INDEPENDENCE or INTERDEPENDENCE?

Despite the recent and resounding victory of independent property and casualty insurance brokers in blocking banks from branch retailing of insurance, Canada’s brokerage community faces many challenges on the road ahead. Even without the bank threat, the distribution end of the business has for some time been subject to intense competition from several quarters, primarily due to modern technology which is reforming the way the industry operates.Consumerism and heightened productivity have become the names of the game, resulting in widespread and ongoing consolidation of the profession, with new alliances and relationships emerging. However, many within the community believe that the course this “relationship evolution” is taking could ultimately undermine the core energy of the broker profession: its independence.

Will it be a future of independence or interdependence is the question many property and casualty insurance brokers are asking themselves. In fact, many within the insurance industry feel that this debate may have already become a moot point.

For a profession with widespread diversity of interests, industry observers have long marveled at the tenacity and unity of the independent brokerage community in its fight to maintain a dominant role in the distribution of insurance. The community’s recent and successful spat with the banks over the course of legislative reform of financial services is a prime example of the political lobbying muscle it can and will flex when needed. However, the common thread of “independence” which knits together the community’s unity could be on the verge of excessive strain — due to the growing trend of insurer interests in brokerages.

The involvement of insurance companies in brokerages through financial lending and equity positions is not a new phenomenon, it has been taking place, as one commentator notes, “since Noah set his feet back on ground”. However, all of the parties consulted in the compilation of this article agree that the pace and extent of company involvement in brokerages has increased over the past two years. These financial arrangements — or interdependent partnerships — have also become more upfront in terms of their structuring, such as direct equity stakeholding, which in some cases has resulted in a shift of shareholder control to the insurer.

As an increasing number of these deals emerge in the marketplace, two opposing camps of opinion have formed — those who believe that partial or total loss of operational independence will destroy the “consumer advocacy” role of the broker, and those that see these interdependent relationships as being an inevitable outcome of the market’s direction, the result having little or no impact on the broker’s ability to serve consumer interests. The first camp is concerned that insurer involvement in the affairs of the brokerage community will undermine the validity of the broker consumer message of “independent advice”. Dealing with the reality of “staying in business” appears to be the religion of the second camp, the view being that closer broker/company ties are the only way open to achieve the necessary business cost-efficiencies to ward off marketshare erosion by direct writers.

The controversy of direct company involvement in brokerages has been particularly intense in Ontario, with both the Registered Insurance Brokers of Ontario (RIBO) and the Insurance Brokers Association of Ontario (IBAO) having over recent months informally surveyed brokers in an attempt to establish a market viewpoint: the samples merely confirming what appears to be a 50/50 split in pro/against opinions. An area of concern in the Ontario market is “backdoor exploitation” of the legislated ownership rules where ownership of brokerages is being shifted from the principals in question to non-registered out-of-province members. Provincial legislation currently requires that the controlling interest of a brokerage must rest with a registered broker. This, however, may even change in the near future as the Financial Services Commission of Ontario (FSCO) is reviewing its ownership rules in response to the market’s changes.

Regulating ownership

A legislative conclusion in defining brokerage ownership and independence will take some time to flesh out, predicts Lorie Guthrie Phair, president of RIBO. “This is definitely seen as a big issue, one which is not going to just go away.”

RIBO is involved in ongoing discussions with FSCO to settle the matter, Guthrie Phair says, with the emphasis being on what a change in the ownership rules may mean from a professional conduct perspective. Consumer interests will occupy central stage in whatever decision is finally reached, she adds. “The priority is to make sure everyone is playing by the same rules and that the consumer’s interests remain best served.”

That said, there does appear to be a shift occurring in what the definition of a broker is according to law and what is being practiced in public, Guthrie Phair confirms. Whether this will have any adverse bearing on the consumer still has to be settled, however, the legislation as it currently stands is not serving the market’s needs. The answer could be to relax the ownership rules but bring in public disclosure requirements, an area where RIBO could play an active part, she adds.

