arrangements)        Session 6 – Who says financial services integration, is in consumer’s best interest?

This was a very light, informal dinner session where Professor Bleth spoke about some of the grass root challenges faced by insurance companies and the related implications for financial services sector and financial services integration. He use the viatical industry related life insurance and investment fraud as a case study. Working from a need, product, players and abuses point of view, he illustrated the problems that occur when regulatory loopholes, non-regulated product niches and unscrupulous elements come together        Session 7 – Role of electronic commerce

A review of priorities, actual demand and latent demand for e-commerce applications & solutions across industries.

In this session Ravi covered structural environmental changes , e-commerce business models, application architecture & lessons from e-commerce applications in banking. Important takeaways included:

  1. Technology driven business transformation is an important driver of convergence of services, channels, products & models creating tremendous pressures on traditional business thinking.
  2. E-commerce deployment can take many forms including Buy side e-commerce (supply chain solutions), sell side e-commerce (fulfillment & customer relationships management solutions) or back office integration
  3. A fundamental paradigm shift is that in an “e” / “information” context, emphasis shifts from company defined access to customer defined access
  4. The insurance industry can learn a lot from the transition of banking from a monolithic, inward focused, technology base to a flexible, customer oriented web based environment. According to Ravi even though banking is well on its way to its transition to the new environment, insurance companies as a rule have a long way to go        Session 8 – Addressing the Risk in Financial services Integration

Presented by a member of the Internal Markets & Financial Affairs, Directorate General, European Commission, this session presented a comprehensive review of prudential regulations governing financial services conglomerates in European Union.

Key takeaways included:

  • A review of public policy issues, primarily from a prudential, transnational, financial conglomeration & EU perspective
  • A presentation of how the European commission is structured and how prudential regulations governing financial services evolve and implemented
  • Examination of financial concentration and conglomeration within EU including a breakdown of markets by banking, brokerage, insurance and regions
  • Challenges that the EU faces, and is trying to resolve in the cross selling and cross ownership of product and firms arena. These included capital adequacy metrics, coordination, intra group transactions, double counting of leverage, risk concentration, safety nets and concerns
  • Larry D wall’s comments on Gramm-Leach-Bliley (GLB) reviewed the environment prior to GLB, key changes brought about by GLB and the challenges brought about in the US market by the breaking down of barriers. The side by side presentation of the two sessions allowed for an effective comparison of the approaches taken in EU and North America