Changing Face of the Broker

Insurance consumers are changing. Thanks to the expansion of electronic and mobile communications, they know more about insurance and expect to buy their insurance products immediately. Historically, brokers have represented the proverbial “middlemen” — the intermediaries — between insurance companies and consumers, providing advice to the consumer about the suitability of insurance products. But as consumers become more savvy about the product, and as technology allows them to access insurance providers directly, brokers are under pressure to change their traditional business model to conform to the expectations of consumers.

Brokers are not the only ones in the industry facing these changing consumer dynamics. Insurance companies, regulators and financial institutions eager to enter the insurance business are re-examining — if not re-inventing — how insurance is sold in Canada. Insurers are consolidating to amass market share. In addition, they are offering new means of communication by which to transact business with their brokers and consumers. Likewise, direct writers, competing for market share with brokers, have expanded their online offerings, using technological innovation to encourage direct contact between insurers and consumers. Regulators, in the meantime, are looking at ways to accommodate these online marketplace trends while at the same time making sure consumers are protected.

As Canada’s property and casualty insurance industry transforms, so, too, will the business model of Canadian brokers. As the following survey of broker associations across Canada illustrates, brokers are changing the way they do business. And while some may be quick to proclaim “it’s the end of the world as we know it,” many brokers clearly feel fine about how it will all turn out.

National Perspective

Celebrating the final passage of the Bank Act, consolidation between brokerages and financial institutions are on the radar screen right now for the Insurance Brokers Association of Canada (IBAC).

IBAC is a national organization bringing together 11 regional and provincial associations of property and casualty insurance brokers from across Canada. One of its main initiatives over the past two years has been to represent the interests of brokers during the federal government’s mandatory five-year review of the Bank Act. This resulted in the Canadian finance minister calling for Bank Act regulations prohibiting banks from selling insurance products on their Web sites.

The Bank Act already prohibits banks from selling insurance in their physical branches. Responding to concerns raised by IBAC, the finance minister indicated banks ought not to be able to do on their Web sites what they cannot do in their branches.

The new Bank Act regulations passed just before press time.

Now brokers appear to have set their sites on the effects of consolidation. Specifically, brokers have always argued that financial institutions such as banks or credit unions should not be able to sell insurance at the point of granting credit. For this reason, they are mindful of the recent acquisition of Western Financial Group by Desjardins Financial Group.

Desjardins made a $443-million, all-cash offer in January 2011 to buy Western Financial Group, the largest insurance and financial services retailer in Western Canada. Western Financial has 121 offices in British Columbia, Alberta, Saskatchewan and Manitoba, and its business units include The Network, the largest property and casualty brokerage in Western Canada.

Having observed Desjardins expanding its operations into multiple provinces in Canada, IBAC believes the organization should be subject to the federal, as opposed to the provincial, licensing regime.

“Federally, you have a regime underlining that, on the issue of distribution, there should be a separation between credit granting and insurance,” Masnyk says. “On paper, Desjardins is registered provincially in all of the provinces in which they operate. So this is a bit of an anomaly. However, it comes back to the constitutional principle: If you are a federal undertaking, which means if you operate under more than one province, generally speaking, constitutionally you would fall under federal jurisdiction. That would be our position.”

British Columbia

B.C. brokers are looking forward to ushering in a new era of the province’s Insurance Act on July 1, when new regulations are due to take effect.

The province’s brokers have been working on the file since 2004, shortly after the Supreme Court of Canada found B. C.’s Insurance Act was “outmoded” and in need of a re-write. The legislation had been shelved in 2009, and then reintroduced in December 2011.

Among other things, the new act eliminates the difference between fire and multi-peril policies (the subject of the Supreme Court case in 2003). It also: mandates coverage for all fire losses except those to be excluded by regulation; clarifies the definition of a “vacancy;” standardizes the maximum limit for issuing lawsuits against insurers to two years; introduces mandatory alternative dispute resolution; and includes protections for “innocent co-insured” against intentional, criminal acts committed by people with whom they share a policy.

“We were particularly pleased with the way the B.C. legislature handled this whole process,” Insurance Brokers Association of B.C. president Maurice Poulin said of the Insurance Act review. “Both sides of the House, the opposition and the governing party, took a very strong position that this is good for the consumer. One of the highlights of this process for us was that it was done in such a constructive, bipartisan manner.”

Poulin also noted the province’s brokers are now working diligently on the earthquake insurance file. Public take-up of earthquake insurance in B.C. is between 40% to 50%, and brokerages are looking for ways to increase these rates.

