What's New in Cybertalk?

By Jean Gora
July 2001

Note: CyberTalk is a column that appears monthly in LOMA's Resource, the magazine for insurance and financial services management. To see more contents of the magazine and to see how to subscribe, click on RESOURCE MAGAZINE.

Blurring Boundaries: Data Processors and Insurance Distribution

In the early days of space exploration, both the U.S. and Russia employed German rocket scientists captured during World War II. Shortly after the two countries launched their first satellites, a newspaper cartoon showed the two satellites meeting in space. One satellite said to the other, "Now that we’re finally here, we can speak German again." A similar situation exists within the financial industry today. Like the U.S. and Russia in their race to the moon, banks and insurance companies compete with one another. A close examination reveals, however, that many of them are powered by a common group of data processing companies.

The services provided by these data processing companies allow the creation of virtual banks and insurance companies, enable firms in one sector of the financial industry to enter other sectors with relative ease, and allow small banks and insurers to match the service offerings of large banks and insurers. In some cases, these firms actually become licensed players in the financial industry.

This month’s CyberTalk examines two such companies, Fiserv and Bisys, both of which started out as providers of data processing services for banks. The two compete directly in a number of areas, providing many of the core processing applications of banks. Because large banks tend to operate their own applications themselves and small banks do not, the consolidation of the banking industry poses a threat to both firms and has caused them to expand their insurance processing capabilities. In the insurance area, Fiserv has tended to focus on core insurance applications processing while Bisys has focused on insurance distribution.

Who They Are
Fiserv, headquartered in Brookfield, WI, trades on Nasdaq (FISV). It has approximately 14,000 employees. Its net income for 2000 was $177 million. In May 2001, its market capitalization was $6,490.55 million. It generates close to 80 percent of its segment revenue from outsourcing, systems, and services for banks and insurance companies. The remainder comes from securities processing and trust services. In the banking area, it provides virtually all the technology a bank or related institution needs to run its operation, from deposit accounts to general ledger to check processing to financial institutions located in more than 60 countries. In the insurance area, it provides policy processing and administrative support for policy issuance and administration, billing, claims management, reinsurance processing, accounting functions and related reporting.

Bisys, headquartered in Little Falls, NJ, also trades on Nasdaq (BSYS) and had 3,200 employees and $70.2 million in net income for its fiscal year ending June 30, 2000. In May 2001, its market capitalization was $2,756.71 million. It is thus significantly smaller than Fiserv. It generates a little more than half of its segment revenue from investment services, almost one-third from information services, and about 15 percent from its insurance and education services division. Its investment services group administers and distributes mutual funds and provides retirement plan services in partnership with banks and investment management companies. Its information services group provides information processing and check imaging to financial institutions. Its insurance group distributes insurance products through financial institutions and other distributors, sometimes functioning as a processing service provider and sometimes functioning as an insurance agent or broker. It also supplies continuing education services to insurance agents.

An examination of recently announced business deals and acquisitions shows how both Fiserv and Bisys are playing important roles in the deconstruction of the banking and insurance value chains and in positioning insurance companies to compete with banks. Deconstruction of a value chain refers to the migration of functions once performed internally by insurers and banks to outside specialist organizations. The outside specialist organizations escape many of the regulatory restrictions applied to insurance companies and banks.

Developments at Fiserv
Fiserv has expanded its business by acquiring small firms that have developed specialized software to automate particular insurance and banking functions. Fiserv made a number of insurance-related acquisitions in 1998 and after; its recent acquisitions in the insurance area have included a provider of flood policy administration services and a provider of third-party administrative services for employee benefits programs. Typically such acquisitions also furnish Fiserv with new customer relationships within the insurance industry.

The most interesting recent development at Fiserv is its role in powering the entry of several major insurance companies into banking. In October 2000, MetLife agreed to use Fiserv to provide the technological framework for MetLife’s proposed bank acquisition. In April 2001, Cigna agreed to do the same for its new federally chartered thrift institution, Cigna Bank & Trust.

In the case of the MetLife acquisition, Fiserv provides its comprehensive banking system for core processing, an Internet banking front end, a customer relationship management system, call center software, check processing, plastic card production and fulfillment, electronic funds transfer, and back-office services.

