Distribution Trends: The Convergence Theory

The passage of Bill C-8 was warmly greeted by Canadian life and general insurance industries alike. Already proclaimed and expected to come into force later this year as regulations are promulgated, the new legislation overhauls the nation’s financial services regulatory framework, allowing greater flexibility and enabling institutions to enter each other’s businesses. With new merger guidelines and cross ownership rules, financial services companies of all stripes will now be able to diversify product lines either through acquisition, partnerships or holding companies.

In their submission to the senate’s banking, trade and commerce committee, the Insurance Brokers Association of Canada (IBAC) indicated that they believed the country’s new financial institutions legislation “should be most praised for what it does not do , which is to change the rules governing bank sales of insurance at the retail level”. Banks may be able to operate insurance companies, but tellers will not be making the pitch.

Retail banking

Bankers were, understandably, not quite so enthusiastic in their welcome to the new legislation. Although the Canadian Bankers Association (CBA) applauded the measures as an important step that will strengthen the financial sector’s ability to compete effectively, the group went on to suggest Canadians “should be disappointed that Canada is still the only major country in which consumers are forbidden to buy insurance [directly] … through federal deposit taking institutions”. Unhappy with a perceived “imbalance, asymmetry and inconsistency” in Bill C-8, the CBA published a 28-page submission in March, pointing out that insurers, for example, may provide savings and checking account services to their customers, but only the banks are required to offer low-fee accounts.

Although the government indicated in a press release that it is prepared to revisit this and other aspects of the legislation on an “as need to” basis in order to keep “pace with the rapidly changing marketplace”, the Bill itself includes an automatic five-year review mechanism. It seems relatively safe to assume that insurance advisors will have at least 60 months of clear sailing, after which they may have to face another regulatory battle and perhaps even the prospect of seeing insurance sold in a retail branch-banking environment. What, then, should they be doing to prepare themselves? Some industry experts think that insurance brokers and other financial intermediaries who want to prosper in a deregulated environment should try to beat the banks at their own game.

“White label”

A market research study conducted last year by BankWorks Trading Inc., a consulting firm headed by former CBA President Helen Sinclair, concluded that there is an “unprecedented opportunity” for non-bank financial institutions to enter the banking sphere. “Investors think the security of Canadian banks is in the stratosphere”, Sinclair comments, “but they are still quite prepared to deal with non-banks as long as the price is right and there is investor protection equivalent to the deposit insurance offered to bank depositors”. The Bankworks study went on to suggest there is also an increasing readiness on the part of banks to “white label” their products and technology for non-banks. This has been done with some success by CIBC, which offers its products and services for Loblaws under the banner President’s Choice Financial.

In order to determine how or if a “white label” operation might work for their constituents, IBAC has apparently hired BankWorks to prepare a viability study. While Rupert Hamilton, Managing Director at BankWorks, refused to comment on the initiative on the grounds that they “have a policy of not discussing our clients or potential clients and their business” and “will not confirm that we are doing, or have done, a project for a specific client”, IBAC president Kevin Umlah did tell attendees of a recent conference that his organization was investigating opportunities to diversify into ancillary financial services product lines. He hastened to add, however, that “no commitment has been made”.

BankWorks is not the only firm attempting to help Canadian p&c brokers find their way into the banking business. The Canadian Association of Mutual Insurance Companies (CAMIC) signed a deal with Laurentian’s subsidiary B2B Trust in the final weeks of 2000. An Internet based wholesaler, B2B manufactures generic financial products and services for independent financial advisors. CAMIC President Normand Lafrenire says that the agreement “will allow participating mutual insurance companies to offer a series of banking products under the mutual concept without having to make massive investments in banking infrastructure”. CAMIC members will be able to offer credit cards, chequing and savings accounts as well as mortgages and farm loans under a personalized brand of the mutual insurance companies network.

Not wealth management

Unlike their counterparts in the life insurance business, p&c brokers have historically been the most reluctant to diversify and dabble in other fields. As the Standing Senate Committee on Banking, Trade and Commerce concluded in its own “blueprint for change report”, the p&c industry “is distinct from other financial services not simply in a marginal way, but at the very core of its operations”, as general insurance is “essentially a pure risk protection product that has none of the investment or wealth management characteristics of life insurance”.

The Insurance Bureau of Canada (IBC) concurs with this view, stating in its May submission to C-8 that “from a public policy perspective there are no benefits to be gained by trying to combine p&c insurance with other financial services” and that systemic risk might actually increase if other financial institutions started to “cherry-pick the market, and cause an unbalanced distribution of risk in the industry”.

New money, old business

Others, however, suggest that a broadening of scope is exactly what the p&c business needs, and that general insurance brokers are in an excellent position to profit from the strength of their existing client base. Warren May, senior vice president of agency sales at Travelers Life & Annuity Co. suggests that many producers are sitting on a “gold mine” of potential new business. Already possessing some insight into the client’s needs and position in life, he suggests that brokers should capitalize on existing relationships and “stop leaving client dollars on the table for someone else to harvest”.

