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