Tied to the ownership/independence debate, and the definition of a broker versus the role of an agent, is the required number of markets/insurance companies the enterprise has representation of. Essentially, this cuts to the heart of the concerns surrounding company involvement in brokerages, namely expectations of a stakeholder insurer to be the preferred or sole underwriter of a broker’s book of business (which would not necessarily be in the best interests of the broker’s clients). From a regulation perspective, this could also be subject to change, Guthrie Phair says. “Our policy has always been that brokers should have at least two standard insurers, but even that is being reviewed. Where are we going from here? We’re very much in the consultative phase, but the government [of Ontario] realizes that it is going to have to deal with the matter sooner than later.”

A further point to these discussions, Guthrie Phair says, is the need to approach regulation reform with an eye to provincial harmonization, “it doesn’t make sense to have different rules from one province to the next, this is one way the rules sometimes get bent”.

Market forces

Interdependent relationships between brokers and companies is critical, comments Doug Davis of market consultants Davis Consulting Inc. “Interdependence is going to be key for brokers to prosper, they [brokers] will need partners, typically a carrier or network consolidator. It [partnering arrangements] is a smart move for insurers and brokers alike — insurers have the capital but want premium volume, brokers definitely need the capital.”

The need for partnering arrangements with insurers is heightened by the current demographic shift occurring in the management of independent brokerages, he observes, with many of the older principals now looking at retirement. The capital inflow to the community from companies allows broker partners to withdraw and also opens up the opportunity for younger members to gain the funding to buy stakes in the business, Davis points out.

Providing financing is one thing, but should companies be allowed to dominate the management of brokerages? Davis’ response is company shareholding in brokerages has become as much of a market reality as the need which lead to the start-up of the network consolidators. Although independent brokers will continue to dominate the distribution of personal lines business, their marketshare is eroding, leaving little choice but to seek out potential partners — this means either choosing companies where the principals in the brokerage can maintain a degree of autonomy in their operational affairs, or alternatively selling out to a consolidator, he remarks.

And, Davis notes, further expansion of the network consolidator market is limited — alrea
dy some of the networks have merged in a bid to contain costs and consolidate their positions. Ultimately, the network consolidator market is here to stay, but it is unlikely to produce many more new entrants. “The regional networks will most likely be absorbed by a handful of national, public-listed consolidators, resulting in a tree-like hierarchy of ownership.”

To whether the drive of the network consolidators and/or company stakeholding in brokerages will eventually weaken market competition, Davis does not believe so. “The term of independence as we refer to it today may be redefined, as companies will be dictating to a larger degree on premium levels, this could mean brokers will end up representing fewer markets, but I don’t see it negatively affecting competition or the independent status of the brokerage community. It’s unlikely any company will expect a broker to place the entire book of business through them [the company].”

However, there are well-known instances in the industry of brokerages placing up to 80% of their book with one insurer partner. Some of these brokerages are also members of the provincial independent broker associations. Is such an enterprise really a broker or an agent? This is a concern which Lawrie Savage of consultants Lawrie Savage & Associates Inc. holds. He points out that the real issue is how an “independent broker” operating in this manner portrays his/her operation in public — it really gets back to disclosure. “If brokers hold themselves out in public to be independent, then they really should be independent. Brokers entering alliances or any relationship affecting ownership should change their public occupational line. Should the broker/company partnership trend continue to grow, consumers will eventually demand clarity of these relationships.”

Conversely, Savage does not believe independent brokers are being faced with an ultimatum to enter into any kind of partnership. “The future is excellent for some brokers be they big or small, and at the same time it’s non-existent for others – those who add value to the client relationship will prosper, and those who are merely order-takers will die out.”

Davis concedes that much of the activity where small independent brokers are selling out to either the consolidators or insurers is prompted by market fear. “Brokers are currently making decisions based on fear, and in many cases they are taking the first offer that comes up.”

George Hutchison, CEO of network consolidator Equisure Financial Network, affirms that partnership is one of several routes open to the independent broker. “Being part of a network isn’t right for every broker, it really depends on how strong the management team is.”

Although the marketshare of the network consolidators will continue to grow to the detriment of the independent broker community, Hutchison believes well-run brokerages focused on service will continue to hold the lion’s share of business. “It doesn’t matter how you approach it, you have to have a face out front. Consumers like specialists, and they see independent brokers in this light — it is this view which will always keep the independent broker on top of the heap.”

