Saturday, June 19, 2010

(No.98) Anatomically impossible? Not in business

For longer than I care to remember I have pointed both privately and publicly to the decline of active, prospecting, selling agency systems, and especially to the reduction in the number of life insurance companies recruting, selecting and training real selling life insurance agents, i.e., those who can make significant numbers of the harder sales -- those of individual life insurance policies and do so not for weeks or months but for years.

It has long been the leakage of active selling agents from career agency distribution systems that has been the main source of active life insurance sales people for the 'brokerage system' in Canada (and in the US too), itself a form of agency system to which an increasing number of life insurance companies turned for some or all of their distribution, including even bank-owned players like RBC and most recently BMO in its post-AIG acquisition phase.

I have also emphasized that there is an elephant in the corner of the industry's distribution room: the number of active, prospecting life insurance sales people selling individual life insurance as a core product has been declining for years even as the total number of persons holding life insurance licenses in Canada has significantly increased.

As the result of industry mergers and acquisitions (the preferred method for company managements who find organic growth too challenging), as well as corporate decisions to abandon career agency systems as too difficult to manage, the number of life insurance companies actually involved in recruiting and developing people new to life insurance selling has dwindled. Yet agents who can successfully sell life insurance as a core financial product do not materialize like the ghost of Christmas future. They have to be brought into the business.

For the industry and public alike there has been a direct relationship between the recruiting and development of new people as agents who can sell and the sales volume of individual life insurance. However, as I have suggested in several of the columns I have posted to [for example: No.6 "Wellington's horse & agency rat holes"; Nos.17 & 18 "The insurance industry's mental health"], too many career agency systems -- like too many life insurance companies -- were poorly managed for too long. That mismanagement played a major part in causing today's weakened agency distribution in Canada. Why is this important? Because notwithstanding the studied ignorance of certain executives, many consultants and various toads in the life insurance garden, the life insurance business is actually about 'selling stuff'.

As the number of new people coming into the business as genuinely active sellers of life insurance continued to decline, the competition among life insurance companies manufacturing life insurance products (and remember that any company that can pass minimum regulatory requirements can become a product 'manufacturer'), the competition intensified among companies for the attention, affiliation and new business of life insurance sales people already active as sellers of this core product. It was and continues to be a parasitic relationship between companies bringing few or no successful sales people into the business and those who do.

In Canada the leading industry companies involved today in bringing new people into the career agency system on a full time basis are London Life (a fundamental role it has long played) and Sun Life by virtue of it having purchased the Mutual Life/Clarica Life career agency system, one as old and as distinguished in its record as London's -- Sun having previously mismanaged and finally collapsed its own career system in Canada. What continues to be played out is a fierce and expensive competition among life insurance companies for the favour of a declining number of active life insurance intermediaries whose selling skills are also in demand to make the easier sales of other financial products.

The life insurance industry in Canada has in recent years had more than 70,000 persons who hold licences permitting them to sell life insurance (with the bulk of them also holding licences to sell other financial products as well). Indeed thousands of life licences are obtained and renewed solely for the purpose of allowing their holders to split commissions on life sales made by other agents to whom clients have been referred. I estimate that fewer than 25,000 life licensed sales people in Canada could be considered to be active (by any reasonable benchmark) in the selling of individual life insurance policies.

What has so often escaped the understanding of those managing life insurance companies as well as many who regulate their activities plus those of their sales people is the fact that a serious challenge facing the industry does not lie in being able to get large numbers of people licensed to sell life insurance but rather in finding and developing sufficient numbers of people who are capable of making a career based on selling individual life insurance as at least one of several core financial products.

The agency distribution situation has become an unhealthy one in which many life insurance companies, third party agency organizations and producer groups are chasing a declining number of active sellers of this core product. The Canadian industry is not providing for renewal of the active agency system of distribution -- and therefore of effective sales growth going forward .

Like its American and UK cousins the Canadian life insurance industry is, in terms of the future effective agency distribution of a core product, at risk of disappearing up its own rectum.


Alastair Rickard