Integrated Product Distribution: Crossing the lines

Fuelled by mergers, acquisitions, alliances and regulatory change, the idea of one-stop financial services shopping is becoming a reality south of the border. With caution, several insurers and brokers in Canada have broadened their focus to “test the market” on integrated product selling. Although traditional companies and the independent brokerage community have in the past shied from the “one-stop shop” concept, the time may well have come where selling a single product through one distribution channel is no longer cost-competitive for either party. And, armed with the close relationship with customers, independent brokers may well be in a superior position of strength in cashing in on integrated product distribution.

One-stop shopping has become the buzz word of the financial services industry with the movement of banks and others into insurance, and in turn, the slow turn by brokers to the idea of selling other financial services.

Although it has been common enough for life insurance intermediaries to also market segregated funds, and some brokers have ventured into a full range of insurance products, so far property and casualty (p&c) brokers have not jumped on board the integrated product sales train in great numbers. But, this may be changing, industry insiders suggest.

The expansion of large insurance companies and broker networks into fully integrated product offerings is making the potential for brokers to expand their operations more immediate. And with the threat of other financial service providers, including banks, mutual fund dealers and even stockbrokers, offering insurance to their customers, brokers may be wondering if they can afford not to increase their product offerings. “We have a window [of opportunity] to get in. If we don’t get in, we’ll be forced out,” says Bob Carter, executive director of the Insurance Brokers Association of Ontario (IBAO). While Carter argues that customers “are not yet of a one-stop shopping mind”, he thinks brokers need to be prepared for the time when they will be expected to deal with a range of requests for products.

Equisure chairman and CEO George Hutchison says it is customers who have expressed a desire to buy more products from brokers, and brokers need to capitalize on existing client relationships. “It’s been proven time and time again, clients of general insurance brokers are much more comfortable buying from a broker [than from a bank].” The drive to offer clients multiple products is “the quickest way to ensure no one swipes your customers,” he says, and to take advantage of the high customer retention level p&c brokers have.

Broker issues

“The real driving force is, it’s hard to make a buck being a broker,” notes Art Despard, president of the Registered Brokers Association of Ontario (RIBO). Increasing pressure on broker incomes is causing many to at least consider expanding product lines to try and bring in more money, especially with the threat of direct writing and the potential for direct selling through the Internet already weighing heavily on the minds and pocketbooks of small, independent brokers.

However, RIBO estimates that currently less than 40% of Ontario brokers hold multiple licenses of any kind, including mutual fund and life insurance licenses. Despard, like many in the industry, questions whether brokers should even pursue multiple licenses. There is a fear of trying to be all things to all people, and not doing any one thing successfully.

Having specialists within a brokerage to handle each product line is more realistic, the argument goes. “It’s hard to be an expert in a lot of different lines of business,” says Gregg Hanson, president of Wawanesa Insurance. Even within the insurance industry, cross-selling life and p&c products is arduous given the different needs and perceptions of customers. If life insurance is sold and general insurance bought, then brokers would have to establish two very different relationships with the same customer.

Brokers need to surround themselves with “the right expertise”, observes Denis Lussier, senior vice president of Standard Life. “If [brokers] think it is just an addition of products that can be managed the same as their core business, then they’re going to fail.” Customers are going to want integrated management of their finances as much as they want the convenience of one-stop shopping. Everyone from stock brokers to mutual fund dealers are eager to tap into the ‘wealth market’, forming alliances to offer broader ranges of products, he says, and brokers are looking for ‘privileged relationships’ with better prices from suppliers in order to keep up with the competition.

However, adding products to a broker’s offering is no “quick fix”, argues Roger Randall, vice president of integrated financial services for ING Canada. Today’s brokers tend to identify themselves with a product, he comments. But, with the move to integrated financial products, brokers will have to identify themselves as a service. Simply selling a client more products does not give better value may land brokers in hot water if they are seen as enticing clients to buy products they don’t need, which is a major concern for regulators, Randall notes.

Why has integration not worked?

Although companies, broker networks and brokers themselves recognize that the industry is changing, there is still a great deal of skepticism in some quarters about how the one-stop shopping approach will fare. ‘Nobody seems to be able to make it work,” insists broker consultant Laird Laundy. While there is a real fear of losing customers to the convenience of other institutions which could offer a full range of financial products, including Internet sites, “most brokerages are too small to institute new departments” to handle new products. It’s not that brokers don’t see the opportunity to capitalize on a broader market, they just can’t afford to get into the game, he says.

Past experience does not provide a good model for cross-selling, notes Jim Ball, president of the Insurance Brokers Association of Canada (IBAC). This is especially true for bank-related products, which he has yet to see sell successfully through brokerages. And the reverse is true, he argues. Banks and other financial institutions have not had resounding success in selling insurance. Getting a good deal with a supplier to introduce a new product is not enough, there has to be an appreciation of how to market those products. “It takes a lot more effort than people think.”

Mergers and acquisitions have had a serious impact on the ability of small brokers to compete, creating large networks with the ability to access a range of products and keep a variety of ‘experts’ on staff, says Carter. One of the roles the IBAO needs to address is how to help “the smaller guys form alliances” to level the playing field.

Broker networks like Equisure have the best chance of succeeding in integrated product distribution, predicts Laundy. “If this sort of distribution is going to happen, that’s where it’s going to be spurred from.” Broker networks have the money to launch new products, including investment in information technology and training. Small distributors are “already too thinly stretched” to spend the money necessary, especially in human resources.

