As we prepare to enter the 21st century, the banking and insurance industries will be facing similar challenges. Both are seeing breathtaking changes in their business and have to prove to the world and especially to their customers that they are able to find new ways to serve in today's global economy.
A number of trends will make the services banks offer more important than ever to their customers. As banks take advantage of these trends, their risk management needs will inevitably grow, increasing opportunities for insurance brokers to show the banking industry just how much they are needed.
Perhaps the most important trend is the move to a global economy. And as the barriers to a wide variety of financial activities in the U.S. appear to be falling, banks can expect a vastly expanded playing field.
Interstate Banking Is Here
Despite existing federal restrictions, all 50 states affirmatively allow some form of interstate banking. In the last 12 years, the number of banks with interstate operations jumped from 300 to 1300, representing 65 % of the total assets in the banking system.
Mellon Bank's pending acquisition of Drcyfus is a stunning victory for banks eager to expand into new financial arenas. Further aleregulation of interstate banking - whether dc facto or de jure - is sure to come in the next few years.
The move to global banking reflects a qualitative as well as a quantitative change. While major banks have always had an international presence, they're seeing a dramatic increase in crossborder business.
The reduction of trade barriers through Nafta, and hopefully GATT, was both pushed by and is creating a globality of demand.
We also are seeing an increase in larger trade transactions in emerging markets where the players are becoming more concerned about the political or legal risks they'll be facing.
Traditionally, the risks associated with foreign commerce and investment have been covered by political risk insurance, but the level of activity is now stretching the capacity of what had been a small market - and one few banks needed to top.
Nothing about these trends is going to slow down. As global enterprise spreads, we're seeing an expanding universe of players, and banks will deal increasingly with customers who will need global banking resources.
As a result, new products and services are being developed by banks to respond to the needs of the global customer. Increasingly, the products are aimed at helping customers manage risks.
Take the whole spectrum of derivatives. They are all about mitigating financial risk. They're popular, despite their complexity, because they give companies a measure of control in a world where risk and volatility abound. Properly used, they really push the definition of risk management.
Two Parallel Universes
In some ways, bankers and insurance brokers are looking at similar techniques to solve their clients' problems - whether those solutions involve financial risk management, or insurance risk management.
Finite risk is an insurance product that has found a market niche because corporate risk managers have found that it clearly offers a way of mitigating risk that banking products may not provide.
There are many other exposures where traditional insurance is the recognized solution, such as professional liability, employee dishonesty and lender liability. But by delving into financial risk exposures, banks will be looking at some very special insurance needs.
And while insurance is available for many director and officer exposures, there currently are no efficient risk-transfer solutions for many financial risks.
To work successfully with banks, brokers are going to have to focus their attention on the banking business' objectives and aggressively pursue non-traditional solutions.
Brokers, along with banks, will have to offer something other than mere intermediation, because economic reality is making intermediaries look more and more like dinosaurs.
For banks, the future lies with helping their customers - whether they're individuals, companies, even countries - manage their financial risks. And the job of brokers will be to help banks in the process.
Insurance brokers of the 21st century are going to have to be very different animals. "Broker" used to be just another word for "intermediary."
The global broker of today recognizes that the mandate for tomorrow is perform or perish. In the insurance crisis of the mid-'80s, capacity became so scarce that brokers developed alternative risk facilities.
Alternative facilities were joined by a boom in self-assumption of risk - whether in the form of higher retentions, or direct risk-sharing through captives or risk retention groups. Many insurance buyers left the traditional market and never returned. That meant clients needed more help in managing risk.
They needed brokers to solve their problems by either reducing their total cost of risk, managing their captives, or providing customized, insurance solutions to meet their specific objectives.
Therefore, the market has never been the same. Buyers are far more sophisticated and they've learned how to stabilize their exposures, spread their risks over time and take advantage of the many risk-financing alternatives now available.
Insurance brokerages, like the banks, will probably experience a wave of consolidations, and the ones that emerge as winners will be those who understand the demands of the next century. They'll be relegating transactional intermediation and creating insurance capacity when it doesn't already exist.
They'll be forming strategic alliances - as Johnson & Higgins did recently with Goldman Sachs, to attract $450 million of capital - to bring additional catastrophe property capacity into the market.
And they'll be organizing capacity - working to get global markets to assume risk in a whole new way - a way they'd never have dreamed of, even a couple of years ago.
Given how fast the banking business is changing the brokerages banks will need in the year 2000 will have to run on a very steep learning curve. New bank products and new exposures will test the mettle of the finest specialists in our industry.
Quite candidly, neither bankers nor brokers have ever been in a more challenging business environment.
As partners with banks in risk management, brokers must be able to design solutions not merely with insurance policies but with a creativity that matches the creativity of the banking industry's broadening business objectives. And the partnership will be based on far more than risk management.