Financial giants turn up the heat in a bitter turf war
Financial giants turn up the heat in a bitter turf war
Floyd Murphy was 13 when a spark from a woodstove ignited his parents’ home in Mabou, N.S. Uninsured, and with only the clothes on their backs, the family watched helplessly from the street as flames devoured the building. Now a successful insurance agent living in Vancouver, Murphy, 48, has spent the past 27 years helping clients protect themselves against similar hazards. But these days, Murphy’s own industry is feeling threatened by forces beyond its control. The Royal Bank of Canada’s recently announced $2.4-billion takeover of giant London Insurance Group promises to
escalate an already furious turf battle in the financial services business—and reawaken the insurance industry’s worst fear: that the Big Six banks will one day win federal approval to sell policies through their sprawling network of 8,000 branches. “It’s bad news if they sell through the branches,” Murphy says. “Nothing will be gained from that other than unfair competition.”
The struggle between the banks and their rivals claimed an unlikely victim earlier this month when prominent Bay Street lawyer James Baillie resigned as head of an eight-member federal task force on the future of the financial services industry. Critics accused Baillie of a conflict of interest after he acknowledged that, months after his appointment as task force chairman, he attended a meeting between longtime client Hal Jackman, the controlling shareholder of National Trustco Inc., and Bank of Nova Scotia chairman Peter Godsoe. The meeting led to Scotiabank’s $1.25-billion bid on June 24 for National Trust, the latest in a decade-long series of acquisitions that have strengthened the banks at the expense of their traditional competitors. In the wake of the Scotiabank and Royal Bank announcements, Ottawa had asked Baillie’s task force to draw up a list of criteria to be considered in deciding whether to approve such takeovers.
The controversy over Baillie’s departure underscored just how politically charged the thorny question of competition in the financial services industry has become. Last week, Bay Street insiders insisted that Finance Minister Paul Martin had engineered Baillie’s ouster to curry favor with backbench Liberal MPs who oppose more power for the banks. Federal officials dismissed that interpretation. Despite Baillie’s ouster, the task force delivered its interim recommendations late last week. The 12-page document did not comment on the two pending takeovers, but it endorsed mergers in general. And it urged Ottawa to minimize its intervention in the financial services industry. Becoming competitive internationally, said the report, “should
be an important criterion” when Ottawa assesses mergers. Those deals, the task force said, should be decided on a case-by-case basis. The industry generally approved of the document.
So far, Martin has frustrated the banks’ efforts to move into other areas of the financial industry. Faced with public outrage over fat bank profits and a frenzied lobbying campaign by auto dealers and insurers, the finance minister’s budget last February denied banks the right to lease cars or sell insurance in their branches. It was a welcome reprieve for insurance companies. Many are still adjusting to a decision by Ot-
tawa five years ago allowing banks to operate separate insurance subsidiaries.
Still, it appears only a matter of time before Canadian insurance companies face the full force of bank competition. So-called bancassurance—the merging of the banking and insurance industries—“is a fact of life throughout much of the world,” says Mark Puccia, co-author of a recent study on the Canadian life insurance industry by Standard and Poor’s Rating Services, the New York City credit-rating agency. The prospect is driving insurance companies to cut costs, but the sector still has a long way to go, says Puccia.
The search for savings has sparked a wave of consolidations. In last year’s biggest deal, Manufacturers Life Insurance Co. merged with North American Life to become Canada’s largest life insurance company. And the Royal’s purchase of London Life is expected to send other banks scurrying to scoop up insurers. With four of the seven largest insurance companies in Canada owned by policyholders—and therefore difficult to acquire—Puccia believes foreign subsidiaries are the most likely takeover targets.
But consolidations are only part of the equation. The high cost of distributing their products through commissioned sales forces is still the biggest area of potential vulnerability for most companies. According to Standard and Poor’s, the typical life insurer spends about $250,000 to train and support an average agent. While sales have remained relatively flat, the number of life insurance policies sold by each agent has dropped—to about 55 in 1993 from 75 in 1984. On many of those sales, agents or brokers earn up-front commissions amounting to between 80 and 150 per cent of the first year’s premium.
In a survey last spring by Marketing Solutions, a Toronto-based consulting firm, almost half the respondents who hold individual life insurance policies said they would switch to a bank for a five-per-cent saving on premiums. The
LESS BANG FOR THE BUCK
Insurance company sales (direct gross premiums) per employee, in thousands
same study found that only 26 per cent of respondents agreed they receive “very good” or “excellent” value for the commissions they pay to life insurance agents. In contrast, 37 per cent said that bank chequing and savings account fees are “very good” or “excellent” value. At an insurance conference in May, one executive labelled the findings “a real wake-up call” for the industry.
Many firms have already responded to the alarm. To reduce costs and encourage agents to build stronger relationships with their customers, companies such as the Mutual Group of Waterloo, Ont., have shifted from high front-end commissions to annual commissions ranging from 10 to 15 per cent of the premium. “That’s one of the cornerstones of our strategy—to deepen that personal relationship,” says Bob Astley, Mutual Group’s president and CEO.
The sector is also hoping to boost revenues from each agent by introducing a host of new products—from criticalillness insurance to long-term-care policies. “The industry’s Holy Grail is improved agent productivity,” says Puccia. “Everybody knows they need it, but it’s difficult to get.” The greying of the baby boom market is already forcing insurance firms to face off against banks and other institutions in the exploding and highly profitable market for mu-
tual funds and retirement savings plans. By the same token, one reason the Royal bought London Life was to grab a larger share of the high-end insurance market, which will require a well-trained, effective sales force. “It’s very hard and timeconsuming to build a sales force like that from scratch,” says Jim Westlake, the president and CEO of RBC Insurance Holdings Ltd., a Royal subsidiary.
Some insurance companies are cutting distribution costs by resorting to direct marketing through the mail, by telephone and over the Internet. ‘The consumer is moving away from hand-holding,” says
Kevin Ceurvorst, the author of a report on the Canadian life insurance industry released last month by Chicago-based Duff & Phelps Credit Rating Co. Firms such as Halifax Insurance and Guelph, Ont.-based The Co-operators are already selling auto and property insurance directly to consumers through toll-free telephone numbers, and term life insurance is expected soon.
Although they are forbidden to sell insurance at branches, the banks are also moving rapidly to sell insurance by telephone and through the Internet. For auto and property insurers, the big fear is that Ottawa will eventually allow banks to use information in their vast customer databases to help market insurance. That way, banks could target customers of specific insurance companies who pay their premiums by direct debit. “I think it would be unfair,” says Brian Wright, an insurance broker in Mississauga, Ont. “I also think it would put a lot of insurance people out of work.”
Ultimately, that may be the price the insurance industry has to pay to stay competitive. When the remaining barriers in the financial services sector come tumbling down, banks will be a “huge threat,” says Puccia. Insurance firms will be forced to thin their ranks in earnest. The super sellers who offer a wide range of financial products—from mutual funds to estate-planning services—will likely remain. “But the days of an insurance agent as an order taker are numbered,” he adds. “They’re just not going to make it.” For Murphy and thousands of other agents across Canada, it is a risk that no amount of insurance will eliminate. □
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