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 the past years (think EAI, XML, Web services) have made the IT integration side of convergence much less a concern than before.

According to Raymond Karrenbauer, CTO at ING United States Financial Services (USFS), technology has been an enabler of the companys converge-and-consolidate business activities that have resulted in 20 acquisitions over the past decade. If we didnt have the technologies available to us that we had in the last three years, such as advanced message broker orchestration, Web services, and more robust data patterns and structures, [bringing these companies together] would be a much more arduous process, he explains.

Technology also allows companies to address other business issues that arise after a convergence, such as privacy regulations and cross-sharing of data. You need to have good database technology, good data interfaces via XML, and good query languages such as SQL, says Russ Bostick, chief information officer at Zurich Life. Without those, we simply couldnt meet either regulations or customer expectations.
Then what explains the lack of a rush to build conglomerates that manufacture, underwrite, and sell all types of financial services products? The reason, quite simply, is insurance and banking are two entirely different animals from a business standpoint. Banks have been reluctant to get into the underwriting business, particularly in P&C insurance. And who can blame them after the industrys 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 leader at TowerGroup. Yet in 2003, P&C has a 200 percent growth compared to last year. This cyclical nature is not to the appetite of banks.

Additionally, ongoing legal battles regarding state and federal regulation issues that supposedly were resolved by GLB further have diminished the insurance-underwriting appetite of banks. How does a [bank] that is federally regulated adapt to a business thats still effectively state-by-state and product-by-product-line regulated, and the person who regulates that product is popularly elected or appointed? asks John Flynn, senior vice president of insurance information strategies at META Group.

And insurers buying banks? In its July 28, 2003, issue, National Underwriter, Life & Health/Financial Services edition (sister publication of Tech Decisions), reported that while 45 carriers had applied for thrift charters from 1997 through 2000, just one carrier 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 to compete 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 a single customer multiple financial services products, while not necessarily being the manufacturer of such products. Whether this is done through a nonintegrated alliance, such as Farmers selling its products in Bank of America offices and vice versa, or through the actual purchase of a product line or distribution channel, both insurers and banks have shown greater interest in this type of convergence than in company-level acquisitions.
Convergence never should have been viewed as strictly an M&A story, explains Paul McDonnell, senior vice president and insurance segment leader at BearingPoint. Rather, it has to do with understanding customer needs and providing anywhere, any-time, anyplace, any-product responses to those needs.
Insurers increasingly are looking to banks as distribution channels for their products, and banks likewise are purchasing and forming agencies to focus on the distribution, rather than the underwriting, activity. At the end of the day, companies can grow either through organic growth or through acquisition. In organic growth, they need to steal market share, so they look for different distribution channels, says Smallwood.

In fact, a banking association with this topic near and dear to its heart, the American Bankers Insurance Association (ABIA), reports agencies have been the main entry point of banks into the insurance business over the past several years, especially if they are targeting the more volatile P&C lines. There is, in particular, an increased interest [by banks] in commercial lines because the agencies banks acquire tend to have a larger commercial book and commercial expertise, and banks have a commercial loan book, says Ken Reynolds, managing director of the ABIA. That really has emerged in the last few years.
TowerGroup reports the bank-agency model is shifting the distribution equation for all P&C. In 1998, banks accounted for just 2.8 percent of P&C distribution. By 2003, that share had increased to 8.1 percent.

Consolidation and Divestiture
Related to the topic of convergence is consolidation, but its too early to call the recent spike in consolidations a lasting trend. On one hand, the insurance industry has witnessed the announcement through September 2003 of more than 130 acquisitions valued at $22 billion in the U.S. insurance market, according to Dealogic, ahead of last years total of $16 billion. Additionally, recent headlines have shown Manulife announcing a purchase of John Hancock, AXA targeting MONY, RGA buying Allianz Life, and The St. Paul Companies merging with Travelers Property Casualty. But on the other hand, the number of consolidations today still is far less than the heady days 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&C business in 2002, and recently, the CEO of its remaining Travelers Life & Annuity reportedly discussed the possibility of that branch receiving the same treatment, as well. CNA Financial is selling off much of its CNA Re business. Fortis put its U.S. insurance arm on the block, and Safeco is selling its life business to focus on P&C.

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

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

At their cores, both consolidation and convergence involve the combination of two or more companies, and this, according to Smallwood, is something many insurers involved in mergers continue to struggle with in IT. Youll often see what appears to be an integrated financial services company, but when you look under the covers, youll see two completely different operations, she says. They have their own CFOs, their own presidents. And as you dig further, you have a variety of legacy systems, as well. If your goal is to give an agent, a call center, or an Internet customer a single customer view, you must collaborate internally and break free from siloed boundaries.

According to Kevin Kraft, vice president and management consulting leader for financial services at Cap Gemini Ernst & Young, The most important issues include developing an application architecture that supports the joined organizations. Also, it is imperative to confirm that the right folks in the new organization have timely and accurate access to information to make decisions and engage the agents [and] customers. . . . Security and data management are important, but most carriers currently do that very well.

