Deregulation alone has not spurred the convergence in financial services. Growing capital markets, improving information technology and increasing competition will likely have a bigger impact.The convergence of financial services institutions traditionally has been defined as "the blurring of conventional boundaries separating the providers of once-discrete financial services."

There have been four primary motivators for financial services firms to converge in product and service offering. They are:

* Revenue enhancement. Firms are driven to enter new markets, acquire a larger customer base and gain increased 'share of wallet' of existing customers.

* Lower operating costs. By leveraging economies of scale and infrastructure, firms seek to reduce overcapacity.

* Satisfy consumer demand. The demand for a wider range of services from a single provider has made the charter of financial institutions less important.

* Balance sheet considerations. In theory, banks and insurers have assets and liabilities that are complementary to each other.

Limited Knowledge Sharing

To date, full integration of operations within a financial services holding company, with insurance, banking and securities firms in its portfolio, has yet to occur. A 'silo' approach within a holding company has led to limited sharing of knowledge, systems and other resources and has failed to attain significant cost savings.

The concept of a holding company encompassing separate operating entities in insurance, banking and securities segments has been much discussed.

Alternatively, products could be sourced through partnerships or joint ventures, rather than through integration in a holding company structure.

Although inherent inefficiencies exist, this operating model has several advantages. A customer could potentially have the option of conveniently purchasing a diverse range of financial products from a single source.

For the shareholder, this model has a risk-diversification benefit-where risk is spread across different markets-making it a more attractive investment option.

Although banks have aggressively entered new market segments, including insurance, the converse has not yet materialized. The Financial Services Modernization Act (Gramm-Leach-Bliley) has failed to motivate convergence to the level expected.

A Bigger Impact

Deregulation alone has not spurred the convergence and consolidation of financial services. Rather, forces such as growing capital markets, improving information technology and increasing competition will likely have a bigger impact on the future convergence and consolidation in this industry.

In order to prosper in this environment, insurance companies will have to reshape their operating strategy and processes. Operations should be designed to enable a seamless linking of processes across a network of manufacturers, servicing companies and gateways, and support an efficient exchange of information within this network.

Furthermore, insurers will need to adopt a customer-centric focus and understand customer-buying characteristic in order to segment customers and products by profitability.

Finally, a cultural change within the insurance industry is imperative.

Research shows that insurers traditionally have a low propensity for embracing change and the risk-averse nature of the business has led to a cautious approach to consolidation and convergence.

Ken Porello is leader of the North American Insurance Practice at New York-based Deloitte Consulting. Hanif Sidi of Deloitte Consulting also contributed to this article.

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