Shrinking competition spooks life insurance industry

By Stéphane Desjardins | April 20 2003 04:32PM

Great-West’s purchase of Canada Life is giving brokers and managing general agencies (MGAs) the jitters. Some worry that the decrease in the number of Canadian players will undermine quality of service, while others warn that the Canadian market will ultimately be dominated by a handful of insurers.

“Beyond doubt, competition in the Canadian life insurance market is shrinking dramatically,” said Paul Brown, President of Hub Financial. “Ten years ago, the industry was doing business with over 50 insurers. Today, there are only about 15. There are fewer companies and a declining producer base, therefore there will be fewer options for the consumer.”

The MGA is worried about the aftermath of the wave of mergers and acquisitions among suppliers, which has completely transformed the sector in the past decade. Mr. Brown added that today, some of the suppliers have even become competitors through various channels.

In reality, distributors are accepting their fate, but not without criticizing the current state of affairs. “Competition is decreasing. But all the mergers and acquisitions are part of a global trend in today’s economy. We are seeing a return to monopolies,” said Jacinthe Collin, President of Vandewinkel Financial Group, a Quebec MGA. “I’m trying to remain optimistic, but I know that more mergers will follow.”

Ms. Collin fears the day when there will be no more than four or five insurers nationwide. “A dearth of competition kills creativity. The industry then enters a zone of comfort and complacency.”

However, she does not consider this vision of the future as necessarily a bleak one for consumers. “Look at the auto industry. Today it is dominated by less than a dozen large players. This has not prevented them from offering a wide range of products to suit all needs and tastes. I think that the insurance industry will do the same. What makes the difference is the quality of service. Insurers will position themselves as the banks did 20 years ago. Today, the image of the Royal Bank is more prestigious than that of the National Bank. Each will find its own niche.”

Ms. Collin expects that the “cartelization” era of life insurance will last quite some time. “The population’s laissez-faire attitude is alarming. Nobody is opposing these monopolies. … As soon as the consumer reaches a certain comfort level, it seems that they no longer feel any pain.”

Mr. Brown commented that the industry has learned to live with insurers that lament, year after year, that they are not profitable: “Contrary to what some people think, they were right! For years, there has been no growth in our market. Consolidation naturally emerged to remedy this unhealthy situation.”

Ten to remain?

“Soon there will be no more than ten life insurers in Canada,” said David Barber, President of Piper Barber Insurance Agency and the Independent Financial Brokers Association of Canada (IFBC). “Consolidation is unavoidable, because of our small population. Even if there is still room for niche players like Equitable Life, Empire Life or Co-operators, insurers must continue to grow to maintain their profitability. And in a saturated market like ours, the only possible growth can come through acquisitions. This phenomenon can only gain intensity because some insurers are now public corporations.”

“This shrinking competition is forcing MGAs to make choices,” noted Gilles Cloutier, president of Groupe Cloutier. “They must develop closer partnerships with their insurers. In concrete terms, MGAs will quickly reduce the number of suppliers, probably to five or six.”

Is he worried about the future? “Yes and no. Let’s say that the current situation is pushing us into long-term partnerships with our suppliers. For MGAs to be satisfied with such agreements, they must try to predict which company will be up for sale in the next few years. That means they have to scrutinize the financial situation of insurers. Those who are in sound health are less likely to disappear. … It is clear that people are questioning the future of the industry.”

Mario Grégoire, President of iForum Insurance Brokerage, thinks that the current wave of mergers will not be limited to insurance. “In the next few years, there will be eight to ten large financial institutions left. These companies will be large integrated groups that offer banking services, property and casualty insurance, life insurance, securities investments, etc. In this universe, all products will begin to look alike. What will make the difference is service. This environment is also favourable to boutiques, where the customer can find the added value they prize in financial services.”

Products count less

Shelly Copoloff, Vice-President at MGA Copoloff Insurance Agencies, considers that the current wind of consolidation is uprooting the industry players’ old habits, especially those of brokers and MGAs. “The product no longer counts in this environment. Added value makes the whole difference. For brokers, personality will make some stand out. Their ability to hone in on their customers’ full range of financial needs will be essential.”