At the application level, the most common issues involve creating a single customer file that reflects the combined businesses. In these [merged] companies, there are many systems that can create and update customer information, having different rules associated with when and how that customer information can be updated, and [also] storing information in different ways and formats, says McDonnell. However, when you address compliance or privacy, when you layer on security, when you add the ability for clients now to log on to a Web site and do self-service, you really need an integrated, single view of customer information.

Of course, beyond common issues, each carrier faces its own challenges when dealing with a convergence or consolidation. Three companies that are addressing such issues include the aforementioned ING USFS and Zurich Life as well as The Principal, which offers investment, insurance, and mortgage products and owns Principal Bank.

At Zurich Life, Bosticks team will be working first on converting and consolidating all the companys systems that do not deal specifically with policy administration and marketing to Bank Ones platform, including financial, accounting, and payroll. The first task is an SAP conversion, Bostick explains. The good news is we were both SAP customers, but the bad news is the chart of accounts we configured for some of the insurance-specific transactions arent in the Bank One system. Theres a lot of work to be done to become integrated, but there are a lot of savings to be gained 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 quickly available to Bank One customers, which is no different than dealing with any other distribution channel, Bostick says. But bank sales will require consultation on our end, and we will use our existing Zurich Direct processes and technology to fulfill them.

The future phase will be to see what new ideas we can create around the financial needs of our bank customers and to identify additional cross-selling opportunities and new products, Bostick says. With the corporate convergence only recently finalized, the specific role that technology might play in that phase is not yet known. However, Bostick does report Zurich Life and Bank One will leverage their direct marketing databases to support targeted marketing campaigns. There are privacy issues there, so we are being cautious to make sure we fully understand our obligations, Bostick says.

Planning Ahead
According to METAs Flynn, The biggest news [in consolidation] is the thinking at the organizational level about enterprise architectures. Both the business architecture as well as the IT architecture should be supporting an enterprise vision.
An example of that can be found at ING USFS. The typical consolidate, integrate, and optimize task list that faces any insurer involved in a business consolidation has been an ongoing task at the firm. Fresh off a project that consolidated several dozen different financial and payroll systems onto one PeopleSoft system, turned 18 call centers into three, and combined five data centers into one, ING USFS has moved to the integrate phase, using a variety of techniques Karrenbauer classifies as surround, sunset, and eliminate. Surround involves using technologies such as Web services to expose the core functions of systems, while sunset combines that task with a data migration to a virtual engine for eventual elimination of the legacy system.

Carriers often approach [integration] from the top down, such as by creating a portal to give a common look and feel, Karrenbauer says. However, behind the scenes you may have many point-to-point connections to back-end systems, which become very costly to manage over time.

Were approaching integration holistically and primarily focusing at the data level for key integration, he continues. When you start to get all the structures of the different businesses alike, you can solve reporting demands, obtain centralized views, compare data sets, and target other types of related objectives in a more managed fashion.

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

Web services also are at the core of ING USFSs Integrated Americas Adaptive Architecture, which the carrier currently is building. Its not a pie in the sky vision, Karrenbauer says. If we acquire a new line of business, we can adapt to that because of the way were loosely handling the business logic and processes. Were in the early stages of that project, but we have tracked very closely to our original strategy and are seeing real tangible deliveries happen in the short term.

ING USFSs business units also are committed to the enterprise approach Flynn mentions. Our marketing area has created a new organization around knowledge that includes a chief knowledge officer, Karrenbauer says. That helps ensure we have a shared success model and that the business organization wants to have this happen as much as we do in IT. Weve seen the business start to talk in terms of data elements, which is an incredible success.

Like ING USFS, Principal Financial Group has established a strong corporate strategy that guides the business of its diversified financial services offerings and has helped align its business and IT organizations. One of the more recent activities weve done is to have an established formal IT governance process, explains Gary Scholten, CIO. The business units have formal representation in our IT governance and vice versa. Weve seen the advantages of this, particularly in operational efficiencies, cross-business-unit project portfolio management, as well as service portfolio management.

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

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

Of course, having a customer file updated potentially by any number of different administration systems is part of the challenge of building it. An employee may have a 401(k) policy and a life insurance policy, for example, and each administration system may update the customer file. System edits created by The Principal help ensure data quality.

The Principal Financial Group uses its consolidated customer data warehouse to provide some detailed information and analytics at the individual level. For instance, an employer may have a 401(k) plan with The Principal through one agent and life insurance through another. A participant in that 401(k) may have rolled over his account to a Principal IRA after leaving that employer but also has life insurance and a new 401(k) with The Principal through a new employer and through different producers. Scholten reports the company uses SAS for market analytics, Chordiant for campaign management, and business objects query tools for ad-hoc analysis.

While these three carriers share some common issues, the differing ways in which their businesses have approached convergence and consolidation emphasize that insurers IT organizations must be prepared for any business possibility. Why some companies have been successful in dealing with convergence is theyve been flexible and adaptive; theyve taken best practices and mixed them with innovation and creativity, says Harris. The dollars dont start rolling in just because you bought another company.