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(Photograph for John Cullen for Report on Business Magazine)
(Photograph for John Cullen for Report on Business Magazine)

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Banks' last frontier: Insurance Add to ...

"In rural communities, 75% to 80% of a broker's business is home and auto," says Justin MacGregor, the IBAC's current president, who works for a Toronto firm that traces its roots back to the early 20th century. "The MPs know that. They know that when they talk to a broker, they'll get a good finger on the pulse."

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By contrast, the banks constantly rotate their managers, and many aspire to move up and out as quickly as possible if they are assigned to a small town. Sure, the local branch donates to kids' sports leagues and hangs out a banner during local festivities, but its managers aren't tied into their communities as thoroughly as the brokers.

And the brokers are motivated opponents. Orr and MacGregor are only too happy to regale visitors with stories of how the banks have tried to get into the insurance business through the back door-offering products such as "warranties" or peddling insurance plans to customers who phone in to activate their credit cards. "They do it, and it drives me nuts," says MacGregor.

This prolonged game of cat-and-mouse helps to explain why the brokers operate like a bunch of guerrillas battling a monolithic invader. They do everything from volunteering in local constituency associations to fundraising and standing for public office. Orr, a former IBAC president, says he's been approached to run in municipal contests, but prefers to remain on the advocacy end of things. "I try to support them when I meet them," he says of federal pols, grinning. "They know what business I'm in." And while many brokers are Tories by inclination, the industry doesn't pick favourites. "All three parties get it," Orr adds. "Jack Layton gets it as much as anybody gets it."

The old political adage-that some votes are counted while others are weighed-could have been written with this crowd in mind.

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anadian banks started nosing their way into insurance as far back as the 1920s, and certain types of products-super-expensive life policies linked to a home mortgage, for example-have long been a staple item, written up when the loan is approved. "They're horrible, and the banks make gazillions off them," sniffs MacGregor. "That's a fight that's long over."

Until the 1980s, the "four pillars" structure of Canada's financial system remained more or less intact, with rules in place to prevent corporate interbreeding. In the late 1980s, however, the banks got the nod to buy investment dealers, then trust companies and, finally, in 1992, insurance underwriters. In the case of the latter, the banks and their insurance arms had to remain separate corporate entities that couldn't share client information or retail space.

During the mid-1990s, with the banks pressuring Ottawa to allow mergers, a federal task force concluded they should be allowed to retail insurance through their branches, as was already the case with credit unions and Quebec's caisses populaires.

Facing a decisive defeat, the brokers leapt into action and forced then-finance minister Paul Martin to capitulate. "The present framework for selling insurance through agents and brokers will be preserved," he said at the time.

Over time, those bank-owned insurance subsidiaries-such as TD's Meloche Monnex and RBC Insurance-have be-come increasingly profitable. Insurance accounted for almost $500 million of RBC's $3.8-billion net earnings for 2009, and produced the highest return on equity of any product line. Yet by the IBAC's estimate, the brokers' market share, compared to direct writers, has only dropped slightly over the past 15 years, down to 69% or 70% from 75% in the mid-1990s.

The branch channel issue has come up twice on the Conservatives' watch-once, in 2006, during a routine five-year review of the Bank Act, and again last year when the banks moved to start selling insurance products through their websites.

Not fair, cried the IBAC, which asked the Office of the Superintendent of Financial Institutions-the regulator credited with saving Canada's banks from the fate of their grossly overleveraged international counterparts-to pass judgment.

In a ruling that is a study in bureaucratic understatement, the regulator confirmed the glaringly obvious: "OSFI concluded that, for purposes of the Regulations, a bank website is not a bank branch. As a result, a bank may, on its website, promote in Canada any insurance policies or any insurance companies, agents or brokers, subject to the conditions that the Regulations impose on such promotion outside a branch."

That's it, by the way. No policy verbiage about the death of competition, the loss of employment in small-town Canada, or any other Chicken Little scenarios.

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