Thursday, April 4, 2013

(No.235) Why having enough life insurance agents matters

"Why having enough life insurance agents matters"

by Alastair Rickard

The possession by Canadians of adequate life insurance protection is a vital factor in the well-being of their survivors as well as an important contribution to Canadian society. Yet selling individual life insurance is the toughest vocational challenge in financial services in major part because individual life insurance is the most client resistant financial product.

The life insurance agent has long been the subject of a prejudice against commission-based selling that is today the stock-in-trade of those in the financial services commentariat who apparently believe that distributing financial products should be undertaken as some sort of philanthropic activity, one unrelated to anyone earning anything from it lest the member of the public be harmed by a distributor's financial incentive to put life insurance coverage in place.

Among the members of this segment of the media's chattering classes there is of course an implied exemption for fee-based activity which appears to occupy a holy place in the view of those who appear willing to ignore certain relevant facts. For example: that 'fees' can be de facto commissions however disguised.

The fact is that most people don't want to buy individual life insurance, either at all or in useful forms ( here I exclude useless forms like accidental death and guaranteed issue burial coverage). The purchase of an individual life insurance policy is inseparable from contemplation of one's own mortality, something most people are reluctant to do and hence to initiate purchase. And the younger the adult, the greater his or her conviction that the product is unneeded because the possibility of dying is thought of as so remote as to preclude the need for the product. The nearest parallel is the surprisingly high proportion of Canadians even among the more wealthy who have no wills.

To find men and women who are prepared to make an ongoing core activity of finding prospects for the purchase of life insurance, of talking to them, identifying and establishing what the need is and convincing them to meet that need by purchasing the policy (i.e., to 'sell') is a challenge, one that most people either refuse to embrace or, having taken it on, give it up. Providing genuine opportunities to buy in the real market place is hard work and success requires continuing commitment and training combined with the ability to handle repeated rejection.

The actual process of selling individual life insurance policies to a largely resistant public can, like surgery, be critically important for family or associates who survive the death of the (potential) life insured. But like surgery most consumers would rather benefit from it than initiate its provision.

Partly for that reason (and there are others) it is difficult to attract people to try to make a career of being life insurance agents.

Please note that I use deliberately, as I have done for years, the currently unfashionable designation "life insurance agent" in preference to "financial advisor" or something generically similar.

I do so because, as both a student of the life insurance industry's history and a participant in its modern form, I know that:
-- "life insurance agent" is a long standing and honourable title;
--  Canadian life insurance agents are licensed as such, not as "financial advisors" although knowledgeable and experienced agents can be valuable and valued advisors to their clients;
--  and because in a Canadian context "financial advisor" carries with it no official or useful information for consumers about the person using it, someone who may not even be licensed by regulators to carry on any form of activity in financial services.

During my years as an executive as well as a public commentator on the life insurance business no topic has attracted as much of my attention in terms of editorials and speeches than the importance to the economic and social well-being of society of people having adequate individual life insurance coverage. The real world of the life insurance business involves as a core activity the "selling of stuff" to Canadians, the concomitant importance of their having genuine  opportunities to acquire individual insurance coverage (critical illness, personal health, long term care, income disability and, above all, life) and the central role in serving the public in this regard of the active, prospecting agency distribution system in its several forms.

The word active is useful in order to distinguish prospecting, 'selling' agents from those who are licensed as life insurance agents but are -- if they 'sell' any policies at all directly to the public -- part of a passive agency system of distribution. It is one which deals with that minority of buyers who initiate the purchase of coverage.

No aspect of the life insurance business has been more poorly understood, more consistently misrepresented and whose important role more consistently underrated or ignored than agency distribution of individual policies. The reality of the agency system has, in my experience, remained a mystery not just to many industry outsiders especially in the media (including 'consumer/financial' columnists) but to the majority of life insurance company executives making decisions affecting the system's health and future.

