Thursday, August 27, 2009

(No.48) Pt.2 -- Sun Life & banks selling insurance

The first part of this column on "Sun Life & banks selling insurance" appeared in No.47 of The column concludes below.


The Aug.18, 2009 Globe and Mail Report on Business article "Scotiabank skirts insurance rules" notes that Scotiabank "will be marketing some products made by Sun Life Financial in its insurance office" and then reports an apparent contradiction: Sun Life strongly supports the current rules limiting bank retailing of insurance in their branches.

It isn't really a contradiction. Bigger life insurance companies like Sun have long 'manufactured' profitable group insurance for the banks to sell. While this group insurance competes with coverage available in the form of Sun's own individual life policies sold by its career agents and brokers, the company wisely chooses to continue to defend its primacy as both a manufacturer and (because of its active, prospecting agency system) highly competitive distributor of individual insurance in Canada.

There is a core point that the ROB articles of June 10 and Aug 18 (and other journalism) miss: all the big Canadian banks could, if they chose, put the additional capital into their insurance subsidiaries in order to have the reserves required to 'manufacture' for their own use as much insurance product as they want, particularly the creditors group life insurance coverage the banks freely distribute in the billions of dollars in their own branches. But the banks think it financially and administratively advantageous to have big group product insurance companies like Sun Life do that job for them. 

The reality is that, happily for both the banks and the big life insurance companies like Sun, the opposition (and it has come from almost all non-bank-owned life companies) to bank branch retailing of individual life insurance has not been allowed to interfere with the mutually beneficial relationships the big banks have with the big life insurance companies on the group side or, for that matter,with the manufacture by Sun Life, Manulife et al of individual life insurance products for sale by, for example, the bank-owned securities firms (commonly referred to internally by the euphemism "national accounts").

Sun's career agents and brokers could hardly be said to be happy about this cozy arrangement with banks on either the group or the individual product side but most understand that the company continues to defend their shared interests in the wider market-place. They have no illusions that the company does so because of some deeply felt love for agents and brokers. Rather the fact is they know that even the least sales-savvy Sun senior executives (and they are not in short supply) appreciate the competitive advantage a commissioned sales force provides in the core activity of a life insurance company when that company wants to be more in Canada than just a manufacturer of product: that is, a company whose objective is to be successful in the core business of actually 'selling stuff '.

So, the Canadian banks could at any time they choose become an even bigger player in "the incidental sale of insurance" like creditors group (i.e., insurance sold incidental to another transaction/purchase like travel or a car or a mortgage). Moreover, any bank can ape the RBC example and become a more significant player in the individual market by buying a life brokerage company as Royal Bank did in 1996 with Westbury Life. RBC also established, as its peers could, its own career agency system and operate it alongside its brokerage distribution system.

Or those banks wishing to do so ( say the Bank of Montreal, aided by its recent purchase of the the Canadian operation of AIG) can continue to focus on non-agency/direct distribution of such life products as burial insurance (aka final expenses), guaranteed issue product (expensive, smaller face amounts), accidental death (cheaper 'lottery ticket' life insurance) plus perhaps some vanilla term.

But there's the rub. 

What the big Canadian banks have wanted for some time is to be able to sell larger quantities of individual life insurance, preferably with higher average premiums -- and of various types (as well as p & c coverage of course) and do so in their branches because that is where they think their leverage to 'persuade' bank clients to buy insurance from the banks can most effectively be exerted. They believe they understand the sales equation because of their longstanding role in the sale in their branches of creditors group insurance related to loans and mortgages.

In the U.S. many of the hundreds of banks have a longer and broader history than their counterparts in Canada of direct involvement with the sale of individual insurance. However, as I reconfirmed for myself at a couple of U.S. conferences about banks selling insurance in that country (meetings specifically billed as organized "for bankers by bankers"), once one gets beyond the spin aimed by banks at various external audiences like the financial media, what becomes clear is the important part played by active, selling agents. By this I mean real agents as distinct from the thousands of life 'agents' who (in Canada) hold life insurance licenses for reasons other than being able to sell themselves such as being allowed to share commissions off a referral sale. The real agent selling outside the bank branch is often the key to even modest U.S. bank sales success with individual life insurance. But that's a story for another day.

