If it happens, the insured company has the right to sell new shares to the pension fund at a set price. At present this cushion against misfortune is provided by common equity, hence such contracts would become a partial substitute for equity. For today s financial intermediaries, all this promises turmoil, as well as innovation. The engineering and pricing techniques needed to operate in the high-margin, sophisticated markets of ART and structured insurance are costly to assemble and maintain. But technology also has the power to demolish existing boundaries between different parts of the financial world.
Banks are no longer the only providers of credit.
Insurers are competing with investment banks to serve big corporate clients. Mutual and pension funds are making direct equity investments, bypassing securities firms. Many of the best financial firms 20 years hence will rely on intellectual more than monetary capital. Their skills, above all, will lie in packaging and marketing. Investors will measure their performance not simply in terms of their returns on capital, but also in terms of how risky they are.