Broker association views

Much of the insurer financial involvement with brokers is not new, observes Stephen Evanson, president of the Insurance Brokers Association of Alberta (IBAA). “It’s just become more openly apparent”.

The IBAA recently rewrote its constitution and bylaws, including a detailed, amended definition of what an independent broker is supposed to be. This was necessary, Evanson explains, to update membership requirements in response to market changes. The main factors distinguishing an independent broker under the IBAA’s definition is who has control over the book of business rather than shareholding controls, plus the where and extent of business placed.

Evanson agrees with Savage in respect of the fact that consumers will eventually decide who is acting in their best interests. However, he takes exception to the view that any form of equity participation by an insurer in a brokerage means a loss of “independence”. “The fact is today’s market is not the same as 10 or even five years ago, just because an insurer has invested in a brokerage doesn’t mean that he isn’t an independent broker. I don’t see this trend as being bad for the consumer as long as his/her interests are being served. As long as control of the book remains with the broker, it doesn’t matter if he places 75% of the business with one insurer.”

In addition, Evanson notes that many of the deals between insurers/brokers are not based on premium volume. Rather, he adds, brokers have always seen insurers as an alternative source of debt or equity financing for expansion purposes rather than approaching a bank, thereby keeping the business within the industry.

Ken Orr, president of the IBAO for the 1999/2000 term, confirms Guthrie Phair’s earlier statement that brokers in the province appear split on the issue of allowing insurers to gain controlling interests in brokerages. “Some [members] believe FSCO’s ownership rule should be tightened and others want the percentage restriction [of shareholding] removed. There isn’t sufficient consensus for the IBAO to take a stand on the issue just yet.”

Orr ascribes any loss of “independence” of brokers in alliances with insurers to the market’s soft pricing conditions, which, he notes, will turn and likely lead to a more traditional arm’s length type of relationship between the two groups. “From the IBAO’s standpoint, our priority is to ensure the interest of consumers, the second [priority] is to see the continuation of the independent broker system.”

In that respect, Orr believes there are bigger issues than insurer involvement with brokerages which have to be dealt with sooner rather than later. To a large extent, these partnerships with insurers are occurring as a means of achieving necessary cost-efficiencies, he says, and getting improvements through the system like effective electronic interface is a higher priority. In that respect, relationships between insurer and broker have to become closer, Orr states.

The company/broker partnership trend will continue to grow, predicts Ralph Libby, president of the Insurance Brokers Association of British Columbia (IBABC). The association also reviewed its definition of the independent broker a year ago in order to accommodate membership.

Unlike Ontario and Alberta’s private insurance systems, the B.C. market is dominated by a state carrier, The Insurance Corporation of British Columbia (ICBC), which represents the bulk of business on the province’s broker books. “Where the premium goes is not an issue for us when determining who is/is not an independent broker. Instead, we look at who is calling the shots,” Libby comments. While the market is likely to undergo further change, Libby points out that the insurer/broker partnerships which have occurred in the province have not resulted in any lessening of the brokerage community’s independence in serving consumers.

Jim Ball, president of the Insurance Brokers Association of Canada (IBAC), sees broker/insurer partnerships as a natural response to market conditions. “I don’t see this as a bad development, I think insurers are realizing that if they don’t protect their brokers, then they will lose.”

Ball notes, however, that a change in relationship might mean that, from a customer perspective, brokers entering into insurer alliances may no longer be able to claim themselves as independent. From a professional viewpoint, one of the more pertinent issues is who will eventually have control over the customer relationship, he adds. “There are definitely some strange deals happening out there — where it is leading I don’t think anyone really knows for sure at this stage. IBAC may have to conduct a membership poll on the ownership issue at some point, but so far the issue has not been raised at member meetings.”

Ball also believes there is a distinction between “independence” and “advocacy”. Should the principal broker lose shareholding control, this does
not lessen the individual’s ability to advocate, he explains. “Even if I’m partly owned by an insurer, I’m still not an employee of the company and therefore can offer good advocacy to my clients. This [insurer/broker partnerships] might eventually mean less choice, but so far I haven’t seen any insurers [in broker investments] demand the whole book of business.”

