Aviva’s New Partnership with Brokers

Aviva Canada is unequivocally endorsing a “new partnership” with the independent broker channel in Canada, betting all of its chips against a direct method of distribution.

The new partnership with the independent broker channel features a quid pro quo: Aviva Canada wants to be able to count on its independent broker partners not to take away underwriting tools that the insurer might use to help independent brokers compete against the direct channel. Credit scoring — a practice that independent broker associations across the country have asked regulators to ban — would be an obvious example of just such an underwriting tool.

In a wide-ranging, sit-down interview with Canadian Underwriter, Robin Spencer, the president and CEO of Aviva Canada, dealt head-on with rumours circulating within the Canadian broker community that Aviva Canada would ultimately substitute its terminated corporate partnership with PC Financial (PCFi) earlier this year with a new kind of direct distribution method.

“We are firmly committed to the broker channel as, quite frankly, the dominant channel in which we are going to be investing all of our resources,” Spencer said. “That is a change. I think brokers, once they saw what I did about PCFi, they might have taken that as a one-off as opposed to a strategic position that Aviva is taking towards the Canadian marketplace. I don’t want there to be any ambiguity. From a consumer perspective, we think that even if corporate sponsorships spring up, they are better served with a broker model than a direct model. This is a very clear statement to be making that hopefully allow brokers to overcome that doubt.”

Aviva Canada in January 2009 terminated its corporate sponsorship with PC Financial, a direct writer that once offered auto, home, pet and travel insurance. At the time, both companies said the relationship no longer served each other’s strategic needs. PCFi’s Web site indicates PC Financial has now “discontinued” its offer of auto and home insurance. PCFi’s pet insurance is underwritten by SecuriCan General Insurance Company, and AIG Commercial Insurance Company of Canada underwrites its travel insurance.

Aviva Canada’s relationship with PCFi, although it only represented 4% of Aviva’s business, nevertheless represented a thorn in the side of Canada’s independent broker community. Brokers often grumbled privately that they weren’t sure what to make of Aviva’s public pronouncements in support of the independent broker channel when in fact the company had a business relationship with PCFi. Spencer was well aware of the brokers’ skepticism.

“We’ve invested hundreds of millions over the last couple of years in the broker channel in the form of helping succession, by clearly being out there advocating on behalf of the independent broker channel,” Spencer said. “But as long as we had this noise… around PCFi, the brokers, although we had all of these structures that were totally supportive of them, were always in the backs of their minds saying: ‘We can’t trust them,’ even though we were putting hundreds of millions of dollars their way. I don’t want there to be any of that ambiguity. We’re here to invest in them [the independent channel].”

Spencer suspects the rumour mill thrived in part because he arrived from the United Kingdom two years ago to succeed Igal Mayer as president and CEO of Aviva Canada. (Mayer moved across the pond to become the CEO of Norwich Union). In the United Kingdom, where Aviva’s head office is based, the direct channel has a substantially greater foothold in the marketplace than it does in Canada.

“I think they [Canadian brokers] had their doubts about what Robin was about,” said Spencer. He suspects brokers might have thought that “just because he comes from the U. K., where there is a lot of direct business, Robin Spencer’s about to launch a direct business in Canada as well — like a belair. And the answer is, ‘no, we’re not.’ From my perspective that is a very clear statement.”

But what’s also clear is that Aviva Canada’s support of the independent broker channel is based on a “new partnership,” according to which the insurance company and its brokers work together to achieve a common purpose — i. e. to gain market share at the expense of Canada’s direct distribution channel. This can’t be done, however, if Aviva’s broker partners are attempting to remove underwriting tools or methods that can help them compete against the direct channel.

“Traditional insurers are just supporting brokers,” Spencer said. “I’m saying, ‘Hang on. If I’m dedicated to you, you’re getting all of the firepower, all of the intellectual property, you’re getting all of the access to long-term investment from the Aviva group, supporting you, the broker channel.’ The quid pro quo is, as partners, this goes two ways, which means that we have to be involved in, quite frankly, big decisions about all sorts of things like credit.”

