Insurance Distribution – The Battle Rages On

Two legislative issues currently stand to the fore in the ongoing “lobbying battle” which has been waged for several years by non-insurance financial institutions in their attempt to gain entry into the distribution of property and casualty insurance products. The first of these is the recent change in regulation in Saskatchewan, and secondly, the federal bank merger discussions.

But, to understand the significance of what entry by other financial institutions into insurance distribution might mean, one over-riding question has to be answered. This is, who are we? All of us in business have listened to countless experts whose major message was: “First know who you are. Then, know what you do. And finally, make sure you do it well.” The basic premise is that the best business strategy is one that focuses on core competencies. The theory is that the desire for your product or service will be driven by the excellence of your delivery.

As p&c insurance brokers, we are very clearly aware of who we are. We are the people who sell 80% of general insurance in Canada. We are also the insurance consumers’ advocate. By law, our first agency responsibility is to the clients we represent. We work to ensure that there are affordable, understandable insurance options available to the folks who need them. We bring our established relationships with insurers, our collective insurance buying power and our expertise to the table. We are in the business of “risk management”.

PROFESSIONAL ROLE

During the tremendous capital market fluctuations of the last number of years, insurance brokers have been the shock absorbers. We have tried to explain the economics of our business while solving the insurance consumers’ need for affordable insurance protection. Brokers have also worked hard to assist provincial regulators and legislators to find sustainable solutions. Overall, brokers have tried to maintain operational flexibility while observing the high ethical standards of the profession.

Could we as a profession do better? You bet. There is always room for improvement. Technologic innovations like the Centre for Study of Insurance Operations’ (CSIO) Internet portal, and ongoing professional development, will make us better.

SASKATCHEWAN FACTOR

What will not improve the lot of the Canadian insurance consumer is the insertion of other financial institutions into our business. In Saskatchewan, credit unions have been allowed to purchase insurance brokerages. This alteration in the conduct of business appears to be a solution without a problem.

Was there an inability for existing brokers to sell their businesses? No. Were there communities that were not served by insurance brokerages? No. Had there been wide spread consumer complaints about service? No. Will there be a substantial number of new jobs created? No. Will there be any increased economic activity? No.

This regulative change by the provincial government has not increased the amount of choice in insurance for the consumer, nor has it broadened the opportunity for them to understand what they are purchasing. And, it has not made for greater availability of insurance nor an increase in basic coverage affordability. In summary, there has been no consumer or public benefit by the government’s move.

FEDERAL FRONT

The potential intrusions into a profession that has been operating well are not limited to provincial jurisdictions. The act governing Canadian banks will be revisited in 2006.

The current act, which essentially provides the direction for how banks in Canada will work, must be either renewed or replaced with a new law or a revision thereof.

Discussions will soon begin about how to best serve the financial interests of Canadians. The potential ramifications of this process are significant for brokers, as well as consumers. In this respect, it is interesting to examine the impact of the various revisions of the banking legislation since 1992.

Prior to 1992, the soundness of the Canadian economy, and the four “economic pillars” that supported it, were a source of national pride. The top five chartered Canadian banks controlled a very profitable sector. They were among the largest banks in the world by virtue of their domestic market domination. The trust companies also flourished. There were both large and small organizations. Independent Canadian stock brokerages and insurance companies functioned as the other two pillars.

Much has changed since then. This past year I had a sobering discussion with a member of parliament, who is considered to be highly knowledgeable about financial institutions. The topic of the four pillars of the Canadian economy came up. I was somewhat shocked when he asked me to remind him what those four pillars used to be.

In the last few years the banks have virtually swallowed the trust company and stock brokerage sectors. Once they were allowed into these sectors, they did not bring competition, they brought control and heavy market dominance. Subsequently, there has been discussion of further cross pillar mergers. The result would inevitably further financial concentration under the banks. As professionals, independent brokers are therefore concerned that this next set of legislative revisions will serve to further weaken the level of real competition in the financial service sectors.

PUBLIC MISCONCEPTION

There appears to be some confusion by regulators and legislators that the insurance industry is the same as the financial service operators engaged in wealth management. Clearly insurance brokers are not.

Wealth management is about gain, it is about increasing wealth normally over a longer-term investment strategy. Risk management is about trying to sustain what you have when calamity strikes, and as such, the risk solutions tend to be for a fixed or short-term.

As professionals serving the public, independent brokers operate by the credo that the insurance buyer’s best interest has to be served. This means understanding the client, and that person’s needs, and ensuring that the product being purchased is fully understood. There should be no opportunity for pressure or coercion either intentional and overt, or subtle and implied. Other financial institutions with other agendas could disrupt the integrity of this well run, unbiased professional process of insurance distribution in Canada.