Adding a wrinkle to this file, the catastrophe models measuring the potential damage of a quake have changed, causing some insurers to increase their earthquake insurance rates. “With the shift in the modeling in B.C., the companies have had to adjust rates and it has now become part of a conversation brokers have with their clients, Poulin noted. For some areas north of the mainland, the impact of earthquake model changes on personal property rates hasn’t been quite as pronounced, Poulin observed, but “we’ve noticed it here on the commercial side.”

Alberta

Alberta brokers are working with the province’s regulator to help re-define the licensing requirements for Level 1 brokers in the province.

Brokers have four licensing categories, each bearing different levels of responsibility. New applicants for a broker license would start with a Level 1 General Insurance Agent certificate and require supervision.

Under the province’s current licensing requirements, an applicant must qualify for a Level 2 general insurance agent certificate by passing an exam within 36 months of receiving his or her Level 1 certificate. Failing to advance to Level 2 within 36 months results in the cancellation of the Level 1 certificate and a six-month waiting period before an applicant can re-take the General level 2 test.

“Part of the problem is that people just aren’t good at taking exams,” observes Dean Bailey, president of the Insurance Brokers Association of Alberta. “And so the requirement within 36 months to move up to a Level 2 was causing people to leave the industry.”

Addressing this concern, the province’s broker regulator, the Alberta Insurance Council, is proposing to do away with the 36-month requirement to progress to a Level 2, so long as Level 1 brokers are properly supervised .

“There are some people that are happy at a Level 1, and are quite happy to stay there for their career,” Bailey observes. “This would facilitate them being able to do that.”

However, the trick is in having a common understanding with the supervisor about what constitutes adequate “supervision.” Noting a similar issue in New Brunswick [please see Page 36], Bailey said Alberta’s brokers are looking for a definition that is “definitive without being restrictive,” more like a guideline than a statutory or regulatory definition.

“There’s a wording group put together from the superintendent’s office, the Alberta Insurance Council, ourselves and CADRI, which is the direct writers’ association,” Bailey says. “The working group is reviewing the proposal and then can hopefully put forward a recommendation. With any luck, it will be done by the end of the year.”

Saskatchewan

Technology and brokerage ownership are leading the way in discussions among brokers in Saskatchewan.

Regarding technology, the Insurance Brokers Association of Saskatchewan (IBAS) is discussing with the province’s public auto insurer, Saskatchewan General Insurance (SGI), what the auto insurance landscape will look like following SGI’s extension of online service to the government’s Auto Pak product.

Currently, Saskatchewan’s consumers can purchase mandatory basic auto insurance online, coverage that includes a $700 deductible and a $200,000 liability. SGI is now extending its online service to Auto Pak products as well. Auto Pak offers consumers the option to change their auto insurance deductible levels and their liability coverage online.

The public in Saskatchewan still must buy mandatory auto insurance through a broker, but the extension of SGI’s online services has brokers re-assessing their role in the online insurance-buying process. SGI agreed to take responsibility for errors and omissions claims made against brokers for one year after the introduction of its online services. But will the brokers’ commission levels have to change? And who owns the client in the online purchase of mandatory auto insurance?

Saskatchewan insurance brokers are also in the throes of re-considering their identity in light of the acquisition of the Western Financial by Desjardins in early 2011. Desjardins is predominantly known as a credit union originating out of Quebec..

Currently, Western Financial is a full member of the Insurance Brokers Association of Saskatchewan (IBAS). IBAS also has an affiliate membership category for brokerages owned by financial institutions such as credit unions or banks. Unlike full members, affiliate members cannot attend or vote at the broker association’s annual general meeting, nor can they use ‘the BIP,’ a brand name identifying independent brokerages throughout the country. IBAS has struck a committee to re-examine its affiliate membership in light of Desjardins’ ownership of Western Financial.

“You look at the landscape of insurance, and the purchases that are happening and the ownership changes, and it’s getting to the point where we have to look into the future five years from now and see what our membership is going to look like,” says IBAS president Barry Seaborn. “And maybe we have to adjust our affiliate membership and see where they fit.”

Manitoba

Manitoba brokers are working to iron out some of the creases that have emerged in the broker compensation model established in agreement with Manitoba Public Insurance (MPI), the province’s public auto insurer.

The compensation model was established in 2008 as a result of MPI’s desire to offer Manitoba drivers a multi-year auto insurance renewal plan.

The multi-year renewal program means Manitoba drivers are required to visit their auto insurance Autopac broker only once every five years, unless they want to make a change to their policy. In their renewal year, customers have to attend their Autopac insurance broker to renew their driver’s licence, insurance policies and identification cards.

Customers still pay for their licence and insurance annually. In between renewal years, customers continue to be insured through additional payment options such as online payments.

