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Insurance company distribution agreements proliferate

par Mathew Kokas | August 20 2000 08:59PM

Distribution agreements among Canadian insurers are multiplying at a feverish pace. Yesterday’s enemies are now joining forces to fill gaps in their portfolios and offer their representatives a stronger product line. Alliances between insurers are nothing new. In disability insurance and in more specialized segments alike, insurers have often signed distribution agreements with competing insurers to fill gaps in their product line. But until recently, these agreements were limited in scope.

Times have definitely changed. On July 20, two companies owned by Power Corporation, Great-West and London Life, signed a distribution agreement with Manulife Financial. It is massive in scope. Under this alliance, the financial advisors of Liberty 55 (a division of London Life) and Great-West, will have access to Manulife’s universal and term life insurance and investment products, while Manulife representatives will now gain Great- West’s personal disability insurance products and employee benefits aimed at small groups.

The trend hit Quebec when MFQ Life began distributing Industrial Alliance’s universal life product June 1, 2000, while the latter company has long been procuring its disability products from Great-West.

“Thanks to this alliance with Manulife, each of the companies will broaden their array of top products and enlarge their client base,” said Raymond McFeetors, Chairman and CEO Great-West and London Life. In his opinion, the trend toward distribution alliances is here to stay. “Brokers prefer to have a single provider,” Mr. McFeetors pointed out. He sees new distribution agreements on the horizon for Sun Life.

According to Trevor Matthews, Executive Vice-President of Manulife’s Canadian Operations, this alliance is part of its strategy to add to its distribution network agreements, initiated earlier this year. It also lets the company access Great-West’s disability and critical illness line, products that their independent agents had been seeking outside of Manulife, Mr. Matthews added. Unlike Great-West, Manulife does not plan to forge other alliances of this type for the time being.

On July 25, Sun Life also announced the expansion of its existing agreement with Great-West and London Life by making access to its Term and Term 100 products immediately available. The two companies have been offering Sun Life’s UL to their agents for the past year, whereas Sun Life has been providing disability insurance and the SME program Selectpac. In 2001, the Liberty 55 advisors will also be able to sell Sun Life’s guaranteed interest and immediate pension accounts.

“Sun Life is at the vanguard of this type of alliance, and has signed agreements with a number of financial services companies,” said Marcel Gingras, Executive Vice-President of the Canadian company. For example, in March the insurer entered into a distribution alliance with CNA. Interestingly, CNA Term contracts sold by Sun Life representatives include a conversion option to Sun Life’s universal life insurance policies.

It remains to be seen whether this type of agreement will spur competition among Sun Life’s own brokers. To this question, Mr. Gingras replied that the Canadian market “is very big.” The more vendors there are, the more products sold, he believes, which will in turn generate economies of scale that profit everyone. The other players also acknowledge the positive impact of an expanded distribution network.

For his part, Mr. Matthews was not unhappy to learn that Manulife’s products will be competing with those of Sun Life under an agreement with Great-West/ London Life. “It’s a free market,” he commented, adding that the presence of other well-known products within the agreement will inevitably boost sales of his own company’s products.

From insurer to MGA

A major advantage for insurers who agree to distribute competitors’ products is the sales commission they earn on these products. This is similar to what happens under more traditional distribution agreements, particularly ones involving general agents. In addition, the supplier keeps better control over its sales force, deterring agents looking elsewhere for missing products.

What’s more, the insurers believe that it is more cost-effective to form an alliance than to develop a new product from scratch. “When a product is missing from our line, it is more profitable to join forces with a competitor who specializes in this product,” Mr. Gingras explained. Take CNA for example, this company had already developed substantial expertise in term insurance “that it would have cost us dearly to acquire by our own means.”

Raymond McFeetors has no doubts that the cost structure motivates the new demutualized companies in particular to create alliances. “When you go public and face expectations from the shareholders, you have to watch your cost structure.” Trevor Matthews, meanwhile, insists that going public did not influence Manulife’s decision to join forces with Great-West and London Life.

Janet De Silva, Sun Life’s Vice-President of Retail Business Development, notes that sometimes it can be easier to forge reciprocal sales arrangements with competitors than to create product lines from scratch. “The markets are moving to more complex products – Universal Life as opposed to Term, for example – so a much heavier system is needed. It’s not just products – you need an end-to-end system that can include technical tools, marketing expertise, sales support, reporting systems … it can be a big investment.”

What else is in the works for Sun Life? The company is not ruling out any co-operative arrangements in the near future in its quest for a comprehensive product line. Long-term care insurance, for example, isn’t offered yet but it’s under review.

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