Monday, October 19, 2009

(No.59) Banks & insurance: like Wellington's horse

Canadian banks received a letter from federal Finance Minister Jim Flaherty the other day in response to which they expressed shock and surprise -- or pretended to do so. I say pretended because, in spite of the inbred arrogance and ignorance of the big banks in Canada, it is hard to believe that they were really surprised by the minister's direction to stop bank websites from hustling insurance (as distinct from the websites of the banks' insurance subsidiaries).

In June this year I took note (see, No.33) of a Globe and Mail report (June 10) that I characterized as having made a mountain out of a molehill by proclaiming that " banks have notched a rare victory in their fight with Ottawa over selling insurance". The article then went way over the top. It declared that a decision by OSFI, the federal regulator -- one refusing a request for action from insurance brokers -- not to prohibit bank websites from promoting insurance meant, expressed in an absolutely orgastic bout of hyperbole, that "the barriers the federal government has long maintained around bank sales of insurance could be crumbling".

I described this interpretation by the Globe as "breathless credulity" and emphasized that their story had ignored "a key reality about any expansion of bank retailing of insurance beyond the present permitted types: any decision to expand significant bank retailing activity will be a political decision, not one made by Ottawa bureaucrats; any such change is one that remains not merely unsupported by the government but opposed by the government and the opposition parties".

Minister Flaherty himself should now have made this fact of life clear even to the banks and their expensive but poorly informed advisors (perhaps the same ones who advised the banks when they made the mistake of appealing their losing Alberta case challenging provincial insurance regulation to the Supreme Court of Canada). The minister accompanied his recent direction to them to shut down their website insurance activity with a clear statement that he was carrying through with a Conservative government commitment to insurance brokers.

The action itself and the comment were yet another illustration in a line stretching back 20 years of the political power of the insurance industry, a lobbying power based more and more in recent years on the work of agents and brokers (particularly on the p & c side) and even less and less on insurance companies -- for reasons that constitute another story.

In an Oct 9 Report on Business "analysis" of "How a scattered army of insurance brokers outmuscled the Big Five" the Globe did a reasonable job of citing relevant facts and factors but omitted to make a number of key points. For example:

1. The "insurance brokers" to whom the Globe's story were devoted and who were quite accurately depicted as being so effective this time around in reminding the government of their commitment to restrict bank involvement with insurance were property & casualty brokers, not those on the life side of the insurance business. Indeed the p & c insurance people took over the de facto lead some time ago in opposing the banks' long desired expansion of their existing role in insurance retailing.

2.Partly this is the result of the life insurance agents' own trade association, latterly called Advocis, declining in terms of strong leadership, membership size, finances and effectiveness since the days in the 1980s and early 1990s when it was the key player on the insurance side of political lobbying in Ottawa.

3. In part this latest episode's key insurance players were who they were because most life insurance agents and brokers know, based on both experience and instinct, that they are not significantly threatened competitively -- despite the illusions of various life company executives who keep discovering 'direct' life sales to be what they think will be some sort of silver bullet to greater sales success-- by buyers initiating the purchase of individual life insurance via bank websites ( although it is important to note that life agents are far from indifferent to the prospect of any expansion involving bank branch sale of individual life insurance) .

P & C brokers do feel threatened and for greater reason: they understand the marketplace reality that their insurance products, unlike life insurance, are ones most people accept they must have (auto insurance) or really need (fire insurance). It is a very different buy-sell equation from individual life insurance. Hence the leadership on this bank website issue
from the p & c side of the insurance business.

4. The fact that the banks were defeated on this issue by insurance sales people's lobbying is unsurprising as well as consistent with the history of their successive political losses in Ottawa since they began their fight going on two decades ago to get government to change the rules to permit an expansion of the permitted types of insurance that can be sold in bank branches where inevitable even if subtle bank-based pressure can be brought to bear on bank customers.

On this whole banks and insurance issue the big banks today remind me of nothing quite so much as the aphorism about the Duke of Wellington's horse at the end of the Napoleonic Wars: it had been everywhere, seen everything and learned nothing. The back benches of all the parties are occupied mainly or exclusively by MPs with no sympathy for the banks, an absence reinforced not only by the effective lobbying of insurance sales people (who have long been systemically active in constituency associations for all parties except the NDP) but also by the consistent absence of public sympathy and support for the big banks.

5. Finally, a note to financial journalists and analysts: in writing about the issue of banks and insurance note that any federal government could, anytime it wished to do so, expand bank branch retailing of insurance without the obstacle of going to Parliament for a legislative change. The ground could be altered tomorrow by a change to existing regulations using an order-in-council.

That is one reason why insurance people move forcefully and promptly when they see the banks trying once again to change any of the ground rules governing bank involvement with insurance.

[More of my comment on banks and insurance and relevant facts and cases can be read in a number of columns to be found on For example: Nos. 33,34,47 & 48].

Alastair Rickard