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 RickardsRead.com). 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)