Is convergence dead? Yes and nodepending on how you defineit.

If you view convergence as mega-merger activity between banksand insurers, which some originally had forecast in the wake of theGramm-Leach-Bliley Financial Services Modernization Act (GLB) thatre-moved regulatory barriers between banking and insurance (atleast in principle, if not in practice), then yes, its dead.

Proof is both anecdotal and statistical. There hasnt been aflood of headlines announcing major bank-insurance mergers. Numbersfrom the FDIC show just three percent of savings banks wereinvolved in insurance underwriting in the first quarter of 2003.The Mid-Year Bank Insurance & Investment Fee Income Report,published by Michael White Associates, shows insurance incomegenerated by banks declined in the first six months of 2003compared to 2002. And according to Forrester Research, banksaccount for just 1.8 percent of life insurance premium and justover $12 billion of the $1 trillion property/casualty premiumpie.

Not only are we seeing fewer companies doing cross-industryacquisitions than in the past few years, we are hearing lessinterest about such acquisitions because a lot of the product linesarent that profitable, particularly if youre bringing P&Cproducts into a financial services organization, says KimberlyHarris, research director at Gartner. Of course, some M&Aconvergence has taken place; for example, Bank Ones recent purchaseof Zurich Life.

Its Just Business
Dont blame IT for any failure of the mega-merger model. In fact,the technologies that have developed, evolved, and matured over thepast years (think EAI, XML, Web services) have made the ITintegration side of convergence much less a concern thanbefore.

According to Raymond Karrenbauer, CTO at ING United StatesFinancial Services (USFS), technology has been an enabler of thecompanys converge-and-consolidate business activities that haveresulted in 20 acquisitions over the past decade. If we didnt havethe technologies available to us that we had in the last threeyears, such as advanced message broker orchestration, Web services,and more robust data patterns and structures, [bringing thesecompanies together] would be a much more arduous process, heexplains.

Technology also allows companies to address other businessissues that arise after a convergence, such as privacy regulationsand cross-sharing of data. You need to have good databasetechnology, good data interfaces via XML, and good query languagessuch as SQL, says Russ Bostick, chief information officer at ZurichLife. Without those, we simply couldnt meet either regulations orcustomer expectations.
Then what explains the lack of a rush to build conglomerates thatmanufacture, underwrite, and sell all types of financial servicesproducts? The reason, quite simply, is insurance and banking aretwo entirely different animals from a business standpoint. Bankshave been reluctant to get into the underwriting business,particularly in P&C insurance. And who can blame them after theindustrys performance as of late?
At the end of 2001, P&C had a negative ROE [return on equity]for the first time, says Deb Smallwood, insurance practice leaderat TowerGroup. Yet in 2003, P&C has a 200 percent growthcompared to last year. This cyclical nature is not to the appetiteof banks.

Additionally, ongoing legal battles regarding state and federalregulation issues that supposedly were resolved by GLB further havediminished the insurance-underwriting appetite of banks. How does a[bank] that is federally regulated adapt to a business thats stilleffectively state-by-state and product-by-product-line regulated,and the person who regulates that product is popularly elected orappointed? asks John Flynn, senior vice president of insuranceinformation strategies at META Group.

And insurers buying banks? In its July 28, 2003, issue, NationalUnderwriter, Life & Health/Financial Services edition (sisterpublication of Tech Decisions), reported that while 45 carriers hadapplied for thrift charters from 1997 through 2000, just onecarrier had followed suit in the two years that followed.
We dont see any major movement of insurance companies buying banks,says Smallwood. Insurers that do obtain charters do so not tocompete directly against banks in the banking business, she adds,but to enhance their relationships with insurance customers.

Convergence Redefined
So lets look at convergence another way: the ability to bring asingle customer multiple financial services products, while notnecessarily being the manufacturer of such products. Whether thisis done through a nonintegrated alliance, such as Farmers sellingits products in Bank of America offices and vice versa, or throughthe actual purchase of a product line or distribution channel, bothinsurers and banks have shown greater interest in this type ofconvergence than in company-level acquisitions.
Convergence never should have been viewed as strictly an M&Astory, explains Paul McDonnell, senior vice president and insurancesegment leader at BearingPoint. Rather, it has to do withunderstanding customer needs and providing anywhere, any-time,anyplace, any-product responses to those needs.
Insurers increasingly are looking to banks as distribution channelsfor their products, and banks likewise are purchasing and formingagencies to focus on the distribution, rather than theunderwriting, activity. At the end of the day, companies can groweither through organic growth or through acquisition. In organicgrowth, they need to steal market share, so they look for differentdistribution channels, says Smallwood.

