Declarations of Independence

Defining the independence of members has proven to be problematic for several broker associations across Canada. Over the last two years, for example, Alberta’s broker association executive met with members frequently to assess where they stood on independence and how important it was to the broker distribution channel. This was no arcane exercise, as the very title of the association had contained the term “independent” for the past 10 years.

According to Insurance Brokers Association of Alberta (IBAA)’s CEO Harold Baker, brokers had more important things to do than argue about the value of a term that few could agree on, let alone define. “Our members…were extremely concerned about the effect a prescriptive definition of independence would have on representation at the provincial level when it comes to politics,” he says. “If you put in a narrow definition, there are going to be those on the outside looking in. Are they going to be more or less than the ones left? Our membership said they didn’t want to take that risk.”

The upshot was that the Alberta brokers association dropped the term independence from its association name this past spring, opting for a more “inclusive” approach to membership, according to Baker.

“The associations are caught in a dilemma,” observes Bob Tisdale, the president and chief operating officer of Pembridge Insurance Company. “Their strength is in numbers. Yet the number of independents — through consolidation and acquisition by insurers — has dwindled. Do they increase the costs to all the members, or look for alternative ways to address the issue of membership? I don’t think there is an easy way out.”

THE ROLE OF INSURERS

Insurance company representatives typically make it clear it is not their place to dictate to broker associations what they should do. Nevertheless, insurers are active participants with a very real stake in the debate.

“I think [Alberta brokers] have taken a practical approach,” says Derek Iles, president of ING Insurance Company. “They want to represent those intermediaries selling property and casualty products. They are not trying to define it (independence), because the issue becomes more and more complex. Are brokers trying to define it because they have an issue? Or should they really be saying: ‘What are the customers’ expectations?’ Then they can make sure they are being clear and transparent with the customers as to who they are dealing with.”

Bob Fitzgerald, executive vice president and chief operating officer of Aviva Canada, says broker associations across the country would be well served to make sure their ranks represent the core values of the independent broker. “We have gone on record that if brokers cannot demonstrate they are working in the customer’s best interest, we are not going to work with those offices because they clearly are not providing the value proposition we signed onto,” Fitzgerald says. “We think choice is a fundamental principle of that channel of business. And consumers have a right to know if that principle is being influenced by any number of factors, including financing, ownership and equity, consolidation and concentration.”

AFFINITY MEMBERSHIPS

Alberta’s approach represents one attitude towards independence. Other associations, such as Ontario and British Columbia, have created “associate” or “affinity” membership classes designed for brokerages with significant financial ownership or control by insurance companies or financial institutions.

The Insurance Brokers Association of Ontario [IBAO] in 2006 amended its bylaws to create an affinity tier of membership, which applies to brokers who have controlling interest by insurers of more than 50%. Affinity members cannot vote but currently have access to all other services of the IBAO, including the Broker Identity Program.

IBAO CEO Randy Carroll says access to the BIP will likely be removed for affinity members this year. Currently 10 main offices in the IBAO qualify as affinity members. “As we are looking at removing the usage of BIP from affinity members, you could actually have a brokerage on one side that is completely independent, waving the BIP flag, and another one across the street owned by a company that cannot,” Carroll says. Now, however, “there will be a definite ability for each of them to be separate and distinct.”

The Insurance Brokers Association of British Columbia [IBABC] has had bylaws in place for associate members for almost 10 years. “Typically, the main qualifier for not having full membership is financial institution ownership and control,” notes Chuck Byrne, CEO of IBABC. “They have access to all the benefits of the association, except voting and the BIP program.”

IBABC has 90 associate member locations, versus a total of 750 full membership locations. “We don’t use the term ‘independent’ in B.C. in our bylaws or our structure,” Byrne says. ” I think independent is a bit of a difficult one to narrow down and everyone has their definition of what it represents. What we are concentrating on is our qualifications for membership and our bylaws allow the board to determine that.”

Byrne notes the issue is not always cut-and-dried. “If the brokerage operations can be proven to be acting independent of that ownership, with their own set management policies, and is reflective of supporting other markets, then the board can consider granting full membership.”

MEASURABLE STANDARDS

Many associations have sidestepped the issue of ownership by looking at other “measurable standards” of independence. In Alberta, Baker says the association will look at issues such as freedom to choose markets, setting of operational business standards, control of day-to-day business activities and the ability to satisfy customer needs if an insurer does not have the products he or she needs.

Some insurance companies agree with the measurable standards approach. “From our perspective, it’s less about broker ownership structure,” says Rowan Saunders, president and CEO of Royal & SunAlliance Canada. “It’s about making sure the brokerage operates independently, with complete disclosure and in the best interests of their customers.”

Other insurance companies take a different stand. “When I see brokers owned 100% by companies belonging to an association, I find it troubling: I don’t think their mandate in the marketplace is the same as others in the association.”

DIFFERENT DIRECTIONS

In the debate between principles of independence and the realpolitik of today’s business environment, even broker associations don’t agree on which direction to take. Ontario and Alberta, two provinces in which insurance company ownership of brokerages is most pronounced, seem to be moving in different directions.

In Alberta, Baker notes, the IBAA concluded: “Why should we be fighting to define a term that has no practical value?” Baker says the association instead agreed to tackle more substantial issues such as auto reform, banks and insurance and how to keep a free market system of insurance alive and well in Alberta.

In Ontario, on the other hand, the IBAO is gearing up for a regulatory push on broker ownership. “We are in a situation where the broker is serving two masters,” says Carroll. “You are supposed to be serving the consuming public on behalf of your brokerage firm, and you can’t do that if you are owned by an insurance company. It just doesn’t work.”

Carroll says the IBAO’s approach now is “to go to regulators and say: ‘Look, we have an issue with the way the distribution channel is working in Ontario, as it relates to insurance company ownership of brokerages and the conflict of interest that causes on behalf of the consumer.’ Those discussions will happen very soon.”

But any push for more regulations could be a risky exercise, according to Iles. “One of the dangers with this approach is that if you try to leave it to regulators to define it, you can’t be sure you will li ke what you get,” he says. “This is particularly true when it comes to areas like having a fixed number of markets, when markets are not so easy to get, or if they (brokers) are to have no loans, for example, or no special relationships with one company.”

Tisdale notes a prime illustration of this, saying the issue really boils down to whether the industry will be able to come up with a definition of independence voluntarily, or whether it will be forced into defining independence. “When I look what has happened in Quebec with the Autorit des marchs financiers (AMF), the industry was forced into it,” Tisdale says. “If you are owned more than20% by a company, you are an agent. That was the definition created by the AMF and it forced a number of operations in Quebec to change their share structure. Whether that will happen elsewhere I don’t know.”

A lot of different roads can take brokers to the same destination, Fitzgerald notes. “I honestly think the leadership of the broker associations, be it this year or next, will have to come to the view that what is best for consumers is…the core values of the independent broker.”