“The 2008 accord [establishing the broker compensation model] was essentially premised upon two main criteria or foundations,” says David Schioler, executive director of the Insurance Brokers Association of Manitoba (IBAM). “They were: premiums would go up over time. And secondly, because of the five-year renewal, it would be anticipated that there would be some reduction of labour in brokers’ offices. Those two things haven’t happened so far.”

For one thing, MPI most recently asked for an auto insurance rate decrease of 6.8% and the province’s Public Utilities Board in fact ordered an 8% reduction. That effectively reduced the premium available for the broker’s commission-based compensation.

In addition, the province’s auto insurance product is no less complicated than it was before, meaning brokers are still putting in the same amount, if not more, work with clients.

“MPI has recognized that these are issues that have to be fixed,” Schioler says. “And there are fixes on the table. For example, we agreed with MPI to freeze the commission rate at 4% on the basic auto. It was to drop down to 3% and ultimately to 2.5% and stay there. But we put a freeze in effect until the end of June while we try to resolve what it should end up being.”

Schioler adds brokers are confident they will arrive at a mutual agreement with MPI on the issue of compensation. One matter for discussion is introducing some flexibility into the model, so that the compensation agreement doesn’t have to be renegotiated every time there is a change of circumstances.

Ontario

Embracing new technology and adapting to changing consumer expectations are key areas of broker activity in Ontario.

The province’s brokers are applauding the recent introduction of an XML standard for Electronic Document Transfer (E-Docs) by the Centre for Studies in Insurance Operations (CSIO). The development of E-Docs means brokers can see electronic copies of insurance policies automatically attached to their files. This is opposed to the current practice, in which brokers have to pull copies of polices from individual insurance company portals into their broker management systems (BMS).

“On the technology side, it just seems like since October, when we got E-Docs, somebody’s lit a fire under everybody on technology, and that’s a good thing,” says Randy Carroll, CEO of the Insurance Brokers Association of Ontario. “E-Docs is huge. The broker workflow will actually be able to get itself back to where it was relating to the management of that [policy] document. I’m pleased that CSIO has released an XML standard that will allow the companies to build to the standard, to cut the expense [of paper policies], but not to the detriment of increasing the workflow cost to the broker.”

The IBAO is also submitting a paper on the topic of online insurance sales as part of a public consultation process initiated by the Canadian Council of Insurance Regulators (CCIR). “Insurance is still a complex product, and you still need to have the advice of a professional at the point of sale,” Carroll says. “So anything we put forward will fully support and hopefully get the support of the regulators to make sure that is part and parcel of any online activity. We don’t want to venture off into a world where advice has been overlooked.”

This paper is timely, Carroll says, because consumers’ buying habits are changing, and brokers need to adapt to a new way of doing business. “This is our next biggest challenge,” he says. “You’ve got consumers who want to deal with almost everything that they buy the way they want, when they want and how they want. We really need to take a look at reaching out to new consumers, and allowing consumers to reach out to us differently than we have in the past, embracing technology and social networking to the advantage of both [brokers and consumers].”

Quebec

Consolidation in Canada’s property and casualty industry last year particularly affected brokers in Quebec, significantly shrinking the pool of insurance carriers available to brokers and consumers. “Things have changed a lot over the past year, especially in Quebec, considering the buyout of AXA Canada by Intact Insurance,” says Catherine Mainguy, chairwoman of the Regroupement des cabinets de courtage d’assurance du Québec (RCCAQ). “That’s an issue we are going to keep an eye on because it affects brokers here in this province more than it does in the other provinces. For the broker industry in Quebec, 50% of our market in personal lines and just a little bit below 50% in commercial lines, is now business transacted with Intact, which is really a lot.”

Mainguy points out that AXA Canada and Intact Insurance were the two biggest insurance markets in Quebec before Intact bought AXA for $2.6 billion in 2011. With the two companies now merging, brokers in some parts of Quebec have very few markets left to offer to their clients. “There are certain areas of the province where there is actually no competition left,” Mainguy says. “If you think about Gaspésie and in the area of our province north of Montreal, in the Laurentians, it is all Intact now. Brokers in those areas are going to have to come up with some kind of solution.”

Like its sister association in Ontario, RCCAQ is submitting a paper to the CCIR on the topic of online insurance sales. “We want to keep somewhere in this distribution [of insurance products] over the Internet the notion of giving advice about insurance,” Mainguy says. “It’s great to buy insurance online, but at what point do we give advice? If you want to protect the consumer, which is the raison d’etre of a regulator, you protect the consumer best by permitting him or her to get advice.”

New Brunswick

The Insurance Brokers Association of New Brunswick (IBANB) says it is “floored” by how the province’s current superintendent of insurance is interpreting regulations related to the licensing and supervision of Level 1 brokers in the province.

