If the organizers of the Commonwealth Games ever get bored with badminton and decide to branch out, the recent collapse of Confederation Life Insurance Co. has revealed at least one alternative sport: finger-pointing. In corporate circles, Canada has some true champions in this event. The rules are simple, the equipment is minimal.
In the case of Confederation Life, the company’s first financial wobbles led to a marathon of finger flexing as players from Ottawa to Bay Street geared up for the inevitable point-off. By the time Confederation Life finally imploded on Aug. 11, all parties concerned were in peak condition. And without missing a beat, the blame was neatly portioned out among them. Management—past and present—was castigated for overly aggressive investments in risky real estate. The fledgling trust subsidiary was faulted for sapping the strength of the established insurance operation. The directors were taken to task for their failure to rein in management. And even GreatWest Life, the company that was poised to bail out Confederation Life, was criticized for taking too long before backing out.
But even among the most accomplished fingerpointers, the perennially popular—and the safest— thing to attack was the regulation of the insurance industry. Finger-pointing, after all, is not a contact sport. And government regulation is a broad enough subject that knocking it can create the appearance of action without actually rocking the boat. In keeping with that spirit, the Senate banking committee, which will conduct a post-mortem on Confederation Life with a series of hearings this fall, made it clear that it is not embarking on a “witch-hunt.” Rather, it intends to probe such grand issues as regulatory policy and insurance industry structure.
Above all, the Senate’s tactful review should allow everyone else to press ahead with their respective agendas while preserving a seemly appearance of concern about Confederation Life’s policyholders. The Canadian Life and Health Insurance Association, for one, is already up on its hind legs, barking about the need to create a new
Crown corporation. This proposed body would be dedicated to protecting insurance policyholders in the same manner that bank and trust company clients are protected—up to a $60,000 limit—by the Canada Deposit Insurance Corp. (CDIC). Sounds like a solid, safe idea, right?
Wrong. A recent report from the C. D. Howe Institute, “Ensuring Failure,” carefully documents how government-backed deposit insurance has directly contributed to insolvency and instability in the domestic banking sector since it was introduced in 1967. According to the study, the CDIC has enabled weak, mismanaged financial institutions to enter a newly deregulated market and to operate aggressively without incurring real risk: the CDIC safety net ultimately guarantees that their stronger peers will bail them out in a pinch.
So why on earth is the insurance industry— especially at a time of considerable uncertainty— eagerly volunteering to saddle itself with the same onerous obligations and inefficiencies? The answer lies in the highly flawed “deregulation” of s Canada’s financial ser§ vices sector. As the banks are permitted to steadily _ encroach upon the tradi“ tional turf of brokers, mutual funds, trust companies and, increasingly, insurance companies, deposit insurance has become a huge competitive advantage. Because the CDIC virtually eliminates risk for depositors, it allows banks to attract capital and customers at a relatively low cost For insurance companies, who are now slugging it out with the banks in their own market—while simultaneously trying to build a new consumer base for their broadened mix of financial products—the banks’ guaranteed grip on their clients is making it tough to survive, let alone compete. Just as the rules of deregulation allowed bankowned brokerage firms to drive foreign-controlled competitors out of Canadian stock markets, it is now causing firms like New York Life to withdraw from the Canadian insurance business. And unless the financial services playing field is levelled soon, there won’t even be enough fingers left to get a good pointing match going.
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