Their knowledge of the facts of individual life insurance distribution generally and the agency system in particular while often little more than intuitive is -- they are confident -- at all times insightful, or so they are convinced (often in the face of evidence to the contrary). That executive delusion is itself one of the main causes over several decades of poor executive decisions which have promoted and accelerated the decline of the prospecting active agency distribution system.

That decline has long been predicted by thoughtful members of the agency system. A leading member of this group in the U.S. has been Norman Levine, a sometime editor of the American insurance publication PROBE and a leading general agent. Long ago he observed that "most life insurance companies appear to be doing everything they can to aggravate the problems [with their agency systems] and avoid the conspicuous solutions." I agreed with Levine and have written more sentences on the subject than many of the uninformed consultants so beloved by senior company managements have had hot dinners.

However it is 2013 and I have discarded from my diminishing portfolio of life insurance business enthusiasms trying to address such executive and media deficiencies by, for example, suggesting to their exemplars that since they do not understand much about the reality of agency distribution it would generally be a good idea not to pronounce on the subject until they have learned more about it.


To assist the reader to really appreciate the impact of myth and codswallop on understanding of life insurance and its distribution would require far more time and space than I intend to use here. However I will touch on several relevant myths and why having a greater rather than lesser number of active life insurance agents is important to the public.

1. Myth: Canada already has enough people licensed to sell life insurance, 91,000 by recent estimate.

Reality: fewer than 10,000 of these life licensed agents are full time career agents while 81,000 are classified by the industry as "independent insurance agents at least part of whose income comes from the life and health insurance business". In fact not even half of the agents holding life licenses in Canada are in any real sense actively engaged in the business of selling individual life insurance coverage. Many thousands of them sell little or no life insurance coverage.

Such inactive life agents have life licenses for various reasons that have nothing to do with desiring to be permitted to sell individual life insurance. One reason is because they need or their employers want them to hold life licenses so they (or their employer) can claim they are fully licensed, or because they need a license in order to split commissions with real agents to whom they have referred clients.

2. Myth:  experienced full-time agents/brokers who are actively engaged in the business of selling life insurance are being replaced by others who enter the business as a vocation. Hence no problem.

Reality: the pattern for some years has been one of an aging sales force of life insurance agents/brokers. The average age of those in Canada who are in any real sense full time in the business is now north of 55. They are not being replaced at their rate of retirement and the average age of real agents (as distinct from those who merely possess licenses) continues to rise.

This is hardly a surprise to many who have been part of the agency system in Canada and indeed the pattern has long been predicted by knowledgeable people. Almost thirty years ago I interviewed for my own magazine The Canadian Journal of Life Insurance (CJLI) a very successful Canadian life insurance agents/broker, David Bruce Cowper of Toronto. Among many other comments he predicted that "I don't see the same large numbers [of life insurance agents] coming into our business. I don't see our ranks expanding the way they used to." [CJLI, Sept.1984, Vol.6, No.33)

Cowper was referring not to the number of persons merely acquiring life licenses -- that total continued to increase over the next three decades -- but to the number of agents and brokers actively involved in the business of selling life insurance, and his forecast was correct.

A main reason has been the decline in the number of life insurance companies prepared and able to have career agency sales forces into which they would recruit people new to life insurance selling and train and finance them as career agents. This was vital not only for such companies but for so-called brokerage distribution of life insurance since it was the 'leakage' of agents from career systems into brokerage that kept the latter supplied with active participants.

3. Myth: in the age of the internet and online buying of everything from books to hairnets the easy ability consumers have to buy life insurance directly online and bypass the traditional selling agent means a sharp decline if not the disappearance of the role of and need for such agents.

Reality: the first and fundamental weakness of such thinking is that it confuses the availability of non-traditional methods for the buyer to use to purchase life insurance with buyer willingness to use those methods to do something about which most are reluctant: take the initiative unaided and unprompted to purchase life insurance.