I intended in this two part column to focus principally on Sun Life but instead went on a bit of a detour, having allowed myself to be distracted by the latest bank spin.

I will pick up the Sun Life theme again in

Alastair Rickard


Sunday, August 23, 2009

(No.47) Pt.1 -- Sun Life & banks selling insurance

In the last column I rode one of my hobby horses: the quantity and quality of the attention paid to Manulife compared to Sun Life by those I refer to as the 'financial services paparazzi' -- the supposed experts to be found in the rating agencies, securities firms and financial journalism.

This connects with other aspects of the attention paid to the life insurance industry in Canada, a major one being the frequent absence of real understanding of the core importance to individual product sales and hence company profitability of effective distribution systems, i.e., those that can actively sell insurance. It is common to see a focus on ROE and other such numbers supposedly central to a company's conduct of a profitable insurance business but with varying degrees of relevance to the actual operation of a sales-based insurance business. 

While investor-oriented indices are an understandable preoccupation of those who look at the life insurance business from the outside they don't support real understanding of a business involving not just the 'manufacturing' of insurance (any company with sufficient capital can get into that game) but the far more challenging matter of actually getting people to buy and pay for it for longer than a year or even a few months. Nor do they help people understand the reality of how the banks and their cheerleaders in the investment and media communities have repeatedly and erroneously overplayed the story of the banks being on the verge of a major insurance victory of some sort -- and they have done so since before the federal financial services changes of the early 1990s and periodically since. 

An important element in understanding the distribution of individual life insurance is what makes it a client-resistant product, one clearly distinguishable from p & c insurance like auto and homeowner coverage, i.e., coverage the purchase of which people will initiate because they must do so or feel themselves compelled to do so. Another aspect is the share of new individual life insurance premium not sold by active, prospecting, selling agents/brokers but purchased 'directly' via (for example) telemarketing, the internet, direct mail. This market share remains a small proportion of the total in Canada and the pattern is the same in the U.S.

The banks and insurance mythology is evergreen. A recent example was provided (Aug 18) by another article in the Globe and Mail's Report on Business "Scotiabank skirts insurance rules". It heralded the fact that the Bank of Nova Scotia, in following the lead of the Royal bank in setting up an insurance office next to a Scotia bank branch and selling Sun Life insurance, was providing yet another "sign that the big banks intend to muscle their way into becoming a major force in the insurance business ... [and] circumvent current federal laws that prevent them from using their extensive branch networks to market most types of insurance." In fact the existing restrictive federal regulation is not being circumvented in any commercially meaningful way, nor is it the sole factor in this equation as the banks learned for themselves the hard way when they unwisely and unsuccessfully appealed the Western Bank case decision to the Supreme Court of Canada.  

The angle in the ROB articles amounts to little more than another dose of bank 'spin' swallowed whole. The fact is that the banks and their insurance subsidiaries could have grown yesterday and can grow tomorrow as much as they choose. They could do so without any expansion in the types of insurance they can retail in their bank branches; more about that later.

I addressed some of the codswallop the banks periodically trundle out for the financial services paparazzi  in a couple of previous columns: "Banks, insurance and the internet" and "Can the provinces protect financial consumers?" (Nos. 33 & 34 on These were prompted by a June 10, 2009 article also in the ROB. It was a breathless discovery of another success in the supposedly inevitable bank march to victory in insurance. 

I will not rehearse here those previous columns (they can be read on my blog) but I do note that in terms of the RBC strategy of a network of "insurance offices" (i.e., de facto insurance agencies located beside RBC branches) they are a parallel to the networks of agency offices long maintained across Canada by insurers like Sun and London. Here's a tip for the analysts: in order to arrive at a useful judgment of the degree of success of this bank strategy for the distribution of individual life insurance, as distinct from travel insurance or various p & c types of coverage, one needs an accurate and detailed breakdown of the % of RBC individual life premium by distribution source. Having such offices does not equal buyer-initiated purchase of life insurance in those offices as distinct from their being a base in which to house prospecting agents who actively sell the core product or as a location to attract and process auto insurance business. 

