Channelling the Future of Distribution

IBAO 86th Annual Convention, Niagara Falls Part 2

Should independent brokers continue to work with insurers that support multi-channel or direct-channel distribution networks, or should brokers simply walk away from insurers that don’t exclusively support the independent broker channel?

The question dominated discussion of the CEO panel at the 86th annual IBAO Convention, held in Niagara Falls on Oct. 18-20, 2006.

The discussion revealed tactical divisions between the insurers represented on the panel. On the one hand, CEOs such as George Cooke of Dominion of Canada General Insurance Company said brokers should walk away from any insurers that don’t specifically support the independent broker distribution panel. “I think the bottom line is: ‘Why would a broker continue to support those companies that were buying, owning or controlling brokers?'” Cooke asked, repeating the question one broker put to the panel members. “The simple short answer to that, from my perspective, would be that I wouldn’t.”

Cooke recounted a situation of one year ago, in August 2005, when Canada Brokerlink (CBL) approached Dominion. Prior to this meeting, in October 2004, insurer ING Canada had acquired CBL, which was formerly an independent broker. Cooke said prior to August 2005, CBL had been placing business with Dominion for about 60 years.

“They (CBL) told me they were going to concentrate – and the word was ‘concentrate’ – approximately Cdn$34 million of Dominion’s business with ING,’ Cooke told his audience of more than 1,500 of Ontario’s brokers. “We terminated the relationship.”

Eventually, a number of Canada Brokerlink’s customers – those that were originally placed with Dominion – migrated back to Dominion, Cooke noted. Nevertheless, the point is that “presumably most of those customers have been placed with the market they were with on the advice of the broker,” Cooke said. “The only thing that I saw change on that fateful day in August was who owned the broker.”

On the flip side of the coin, Claude Dussault, the president and CEO of ING Canada, said ING Canada’s sales volume had nothing to do with Canada Brokerlink’s business decisions relating to Dominion. In fact, he said, ING Canada has historically supported the independent broker distribution channel.

“Let me be clear,” Dussault said. “ING will not succeed without strong support from the broker communities. In addition, we will not succeed unless you are successful.”

Specifically, Dussault noted that ING Canada this year:

* Loaned Cdn$154 million to brokers with whom ING has no equity relationship.

* Built up Cdn$2.7 billion in capital behind insurance, specifically for broker operations.

* Employs 5,000 people exclusively dedicated to working with the independent broker distribution channel.

* Trained about 2,000 brokers.

As these facts would indicate, Dussault said: “We don’t have a hidden agenda to exit from the broker distribution channel.”

At the same time, Dussault made no bones about supporting other kinds of distribution channels. “ING is moving forward and our objective is to grow in every channel,” he said. “What will make brokers successful is not exclusivity, per se. It’s providing you the tools to make your business successful on a go-forward basis. Even though it might be seen as negative to have that position, I think it has to be balanced on what is being brought to the table in terms of product, support and tools to make your business successful.”

The debate, as articulated in the exchange between Dussault and Cooke on the CBL issue, caused other insurance CEOs to reveal their basic tactical approaches towards the various distribution channels.

Rowan Saunders, president and CEO of Royal & SunAlliance (which owns the quasi-direct writer Johnson Insurance), reinforced Dussault’s basic message that brokers can’t afford to burn bridges with insurers that support other forms of distribution channels.

“Any broker needs to deal with an insurer that can meet your customer’s needs,” Saunders said. “You’ve got to look at the value proposition to the customer and the value proposition to the broker. When we speak to our brokers, they tell us we’ve got a strong value proposition. What we try to do is differentiate our proposition from that of our competitors and we focus on three key areas…relationships, technology and expertise.

“In relationships, our proposition is strong. We continue to expand our channel. We train our brokers. We are investing in marketing to pull customers into our broker channel.

“In terms of technology … I would say that our investment in our broker channel over the last four years represents about two points of our combined ratio. That’s Cdn$70 million.”

But ultimately, panelists said, the various distribution channels will wind up competing with one another for business – and when that happens, which channel is best from a consumers’ point of view?

“There has been a lot of fracturing of the distinction in our marketplace between the brokers and agents,” said Bob Tisdale, president and CEO of Pembridge Insurance Company. “And what we’re seeing is a blurring of brands, which is causing a lot of confusion [for consumers].”

He noted The Allstate Corporation, the parent company of Pembridge and the Allstate Insurance Company in the United States, is committed to a multi-distribution channel. Nevertheless, he added: “We see a major distinction between what we’re doing and what is happening in the marketplace, and that is, we have two distinct brands: one [Allstate] operates entirely in a different channel, and one [Pembridge] operates entirely in the broker channel. We don’t try to confuse consumers in having them look at [Pembridge] as part of [Allstate’s] broader organization.

“What is Pembridge going to do in the future as an organization? One thing is, we will not compete with brokers. That is our pledge. We will not own brokerages. What we will do is that we will appoint exclusive broker contracts in areas that can do business in our organization, brokers who meet our definition of independence.”

Igal Mayer, the president and CEO of Aviva Canada Inc., reiterated that a hard and fast distinction should apply between agents and brokers. He said the issue of an increased push for market share has manifested itself in the distribution channel (broker ownership). The need to maintain the independence of the broker channel has become acute recently, he observed, because of the increasing number of opportunities for brokers to sell their businesses.

“There’s something fundamentally wrong with insurers buying brokers,” Mayer said. “When insurers get involved in the brokers’ operation, it waters down the basic proposition, and the basic proposition is that brokers are independent. You work for your clients, you don’t work for your insurance markets….

“For insurers to get involved, there’s something wrong with that. It will eventually come back and hurt us as an industry if consumers ever figure it out.”

Mayer said Aviva would help support to the independent broker channel by providing the financial tools to help brokers buy brokerages from other brokers. “When I say financial support, I do not want to own brokers,” he said. “But where brokers need our support for financing, we will finance our brokers,” he said. “And we will do that with no hooks – no commitments to volume, and no equity.”

In addition to providing financial assistance to brokers, Mayer said Aviva would be willing to consider “warehousing” (temporarily owning) a brokerage up for sale until a suitable, independent owner could be found. “Ultimately I respect the fact that it’s your business, but if we can help keep the business independent and in the channel, we’ll do it.”

Kevin McNeil, president and CEO of Gore Mutual Insurance, said he didn’t buy the notion that insurers turned to multi-channel or direct distribut ion channels in response to the tactics of their competitors. “I’ve heard on a number of occasions this ‘defensive’ strategy of becoming involved – either starting a direct writing channel or becoming multi-channel – and frankly I just don’t buy it,” he said. “I see it more as an offensive strategy.” (Responding to this comment, Dussault said ING Canada has never represented their support for the various channels as a ‘defensive’ maneuver.)

In the end, McNeil said, the overall strategy is to win an intense battle for market share. “The consequence is, in battling for market share, this leads to the share of market, which has roughly been 70% for the independent broker channel, being challenged,” he said. “If [competing insurers] achieve their results, that market share for brokers will fall to below 50%.”

Nevertheless, McNeil added, there is no need for independent brokers to fear. “What I think will happen is that when [insurers are] not successful at achieving that success by adding multi-channel operations, buying brokerages, [forming] strategic alliances with retailers, starting up direct operations, then I think you’re going to hear and see them return to the broker channel and start advocating for the broker channel as the channel to sell your products.”