Cigna plans to use its new bank to provide deposit products such as checking and savings accounts, certificates of deposit, money market accounts, and individual retirement accounts to participants in Cigna-provided retirement plans. Fiserv will supply Cigna Bank & Trust with a core processing system, an Internet banking engine, check processing, automated teller machine operation, plastic card products and mailing, loan origination software, and credit card processing. Fiserv already provides services to Cigna’s retail brokerage operations. In addition, it supplies plastic card production and mailing to Cigna for its health benefits program.

Thus, MetLife’s and Cigna’s new bank customers will both be dealing with Fiserv.

Developments at Bisys
Because it has focused on distribution, Bisys is playing an even more interesting role than Fiserv in powering the entry of banks and insurers into one another’s business.

Bisys claims to have provided more than 100 of the largest insurance companies with the services necessary to operate retained asset accounts. Insurers deposit policy benefits into checking accounts in the name of the beneficiary. Beneficiaries can then use such banking services as Internet banking, debit cards, and electronic bill payment. In the case of their group business, insurers can also use retained asset accounts to offer plan sponsors money market accounts and associated credit lines. Before insurance companies could affiliate with banks, they had to partner with banks to offer these accounts.

Bisys is using this platform to provide AIG’s recently chartered bank with its information processing. It is unclear whether this arrangement covers the wide array of products and services covered by Fiserv’s relationships with MetLife and Cigna. Bisys acquired its retained asset account business by buying the Retained Asset Account division of State Street Bank & Trust in June 1999. Presumably the bank realized that in a post Gramm-Leach-Bliley world, insurers would establish their own banks and run their retained asset accounts through them. Bisys provides the processing that allows them to do so.

Bisys provides information processing services to community banks under an agreement endorsed by the American Bankers Association’s subsidiary, the Corporation for American Banking, which services community banks. Although the number of banks in the U.S. has dropped as the industry has consolidated, new banks continue to be established, suggesting that the community bank model continues to have some validity. Started by individuals with strong ties in the local business community, many community banks are established in areas that are growing. The managers of such banks may, in fact, intend to sell them at some point to larger banks so that they can cash out of their investment.

One reason that community banks can remain viable is that Bisys and others provide these banks with an array of services that duplicate those offered by large banks. Bisys has a Web financial services portal that allows banks to offer an array of online services, such as discount brokerage, direct investing, mortgages, business loans, service cards, retirement account servicing, auto shopping, travel services, news, weather—and life insurance and other forms of insurance. Many Internet commentators have proclaimed that U.S. banks have made a greater commitment to the Internet than U.S. insurers have. Much of the bank commitment rests on a common core of services provided by outsourcers such as Bisys.

Powering Distribution
Bisys is capitalizing on its relationships with banks to power much of the move by these banks into the insurance distribution business. It is also a major supplier of services to nonbank agents and brokers engaged in the distribution of insurance. As many major insurers have reduced their tied agency forces, the number of independent brokers has risen. The independent brokers, like many community bankers, prosper if they have strong ties in local communities. Just as Bisys helps community banks expand their product offerings, it performs similar services for local brokers. In some cases, Bisys also provides services to the tied agents of insurers, which want their agents to offer a broader product line than they can furnish themselves directly.

Bisys provides outsourcing services for the distribution of life insurance, annuities, group health, and long-term care products. It functions both as a distributor and an administrator of insurance services and employs strategic alliances with 200 major insurers and national distributor groups. It has relationships with more than 100,000 insurance agents and brokers throughout the U.S. As a wholesaler of insurance, it is required to have an insurance brokerage license in some jurisdictions. It claims to be the largest life insurance agency in the United States.

Bisys’ services include agent contracting, marketing support, advanced case design, application processing, medical underwriting, commission reconciliation, and policyowner services. It offers a Web site that allows its distributors to generate real-time competitive quotes, download carrier software, research carrier and case data, review product specifications, and manage their agencies. It also provides customized agent Web sites, state-specific licensing, compliance, and continuing education.