Company approaches

Alan Hanks, vice president of field operations at newly created call-center insurer Chieftain Insurance, believes broker partnering with insurers is a necessary market step. Chieftain, which is owned by Dominion of Canada General Insurance Company, was set up as a broker-support call-center alternative to direct writers. The operation works on a call-center basis where consumer queries are routed through to the closest broker partner. As such, call-center technology is one way insurers can partner with brokers without influencing their management independence, Hanks says. “From our point of view, Chieftain is another tool for the broker to use, they [brokers] have other markets but this [Chieftain] provides the opportunity to get a new piece of business.”

With Chieftain, there is no influence to get the broker to switch his book of business from other insurers, Hanks adds, “our purpose is simply to serve that group of consumers who would prefer the convenience of a call-center”. Actually, Hanks notes, a broker is free to write a consumer who may have been routed through the call-center to any other insurer if he/she believes that the consumer would be better fitted with another product.

Donning his Dominion hat, Hanks says the company does not actively pursue ownership of brokerages, although it does hold minor equity holdings based on acquisitional financing arrangements. “But, there are some insurers out there aggressively taking ownership positions, we’re just not one of them.” The future of the independent broker channel rests on its independence, he remarks.

Linda Mathews, chief operating officer at Royal & SunAlliance Insurance Company of Canada, which has adopted an active approach to brokerage ownership, says interdependent partnerships are an inevitable reality in the current environment of consolidation. She emphasizes, however, that Royal & SunAlliance does not enter into broker equity investments with a view to becoming the “preferred underwriter”. “We don’t want to be in a position to restrict independence of the broker, we look at each opportunity from a business investment perspective.”

In addition to equity and financing deals, Mathews says insurers can partner with brokers on an “added value” level, namely providing call-center and customer handling facilities. A growing trend, she notes, is for insurers to provide financial management assistance to brokers in areas such as succession planning. Carol Jardine, vice president of claims at Royal & SunAlliance, also sees significant scope for insurers to assist brokers in claims handling, thus freeing up the broker’s time for selling. “Since Royal & SunAlliance brought in its 24-hour, 1800-number claims reporting-center, our customer satisfaction rating has increased by 7%. Brokers have been highly receptive to the service, with the majority of our personal lines-related claims being routed through the center.”

Mark Webb, chief operating officer at CGU Insurance Company of Canada, regards insurer equity financing of brokerages as an opportunity to strengthen market relations. “We work with the consolidators and independent brokers in providing funding to allow partners to leave the business.”

Although CGU does look for preferred status when entering financial arrangements with brokers, which Webb describes as a natural objective of an insurer in a partnership deal, the company does not like to take equity positions. It also expects the brokerage to maintain several markets in its dealings.

Gregg Hanson, president of The Wawanesa Mutual Insurance Company, adds his voice in support of company/broker partnerships. “We don’t believe in buying brokers outright, the broker has to remain independent, this is the advantage the independent community has over the other distribution channels.”

However, insurer financing is a way for companies to strengthen their broker ties, Hanson says. It also provides an opportunity for the independent broker to not only survive but grow in an otherwise difficult market, he adds. As such, he does not see company financial aid as being a threat to the independence of the brokerage market. “There are different strategies being applied, which I believe there should be room for — there is no one type of customer or one broker/company approach. I don’t think every broker is going to want to give up their independence for a short-term gain.” That said, brokers need to focus on their strengths rather than trying to duplicate the approach of direct writers, Hanson observes.

REGISTRATION OF BROKERS

RIBO outline of the function of a BROKER VERSUS AGENT:

BROKER:

A Broker is an independent intermediary between the parties to an

insurance contract (i.e. the insurer and the insured).

A broker is the “agent” of the insured, and acts on behalf of the

insured in placing the insurance contract.

A broker is employed by the insured.

A broker is a risk management consultant.

A broker is an advisor.

A broker is an advocate for the insured following a loss.

A broker is the owner of a book of business.

A broker is an independent contractor vis-a-vis an insurer, which will not be vicariously or absolutely liable for his/her actions or representations.

AGENT:

An agent is the representative of one of the parties to an insurance contract (i.e. the insurer).

An agent is the “agent” of the insurer, and acts on behalf of the insurer for all purposes, in placing the insurance contract.

An agent is “employed” by the insurer.