Ms. Copoloff added that presentations on paper or on laptop are already virtually identical from broker to broker. Brokers’ work will become more complicated because customers are now more financially savvy. “Brokers must increase their knowledge of all areas of financial services. They must manage their relations with the clientele much more comprehensively than before.”

Ms. Copoloff does not see the future as all that bad: MGAs have some shining opportunities ahead. “These days, all MGAs strive to present a differentiated offering to their customers. They will develop closer relations with their suppliers. This is a positive aspect of consolidation.”

No problem!

Klaus Zabel, President of MGA Marketing Concepts Group and the Canadian Association of Independent Life Brokerage Agencies (CAILBA), is not perturbed by the current situation. “I don’t believe there will be less competition. If this was the case, I have not seen much proof, at least not on the product front. Today, we are dealing with about 15 suppliers. The picture may be less rosy if this number drops to five or six, but it is not the case right now. We have a good choice of products and the companies are quite innovative. In this context, an individual broker who has a flair for business can present the right solution to the customer.”

Mr. Zabel said that the industry has evolved in other respects, such as responsibility. “There are things that were acceptable ten years ago that are no longer condoned today. Also, the industry has recognized that insurers have expenses. They cannot simply sign contracts and immediately pass on 95% of income to the brokers without demanding anything in return. Today fewer and fewer insurers are prepared to take wild rides just to increase their market share.”

The situation may not be worrisome now, but in ten years we may be seeing a cartel, continued Mr. Zabel. “I’m not very optimistic about this. When the life insurance industry resembles the banking sector, it will be very disturbing. And don’t count on foreign insurers to fill in the gaps created by mergers and acquisitions. For the past ten years I have only seen insurers leaving the Canadian market. No one is coming in!”

Mr. Brown agrees it is unlikely that foreign insurers will take a sudden interest in the Canadian market. “Our market is too small. The Americans and Europeans will go to China before entering a saturated competitive market like ours.”

He admits that some niche players may carve out a place in Canada. “In a monopolistic or cartel market, there is always room for niche players. The problem is that the chances of their attaining a critical mass and achieving profitability are slim.”

A cartel, yes but…

Cartel or not, Mr. Brown believes that insurers will never be in a position to push distributors around. “In life insurance, distribution is provided by independent contractors. And the nature of the products is not conducive to direct sales. That’s why insurers will never want to get on their distributors’ bad side,” he pointed out.

The MGA’s situation has deteriorated all the same, he added. “There are more players than ever in our sector. The more competitive we are, the smaller our margins. In addition, the insurers have transferred a lot of work to MGAs. Times are tough but the challenge is a stimulating one.”

For Mr. Barber, there is still sufficient competition for brokers to get by. “I am a broker, and I still have many choices to offer my customers.”

From bad to worse

Lawrence Geller, President of L.I. Geller Insurance Agencies and moderator of the discussion forum For Advisors Only, is less optimistic. “There are many forms of competition related to products, prices or underwriting. It is true that these days it is still possible to get some products at a decent price. In a few areas, insurers are even waging price wars. T-10 is a perfect example. Many products may appear very competitive, but this is a mirage. When you look at renewal rates for ten or twenty years, you will see a dramatic rise. Insurers assume that most customers will go elsewhere at renewal. The bottom line is it’s the customer that pays…through the nose.”

Mr. Geller admitted that he prefers Great-West’s offer to purchase Canada Life to Manulife Financial’s, a partner he considers to have poor marriage potential. But he added that the union of Canada Life and Great-West will considerably reduce competition in the market.

“Today, it is more difficult for a broker to have contracts approved. Insurers have offloaded a large portion of the bureaucracy to their distributors. All the paperwork we do takes an immense amount of time. Replies from insurers are invariably slow, and these replies are often incorrect. You have to call them back many times. No, the situation is certainly not improving and the current consolidation will aggravate things. To make matter’s worse, one day the banks will penetrate the lower end insurance policy market. This will hurt because the industry is currently very competitive in the most profitable product such as T-10,” he concluded.

In some niches, the Canadian market is already in an oligopoly situation. And even a duopoly. A dire predicament, some say, worried that their warnings are falling on deaf ears.

“Look at the group life insurance market and you can see that the number of insurers has decreased dramatically in the past two or three years alone,” explained Mr Geller. “Before, if you did not know whether a file had a substandard risk, you could still obtain two quotes. Today, zero.”