It's true that there was in the period before the new millenium something of an apparent upsurge in the U.S. in so-called direct sales of certain kinds of non-complex life insurance products via 'online', call centre and direct mail/response. In fact only fairly simple life insurance products can be distributed 'directly' with much success absent face to face specialist involvement and even then there can be problems.

Not so long ago in a large Canadian life insurance company one of its senior executives -- having discovered (like so many others before him) the supposedly marvellous potential of direct, non-agent sales -- caused to be introduced a "basic critical illness insurance" policy aimed at the internet buyer base. When sales soon turned out to be almost  non-existent this basic CII policy was made available for sale by agents but they were forced to go online to actually complete the policy application and thereby these sales became "online" transactions.

This episode also illustrates a common reason for suspicion when a company claims/reports that X% of its individual life sales were "direct". In my experience life insurance companies and their trade associations can report numbers in ways that give new meaning to the phrase "freedom of stipulation".

When one reads about 'direct' insurance sales, numbers vary and estimates conflict. So far as I can tell the reality of 'direct' individual life insurance sales in the U.S., where such sales have been around for decades, reached a 5% share of premium from new sales and since ca 2000 have levelled off.

4. Myth: numerous surveys of consumers over the years indicate that a significant proportion (30-40% or more) say they would prefer to buy life insurance without involving an agent. Hence steadily fewer agents will be needed.

Reality: one of the fundamental misconceptions that for years has influenced the judgments of many company CEOs as well as the opinions of assorted financial services analysts is the failure to understand the huge gap which has long existed involving the results of consumer surveys between what significant numbers of survey respondents say they prefer when it comes to the purchase of individual life insurance and what, in the real world, they actually do or don't do when it comes both to dealing with agents and initiating themselves the purchase of life insurance.

The oldest aphorism in the life insurance business is this: life insurance is not bought it is sold. While it is rooted in past experience it remains current reality. Mostly it still takes an agent using needs-based selling to prompt purchase. Even with mutual funds, a product Canadians commonly like and want, 85% of purchases involve a sales person.

5. Myth: 'direct' sales of life insurance measured by share of the number of policies sold constitute a more  impressive share of the total -- likely approximating 20% currently in the U.S.

Reality: the 'direct sale' market share gauged by number of policies is inflated by several factors. For example: 'direct sales' reported as such that actually require face-to-face involvement may still be reported as 'direct sales'. Also there are types of coverage that seem cheaper and more attractive to some consumers than traditional life insurance coverage and generate a greater degree of buyer initiative than regular life insurance. A leading example of this is accidental death coverage which the industry will never admit is its version of a lottery ticket, coverage that seems cheap to consumers but is worthless for any financial planning purpose.

6. Myth: Group life insurance is widely available to Canadians through their group benefits from employers and to cover their loans and mortgages. It is estimated that 60% of Canadian households have some group life insurance. It would seem that millions of Canadians prefer to obtain their life insurance as a member of a group plan. This is another fact that lessens the need for life insurance agents and agent-sold individual life insurance.

Reality: For several reasons group life insurance is in the main a form of life insurance coverage inferior to individual coverage. It is beyond the control of the insured because he or she is a mere certificate holder, not the policyholder -- the latter being the employer or the lending institution. Life coverage can melt away faster than an ice cream cone on an August afternoon if the employee leaves the employer. As for creditors group coverage, an individual life policy is usually better in cost and can be kept in force after the loan is discharged.

The average group life certificate of coverage in Canada is only $45,000; more than a third of group life insurance in force is not even employee group coverage (it represents 61%); and in terms of it being reliable death benefit protection regardless of when death occurs, only 41% of life insurance death benefits in Canada are paid under group coverage.

Group life insurance is an inadequate substitute for lifetime death benefit protection which utilizes individual life insurance policy coverage.

