The convergence of financial services presents particularchallenges to each segment of the industry. Financial services arein a state of flux, trying to understand both the opportunities aswell as the obstacles that must be faced. Immediate challengesinclude IT hurdles, a new and still changing regulatoryenvironment, and the necessity to broaden the expertise ofpreviously segmented sales forcesnot to mention competitive issues.Opportunities such as immediate access to new markets and expandedproduct and service offerings are significant. Taking advantage ofthe opportunities while keeping the obstacles to a minimum are thetasks at hand.

Financial convergence impacts have been slow in coming, but theycontinue to grow, says Judy Johnson, vice president, insuranceinformation strategies, at New Brunswick, N.J.-based META Group,Inc. Insurers are looking to the future, trying to understandwhether they can continue business as usual in a world that israpidly reconfiguring itself from the ground up.

In facing the challenges posed by convergence, insurers need tostay aware of what is happening in the other financial segments.Banks are developing innovative ways of integrating insuranceproducts with existing and new distribution channels. Not unliketheir insurance cousins, complying with the regulatory changes,streamlining processes, and cutting costs are paramount to success.Keeping timely sales opportunities in front of the sales force isanother challenge.

Making the Transition

One example of a bank broadening its horizons is Chase InsuranceGroup, formed in the mid-90s as part of J.P. Morgan Chase & Co.We have evolved, beginning with credit insurance and moving intolife products, auto, homeowners, and employee benefits, says PaulPetrylak, senior vice president of Chases Regional Banking Group.And were among the lead banking distributors of insuranceproducts.

Chase recently introduced its first in-house underwritteninsurance product, a fixed annuity. Petrylak says customers thinkof it as more of an investment product than an insurance product.The economics for an annuity are competitive, but our competitiveadvantages bring a higher return on equity than a traditionalunderwriter, he says.

A third-party carrier normally pays a six percent distributionfee to financial institutions for selling their product. SinceChase is now underwriting its own annuity, it can save that sixpercent. The product was easily assimilated into Chases currentenvironment. Since the firm has been selling annuities for severalyears, underwriting its own product was a natural step.

Within Chase Insurance, we have a carrier management and newproduct development group. The product was developed within thatgroup, with the addition of a third-party administrator (TPA). Sothe TPA adds the capabilities we didnt already haveits definitelyan outsourced solution, explains Kevin Rice, vice president of thecustomer solutions group.

The end-to-end process works like this. The customer fills out apaper annuity application, which is then sent to a unit in the bankthat consolidates all the applications and forwards them to thecarrier. The carrier completes the applications and sends a feedback to Chase through the National Securities Clearing Corporation(NSCC), which provides clearance, settlement, and informationservices to the securities industry. The NSCC sends informationback to Chases processing systems for posting to the mastercustomer information file, to the investment data mart, and to thecommission payment systems. Right now its a fairly upfront manualprocess that were looking to automate within eight to 12 months,adds Rice.

Chase uses its own distribution channel of brokers, which itcalls Personal Financial Advisors (PFAs). Were working towardproviding insurance solutions through financial planning for atargeted customer basethose with $250,000 or more in investableassets, explains Petrylak. Insurance is a natural component of afinancial plan.

Having brokers sell insurance products is a program Chaseinitiated last year. Its a natural transition for a PFA toincorporate selling insurance along with other investments. Oncethey become more familiar with the product and integrate it fullyinto financial planning, well have greater success. Were moving inthat direction, Petrylak says.

Insurance and IT Working Together

At Chase, insurance and IT work hand in hand to improve costefficiency, product availability, and client data mining, whichdetermines profits and the level of client service. We integratecustomer information from a data mining perspective, and we usethat information in our target marketing, explains Rice.

The carriers that underwrite the various products provide thecustomer information through tapes, data feeds, or some othermedium. This enables Chase to keep tabs on what products are beingbought and by which types of clients. Within the branches, we havea platform that allows access to the customer record, says Rice. Wecan use those records to provide information to the rep regardingsales opportunitiesby employing an application thats designed tocreate more timely offers than batch updating processes. It resultsin a more timely delivery of event decisions to the rep.

Data mining is just one function that is outsourced. Ourstrategy is to leverage our existing bank systems and processeswhere we can and outsource the processes our systems are notdesigned to handle. We leverage the third-party administrator to docustomer tracking and administration, notes Petrylak. Chase getsfavorable pricing in this case by outsourcing the functions thatare not within its core competencies. Outsourcing was key increating higher profits for the annuity than the norm. We are ableto provide variable pricing, and theres no fixed cost, he says.

The bank has insurance-dedicated servers at Pinnacle, itsoutsourced data center, as well as a client-server environment thatallows the gathering of client information both internally andexternally. We use this information for marketing purposes,explains Rice. Basically, what were doing is creating a lead file.The lead file is subsequently sent to the telemarketing vendor andthe third-party carrier, which executes the campaign.

How Chase Does IT

Industry organizations integrating insurance products with otherfinancial service offerings focus on smoothing and enhancingbusiness processes to increase operational efficiency and improvedistribution capabilities and relationships, says Johnson. As aresult, these firms are focused on streamlining the organizationsability to comply with changing regulatory demands and to respondto sudden market shifts.

Chase has a good start down that road. We have some segmentationprograms that point to product opportunities if we can get theright information [from the client], says Rice.

These segmentation programs are part of a decision engine, whichis designed to take multiple inputs and provide a business rulebased on those inputs. If youre tracking a group of customers andan event happens, such as a large deposit, a large withdrawal, or anew mortgage, that would lead to a business rule that might say,based on the activity of this customer, you should offer them lifeinsurance, or offer them an extension on their home equity loan,says Rice.

The decision engine being deployed by Chase is not yet complete.We have the systematic piece down, but we dont have the real-timepiece down yet. Were working toward that this year, he says.

By hosting all its data at a vendor and using a Web-basedinterface to its remote salespeople, the bank avoids having toomuch software or data on its remote reps laptops. Its easier tomanage, and Chase doesnt have to spend the money to build a massiveinfrastructure. It also avoids all the costs associated withmanaging such an infrastructure. In selecting third-party vendors,Rice says, We do a strict due diligence and risk managementprofile. Its difficult to find vendors that have a lot of marketexperience with Web-based applications, and we dont want to be aguinea pig. So we want to find a vendor that has experience in themarketplace doing the application we are focusing on.

Future Developments

Petrylak and Rice agree the future of financial services ingeneral lies in Web-based applications. Keeping costs down is alsokey, a function vastly aided by interfacing with the Web. ChaseInsurance is well prepared to benefit [from this movement to theWeb]. We dont have a lot of legacy systems and no mainframeapplications, so theres very little or no conversion to Web-basedapplications, says Rice. Fortunately, since insurance is relativelynew to banking, we havent built up those large infrastructures.

Adds Petrylak: Again, our strategy is not to create a lot ofinfrastructure. Were trying to find the best solutions, and thosemight not be internal. They reside at times externally, and one hasto reorient ones thinking to get the best possible solution from aneconomic perspective and a core competency perspective throughoutsourcing. So, we already think, How do we get the bestsolutionby leveraging within the bank or outside of the ChaseInsurance Group or through other partners who can providesignificant scale? We work with the IT division for thatpurpose.

META Groups Johnson points out that banking and insurance firmsin general are moving to address the management of internal data,documents, and records. Few companies are presently equipped tomanage, distribute, and act upon the kind of market informationneeded to conduct todays business of financial services. Insurersneed a robust data input channel to enhance decision-making,Johnson says, and to allow market leaders to take advantage ofemerging opportunities.