Butting Heads for Business

It has taken a few years to shape up, but the lines are now clearly drawn and the battle for market share is beginning in earnest. On one side is the independent brokerage system; on the other is direct writers in various forms. The outcome of the market share battle could significantly and permanently change the landscape of Canada’s insurance distribution.

Current market conditions help set the stage for this intense competition for customers. As a result of government rate regulation, auto insurance rates have fallen in several provinces. This drop is most notable in the key Ontario market, where average premiums have dropped almost 14%. To grow revenue, both insurers and brokers must increase their policies-in-force. This is true for both insurers and brokers. In other words, take customers from your competitors.

On the commercial side of the business, revenue growth is challenging because price competition for business often results in inexplicable outcomes. As with personal lines, commercial lines competitors are focussed on increasing their customer base in order to grow their revenue. Yes, competition is alive and well in the property and casualty industry.

MULTI-CHANNEL PLANS

We have seen these periods before as the insurance cycle goes through its motions. Something different is happening this time, however, and the stakes are high for all the players involved.

During the last 10 years or so, we have seen more than 45 insurers disappear from the marketplace. Notwithstanding this significant reduction in competitors, clear market share leaders – companies with 20% or more in market share – have not yet emerged. Unlike the banking and life insurance sectors, the property and casualty industry remains very fragmented – and consumers benefit from this.

What is different today is that at least two major foreign insurers, ING and Aviva, have set their sights on becoming true market share leaders. Though acquisitions will likely be in their plans, targeted companies available and willing to sell at reasonable prices are becoming scarce.

Historically, these competitors distributed their products almost exclusively through independent brokers; in recent years, however, they adopted a new ‘multi-channel’ market strategy and have re-positioned their operations to execute this strategy. They are ready and are moving quickly into implementation mode.

BANKS AND INSURANCE

What about the banks? Of the five major banks – Royal Bank of Canada (RBC), Toronto Dominion (TD), Canadian Imperial Bank of Commerce (CIBC), Bank of Montreal (BMO) and Bank of Nova Scotia (BNS) – only two have property and casualty insurance subsidiaries. CIBC, BMO and BNS show no ambition to enter this segment of financial services. RBC has a grown a significant life insurance business both in Canada and the United States, but it is a relatively small player in the Canadian property and casualty insurance industry. TD has successfully added to their operations Meloche Monnex – a large group direct writer with a solid business model that generates consistently attractive returns.

At this point, changes to the Bank Act that would allow the in-branch sale of property and casualty insurance products seem unlikely. The new government prior to the recent federal election indicated in their policy commitments that such a change would not occur. We’ll see.

It is likely TD will continue to build their property and casualty operation: their business model consistently delivers superior returns. RBC General Insurance is more likely to parallel the industry results, which are up and down. Over the long term, the company has averaged well below the 15% to 20% they achieve in their other businesses. The question is: Will RBC stay in property and casualty if changes to the Bank Act are not in their favour and returns drop below 15%? Even if rates of return fall, they may stay in the P&C business in order to protect their consumer base from their two bank competitors – TD and ING. Time will tell.

Traditional agent companies – State Farm and Allstate, for example – will continue to compete aggressively. But the major threat to the independant broker system’s market leadership is more likely to come from foreign-controlled p&c insurers. These companies are hotly pursuing several direct marketing initiatives. Establishing direct writing operations (i.e. Belair Direct), buying and/or controlling brokerages (i.e. Canada Brokerlink) and forming strategic alliances with major retailers (e.g. President’s Choice Financial) all come to mind.

FOREIGN INSURERS

These major foreign players (ING, Aviva and Royal &SunAlliance in particular) have the critical mass, infrastructure and market experience to cause a significant (15% to 20%) shift in market share from independent insurance brokers to their alternate distribution channels.

This is a scary proposition for the broker comm nity, especially younger broker principals still building their businesses.

The irony in all this is that the financial strength needed by these insurers to grow their direct business is coming from the independent broker distribution channel.

Canadian insurers seem to be taking a very different strategic direction than their foreign counterparts. They are increasingly differentiating themselves by pursuing a single-channel distribution strategy – they are distributing their products exclusively through independent brokers.

Brokers increasingly have a clear choice. Do they support the same companies they have in the past, even though they may be competing with these companies directly or through non-broker alliances? Or do they increase their support for those companies that will help them maintain their market share? Over the longer term, will the direct channels of foreign players achieve stronger brand recognition and customer loyalty at the expense of local brokers – and what would this do to brokerage valuations?

It’s going to be an interesting time going forward and there are a lot of ‘What ifs’ to think about.

A big ‘what if’ is this: What if revenue gains from a new foreign insurer’s direct operations are more than offset by revenue losses to Canadian insurers as a result of brokers moving business to ‘broker-loyal’ companies? Will foreign insurers reconsider their multi-brand, multi-channel distribution strategies or will they march on undeterred?

And don’t forget the consumer. In the end, consumers will decide the outcome based on the service and value added to their purchase experience as they shop for our products.