In fact, a banking association with this topic near and dear toits heart, the American Bankers Insurance Association (ABIA),reports agencies have been the main entry point of banks into theinsurance business over the past several years, especially if theyare targeting the more volatile P&C lines. There is, inparticular, an increased interest [by banks] in commercial linesbecause the agencies banks acquire tend to have a larger commercialbook and commercial expertise, and banks have a commercial loanbook, says Ken Reynolds, managing director of the ABIA. That reallyhas emerged in the last few years.
TowerGroup reports the bank-agency model is shifting thedistribution equation for all P&C. In 1998, banks accounted forjust 2.8 percent of P&C distribution. By 2003, that share hadincreased to 8.1 percent.

Consolidation and Divestiture
Related to the topic of convergence is consolidation, but its tooearly to call the recent spike in consolidations a lasting trend.On one hand, the insurance industry has witnessed the announcementthrough September 2003 of more than 130 acquisitions valued at $22billion in the U.S. insurance market, according to Dealogic, aheadof last years total of $16 billion. Additionally, recent headlineshave shown Manulife announcing a purchase of John Hancock, AXAtargeting MONY, RGA buying Allianz Life, and The St. Paul Companiesmerging with Travelers Property Casualty. But on the other hand,the number of consolidations today still is far less than the headydays of the 90s. In 1998 alone, for example, 265 deals valued at$59.9 billion were announced.

And on the flip side of consolidation (and, for that matter,convergence), are the ongoing divestitures in the industry.Citigroup, of course, spun off the aforementioned Travelers P&Cbusiness in 2002, and recently, the CEO of its remaining TravelersLife & Annuity reportedly discussed the possibility of thatbranch receiving the same treatment, as well. CNA Financial isselling off much of its CNA Re business. Fortis put its U.S.insurance arm on the block, and Safeco is selling its life businessto focus on P&C.

You wont have to look hard to find companies for sale, saysBostick. I would argue there are more for sale than there arebuyers, and that will ultimately improve ROE if you can buy acompany below book value as a result.

Well, So What?
Perhaps to look at the issue another way, what is defining activityin financial services is not a single trend but, rather, adivergence of activity as insurers and banks do what makes sensefor their individual businesses. And that reality would seem toimply IT organizations need to be ready for anything. Since thisisnt possible, the best that can be done is to identify thehigh-level, common issues that face IT in any of the businessupheavals discussed so far.

At their cores, both consolidation and convergence involve thecombination of two or more companies, and this, according toSmallwood, is something many insurers involved in mergers continueto struggle with in IT. Youll often see what appears to be anintegrated financial services company, but when you look under thecovers, youll see two completely different operations, she says.They have their own CFOs, their own presidents. And as you digfurther, you have a variety of legacy systems, as well. If yourgoal is to give an agent, a call center, or an Internet customer asingle customer view, you must collaborate internally and breakfree from siloed boundaries.

According to Kevin Kraft, vice president and managementconsulting leader for financial services at Cap Gemini Ernst &Young, The most important issues include developing an applicationarchitecture that supports the joined organizations. Also, it isimperative to confirm that the right folks in the new organizationhave timely and accurate access to information to make decisionsand engage the agents [and] customers. . . . Security and datamanagement are important, but most carriers currently do that verywell.

At the application level, the most common issues involvecreating a single customer file that reflects the combinedbusinesses. In these [merged] companies, there are many systemsthat can create and update customer information, having differentrules associated with when and how that customer information can beupdated, and [also] storing information in different ways andformats, says McDonnell. However, when you address compliance orprivacy, when you layer on security, when you add the ability forclients now to log on to a Web site and do self-service, you reallyneed an integrated, single view of customer information.

Of course, beyond common issues, each carrier faces its ownchallenges when dealing with a convergence or consolidation. Threecompanies that are addressing such issues include theaforementioned ING USFS and Zurich Life as well as The Principal,which offers investment, insurance, and mortgage products and ownsPrincipal Bank.

At Zurich Life, Bosticks team will be working first onconverting and consolidating all the companys systems that do notdeal specifically with policy administration and marketing to BankOnes platform, including financial, accounting, and payroll. Thefirst task is an SAP conversion, Bostick explains. The good news iswe were both SAP customers, but the bad news is the chart ofaccounts we configured for some of the insurance-specifictransactions arent in the Bank One system. Theres a lot of work tobe done to become integrated, but there are a lot of savings to begained as well as a lot to be learned about the other company,particularly in dealing with its financial systems.
The next phase will be to make Zurich Life products quicklyavailable to Bank One customers, which is no different than dealingwith any other distribution channel, Bostick says. But bank saleswill require consultation on our end, and we will use our existingZurich Direct processes and technology to fulfill them.

