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

Top 1000 Companies

Banks' last frontier: Insurance Add to ...

Ken Orr is not, in the main, a scary-looking dude. Bearded and bearlike, the 55-year-old insurance broker has the confidently convivial manner of a small-town businessman for whom the jagged line between customer and neighbour has long been smoothed down by years of Lions Club events, kids' hockey tournaments and Canada Day barbecues.

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Orr & Associates, the firm Orr's father, Gord, started in the 1920s, is sandwiched between a beer store and a drugstore in an unprepossessing mall in Schomberg, an hour's drive northwest of Toronto. He has 17 employees, plenty of referral business and "lots and lots" of second- and even third-generation clients. "They're the best," Orr says, smiling broadly.

As a broker, he creates insurance plans (home, business, automobile and farm) that fit his customers' specific needs, then sources the appropriate policies from a range of underwriters, almost all of them Canadian firms. While he sells what most of us consider a necessary (and increasingly costly) evil, Orr makes it his business to negotiate the best premiums for his clients, year after year, decade after decade.

Outwardly benign appearances aside, Orr and the 33,000 members of his profession also understand how to put the fear of God into Canada's Members of Parliament; indeed, they may inflict the big squeeze more effectively, and more tactically, than almost any other industry group-including the chartered banks.

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In fact, the brokers are the only lobby group that has been able to impede the banking industry's imperial ambitions. After Ottawa dismantled the barriers between the so-called four pillars-banks, investment dealers, trust companies and insurers-the chartered banks ingested the brokerage firms, the trusts and some of the underwriters. Now, besides Ottawa's disinclination to allow bank mergers, the only remaining restriction is that banks are prohibited from selling most types of insurance through their branches and, as of last year, their websites. But the banks are not giving up, and it's a battle that gets Orr's competitive juices flowing. "I'll beat 'em on service every time," he boasts. But, he adds, "Let's compete on a fair and level playing field."

The restriction on banks' ability to sell insurance, designed to thwart "tied selling," is ostensibly about maintaining healthy competition and protecting consumers. After all, if you're waiting for your bank to approve a $300,000 mortgage and the manager inquires, ever so politely, if you might want to buy some insurance while you're at it, you may well think twice about passing up the offer.

So despite their obvious stake in this contest, the brokers have long positioned themselves as selfless consumer advocates, protecting Main Street from avaricious Bay Street bankers-the same crowd, it might be mentioned, that has closed branches throughout small-town Canada. "Credit-granting institutions ought not to be selling insurance at the point of granting credit," says Dan Danyluk, CEO of the Insurance Brokers Association of Canada (IBAC), who has a bone-crunching handshake, a steely manner and a dash of self-righteousness. "I don't know what your life experience is, but going for a mortgage or a business loan is not the most empowering experience." Got that right.

Like most established insurance brokers, Ken Orr transacts the lion's share of his business over the phone. There's little to see in the company's office besides several floor-to-ceiling banks of colour-coded vertical files, each one containing a detailed story about the lives of the firm's 6,500 clients.



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Perhaps more than any other service profession, insurance brokers have an intimate perspective on how communities function economically. They know about the addition the Richards put on the back of their house. They've watched the Feldmans update their family vehicles with the arrival of kids. They've read the appraisals on the new equipment that the local printer bought for his plant, and know all about the inventory levels at the manufacturer in the next town over. But they will also know that the Browns are facing some kind of cash crunch because they downgraded all their policies at renewal time last year.

"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.

In early October, not long after OSFI's curt ruling, a newbie Liberal MP from Quebec, Alexandra Mendès, tabled a private member's bill-C-457-that proposed restricting the banks from providing their customers with access to insurance products, even on the Internet.

Asked why she decided to wade into the murk of financial services regulation, Mendès gives it up without hesitation. The bill, she says, "started with me being approached by the Insurance Brokers Association and letting me know what was a major problem for them." The IBAC, it seems, visited Mendès on a Hill lobbying day and inquired whether she'd go to bat for them. "They saw it as interference with their domain of business and wanted to correct it," she says, adding that she found the brokers' argument "logical." "Why are we going to allow the possibility of less choice for consumers?"

Private members' bills, of course, tend to die on the vine, but this one served its tactical purpose impressively. Finance Minister Jim Flaherty, apparently feeling the heat, promptly moved to trump the OSFI ruling in a letter to the various stakeholders. Last January, he went further, announcing a review of the regulations governing how banks sell insurance online: "One ought not to try to do indirectly what one cannot do directly," he pointedly told reporters at the time. (The government finally issued the rules in May, prohibiting banks from going offside on any part of their websites.)

The brokers, having left none of this to chance, were ecstatic. "Those are not our words," MacGregor says, referring to Flaherty's comments without wanting to take too much credit for them.

The banks, hobbled as always by their lead-footed approach to advocacy, remain mystified. "We're a little puzzled as to why they would impose inconvenient barriers that will, at the end of the day, impact consumers," says Nancy Hughes Anthony, CEO of the Canadian Bankers Association. "It just presents an inconvenience as far as I'm concerned." Canadians may hate banks, but many would probably agree with her point.

Setting aside the politicking, a meaty policy question remains unanswered. In the age of e-commerce and mobile banking, is there a legitimate reason for preventing banks from selling insurance in their branches and on their websites?

Citing the example of Caisses Desjardins, where Quebeckers can procure bank and insurance products through the same branch, Hughes Anthony dismisses the competition argument as overstated. "The banks still have a very small percentage of this marketplace. There's no persuasive evidence that this is an overwhelming tidal wave. It's a small portion of the insurance market we're talking about." According to their association, the banks have just 2% of the life/health market and less than 10% of the property/casualty market, as measured by premiums.

Those numbers offer little comfort to the brokers, who insist that they themselves represent the last bastion of protection for ordinary consumers from anti-competitive practices like tied-selling and predatory marketing.

And if those arguments don't convince you, the brokers have even more tucked away in their advocacy arsenal. The banks, Orr observes, have credit scores on their customers. If the divisions are erased, that information will allow the banks to cherry-pick the best customers for their own insurance marketing efforts, leaving the brokers to fight over a higher-risk client base. "If the banks get to sell insurance [in the branches]" Orr shrugs, "I'll still have a business, but I'll have clients who won't be able to get insurance."

Justin MacGregor touts an even more apocalyptic scenario. Imagine a natural disaster on the West Coast, he says. An earthquake, say. There's a huge disruption to the economy, and people can't pay back their bank loans. Now consider if those same banks were on the hook for insurance payouts. "If these banks are holding loans on businesses and properties, and are also insuring those properties, isn't that the perfect storm?"

Far-fetched? Maybe, but the financial storm of the fall of 2008 certainly inflicted a lethal double-whammy on many overseas banks that had been working both sides of the street. IBAC's Dan Danyluk points to European regulators' ordering leading financial institutions like ING to divest their insurance divisions-proof, he says, that Canada's regulations aren't quite as vestigial as they may seem.

"Through the whole financial crisis," Orr says, jumping on this point, "who was the one that was looked at as the model regulatory environment to protect the investors in those banks? So we should change what we do now?"

In other words, Canada's insurance brokers are not just providing Canadian consumers with choice and good prices; they're also saving those big nasty banks from their own worst instincts. The status quo never looked so good.

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