Friday, October 1, 2010

(No.116) Trying to bury a turd on a frozen pond

In September I spoke to a conference of life insurance brokers at the Crowbush Resort on Prince Edward Island. The meeting was organized by the MGA firm Younker and Kelly. The column below is, in part, taken from that presentation.


It would be foolish to minimize much less ignore the role of the internet as a rising force in the business of 'selling stuff'. How can one fail to be impressed, for example, by the fact that in 1992 there were only 50 websites and today there are more than 300 million?

Nor can even the technology Luddites with whom I have sometimes been grouped be blind to the contribution (albeit mixed) to the information age of Facebook, YouTube, Twitter and other new social media. I confess however to wondering how to measure the net improvement to the body politic's knowledge in North America when, to take just one current example, 27% of Americans think -- almost two years after the last presidential election -- that their president was not born in the U.S. while 18% believe he is a Muslim.

Such contradictions of the information age abound but do not interfere with the desire of many in business to believe that the availability to consumers of a new method they can use to buy products directly means that most or even many will use it to make a purchase even when it involves a notoriously client-resistant product like individual life insurance.

When it comes to distributing this financial product, and after decades of increasingly sophisticated attempts to take individual life insurance to the public using various non-agent methods, I wonder if these 'direct distribution' methods are not beginning to resemble the state of religious grace: nobody knows for certain where or at what moment it can be said to exist.

Indeed the predictions of the inevitable decline or obsolescence of the active, prospecting, selling agent and broker in favour of the rise of non-agent selling of individual life insurance have moved beyond being merely wrong-headed to being tedious -- but there is no shortage of CEOs and other life insurance executives who periodically discover 'direct' sales as the wave of the future, rather like the late Malcolm Muggeridge rediscovering Jesus.

The reality after years of 'direct' life insurance sales: the proportion of new individual life insurance annual premium in Canada from so-called direct, buyer-initiated, non-agent sales remains far less than 10% of the total.

Even with mutual funds, a financial product many people actually think they want, distribution is a key factor. This is a point the Bank of Nova Scotia would do well to consider carefully when it comes to negotiating a price to buy the rest of the shares of CI Financial (BNS bought Sun Life's 37.6% interest in CI for $2.3 billion in 2008, one that Sun had acquired by trading its own mutual fund operation and Clarica Life's larger one to CI.)

Why exercise caution? To avoid over-paying since an important element in CI's post-2000 sales success has been its preferred access to Sun Life's career agency distribution system, a system which produces quality business. I recall one year when more than 60% of CI's NET sales came from Sun's career agents. Now that Sun Life no longer has an ownership interest in CI it should long since have been actively seeking competitor interest from other mutual fund players for access to its distribution system, access which (unlike CI's sweetheart arrangement) requires an investment in that system's enhancement.

As with so many of the numbers among which life insurance executives can choose to prove their points, beware of the numbers used if there already exists a corporate commitment to demonstrating a growing significance for direct sales of life insurance, online or otherwise. In fact the bulk of current premium from direct, non-agent life insurance sales in Canada actually originates from creditors' group insurance of one sort or another distributed by banks, car dealers and that ilk.

Individual life insurance is less than 15% of the toal direct premium which in turn (including group with individual) is less than 15% of the industry's total premium from all distribution channels. In other words, when it comes to individual policy sales, it is a 15% share of a 15% share.

A life insurance company seeking to inflate the apparent success of its direct sales of individual coverage has various ways available. For example, it might count conversions by group certificate holders (on leaving an employer) of their group insurance to individual coverage as 'direct sales'.

Or a company could introduce for sale to the public online, say, a basic four disease critical illness insurance policy (CII) and when it became clear that consumer-initiated purchases made without the involvement of a traditional intermediary would be embarrassingly small, the company could try to redeem the situation by making the product available for sale by agents. BUT require agents to go online to complete their sales of this CII policy and then count the agents' sales as 'direct/online' sales.

However agency system life insurance companies can and do alienate their sales people when they -- the company -- competes with them (the agents) by introducing policies available directly to the public for purchase, policies the public may even perceive as superior to the same company's policies the agent/broker offers. Sun Life provides a recent example of this with the introduction in Canada this past summer of a yearly renewable term policy for 'direct' sale. After progress had been made at a much needed improving of Sun's career agency system's trust, loyalty and morale, especially following the return of Kevin Dougherty to the Canadian operation's CEO role, many Sun agents were disappointed and ground was lost -- and for what sort of new 'direct' premium?

As one experienced Sun Life agent wrote to me: "I am disheartened at today's announcement that Sun is getting into the online term business. Out of one side of our mouth we are saying 'proper financial planning requires an advisor' and out of the other side we are saying 'analyze your own need and purchase direct from us' ".

The modern history of non-agent selling of individual life insurance in Canada calls to mind nothing quite so much as the image of a cat trying to bury a turd on a frozen pond: there is focus and much concentrated effort but not all that much in the way of results (particularly if one sets aside the industry's promotion and sale of its own form of lottery ticket -- accidental death insurance).

If the sales from direct distribution methods actually increase significantly in future as a share of total individual premium, more than anything else it will be the result of the fact that too many life insurance companies operating in Canada have failed their own agency systems and agency distribution generally to the detriment of the consumer and advisor-based opportunities to buy this product.


Alastair Rickard

email: Alastair.Rickard@