2006 General Meeting

Assemblée générale 2006

Chicago, Illinois

2006 General Meeting

Assemblée générale 2006

Chicago, Illinois

PD 29 – Cost of Distribution and Its Future

in Canada

PD 29 – Cost of Distribution and Its Future

in Canada

Speakers: Byren InnesJohn McKayPierre Vincent

Speakers: Byren InnesJohn McKayPierre Vincent

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The future of life insurance distribution in Canada

The future of life insurance distribution in Canada

Agenda• Evolution of distribution• Important factors• Today’s advisor• Tomorrow’s advisor• The future

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Evolution of distributionEvolution of distribution

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Evolution of distributionEvolution of distribution

From Captive to Independent to Semi- Captive?

From Single Channel to Multiple Channels?

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Primary Distribution Channels in 1990Primary Distribution Channels in 1990

• Career • Managing General Agent (MGA)• Company Owned Brokerage Office• Personal Producer General Agent

(PPGA)

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Primary Distribution Channels in 1990Primary Distribution Channels in 1990

• Career– Recruit, train, support, motivate– Compliance – Agents are employees– Agents represent 1 company– Actively recruit agents – High fixed cost

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Primary Distribution Channels in 1990Primary Distribution Channels in 1990

• Career Distribution System• Managing General Agent

– Independent– Responsible for training, recruiting, support,

motivate, compliance and some administrative functions

– Variable compensation: high first year bonus and service fees

– Brokers are independent (may be tied to MGA by contract)

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Primary Distribution Channels in 1990Primary Distribution Channels in 1990

• Career Distribution System• Managing General Agent (MGA)• Company Owned Brokerage Office

– Brokerage manager is an employee– Broker is independent

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Primary Distribution Channels in 1990Primary Distribution Channels in 1990

• Career Distribution System• Managing General Agent• Company Owned Brokerage Office• Personal Producer General Agent

– Large independent advisor who does business directly with LifeCos

– Variable compensation: commission and bonuses

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Career in 1990Career in 1990

• Single company representation• LifeCo responsible for all functions

Insurance Co.

Branch Office

Captive Agent

Captive Agent

Captive Agent

Branch Office

Captive Agent

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MGA in 1990MGA in 1990• MGA represents a few companies• Broker can work with 2-3 MGAs• New recruits – often from career

Insurance Co. A

Insurance Co. B

MGA

Broker

Broker

Broker

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Bank

Mutual Fund Co.

B

Mutual Fund Co.

A

Insurance

Company B

Insurance

Company C

Insurance

Company A

Branch Office

Branch Office

“Independent

Agent”

“Independent

Agent”

“Indenpendent

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“Independent

Agent”

Career in 2006Career in 2006LifeCo:• Enters into strategic partnerships• Wants control of “independent agent”• Offers multiple proprietary solutions

Strategic Partners

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MGA in 2006MGA in 2006• Represents multiple companies• Multiple locations• Wants control of independent broker• Some start training new recruits

Insurance Co. 1

Insurance Co. 2

Insurance Co. 15

MGA

MGA Location# 1

MGA Location# 5

Broker

Broker

Broker

Broker

MGA Location# 2

Broker

Broker

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MGA in 2006MGA in 2006• Represents multiple companies• Multiple locations• Wants control of independent broker• Some start training new recruits

Insurance Co. 1

Insurance Co. 2

Insurance Co. 15

MGA

MGA Location# 1

MGA Location# 5

Broker

Broker

Broker

Broker

MGA Location# 2

Broker

Broker

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Primary Distribution Channels in 2006Primary Distribution Channels in 2006

• Career• MGA• Company Owned Brokerage Office• PPGA • Bank owned investment dealers (IDA)• Financial Planning Firms (MFDA)• Banks• Direct (TV, phone, mail, internet,...)• Affinity Groups• Worksite marketing• Recruiting organizations• ....

