We are entering a global century where insurance and financial services are converging and e-commerce continues to do away with traditional national borders. The US government has been driving this convergence by advocating financial services reform. Recently, Congress helped bring down the lines between banks and insurance by enacting landmark legislation known as the Gramm-Leach-Bliley Act, which President Clinton signed into law on 12 November 1999. The Act repeals the 66-year old Glass-Steagall Act, which prohibited banks, securities firms and insurance companies from affiliating, and allows them to join within a new financial holding company structure. In addition, the Act prohibits non-financial companies from owning commercial banks.
The US insurance market continues to adjust to a new landscape created by this legislation. While the Act's final legacy remains to be seen, there are a few outcomes upon which the US insurance marketplace can rely. Passage of the Act breaks down regulatory barriers and levels the playing field for banking, insurance and securities firms, allowing them to provide a greater variety of financial services to consumers at more affordable prices. Senator Phil Gramm, co-sponsor of the legislation, probably summed up the true significance of the Act's passage when he said: “This bill that we bring to the floor of the Senate basically knocks down the barriers in American law that separate banking from insurance and banking from securities. These walls, over time, because of innovative regulators and because of the pressure of the market system, have come to look like very thin slices of Swiss cheese. As a result, we already have substantial competition occurring, but it is competition that is largely inefficient and costly, it is unstable, and is not in the public interest for this situation to continue.”
There has been a great deal of discussion as to whether the Act will indeed spur rapid consolidation within the financial services industry. For the most part, we have yet to see any convincing evidence that bigger is necessarily better for all types of financial services. Companies that have merged to achieve economies of scale and position themselves to better cope with the competitive climate are not posting results better than anyone else. For many merger partners, the economies of scale they were looking for simply have not materialised. Furthermore, the real impact of Gramm-Leach-Bliley will only be clear when there is effective integration of regulatory structures within the financial services industry. While state regulation has always addressed the US industry effectively, the challenge will be to achieve some union among the state insurance regulators, the banking authorities and the Federal regulators. Insurance is unique to the financial services marketplace in that markets are often differentiated by state based on geography, population, weather and other factors. The immediate issue around Gramm-Leach-Bliley centres not on convergence, but on achieving effective distribution in a changing marketplace. The Act will dramatically impact the way products and services are distributed across all financial industries.
At this point, banks believe they have mastered distribution, ranging from branches and call centres to electronic channels. However, the favour of consumers in this more complex era will ultimately rest on those perceived to be the most trusted advisors. As insurers continue to respond to a changing marketplace and the evolving demands of customers, they are looking to a number of alternative distribution methods. Direct marketing, including direct mail, telemarketing and agents using direct marketing techniques, is growing. Internet sales are a very small piece of the mix today but will be growing a great deal in the next several years. Despite the dramatic growth that is expected, it will still be a while before internet sales will be a major factor in the insurance business.
Once a place to post website and marketing information, the internet is now viewed in the insurance industry as a vehicle to administer products and services on-line. According to Deloitte & Touche, insurers which can exploit brand recognition by providing distribution through multiple channels (both on-line and off-line) will have a distinct competitive advantage. Insurers will have to realise that competition in e-commerce is not only coming from other insurers, and that the performance bar is being set by other industries. Booz Allen & Hamilton has reported that nearly half of insurers are spending less than $500,000 a year on e-business initiatives. That compares to $400m spent by Citigroup on e-Citi in the past three years and the $150m First Union will spend this year.
Personal lines insurers first began using the internet to provide consumers with policy quotes, and a few commercial lines insurers now allow producers to quote and bind high volume, low premium business on-line. Marketing-based websites known as “insurance malls” emerged a few years ago to allow customers to request quotes for life, auto and some types of health insurance. Quicken InsureMarket, a division of Intuit, became the first of the insurance malls to allow customers to purchase auto insurance on-line through Travelers Property Casualty. Recently, Priceline.com and other internet pricing systems began providing customers the ability to bargain for their auto insurance over the internet.
Due in part to recent federal legislation that will give an insurance contract signed on-line the same status as one signed in a branch, the delivery of insurance products over the internet will offer consumers more choice, greater flexibility and lower costs. The legislation, known as e-Sign, will make it easier for Americans to shop, compare and purchase insurance over the internet.
While e-commerce is beginning to penetrate the industry, it is far from the preferred method of underwriting. The challenges will come in accepting the internet as a new method of distribution and defining business strategies around it. Buying forms of personal insurance direct from the internet has become a reality, but the complexity of other types of insurance will probably require the expertise of an agent or broker. Agents, brokers and other professional insurance counsellors and intermediaries will continue to play key roles, augmented by technology. Changes and advances in technology will never take the place of solid insurance and risk management counsel because customers seem to prefer a “human element” in purchasing commercial insurance. E-commerce will include a place at the table for brokers, since commercial lines will continue to require brokers as intermediaries even if augmented by on-line services, such as quotations.
In the post-Gramm-Leach-Bliley era, the strategy of the Kemper Insurance Companies will remain the same because it is driven primarily by the dynamics of consolidation within the industry, a move toward multiple distribution channels and an evolving e-commerce society. The tenets of Kemper's strategy centre on growing profitably and making bold strategic moves in an ultra-competitive marketplace. Kemper employs a very opportunistic approach. We believe that in order to be successful as an insurance company one has to react to the current market conditions. That said, we also believe that mergers of scale are less important than those that fill a need we have identified in the marketplace. The fact that insurance companies can now own banks and banks can own insurance companies is not going to lead to any change in our thinking as a company. While we do consider banks to be part of the multi-channel distribution system that is the trend in the industry, we are not necessarily looking to buy a bank or seek to be acquired by one.
In the end, the Gramm-Leach-Bliley Act has advantages for all parties. A fundamental difference exists in the sales strategies of banks and insurance companies, so each industry will benefit from different aspects of the Act. Those which will succeed will show the ability to convert from producing and selling commoditised products to a model focused on value-added services. The new environment increases pressure on companies to bring innovative, new products to market faster and with a more customer-friendly approach.
William D. Smith is President and Chief Operating Officer of Kemper Insurance Companies in Long Grove, Illinois.