“There are two particular areas that are of great concern to us, and these seem to be the two areas on which the current office of the superintendent is focusing,” says Terry Gaudet, president of IBANB.

“One is the supervision, which in the act is not clearly defined. It says that if you are an owner or a manager of a brokerage, you must supervise.

“In today’s world, I think you would agree that, with a BlackBerry or laptop, you could pretty much supervise anyone from anywhere with the proper measures in place. But the current office of the superintendent says the supervision needs to be physical.

“In other words, owners or managers must be physically present in the offices they are supervising. So if you have multiple locations, if you are an owner of three offices, let’s say, they are expecting you to be in all three at the same time or have staff who are properly certified to do so.”

Second, Gaudet says, there is a discrepancy between what brokers and the superintendent think Level 1 brokers should be allowed to do.

“A Class 1 broker, as far as we are concerned, since 1995, has been able to sell and service personal lines insurance, be it for home or auto, travel, trailers, motorcycles and snowmobiles. These are personal lines insurance policies, and it says in the act that a [Level 1 broker] can do that.

“And yet the superintendent is saying, ‘No, the act may say that, but because it says something different somewhere else in the act, it negates that.’ It means that if you have a Class 1 broker in your office, they technically cannot sell personal lines of insurance.”

Brokers are resolved to continue negotiating with the superintendent on this issue, but it hasn’t been easy. “Brokers have gained a lot of respect in New Brunswick and in Canada, and we’ve worked so hard to get what we have, and to have one office single-handedly change that relationship, it just floors us,” Gaudet says.

Nova Scotia

The provincial brokers’ association will be front and centre in making sure their clients know about the province’s recent changes to the auto insurance product.

But the messages to be communicated were still up in the air as of press deadline in late March. The government was cutting it close: Apr. 1 was the scheduled implementation date for the first phase of the reforms.

Nova Scotia unveiled its proposed auto insurance reforms in November 2011. The reforms are to be implemented in two phases over the next two years. Key aspects of the reforms include enhanced no-fault, mandatory med-rehab limits of up to $50,000; a new minor injury treatment protocol based on Alberta’s current model; and an optional tort product for minor injuries.

The first phase of the reforms, to be implemented this April, include the enhanced benefits; a prohibition on insurers increasing premiums when drivers report collisions that do not result in a claim (even if the driver was at fault); and a new levy that insurers will pay to help volunteer fire departments cover the cost of responding to auto collisions.

The second phase of the reforms will be effective Apr. 1, 2013. These include a direct compensation framework allowing insured drivers to be compensated by their own insurer for property damage resulting from an automobile collision with a different party (based on the New Brunswick model); limited liability for rental companies; the new minor injury treatment protocol; and an optional tort product. The province’s brokers have been in touch with Nova Scotia Premier Graham Steele’s office regarding the content of the reforms and what clients should know. As per their understanding with the government, brokers were waiting for the province to develop communications tools to help brokers explain the reforms to clients. But as of press time in late March, the Insurance Brokers Association of Nova Scotia (IBANS) was still awaiting word from the province about the communications strategy, reports IBANS executive director Karen Slaunwhite.

All the same, Slaunwhite noted the general environment around the Nova Scotia auto reforms has been good. “Thank heavens it’s not 2003-04,” said Slaunwhite, referring to a time of escalating insurance rates and public dissatisfaction that precipitated a revamp of the province’s auto product at that time.

Newfoundland

The Insurance Brokers Association of Newfoundland (IBAN) is proposing to draw a line in the sand when it comes to credit-union ownership of independent brokerages.

“In our association, we’ve got a [proposed] bylaw amendment going to our members that says essentially no bank or credit union-owned organization can become a member,” says Basil Crosbie, president of IBAN. “The bylaw is to make sure that if it happens here in Newfoundland, because consolidation is a fact of life, there’s no ambiguity.”

Crosbie said the bylaw amendment was prompted by Desjardins’ purchase of Western Financial in 2011. He says Desjardins is not a factor in the local insurance market; however, the acquisition did cause brokers in the province to think about the broader ques tion of independent brokerage ownership.

Currently, the association has “associate” memberships for insurance industry partners such as managing general agents (MGAs), but this category is not intended for non-insurance owners. “Right now, we recognize that [bank or credit union ownership of a broker] could happen in the future. Rather than wait for that to happen, we are taking the proactive step of creating the proper bylaws to avoid the possibility of having a bank-owned or credit-union owned broker member,” Crosbie says. “We don’t want that.”

Crosbie says ownership of a brokerage by a financial institution runs counter to the notion that banks and credit unions ought not to be able to influence an insurance sale at the point of credit.