Some of Canada’s largest managing general agencies (MGAs) are growing even bigger, leading some to speculate the country could soon be in store for “super MGAs” that can only be bought out by insurance companies. But many in the industry think advisors’ independent streak will prevent insurers from reverting to their previous stronghold on distribution.
Just recently, Vancouver-based IDC Worldsource Insurance Network Inc. (IDC) announced it was acquiring First Prairie Financial Inc., which has a large presence in Alberta and Saskatchewan. As well, HUB Financial Inc., based out of Woodbridge, Ont., said it was buying up MGA Cortex Financial Inc., based in Thornhill, Ont.
“We created MGAs to avoid bureaucracy and now we’ve become bureaucratic all over again,” says Jim Ruta, insurance industry speaker, coach and author, regarding the increasing size of some MGAs.
Canada is home to five major MGAs: IDC, HUB, Financial Horizons Group, PPI Solutions and BridgeForce Financial Group, some of which, says Ruta, have close to 10,000 advisors on their books – about the same size as Sun Life Financial, London Life and Investors Group together.
Some advisors try to get away from a certain MGA, only to go to another and have that one gobbled up by the one they wanted to leave in the first place.– Jim Ruta
In a recent interview published in the March 2015 issue of The Insurance and Investment Journal, Mark Sylvia, president and CEO of Empire Life, said he was concerned that as MGAs expand, the only ones left with enough money to buy them will be large, financial institutions. If that occurs, said Sylvia, they could exert influence on the MGAs as to whose products they sell.
Ruta says the “law of unintended consequences” would point in that direction, with acquiring insurers telling advisors what to sell – resulting in less competition – and even how many policies to sell.
But Arnold Scheerder, who is compliance officer with R.G. Packman & Associates (an MGA that was recently acquired by Financial Horizons Group) and compliance chair for the Canadian Association of Independent Life Brokerage Agencies (CAILBA), says he personally believes that the industry will not end up with only a handful of super MGAs.
Scheerder says he thinks there will always be a place for smaller, regional or niche MGAs, just as is the case on the mutual fund dealership side. Even in Canada’s banking industry, dominated by the Big Five, there are smaller financial institutions that end up offering unique products or services and thriving in that niche.
Like many in the industry, Scheerder says the long-held independent streak of many financial advisors won’t let insurers force them to do something they don’t want to do.
“Will we end up with four or five MGAs and then have them bought up by the insurers? It could happen,” says Scheerder. “Distribution is a big part of the industry. If an insurer were to buy an MGA, I think the one thing that they need to remember is that the broker community is fiercely independent so they will want to maintain a choice of product offering to their clients. So an insurance company buying an MGA will have to respect the stand by the broker that…if I have a client who requires a product with better suitability to the client from company B, then I want to maintain that choice.”
In fact, National Financial Insurance Agency (NFIA), a member of the Industrial Alliance Group, recently purchased MGA Ten Star Life.
But John Hopkin, president of NFIA, says the plan for Ten Star Life is to merge with NFIA and continue as per usual.
“As part of that plan, the Ten Star agents can sell the products of any company they choose and see as the best option for their clients,” Hopkins states in an email. “They will not be ‘forced’ to sell the products of any particular company, including [those of] IA.”
Paul Brown, chairman and chief executive officer of IDC said his MGA’s purchase of First Prairie Financial stemmed from IDC’s desire to gain more scale through acquisitions accretive to its earnings and more strength in Alberta and Saskatchewan. First Prairie had built up its business over the past 60 years but its principals were looking for a succession strategy and the ability of its advisors to gain access to a wider array of products and insurers. The transaction is expected to close in the second quarter of 2015.
Despite his own company’s growth, Brown agrees there is always room for smaller players. Hundreds of MGAs have merged over the years as a natural evolution of the business, but there are, he says, about 100 still left out there. “We’re not even near to the point where there are four or five MGAs.”
He points out that the three big insurers – Great-West Life, Manulife Financial and Sun Life Financial – control 60 per cent of the market and there aren’t that many concerns about them.
But like others, he agrees with Empire Life’s Sylvia, that when MGAs become very large the only natural acquirers may well be the large financial institutions. “I think that’s a fair comment….I think there’s somewhat of a likelihood of insurance companies buying up MGAs, but who knows?”
Also on the consolidation trail is HUB, whose recent purchase of Cortex Financial broadens HUB’s footprint in Canada, providing advisors with multi-fund insurance and risk solutions, including travel insurance, says HUB president Terri Botosan.
When asked how she felt about Sylvia’s thoughts about insurers eventually buying up super MGAs, Botosan said: “I don’t think he’s crazy.”
Botosan said most of the large MGAs are owned upstream by private equity and very large firms. She agreed with Sylvia that right now the MGAs are getting to be very large and that there comes a point when the market for a buyer becomes quite narrow.
While she said insurance companies might buy a larger MGA down the road, she too believes that the independent channel will prevail.
“I’m not sure [...] there would even be a big shift in the independent distribution channel,” said Botosan. “I don’t think an insurance company would buy a large MGA and then think that that meant that they would get the lion’s share of the business just because of ownership. The independent model is so well established and advisors vote with their feet. So if, for example, an insurer bought a large MGA and somehow tried to mandate production to go to that particular insurance company, advisors would just leave and go somewhere else.”
“So I don’t think it would mean the demise of the independent channel, but I think it would certainly create an interesting next chapter in our journey.”
Ruta says increased compliance and the cost of requiring compliance officers have forced many smaller MGAs to sell out to their larger competitors. However, he says increased compliance, has resulted in MGAs that provide good management support, which in turn, can improve the quality of their business and make for better advisors and better service for their clients.