For example: what proportion of new RBC life PI came from purchasers entering the insurance offices in order to buy this product (buyer initiative) and what was the % of life premium generated by agency sales people, whether RBC's own career agents or brokers of one kind or another from whom RBC gets business? Having some consumers walk into a bank "insurance office" (whether located beside a bank branch or a lingerie store) to ask about car insurance rates or travel insurance is a very long way from establishing the utility of such an office as a key to generating buyer-initiated purchase of individual life insurance. 

To be continued in Part 2 appearing in the next post (No.48) 

Alastair Rickard


Tuesday, August 18, 2009

(No.46) Manulife, Sun Life & shop-worn insights

Because I was the founding editor of the Canadian Journal of Life Insurance and am a former executive of the Mutual Life of Canada (demutualized, renamed Clarica Life and then taken over by Sun Life) it is perhaps unsurprising that I have devoted a fair number of the nearly 50 columns written so far this year for to the financial services business, especially its management defects.

I have also written specifically about Sun Life and  Manulife (see Nos. 9, 26 & 39) as well as the financial services 'paparazzi' in Canada, the self-styled experts of the rating agencies, securities firms and financial journalism. They are members of the same fraternity as their brethren on Wall Street who, in the years and months leading up to the near collapse of the U.S. financial system, were largely useless even as canaries in the financial coal mine. 

In the public arena the attention of the Canadian paparazzi (as between Sun and Manulife) has favoured Manulife over the years to a ridiculous extent. This may be due in no small measure to the performances for the paparazzi of (former) Manulife CEO Dominic D'Alessandro. 

Meanwhile, so besotted were the paparazzi with the great quotes and the energetic self-promotion from Manulife, they managed (at least insofar as providing useful warnings to the investing public) to ignore or remain oblivious to the implications of the fact that Manulife had ceased in 2004 to hedge the tens of billions of dollars of risk guarantees associated with the variable annuity business it was selling -- but Sun Life had not stopped hedging. Indeed it was not until recently that Manulife's rating was even reduced -- from triple A to double A+.

Not that many people in the business weren't aware of the real story as well as the imbalance in attention. As one senior insurance executive wrote to me recently: "Gotta love the spill from the necessary shoring up of Manu's reserves due to years of variable annuity sales without hedges. As you would expect Manu is continuing to get positive press for making the tough decisions (about a decade too late) and all others like Sun are assumed to not be as insightful and forward thinking."

On Aug.6, 2009 both Manulife and Sun presented the market-place with their 2nd quarter results and as part of this process the most senior members of company managements made themselves available to the usual suspects from the financial services paparazzi. I have seen no better example of the continuing and disproportionate attention paid to these two leading Canadian life insurance companies than can be found in the Aug.7 issue of the Globe and Mail's Report on Business section:   3 major pieces devoted to Manulife beginning on the first page of the ROB and occupying all of p.B10.

Column inches devoted to Sun Life's results in the same Aug.7 issue of the Globe's ROB?  Zero.

Doubtless the defence offered of this ridiculously unbalanced coverage would involve the fact that Manulife announced a cut of its quarterly dividend by half in order to retain $800 million of capital a year. Doubtless worth some space but hardly so much as to justify the exclusion of even a cursory review of Sun's performance. 

The post-Aug 6 'expert' analysis of the Manulife move was hardly all that impressive given new CEO Donald Guloien's previously declared intention to prepare the company financially for a future that will likely involve still more very choppy financial waters. Dividend reduction -- how big a surpise given the company's exposure to guaranteed investment/stock market risk and in light of the fact that the CEO had already taken Manulife to market last December to issue more common shares as a way of gathering in more capital (more than $2 billion)?

I recognize that for the financial services paparazzi the chewing of the Manuife cud seems to have become over time an irresistible activity. It reminds me of nothing quite so much as CNN's 'talking head' panels drawn from their roster of familiar 'experts'  who repeat shop-worn comments on American politics and do so in sound bites short enough not to strain the supposed attention span of CNN viewers. The thoughtful American viewer of public affairs is left to seek out lengthier, more informative insights on PBS.

Meanwhile, informed analysis of both Sun Life and its second quarter results is thin on the ground, almost as hard to discover in Canada as intelligent comment from U.S. Congressional Republicans in the current American debate over health care reform  (q.v.,, Nos. 44 & 45).

I shall return to this subject and to Sun Life, probably in my next column (No. 47).

