Insurers Race to Catch Up With Banks.

Insurers and banks must rethink which products and services they will offer consumers who are less willing to accept the traditional offerings of financial services providers, insurance industry advisers with Ernst & Young LLP New York, said in their annual state of the industry presentation.

Insurance companies and financial institutions are borrowing a page from retailers and are shifting from a supply-driven to a demand-driven model, the analysts noted.

Most insurers have been focused on developing products to sell rather than on designing solutions aimed at specific customer needs, said Robert W Stein, national director of financial services at Ernst & Young. The era of the "complacent provider" is over, he said.

"Customers are a lot more knowledgeable than they used to be," Stein said. "They're a lot more sophisticated about their financial affairs."

Customer choices have increased, spurred by greater competition, the analysts said. As a result, the market has been segmented into retail and wholesale layers, rather than divided among products or institutional suppliers.

At the retail level, a range of products must be made available to serve customers, including mutual funds, individual stocks, whole life insurance, annuities and savings products, said Peter R. Porrino of Ernst & Young.

Existing distribution channels--the manner in which products are sold--will service broader product lines, and companies will add distribution channels.

"This is where we see convergence happening...not necessarily at the institutional level, but at the delivery level," Porrino said. "It's going to drive standardization even more than what we have today.

"Commercial companies are not going to need an insurance company or a bank to bundle their risks together," Porrino said. "They are going to be able to unbundle it themselves and get it out to the capital markets on a more efficient basis."

Ernst & Young's report highlighted several issues driving change, including:

* Intra-sector consolidation will continue, a response to growth and cost pressures and overcapacity in the property/casualty market.

* The number of mutual life insurers will continue to shrink.

* European insurers will continue seeking to expand their operations by acquiring established U.S. insurers.

Banks will lead consolidation, Porrino predicted. Consolidation among life insurers will be moderate, while property/casualty insurers will see "very little" consolidation because of market overcapacity, he said. In fact, many property/casualty companies will literally surrender. "There are going to be more P/C companies that are not going to compete in today's marketplace," Porrino said.

Alliances between banks and insurers will continue, with the emphasis on cross-marketing products.

Insurers' products and marketing are becoming more finely focused because of competition from outsiders, especially financial institutions, Stein said.

To compete, insurers must become more customer-focused and pay more attention to strengthening their brands. "The customer power has certainly brought the traditional retail-marketing concept to the financial-services sector," Stein said.

Insurers must become "simple product providers," Stein said. They must choose to become predominantly retail organizations or wholesale organizations.

Bank-driven institutions now have both, but it's too soon to tell if they "have the capacity to manage such a diverse portfolio." Stein estimated that 50% to 60% of banks "have insurance providers in the stable."

"The traditional agent is in jeopardy because of the potential of the Internet and the retail products side of financial services," he said. He added that regulatory frameworks leave insurers ill prepared for an intense competitive environment.

Companies will learn that understanding and serving the customer is not the same as having access to those customers, Porrino said. "People want best of breed," he said. "If it's the best I can buy, I'll buy it from that institution."

Stein also pointed to globalization as a key element. "We think the European consolidators are going to lust after some of these U.S. brand names," he said.