Thursday, June 24, 2010

(No.99) Kittens aren't biscuits (more about agency decline)

In my last column (No. 98: "Anatomically impossible? not in business") I wrote about the decline of the active agency system in Canada on which, in one of its forms, most of the industry depends to sell a core product that does not lend itself to buyer initiative: i.e., individual life insurance.

This column continues those views.


A reality which few people outside the life insurance business understand ( nor do many executives employed within it) is the huge difference affecting the future of life insurance distribution between life insurance companies 'sponsoring' the life insurance licences of people in financial services in return for whatever business they may put their way and companies engaged in selecting, training and developing people new to life insurance selling, people who can actually make their careers as professional advisors in a difficult business.

Also important is this reality: it is a more difficult task to find, select and recruit people who can be successful beyond a few weeks in making the harder sales of client-resistant individual life insurance compared with recruiting asset product sales people whose very important role revolves around selling savings products that most people actually want and recognize that they need. Agents who can succeed in a life insurance sales career have different skills and characteristics from sales people who do not. As the Duke of Wellington once observed: the fact that kittens are born in a kitchen doesn't make them biscuits.

It has proven to be no major hill to climb to have successful dual-licensed life agents make the easier sales of asset products, mutual funds in particular. At one point the Mutual Life/Clarica Life career agency distribution system which Sun Life had acquired was generating 2/3 of the year's net mutual fund sales of CI Financial (the outfit for which Sun Life had traded its own mutual fund business plus Clarica's in return for a 1/3 ownership interest, since sold to the Bank of Nova Scotia).

However people recruited to sell asset products do not constitute the mirror image of this sales equation: trying to get them to make the harder life insurance sales with any sort of quantitative success can be a steep slope indeed. One of the best Canadian illustrations is the Investors Group mutual fund sales force -- an excellent branch office/managerial career agency-type distribution system but one that Investors has never been able to make into a distribution system in which even a significant minority of its advisors make their own life sales in any sort of quantity.

In the Canadian market-place today there are a variety of intermediaries and organizations involved in the sale of financial services products of all kinds. They are commonly referred to as financial advisors or financial planners -- and many are well qualified to provide advice. I note that one sees enthusiasm expressed publicly in certain quarters for the embrace of a fantasy version of the financial services business in this country, i.e., that those who sell products and receive commissions should not be allowed to hold themselves out to the public as financial planners.

As a former board chair of the Financial Planning Standards Council I regard this sort of attitude as unrealistic and too precious by half. Whether, for example, a CFP-qualified financial planner receives directly or indirectly commission income from the sale of financial products does not disqualify that person as an advisor provided the expertise is there and is used to benefit the client. Rather this merely reflects the reality of a market place in which genuine fee-only financial planning remains a boutique segment of the financial services business and, since most Canadians show no inclination to seek out nor willingness to pay for fee-only advice, is likely to remain so.

Were it not for the financial advice being provided to Canadians by tens of thousands of licensed financial services intermediaries there would be a huge shortfall in advisory support as well as in the acquisition of problem-solving financial products.

If today's recruiting or sponsoring life insurance company or agency does little more for the agent new to the business than the equivalent of what was mainly done 50 years ago -- that is, sponsor a licence, hand the new agent a rate book and inform the new agent that he (and agents then were virtually all men) would sink or swim financially based on sales from day one, then the odds against becoming a successful life insurance professional are high indeed.

Agents who sell life insurance make a valuable contribution to their communities and to society. Their market in Canada today is not "saturated" (despite the use of this self-serving codswallop by life company executives seeking camouflage for the latest corporate acquisition and by members of the financial services paparazzi who merely repeat what they don't understand about the distribution of life insurance). In fact the market for individual life insurance in Canada today is not adequately served.

The last time I sat down to do some review and calculations involving life insurance coverage in Canada, I concluded that it was a fairly safe bet that (allowing for ownership of multiple policies on the same life and/or owned by the same person) it is likely that today something approaching 2/3 of Canada's population have little or no individual life insurance coverage, the type of coverage which assures a policy owner both control of the coverage and payment of a benefit at the end of the day.

I have long been a supporter of the active agency system, especially the career agency distribution system, not out of some emotional attachment but because I value the social and economic benefits to society and to individuals of their having adequate individual life insurance coverage. Society as a whole and not merely those in the life insurance business have a direct interest in whether or not Canadians are adequately insured and therefore -- whether they realize it or not -- they also have an interest in its effective distribution to Canadians, i.e., in the provision of genuine 'opportunities to buy'.

Perhaps the hoariest cliche of the North American life insurance business holds that life insurance is not bought, it is sold. But cliches customarily attain their status because they encapsulate a truth. Today's active agency system is involved with the distribution and sale of a product most Canadians will not take the initiative to purchase either at all or in the right amount at the right time.

Finally, an informed understanding of the subject makes it impossible to avoid the conclusion that nothing has weakened the potential growth of the active agency system in Canada as much as the poor stewardship of that distribution system by most of the life insurance companies with which it has been partnered for decades.

[This theme will be continued in the next column, No.100, with the presentation of excerpts from several of the interesting responses to by life insurance agents and others to my comments on the decline of the agency system.]

Alastair Rickard