Alastair Rickard


Thursday, August 13, 2009

(No.45) pt 2: Insurance companies & U.S. health care reform

The previous post to (No.44) presented the first part of an essay presenting a Canadian perspective on the U.S. debate over health care reform. The essay concludes with this post No.45 (below).
The fact is that a huge contributor to the rapidly rising cost of U.S. health care is the central involvement of insurance companies. They add significant cost to the system from both administrative complication and inefficiency as well as the pursuit of profit. Canada constructed a health care 'insurance' system from which insurance companies were excluded in favour of single payer, state-financed insurance. 

Thoughtful Americans understand that insurance companies are needed for an efficient, patient-oriented health care system as much as a fish needs a bicycle. Never mind the silly cliche about the dangers of government standing between patients and their doctors; the minimizing of the payment of health claims by an insurance company is, for executives interested in their compensation and in career management, what their insurance companies' role in health care is about.

I think what many Canadians may find most puzzling involves an unfortunate conjunction of several factors:

  1. a U.S. political system that continues to be the captive of special interests like insurance and 'big pharma' companies spending many millions of dollars annually lobbying against even small steps toward  what is obviously needed in the US -- a single payer health care system or, at the very least, a public option for those buying health insurance.                                                 
  2. a credulous American public many of whom seem prepared to believe what appears to most Canadians as laughable propaganda about 'socialized medicine' from the political right and various special interests, and against any hint of advantage to be derived by patients from a public health care system.                                                                                                         
  3. the absence of impact on so many members of the U.S. Congress of indisputable facts, including American spending of a higher proportion of its GDP on health care than any other OECD country (nearly 17%) but without securing the best health outcomes for its citizens (in Canada the comparable figure is 10% of GDP).                                                                            
  4. according to the World Health Organization, U.S. spending of 23% more per capita on health care than does the Canadian government; and                                                                      
  5. the fact that advocates of what to most Canadians is the best and only serious option for most Americans, i.e., a single payer system similar to the U.S. Medicare system for seniors, are not only NOT given a seat at the table in this Washington debate but have been deliberately excluded from any genuine participation by the politicians of both Democratic and Republican parties.                     
The current U.S. health care system and the opposition to meaningful and desperately needed reform strikes me (and I think I have lots of company among Canadians) as being as bizarre as American gun laws. I suspect the latter would likely be the second prominent difference most often cited by Canadians between their society and that of our neighbours.

[Upcoming on -- comments on the 2nd quarter results of  Sun Life and Manulife.]

Alastair Rickard



Saturday, August 8, 2009

(No.44) pt 1: Insurance companies & U.S. health care reform

Earlier this year, before the political battle over health care reform reached its current fever pitch, I was in Tuscaloosa answering questions from University of Alabama business students. They were interested in my views, as a Canadian and a former insurance company executive, about what they had been told about the Canadian health care system. My impression was that much of what they had heard from special interest spokespeople had been the sort of right wing nonsense which has subsequently characterized the Canadian angle (and much else) in the health care reform debate in the US.

So strongly do Canadians value their single payer government health care system (I explained to them) that any change seen as a threat to it is the third rail of Canadian politics -- touch it and you are dead. Most Canadians value the system's quality of care. Many do still complain about wait times to see specialists in certain fields although government has moved to address this issue in recent years. By April 2009 at least 75% of patients in Canada receive non-emergency surgeries within appropriate wait-time benchmarks. If asked to single out an aspect of Canadian society superior to that of our American neighbours, most Canadians would cite first our health care system.  

What I might also have told those students, something highlighted for me in the American public debate of the past few months, were some things Canadians regard as puzzling if not perverse in the anti-'public option' arguments (some incorporating, usually inaccurately, negative references to the Canadian health care system). Indeed, as I write this, it is looking more and more as if a 'public option' in the American health care [reform] legislation as even a handicapped alternative to coverage offered for sale by insurance companies may well not survive all no matter how inadequate or watered down. 

Many Canadians who follow the US health care reform debate wonder about, for example:

-- use of wildly misleading references by American opponents of fundamental health care reform involving a public [i.e., government] option to wait times for 'government' health care in Canada  despite 47 million Americans having no health insurance at all and therefore forced, if in need of treatment, to line up in hospital emergency rooms to say nothing of the thousands of Americans who line up periodically in the early morning in parking lots across the US hoping to receive free treatment for their medical and dental problems provided periodically by "Remote Area Medical" volunteers.