Bisys’ role in getting banks into the business of insurance distribution is exemplified by its program to provide members of the Pennsylvania Bankers Associations (PBA) with access to insurance products and services through a PBA subsidiary, the PBA Services Corp. (PBASC). Bisys provides back-office case processing and administrative support. PBASC provides program and compliance guidance and training to individual banks participating in the program.

A Raft of Acquisitions
The most interesting aspect of Bisys’ activities is that it is currently acquiring wholesale insurance agencies and brokerages—rather than insurance software companies. In effect, Bisys is buying itself a sales force and relationships with a host of new insurance distributors. Here are some of its recent acquisitions:

In May 1998, it acquired Underwriters Service Agency and its affiliates, a life insurance distributor. In August 1998, it acquired Potomac Insurance Marketing Group, another life distributor. In April 1999, it acquired Poage Insurance Services, a third life insurance distributor.

In July 2000, it acquired Ascensus, a provider of insurance services based in Salt Lake City. It is a major distributor in the annuity market and the broker/dealer and bank distribution channels.

In March 2001, it acquired The Advanced Markets (TAM) and related P.J. Robb Companies. These organizations are Tennessee-based distributors of life insurance products and services for the high-end clients of brokerage firms, financial institutions, and independent agents. They currently support more than 5,000 financial advisers and independent agents. The acquisition expands Bisys’ distributor relationships in the Southeast.

In May 2001, Bisys acquired The Insurance Exchange of America, Inc. (IXA), a New Jersey-based insurance brokerage firm that supports more than 3,000 independent distributors with an array of sales programs and insurance products. This acquisition expands Bisys’ presence in the Northeast.

Strategic Alliances
Bisys has also entered several strategic alliances with other insurance distributors. One is with Insurance Central, a third-party marketer affiliated with Association Group Insurance Administrators (AGIA), a California third-party administrator of insurance programs for associations and affinity groups. Insurance Central’s clients currently represent about $200 million in policy premiums.

The joint venture calls for Bisys to provide Insurance Central with access to its term life insurance portfolio while Insurance Central will offer Bisys an integrated marketing, sales, and administrative vehicle for delivering insurance and financial products to retail bank customers. Insurance Central will also promote Bisys’ term life portfolio to its own clients and will use Bisys’ Internet-based communications and direct links to insurance carriers to reduce the time it takes to process a policy application and issue the policy. Insurance Central offers a turnkey direct marketing program that combines technology, database analysis, underwriting uniformity, and rapid data collection.

Bisys has also entered an alliance with New York-based Bender Insurance Agency, a distributor of property/casualty insurance. This alliance allows Bisys to expand its insurance product line to include both personal lines and commercial lines of property & casualty insurance. Bisys’ goal is to enable its bank clients to distribute property & casualty as well as life and health insurance.

In most of the insurance industry, insurance companies and agencies buy the data processing services and systems they require. Rarely does a data processing company go out and acquire the insurance expertise it needs to turn itself into an insurance agency. One of the problems with the traditional agent-based distribution system is the difficulty of generating economies of scale through it. Each independent agent has his own unique business and marketing practices and technology. Bisys begins with highly scalable technology and processing capabilities and then recruits distributors to exploit these capabilities. This approach may be more efficient than the traditional approach.

It is not possible to know precisely how successful Bisys’ approach to insurance distribution has been because Bisys’ mixes the results of its insurance agency and brokerage operations with those of its insurance education operations. However, the segment containing these two operations has generated margins of about 33 percent since 1998. It represents the company’s highest internal margins and highest internal growth rate. These results suggest that Bisys’ approach to insurance distribution is effective.

Bisys’ move into insurance distribution illustrates a profound truth regarding today’s financial industry: the entity that controls processing is well positioned to become whatever kind of financial intermediary its owners want it to become. Fiserv’s move to supply the core bank processing functions to two insurer-owned banks illustrates a different but equally profound truth: with the right kind of processing support, any entity that can get a bank charter can be a bank. An insurer that wants some kind of affiliation with a bank does not have to buy a large bank to get one. The activities of both companies show that many of the important activities in the banking and insurance industries occur beyond the formal boundaries of the two industries.

See previous issues of CyberTalk in the CyberTalk Archives.