Still, others argue the small brokerage possesses a distinct advantage in reaching customers. The industry is in agreement that brokers have been able to fight off the threat of direct marketing because of their close relationship with the consumer. The concept of buying a range of products from under one roof “may be more attractive in smaller centres where’s there’s still a tendency to trust people,” says Hanson.

Stephen Evanson, president of the Independent Insurance Brokers Association of Alberta (IIBAA), says small town brokers have a niche opportunity, a chance to offer many products where they may be little or no competition. In rural Alberta, he points out, the province’s treasury department is trying to address the needs of residents who live in communities with one or no bank. There is a “need t o be filled” in these remote places, he asserts.

Role of Companies

Brokers are looking to financial service companies to lead the way in terms of offering a broad range of products, insiders say. In fact, says Randall, companies have a responsibility to support the broker system, “protecting” brokers by giving them the chance to maximize the value of their people, infrastructure and client relationships. Companies have to make a long-term commitment to providing a variety of products that brokers can choose to market.

ING’s pilot project to introduce full financial services into brokerages, including banking functions such as loans, investment savings accounts and mortgages, is intended to test the waters of consumer demand. With 10 brokerages already up and running with the project, ING is recruiting for 15 more, all located in Ontario and Quebec. It’s the right approach, according to Ball. “ING has recognized this is not an easy thing to do,” he says, and testing this new approach first makes sense. “If they’re successful, others will follow.”

At the same time, fear exists that companies could cut out brokers who are not willing to expand their business. Carter questions whether it is consumers or large companies who are pushing for the integrated product approach. The IBAO, he says, wants to ensure brokers aren’t “pushed into so-called consumer needs that are just the visions of larger corporations”.

But insurers insist that brokers are simply being offered the opportunity to access a broad range of products, and that whether they expand their operations is their own decision. “Different people want to buy products differently,” contends Hanson. “We have to respect the independent broker’s choice to run their business the way they choose.” There is still a “niche market” for small brokers who just want to sell one product, he adds. “A small p&c broker can still survive and thrive.”

Competing against the banks

Competing with banks increasingly becoming involved in the sale of myriad financial products, including insurance, is definitely a factor for insurance brokers and companies alike expanding their horizons, sources agree. Successful lobbying has kept banks from selling insurance through their branches, notes Ball, but how long federal regulations will keep the banks at bay is unknown. And as insurers move into banking services, the banks may have a valid argument: if they can do it, why can’t we?

Regulatory change in the U.S., in the form of last year’s Financial Services Modernization Act, opened up the market for banks, “allowing the creation of corporate owners of one-stop shops”, explains John Gohsler, senior vice president at Conning & Company. The rationale was that by allowing for economies of scale, consumers would benefit in terms of price, product and service. But, Gohsler admits, whether this will result in anything of substance remains to be seen.

In Canada, regulations can provide a “cushion” for the insurance industry to get integrated product systems up and running, says Randall. “Restrictions on banks cross selling, while the banks see as unfair, we see as giving independent brokers a fair shot at competing.” However, it’s only a matter of time before the government will loosen restrictions on the banks, he predicts, so insurers have to take advantage of the current window of opportunity.

And, with the expansion of Internet use, whether banks can sell insurance at branches may become a moot point. “Is there really any incentive [for banks] to sell at branch offices when the move now is to shut down branches?” questions Despard. Assuming banks continue in the trend towards automation of services and web-based transactions, they will already have the ability to market other financial products, including insurance, through these channels. In fact, Despard thinks the latest suggestion from Belton Report author Ted Belton, that brokers should consider alliances with banks to become outlets for their services, a good plan. Brokers would have the ability to market a range of products, while banks would have a ‘bricks and mortar’ site to sell from.

Where the banks are still at a disadvantage in terms of regulations is in restrictions on target marketing, says Ball. 1992 legislation requires banks to send brochures en masse, a costly venture, rather than focusing on customers would might be more susceptible to insurance offerings. What banks really want, he believes, is the right to selectively market insurance products.

Sole occupation rules

From a broker standpoint, regulatory change at the provincial level which would loosen requirements on brokers to have insurance as their ‘sole’ or ‘principle’ occupation have not been welcome. In Alberta, the provincial government has approved removal of the requirement despite IIBAA’s objections, although the legislation is still awaiting proclamation. Evanson says the association’s point of view is that brokers, who can theoretically hold as many licenses as they qualify for, want to uphold professional standards by requiring brokers to devote the majority of their time to insurance sales alone.

The same debate is taking place in Ontario, where the Financial Services Commission of Ontario (FSCO) has said it will recommend the removal of the sole occupation requirement on brokers, despite concerns voiced by RIBO. “Our position on sole occupation is that it’s a good thing and shouldn’t be changed,” Despard says.

RIBO did, however, support a change in language to ‘principle occupation’, saying this reflected the reality that many brokers already did engage in secondary occupations, financial or otherwise. FSCO has indicated that it will turn its attention to market conduct and ensuring that as brokers become involved in more lines of business, the result is not a conflict of interest or undue pressure being place on clients to buy unnecessary financial products.

But, removing the requirement could present an opportunity for brokers, notes Carter, opening up the possibilities for independent p&c brokers to expand their operations and compete. Whether brokers will want to seize that opportunity in significant numbers remains to be seen, however many in the industry say this is definitely the direction of the future. And there’s a simple reason, says Hutchison, “we don’t want anyone else to get their foot in the door”.