Spencer said he fears broker associations calling for bans on credit scoring have already taken a definitive position even before the dialogue around credit scoring has started. This dialogue might include how to use credit scoring in a transparent, ethical way that would allow independent brokers to compete against direct writers. The Insurance Bureau of Canada, Spencer noted, is now working on a Code of Conduct related specifically to the use of credit scoring in areas allowed by regulation.

When asked about his views on the use of credit scoring, Spencer says there is no such thing as a bad customer, just a bad price. To the extent that credit scoring can help price risks correctly, he said, direct writers using it have an advantage over insurers and independent brokers that don’t.

“If we look at the direct writers and we look at the banks that have used [credit scoring] already, the bottom line is that they’ve got their books of business and they are clean, scrubbed books of business that have already got good risks and the right price to them,” Spencer says. “Which puts them at a huge, structural advantage — a competitive advantage — because now, with everything they do from today, they’re starting with a totally clean book and they’re pricing from that… And if you’ve already got a very clean book, your loss ratios are very low. And so basically what [direct writers and banks] can do is say: ‘You know what? In the future, even if they close down my [use of] credit [for underwriting], given that I’ve got this nice book of business already, I have really tight underwriting rules and I only let really good business flow into this part of my model.'”

Credit scoring thus becomes a key weapon in an insurers’ — and brokers’ — arsenal to chip away at these clean books of business, Spencer said. “If I wanted in the future to get at any one of those customers, if I want to work with my brokers… to become competitive to try and win customers back, I have no vehicle if [Aviva’s broker partners] have taken credit away. In my mind, brokers are not allowing me to help them to try and win those customers back by offering them great prices on the best risks.

“So again, I am seeing totally through the eyes of the brokers. I’m saying:’How can I, using all of these progressive tools — being credit or other things — how can I use all of these things to allow you to be most competitive, Mr. Broker?’The irony is, I’ve got the brokers going:’Just close it down. We don’t want to use credit.’ And I’m saying:’Guys, you’re basically going to help the direct writers. This isn’t going to stop them; it’s going to help them. This is going to cement the fact that those guys have already got great, scrubbed books. That’s a big issue for me.”

Thus the “new partnership” involves a choice: Aviva will align itself with brokers agreeing to use underwriting tools and methods that allow Aviva to help the independent channel. In exchange, broker partners agreeing to help Aviva will receive full benefit of Aviva’s full endorsement of the inde pendent broker channel.

Spencer said the industry should not be afraid to consider the use of credit as means to help price insurance policies correctly. He said he found a great deal of irony in the use of credit scoring in other industries, where the risks involved represent only a fraction of the risks assumed by an insurer. And yet, the insurer may or may not be able to use credit scoring, depending on the lines of business and the regulatory jurisdiction.

“If you go and get a mobile phone, and you’re going to use credit, they automatically do a credit check to see whether you can have it and how much access to how much use per month you can have,” Spencer says. “Let’s say that’s a $50/month purchase…. And we’re fine with giving them our data, allowing them access to credit. It’s exactly the same whether your house is half a million or a million dollars, you still allow the mortgage company to get the credit details so that they can make sure you can pay, etc. etc.

“Where I struggle is that most people think about an insurance purchase as a $1,500 purchase. I think about it as a choice between a person who is potentially going to claim nothing, or potentially [make] a $10-million catastrophic claim. So the decision I am making is a $10-million decision every time we give somebody a long-term policy. Up to $10 million, I’d say, and I’m not allowed to use [credit]? That’s hundreds of times greater than a mobile phone decision. But the regulators don’t think to stop them (mobile phone companies from using credit). The risk is far greater for us.”

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We are firmly committed to the broker channel as, quite frankly, the dominant channel in which we are going to be investing all of our resources.

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The decision I am making is a $10-million decision every time we give somebody a long-term policy. And I’m not allowed to use credit?