7. Myth: the market for life insurance in Canada is "mature". I have read this in many articles in the financial media. Canadians are well-insured and there is limited room for growth in life insurance sales as the demographic trend continues to skew to a higher percentage of the population being over the age of 65. Obviously there is a declining need for traditional life insurance agents to distribute life insurance.

Reality: Reference to the supposed mature market for life insurance in Canada has long since become the refuge of life insurance company CEOs with under-performing distribution systems generating inadequate new sales who seek to justify expensive growth by acquisition. It is also the default position of those life company executives and industry analysts who understand neither the life insurance market place nor how to serve the bulk of it.

The life insurance market is not mature -- as any examination of a range of relevant data attests. For example: The current population of Canada exceeds 34 million. At least 8 million adults have no life insurance of any type; at least 50% have no individual life insurance in force; millions more are grossly under-insured. Among the population age 15 and over the amount of individual life insurance coverage in force, averaged over that entire population segment (insured and uninsured) is only $75,000. Even if each Canadian had that level of coverage, and most do not, it would still be inadequate.

Canada is not a mature market or anything close to it. It is a conservative estimate that a minimum of 5 million Canadian households need more life insurance; it likely closer to 10 million. The life insurance industry's challenge is not market maturity vis-a-vis life insurance but the long history of the industry's declining ability to distribute its core product effectively, the decrease in its effectiveness at reaching a large and broad market through agency distribution. The reason is, with a few honourable exceptions, lousy stewardship by life insurance companies of the industry's long standing core strength: agency distribution.

8. Myth: statistics seem to indicate that there is less need for individual life insurance coverage as death benefit protection (i.e., for individual life insurance policy protection which insureds own and control themselves unlike group life insurance certificate holders). Most individual life insurance policies are called upon to pay death benefits only after decades have passed since they were purchased.

Reality: In Canada 1 in 3 death benefit claim dollars are paid on individual life insurance policies which have been in force for less than 10 years; 59% of life insurance death benefits in Canada are paid under individual life insurance policies.      


I have expressed in several recent columns on my dislike of the intended revision of the Life Licensing Qualification Program (LLQP) regime across Canada by the regulators of the Canadian Insurance Services Regulatory Organizations (CISRO) working hand-in-hand with those of Quebec's Autorite des marches financiers (AMF).

My main reason is only partly rooted in the fact that the sort of change planned is unnecessary, one not required to correct pedagogic deficiencies but rather a reformation activated by parochial budgetary needs of provincial insurance regulators.

A major concern I have with 'LLQP revisited' is the fact that it will certainly for some years (at the least) following implementation unnecessarily depress the number of people prepared and able to enter the agency system by clearing a bar whose degree of difficulty will have been determined by a licensing regime reconfigured to satisfy the financial interests of provincial regulators.

The effect on the public interest of a revised, 'modular' LLQP-induced negative impact of the inflow of new agents will be to make even fewer the genuine opportunities in the real market place for Canadians to purchase a fundamentally important financial product, one that is the prudential product base of an intelligent financial planning pyramid. This will be entirely avoidable collateral damage

One needs to calibrate the significance of that malign result of so-called agent licensing reform using the yardsticks to which I have alluded in this column, i.e., those which indicate the reality of how most individual life insurance coverage gets put in place; how and by whom it is sold, serviced, retained, upgraded and where necessary replaced.

I have low expectations of the ability and/or willingness of most media financial services pundits and self-appointed advocates when it comes to real understanding of the important role and contribution of life insurance agents to the public good as well as that of the agency distribution systems to which they belong.

Such 'experts' enjoy the luxury available to pundits of leaving the life insurance industry's complexity and nuance to others. Indeed their attention to the subject, however superficial, is routinely uninformed or idiosyncratic or both.

I know and have worked with several of the current senior provincial insurance regulators, the regulatory godparents of the agency system for distributing individual life insurance. From most of them I would expect better than what I have seen so far in LLQP redux. Hence my disappointment in and criticism of the ill-advised licensing changes they are initiating -- or at least acquiescing in.




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