The future phase will be to see what new ideas we can createaround the financial needs of our bank customers and to identifyadditional cross-selling opportunities and new products, Bosticksays. With the corporate convergence only recently finalized, thespecific role that technology might play in that phase is not yetknown. However, Bostick does report Zurich Life and Bank One willleverage their direct marketing databases to support targetedmarketing campaigns. There are privacy issues there, so we arebeing cautious to make sure we fully understand our obligations,Bostick says.

Planning Ahead
According to METAs Flynn, The biggest news [in consolidation] isthe thinking at the organizational level about enterprisearchitectures. Both the business architecture as well as the ITarchitecture should be supporting an enterprise vision.
An example of that can be found at ING USFS. The typicalconsolidate, integrate, and optimize task list that faces anyinsurer involved in a business consolidation has been an ongoingtask at the firm. Fresh off a project that consolidated severaldozen different financial and payroll systems onto one PeopleSoftsystem, turned 18 call centers into three, and combined five datacenters into one, ING USFS has moved to the integrate phase, usinga variety of techniques Karrenbauer classifies as surround, sunset,and eliminate. Surround involves using technologies such as Webservices to expose the core functions of systems, while sunsetcombines that task with a data migration to a virtual engine foreventual elimination of the legacy system.

Carriers often approach [integration] from the top down, such asby creating a portal to give a common look and feel, Karrenbauersays. However, behind the scenes you may have many point-to-pointconnections to back-end systems, which become very costly to manageover time.

Were approaching integration holistically and primarily focusingat the data level for key integration, he continues. When you startto get all the structures of the different businesses alike, youcan solve reporting demands, obtain centralized views, compare datasets, and target other types of related objectives in a moremanaged fashion.

This integration will extend first to similar lines of businessbefore it crosses between insurance and other financial services,however. Like categories are the easiest things to tackle insequence. I dont see getting an insurance/banking view for at leasttwo years, Karrenbauer says.

Web services also are at the core of ING USFSs IntegratedAmericas Adaptive Architecture, which the carrier currently isbuilding. Its not a pie in the sky vision, Karrenbauer says. If weacquire a new line of business, we can adapt to that because of theway were loosely handling the business logic and processes. Were inthe early stages of that project, but we have tracked very closelyto our original strategy and are seeing real tangible deliverieshappen in the short term.

ING USFSs business units also are committed to the enterpriseapproach Flynn mentions. Our marketing area has created a neworganization around knowledge that includes a chief knowledgeofficer, Karrenbauer says. That helps ensure we have a sharedsuccess model and that the business organization wants to have thishappen as much as we do in IT. Weve seen the business start to talkin terms of data elements, which is an incredible success.

Like ING USFS, Principal Financial Group has established astrong corporate strategy that guides the business of itsdiversified financial services offerings and has helped align itsbusiness and IT organizations. One of the more recent activitiesweve done is to have an established formal IT governance process,explains Gary Scholten, CIO. The business units have formalrepresentation in our IT governance and vice versa. Weve seen theadvantages of this, particularly in operational efficiencies,cross-business-unit project portfolio management, as well asservice portfolio management.

As a diversified financial services company, the PrincipalFinancial Group offers insurance products, retirement accounts andother investments, mortgage banking, institutional assetmanagement, and retail banking. And the business of Principal Bankhas grown substantially, with assets up from $100 million in 2000to $1.5 billion at the end of 2002.

The relationship that any one customer can have with ThePrincipal can be complex. Therefore in 1998, the same year thecompany launched Principal Bank, it set about building an affiliatefilea common customer data warehouse that maintains informationabout all customer relationships and their history of contact withthe Principal Financial Group.

Of course, having a customer file updated potentially by anynumber of different administration systems is part of the challengeof building it. An employee may have a 401(k) policy and a lifeinsurance policy, for example, and each administration system mayupdate the customer file. System edits created by The Principalhelp ensure data quality.

The Principal Financial Group uses its consolidated customerdata warehouse to provide some detailed information and analyticsat the individual level. For instance, an employer may have a401(k) plan with The Principal through one agent and life insurancethrough another. A participant in that 401(k) may have rolled overhis account to a Principal IRA after leaving that employer but alsohas life insurance and a new 401(k) with The Principal through anew employer and through different producers. Scholten reports thecompany uses SAS for market analytics, Chordiant for campaignmanagement, and business objects query tools for ad-hocanalysis.

While these three carriers share some common issues, thediffering ways in which their businesses have approachedconvergence and consolidation emphasize that insurers ITorganizations must be prepared for any business possibility. Whysome companies have been successful in dealing with convergence istheyve been flexible and adaptive; theyve taken best practices andmixed them with innovation and creativity, says Harris. The dollarsdont start rolling in just because you bought another company.