May recommends that p&c brokers interested in getting into the broader financial services marketplace should begin with life insurance products, in particular long-term care. Although relatively new to Canada, the product has shown tremendous growth potential in both the States and in the U.K. “Long-term care is the most dramatic door opener to hit the financial services scene since money market mutual funds were invented back in the early 1970s”, says May, who believes that anyone wealthy and over the age of 50 is a prospect, as they are likely to be concerned by how health care costs in later life could erode personal savings.

In many cases, a general insurance broker may become aware of a potential sales opportunity before any other financial intermediary. This is especially true of the home buying experience, which was identified in an A.M. Best research piece last year as “a sleeping giant that a few insurers are attempting to awaken.” The article identified several successful mortgage/property casualty cross-selling initiatives, in particular the “Pru Home” program. Until it was sold to Norwest Mortgage in 1996, Pru’s system was the single most effective of its kind in the U.S. Not only did Pru achieve a 46% homeowners insurance penetration rate, but the lead penetration rate for agents following up with an auto insurance offer was more than 25%. Other non-life insurers are looking for similar successes – a study conducted by PriceWaterhouse Coopers revealed that more than half of those surveyed wanted to start offering other financial products and services.

One-stop skeptics

If cross-selling can be so lucrative for general insurance brokers, one wonders why everyone is not doing it. The media has certainly been critical of company initiatives, with both Business Week and The Economist having pooh-poohed the idea of property casualty “synergies” in the past. The latter went so far as to dismiss the idea as linguistic commotion centered on the word insurance, pointing out that “even computer systems do not dovetail: life insurers require software loaded with investment-tracking features, similar to that used by mutual-fund managers, while p&c insurers need systems that help evaluate customers’ losses.”

The financial services industry itself is skeptical of the viability of cross-selling, and the true potential of financial supermarkets. Findings released by the Life Insurance Marketing and Research Association (LIMRA) show that consumers are not quite as keen on one-stop shopping as they may have appeared to be. The LIMRA research indicated only 35% of those surveyed like the idea of a single financial institution handling all of their needs, while 8% were not sure and the remaining 55% were against the idea.

Rather than perceiving this as a “seal of doom for financial integration”, LIMRA recommends that companies interpret the survey results as a “marketing challenge” and ask themselves how they can “make the advantages to the customer real”. Consumers may not want to deal with one institution, but they may be receptive to dealing with one advisor who can offer a variety of products. The real appeal of financial integration, says LIMRA, is the ability to combine information about the customer’s various financial products and services with demographic information “to develop customized offerings that uniquely respond to the customer’s situation”.

Learning curves

Douglas Grant, principal of the www.insurance-canada.ca Web site, believes that education is one of the biggest hurdles to overcome in the pursuit of integration. The insurance advisor may be in a favorable position, and theoretically able to offer a wide variety of product choices, but in practice he/she may lack the technical expertise to do so profitably .”If a broker represents both more markets and more lines of financial services business,” says Grant, “the challenge will be to represent those knowledgeably to the consumer”. This is where partnerships and strategic alliances can play a central role.

Rather than trying to master all aspects of the financial services marketplace themselves, brokers may opt to either hire or partner with someone more experienced so that they can focus on writing main lines of business. Dennis Pike, Jr. a consultant for MONY Life Insurance Company’s P/C Life Development Program, recommends that p&c brokers should find someone to work with them full-time. Rather than using an outside resource, Pike recommends finding and hiring a producer with between three and eight years of experience, “for whom prospecting has been somewhat of a hindrance”. He points out that such professionals “know the ropes”, but are still fresh enough to be integrated into the general insurance agency culture. Even if an established financial services firm is prepared to consider a relationship with a p&c operation, Pike warns that “they will be looking for a very loose alliance which will serve their own goals and objectives, not yours or your agency’s”.

Recent top-down company initiatives have helped to create instant partnerships for some brokers. Zurich and Allstate have teamed up with Manulife and Clarica respectively to enhance bottom-lines for both parties. The Zurich-Manu deal is strictly referral based, rather than actually selling the individual products, which would require new licensing and training measures. Zurich President and CEO Barry Gilway explains that business will be handed off to the appropriate party, and the two parties will share commissions according to a specific formula. “If a broker participates with us on this, we can show him graphically how he can increase his bottom-line on the [customer] portfolio by 50%-plus,” says Gilway. The Clarica-Allstate deal is similarly structured, with agents receiving a referral fee for any new business generated.

Strategic alliances and partnerships between banks, life insurers, trust companies and general insurers are relatively new concepts, and it will be some time before the results of these endeavors can be properly evaluated. It remains to be seen to what extent p&c brokers are prepared to venture into the broader financial services marketplace. There may be some reluctance to move into these uncharted waters, but as PriceWaterhouse Coopers points out in their analysis of current trends, there will almost inevitably be “greater pressure on brokers to reinvent their role”.