No sale: Despite Gramm-Leach-Bliley, there are still obstacles holding back bank and insurance company mergers. (Industry Strategies: Banks in Insurance).

Since passage of the Gramm-Leach-Bliley Financial Services Modernization Act on Nov. 12, 1999, only a handful of banks have acquired insurance companies, and those acquisitions have been relatively small deals. This lack of bank-insurance melding flies in the face of what was anticipated--a flurry of cross-industry activity to create one-stop shops like Citigroup, the icon of financial-services convergence. No one expected that Citigroup would announce the company's spinoff of Travelers Property Casualty Corp. less than two years after it acquired all shares of Travelers Property Casualty stock it did not already own.

The industry's recognition that banks and insurance companies don't necessarily make good bedfellows involves impediments in several important fronts:

Regulation. Banks and insurance companies operate within two different regulatory environments. Unlike banks, which have federal oversight by the Office of Thrift Supervision, insurance companies are state regulated. To address one aspect of state regulation, a provision of Gramm-Leach-Bliley requires U.S. jurisdictions to adopt uniform or reciprocal agent-and broker-licensing laws by November 2002 (three years from the enactment of the law) to avoid the creation of a National Association of Registered Agents and Brokers. Although the National Association of Insurance Commissioners said it had succeeded in satisfying the Gramm-Leach-Bliley requirements by having enough state legislatures pass bills permitting reciprocity, there are other issues raised by state regulation, like duplicative administrative processes.

Insurance companies are unable to respond to market changes and consumer demands on a timely basis, because they are subject to regulation (rate filings, new product approval, etc.) by each insurance department in the states in which they do business. To address this, a number of different industry organizations have advocated the federal chartering of insurers. And Sen. Charles Schumer, D-N.Y, and Rep. John LaFalce, D-N.Y, introduced legislation that would permit the optional federal chartering of insurers. Clearly, the regulation of insurance companies is evolving, and it is uncertain how it will play out. (See "State vs. Federal," Best's Review, April 2002.)

Technology. Banks generally have been quicker to embrace technological innovations than their insurance counterparts. Due to the nature of the business, banks are better able to use technology to accelerate the rate at which they interact with their customers, thereby creating customer loyalty and profitable relationships. Insurance products are not as interactive--a consumer usually purchases auto or homeowners insurance and forgets about it unless an event prompts action. Insurance products also do not lend themselves as easily to online purchase because of underwriting issues. Moreover, the insurance industry is known for relying on antiquated legacy systems and using reams and reams of paper.

Financial. According to SNL Data-source, the median return on average equity in 2000 for insurance companies was 7.42%, compared with a 12.2% return for

banks. Because insurance companies as a whole have had lower returns on average equity than their bank counterparts in recent years, they aren't the most attractive acquisition targets. It is no surprise that a bank would be reluctant to sink its capital into an entity with a lower return. Many observers believe that Citigroup, which is considered a higher-growth financial-services organization, spun off its property/casualty business because it would not realize double-digit organic growth.