I. INTRODUCTION
Robert Stein & Beth Morrow, The Changing Landscape, NAT'L UNDERWRITER, Jan. 12, 1998, at 19.
This is the first time in the history of our financial marketplaces that there is more money in the markets for mergers and acquisitions than deals to be done. Banks have bought out security brokerage firms so that they have the capacity to offer full service options. We see this when we watch any sporting event or any of the financial news networks' advertising. Because of this accumulation and concentration of wealth, banks want to also move into the insurance industry. They are doing so by motivating and lobbying Congress and the Officer of Controller of the Currency to allow them to sell insurance with mixed, but progressive, results to date. While this is going on, the first reaction by the insurance companies, which is typical, is to resist. However, now they know that resistance is futile and they would literally be the "bride waiting at the altar" while the financial services market passed them by. To respond to that, the large insurance companies have immediately applied for ownership of federally-chartered savings and loans. Those charters have been given to the likes of Allstate, State Farm, etc. The companies intend to provide all of their existing financial services plus traditional banking services all in one place, i.e. a savings and loan type institution. Overall, what has happened as these two financial giants have moved to the center of the stage is that there has been one mosaic or fabric created that is the financial services organization that we know today. Within the next few years, probably only two or three, there will be one large financial services group which will be wall-to-wall between stock brokerage houses, insurance companies and all of their different products and banks. This article is going to try to lend some kind of understanding to this process and point out the future for bad faith concepts in this new marketplace.
II. CONSOLIDATION OF COMPANIES AND "NICHE" SPECIALIZATION
The net income to insurers after taxes was reported to be approximately 8.3 billion for the third quarter of 1997 increasing more than 60% over last year's numbers. See December 15, 1997, National Underwriter, Volume 101, No. 50, Page 1. At the same time, the property casualty industry employed a total of 2.2 million people directly in the industry in 1997 with a payroll of approximately $83 billion. Agents, brokers and employees of insurance service organizations (such as outside claims adjusting services and statistical services) did not fair as well. The estimates show their growth rates are expected to fall from an annual rate of 3.7% to .02 % between 1994 and 2005. The reason for this lack of growth in the insurance sales industry reflects competition and essentially a saturated sales market. Therefore, the business reaction by insurance companies has been to buy other companies that were once competitors. The rationale for this is that it is much easier, especially with money in the financial market to fund the purchase, to buy another company to increase one's market share dramatically than to try to hire more sales force to make further sales through one's existing company. This is known as niche specialization and it is occurring in both the property casualty and life insurance market place at phenomenal speed.
Within a very few years, there will be literally a hand-full of companies that control the majority of the markets. There will be very few companies responsible for health care, disability insurance, pension funds and life insurance products. The result will be attempts at further expansion into the market by those big companies with new products through their sales forces. In managed care, HMOs and group insurance sectors, there is less consolidation at the moment but more will occur very quickly. This consolidated financial services market will leave few national players. Insurance companies that once specialized in a single line now face competition from the likes of Travelers, Solomon Brothers, G.E. Capital, Zurich Kemper, Morgan Stanley, Dean Whitter and others.
The insurers therefore are shifting their focus from products to consumers as they recognize that the retail market will more directly drive the performance of competitors that no longer respect traditional product boundaries. The question will be where is the point of service for each niche to approach us for a sale? The ATM machine, the bank teller, or the supermarket checkout clerk may become our insurance broker of the future.
III. THE FUTURE OF INSURANCE IS BANKS, STOCK BROKERAGES AND AS YET, UNIDENTIFIED FINANCIAL INSTITUTIONS
In the future, companies will retain well-known insurance names for the purpose of name identification, but will no longer be run by insurance people. They are going to be run by bankers and people from financial institutions. Bottom-line financial reports to the stock markets on a quarter-by-quarter basis will be their driving criteria. Therefore, the future of insurance and traditional insurance products will change. As it changes, there is a unique opportunity for mischief. Insurance products are going to be designed with only one compelling purpose in mind: an internal rate of return between 15% and 20% net to that institution. To support such a return, there is going to be tremendous pressure for increased sales and to retain existing insureds. One can project a scenario where a single financial institution will offer insurance, stock, pension, and banking services, potentially through the Internet, often without personal contact. The traditional "kitchen table" insurance sales transaction may soon be a thing of the past.
Any of us could buy insurance through the internet today from hundreds of companies. If you have not done so, take a minute to look up your own company on the Internet and see what it has to say about itself and what it says it is doing. It is really an eye opener. What the future holds in that regard is an opportunity for plaintiffs' lawyers. Banks have been notoriously hard headed, stubborn and insensitive to the needs of their customers. As they become one of the leading forces in insurance sales, that philosophy is sure to carry over.
IV. WHO IS SELLING WHAT TO WHOM?
The present sales agent is soon to be a thing of the past. As the above referenced statistics show, independent insurance agents recognize that they are a dying breed. They are fighting hard in Congress, through their trade associations, to keep their profession alive in the face of tremendous pressure by banks and insurance companies to operate without them. The offshoot of that is two-fold: (1) there will be a number of disgruntled former insurance agents who are willing to spill the beans on improper insurance tactics, and (2) there are going to be more electronic sales transactions. These developments will require innovative plaintiff counsel to adapt and find and investigate the electronic sales practices in ways yet to be defined. One thing is clear, the old direct mail, direct call, direct solicitation, personal relationships among and between insureds and insurance agents is dying.
V. LOSS OF HISTORIC INSURANCE CULTURE AND ATTITUDE
One of the large head hunters in the insurance field recently opened a web site that was reported in the Wall Street Journal. The internet web site was for middle-management insurance employees. What is newsworthy about this is that the site is focused on the banking industry as a source of middle management employees. This follows a pattern of senior executives in insurance being hired away from banks, resulting in a significant loss of insurance culture. That culture understood that the premiums earned yesterday paid the claims of today, and the companies also knew that the insurance premiums of tomorrow would make up for increasing risks and losses. Unfortunately, Wall Street does not have that institutional memory. There is going to be intense pressure in the form of memoranda from senior staff to limit and exclude claims. In the past, this business direction would have been recognized as merely a cyclical trend inherent to the ebb and flow of risk. The mentality of financial institutions will not allow that kind of foresight. Again, this climate will be a fertile ground for plaintiffs' lawyers to capitalize on this kind of financial pressure by upper management.
VI. INDIVIDUAL VS. CLASS ACTION ADAPTATIONS TO THE NEW ERA OF INSURANCE/FINANCIAL SERVICES
Until the last few years, there have been very few insurance class actions. The first wave of those cases primarily concerned vanishing premiums. It became evident that class actions were a legitimate vehicle for bringing widespread insurance sales abuse tactics into focus. There was basically a uniform sales practice that affected thousands of people with the same types of policies in the same way. The class action vehicle singularly lent itself to addressing these systemic abuses. That wave is only now a swell of things to come. It will affect many types of insurance products in the very near future.
VII. WHAT LEGISLATION IS ON THE HORIZON?
The Norwood Bill presently pending before congress in its present form will provide civil tort liability for HMOs. This legislative initiative reflects a public outcry against the outrageous conduct of HMOs. It also reflects the conduct of companies that continue to take unreasonable positions knowing that, because these matters are potentially subject to ERISA, they really have little liability. This has to change to allow civil enforcement, since no one else is able or willing to enforce these insurance contracts other than private counsel.