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Important FactorsImportant Factors

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Considerations when selecting distribution channels

Considerations when selecting distribution channels

• Access to market and consumers• Cost• Control• Growth Potential• Risk

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Access to market and consumersAccess to market and consumers

• What is the target market?• How can this target market be reached

most effectively?

One example ...

Target market: self-employed professionals with income protection needs

How to reach: Professional association, specialized DI brokers

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Cost of DistributionCost of Distribution

• Fixed versus Variable• Who assumes the marketing risk?• Economies of scale• Cost of technology / communication• Volume bonuses for distributors• Cost of training and support required

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Change in distribution costChange in distribution cost

Average marketing expenses per $100 of new premium*:

*: LIMRA – Canadian Distribution System Costs Study (2000 and 2004)

$221

$170

$187 $183

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Career MGA

19992004

Economies of scaleMultiple productsLower recruiting costs

Economies of scaleHigher bonusesHigher fixed costsIncreased competition

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Cost comparison – Direct MailCost comparison – Direct MailAverage marketing expenses per $100 of new premium:

Assumption:• Average premium is $100• Cost per package is $1.00

Response rate Cost per $100 of new premium

5% $20

2% $50

1% $100

0.5% $200

0.1% $1,000

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Distribution ControlDistribution Control

• Independence versus control/ownership• Higher level of control

– Easier to influence behavior– Less price sensitive– More predictable sales– Higher fixed cost?– Less entrepreneurial spirit?– Lower commission– Easier to justify some investments

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Growth PotentialGrowth Potential

Desire for LifeCos to increase profit yearly

=>continuous need to increase sales

• Which market offers the highest growth potential?

• Which distribution channel is expanding the most?

• Is the growth sustainable?• How much investment is required?

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Growth Potential for Career ChannelGrowth Potential for Career Channel

Observations:• Less companies• Less recruiting• Ageing advisors• Not a well publicized career path

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Growth Potential for MGA ChannelGrowth Potential for MGA Channel

Observations:• Fewer agents to attract from career• Minimal recruiting/training of new

brokers• Ageing brokers• Reduced margins• Consolidation• Increased cost of compliance,

technology, ...

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Growth Potential for IDA ChannelGrowth Potential for IDA Channel

Observations:• Attractive for high-end clients• Access to clients with needs and money• Desire by the firms to provide financial

planning services and sell insurance

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Growth Potential for MFDA ChannelGrowth Potential for MFDA Channel

Observations:• Financial Planner is sexier than Insurance

Agent• Mutual funds is their core product but

they are starting to sell more insurance• Many clients with money• Advisor is younger

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Growth Potential for Bank ChannelGrowth Potential for Bank Channel

Observations:• Access to many clients• Lower end, middle class• Currently training many financial

planners

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Risk managementRisk management

• Diversification – single/multiple channels• Independence has a price• Independence has benefits• Size of distributors and influence• Price competitiveness and sales volume

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Today’s AdvisorToday’s Advisor

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Demographics of insurance advisorDemographics of insurance advisor

• Average age: 50+• Prefers to work with clients in his/her age

group• Many consider retirement• Who will serve the younger clients?• Few new recruits• Financial Planner is younger

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Tomorrow's AdvisorTomorrow's Advisor

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Training of new advisorsTraining of new advisors

# of hours to become a plumber: 1,500 hours

# of hours to become a Financial Security Advisor: 120 hours

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Who is recruiting & training new AdvisorsWho is recruiting & training new Advisors

• Career companies• Banks (financial planners)• A few large MGAs• Colleges (new programs)• Independent distribution companies

The small # of new advisors is a big issue...

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The FutureThe Future

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The crystal ball says...The crystal ball says...

• Banks’ market share will increase• LifeCos will use multiple channels• LifeCos would like more influence on

distribution networks• Distributors’ consolidation will continue• More college programs for new advisors• Financing of block of business• Level Compensation? • Distribution cost will not decrease...