Until recent years, financial service institutions tended to confine their activities to their traditional functions, both for business reasons and because legal barriers posed certain limitations to crossing the traditional lines. However, the 1980s witnessed an increasing number of assaults on or end runs around these legal barriers. The combination of several economic and technological forces and the determined efforts of some major financial institutions to break down such barriers heralded a substantially changed and still-changing marketplace. Such changes, in turn, call for evolving regulatory responses to keep pace with changing conditions and needs.

Banks are getting into insurance and securities activities. Insurers are getting into securities and banking activities. Securities firms are getting into banking and insurance underwriting and marketing. Nonfinancial retail companies and conglomerates have entered into the financial services arena through holding company structures. Different groups vie to protect their own turf and/or open invasion routes into the territory of others.

A variety of economic and technological forces prompted the movement towards the convergence of financial services, some transitory and some more permanent in nature. These include the following:

(1) The high interest rates experienced in the 1970s and early 1980s led to increased consumer demand for greater benefits or returns per dollar spent or invested. Until the banks obtained freedom to pay interest rates at the market level and life insurers introduced products providing the consumer with higher returns, there was a mass movement of dollars out of savings deposits and life insurance cash values (that is, policy loans or surrenders) to money market funds and other high-yield instruments. The ability of some financial institutions to market products that caused such a mass movement of funds and the responses of banks and life insurance companies brought great pressure to bear upon the traditional psychological and legal barriers between such institutions. Banks, for example, sought an additional stable source of income to offset the increase in their liabilities resulting from the need to pay higher interest rates to their customers. Fee- and commission-based insurance services were seen as a foundation to income stability.

(2) The high levels of inflation caused considerable disenchantment with long-term fixed-dollar investments, such as traditional fixed-dollar cash-value life insurance.

(3) The high tax rates encouraged the development and marketing of products providing tax shelters, to wit, individual retirement accounts (IRAs). Although the rates have dropped considerably since the early 1980s, the prospect of substantial tax payments, combined with increased consumer and investor sophistication, continues to affect the nature of the demand for products.

(4) Technological change has revolutionized the nature of the products and the manner of delivering such products. The computer enables financial institutions to make available products which previously had been impossible or impractical to provide. The ability to communicate vast amounts of information on a timely basis has resulted in an informed consumer, which in turn translates into a more competitive marketplace. For those financial institutions willing and able to take full advantage of technological change, such change affords opportunities for greater innovation in products and services, lower costs, and perhaps economies of scale and, hence, greater capacity to compete.

(5) Another driving force leading to the convergence of financial services has been financial service institution strategies, including product diversification to reduce dependence upon a narrow line of products, maintenance of the vigor of distribution systems by increasing opportunities for additional agent income, increased inflow of money (regardless of the form) to generate float on funds, and capitalization on the fact that the acquisition and management of money is a function common to and underlying financial service institutions across the traditional barriers.

(6) Competition across traditional financial service lines is both a result of and a further cause of financial convergence. The above-mentioned forces create the environment, need, and motivation to compete; competition causes others in the marketplace to make competitive responses, thereby generating even more competition.

Life insurers, either aggressively or defensively, have been very much caught up in the convergence of financial services. In the 1960s, the concept of "one-stop shopping" with respect to insurance emerged on the national scene. A number of insurers explored marketing life, accident and health, and/or property and liability insurance through the same agency force. Underlying this effort was the rationale that members of the public wanted to buy all of their insurance from the same organization. However, the experiment never really took hold.

Through the late 1970s, the life insurance industry conveyed a solid and stable image. Traditional whole life policies constituted the vast bulk of the life insurance business, providing steady if unspectacular gains. Insurers concentrated on providing death protection to their customers.

When inflation roared to double-digit levels and the deregulation of interest rates paid on savings deposits enabled interest rates to soar, all financial service institutions were thrust into an environment of high and volatile interest rates. The public focused on obtaining high rates of return. Vast amounts of money moved out of low-interest bank and savings accounts and were withdrawn from life insurance companies as policy loans or surrenders for investment in higher- return investment vehicles. Money market funds, mutual funds, and the stock market absorbed substantial amounts of the shifts in money. Life insurance companies were left in the wake of other financial institutions offering higher investment returns.

These developments triggered a rapid proliferation of interest-sensitive products issued by life insurance companies. Some insurers formed or acquired mutual funds to sell separately or in conjunction with other products. Variable annuities, variable life, universal life, variable universal life, single-premium deferred-annuity, and single-premium life policies were introduced or reintroduced to the buying public. Life insurers engaged in offering real estate syndications, generally through third parties. Some life insurers acquired securities firms, enabling the provision of securities underwriting and execution services. With the combination of an aging population and the 1986 tax law changes constraining or eliminating other tax-sheltered products, the sales of annuities (with their tax-deferred treatment) skyrocketed. Life insurers became major players in the market for investment-oriented products.

As the life insurance industry moved in the direction of offering products with lower profit margins and higher volume, over the past 15 years or so, insurers have sought additional means to distribute their products. Selling insurance products through securities brokers has become a well-established practice. A much slower development, but nevertheless an evolving fact, has been the sale of insurance through banks and other depository institutions.

Furthermore, during the 1980s, "one-stop shopping" reemerged with a new dimension—the financial supermarket. Insurers, securities firms, savings and loans, and others are currently on a parallel or converging course in their attempts to market a broad array of financial services, including insurance policies, mutual funds, stock brokerage, money market funds, tax shelters, and other diversified services, such as financial counseling and real estate management services. Currently, legal barriers continue to restrict the extent to which life insurers can provide banking services—such as trust, credit card, and deposit-taking services—and the extent to which banks can sell and underwrite life insurance. However, since many banks wish to sell and/or underwrite insurance and many insurers are pushing to provide various bank services, there has been a definite movement toward consolidation within the financial services industry, with a lowering of regulatory barriers between these institutions. The recurrent theme is "consumer service," with one agent or firm orchestrating a consumer’s entire financial planning program, including insurance, mutual funds, money market funds, stocks, bonds, tax shelters, tax write-offs, savings, and credit.