-- how any opinion poll in the U.S. could supposedly discover 77% of Americans prepared to say that they are generally satisfied with their health care when so many millions of their fellow citizens are uninsured and when many millions more are under-insured; with 3/4 of those families who file for illness-related bankruptcy actually having health insurance; and with health insurance premiums having increased 3 times faster than wages between 2000 and 2008.

-- the negative representation of Canadians' experience with and attitude to their 'government heath care' as part of the propaganda campaign in the US against the old 'beware socialized medicine' bogeyman when that argument is at odds with the reality. For example: 85% of Canadians have their own primary care physician and 92% would recommend that doctor to a relative or friend; 95% of Canadians with chronic conditions have a regular place of care; and of those requiring ongoing medical care, most were able to see a doctor within 7 days.

-- the widespread use of an exceptional and misleading Canadian medical case as part of the organized opposition to the inclusion of a 'public option'  in any reform of the US health care system. This case involves a television commercial sponsored by one of the special interest groups and features an Ontario woman who (American viewers are told) had to go to the US to have a life-threatening brain tumour removed in order to save her life. Why? Because of an alleged 6 month wait time in Canada for treatment. The patient has since admitted to a 3 month wait time involving a benign Rathkes cleft cyst, the removal of which at a Mayo Clinic in Arizona cost her $97,000 she is now seeking to recover from the province where its removal would have cost her nothing.

( To be continued in the next post -- no.45 -- to 

Alastair Rickard



Wednesday, August 5, 2009

(No.43) Me and boors, bullies, dopes & cynics

I spent many years -- too many some would say --  in the life insurance business as well as writing about it in my magazine (the Canadian Journal of Life Insurance) and in other magazines and newspapers. As an insider I have known (and known of) a number of company CEOs and platoons of  senior executives. 

I derive both amusement and some satisfaction from the fact that as a life company employee I was threatened more than once with termination of employment and as a writer/editor with libel action -- in both roles the threats usually came from company CEOs. These threats were prompted by various publicly expressed views on industry issues and companies, views that infringed some corporate ban on unlicensed expression or offended some senior executive's delicate sensibility or merely ran afoul of someone who lacked a sense of humour. 

One of my treasured possessions is a letter addressed to me early on from a life company CEO warning me formally that my job was hanging by a thread. That thread turned out to have quite remarkable tensile strength. 

I have been asked frequently how, with my views on various issues, I managed to survive in the insurance business. My answer is to relate the anecdote about British Prime Minister Winston Churchill, having formed his war cabinet, being approached by a colleague very disappointed by the appointment of a particularly difficult individual. Churchill explained that he would rather have this politician in the tent pissing out than outside the tent pissing in. It is this sort of 'pissing out/in' factor that I think may account at least in part for my having been a most unlikely corporate survivor.

I have not been awed by any consistent brilliance within the industry's CEO and senior management group. The majority have been decent and competent people; a few have been thorough-going boors and bullies who treated their subordinates like crap; several had industry IQs only slightly above room temperature while a number were very bright. These categories were not and are not mutually exclusive.

I am no harsher in this assessment than is New York Times columnist Thomas Friedman who, having considered the financial industry leadership on Wall Street who produced the financial services meltdown, declared that "some of our country's best paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn't only the bankers." (NYT, Nov 26,2008)

Indeed it was not, as the insurance industry's own experience attests. The performance as managers of North American life insurance company CEOs has occupied a spectrum, from the very sharp through the merely custodial all the way to the stupidly reckless with the majority scattered along the range. 

Based on my industry experience I think that more numerous and costlier financial services corporate mistakes have been quietly buried over the years than the financial media, the rating agencies, et al [the financial services 'paparazzi' as I think of them -- see (No.39)] have ever come close to realizing. 

The evidence now public involving the risk of financial system meltdown during the past couple of years, the potential disaster the actions of the Bush and Obama administrations now appears to have averted, makes it clear that while some financial executives played beneficial roles there were far too many others who were directly responsible for not just inferior but disastrous corporate results for which, nonetheless, they expected to be paid obscenely large amounts of money -- and were.

Alastair Rickard