Rising costs of doing business has put consolidation and independence issues atop managing general agencies’ (MGAs) agendas for the next 1000 days.
Several key issues at stake in the life and health product distribution industry were discussed during a conference entitled “Consolidation, compensation and advisor independence: what the next 1000 days have in store,” at the 2004 Insurance and Investments Convention held in Montreal November 12.
A primary concern for the three experts speaking at the conference was that consolidation may surge as a result of narrowing profitability margins and increasing expenses.
They also pointed to the increasing need for more efficient technology and training, and feel carriers are downloading those liabilities to MGAs.
One speaker, James Burton, chair and CEO of PPI Financial Group, also mentioned the possibility of seeing the creation of regulatory organizations specifically for MGAs.
Another speaker, Bernard Bissonnette, president, Eastern Canada at MGA consolidator Bridgeport Financial Corporation, said: “What’s happening here has been a reality in Europe for a good 15 years: consolidation will accelerate among managing general agents because they simply have no other choice.”
“The main challenge that our MGAs are facing today is to protect their long-term survival by acknowledging that their profit margins have shrunk considerably in recent years,” continued Mr. Bissonnette.
He attributed the decline in profitability to an overly high cost structure. MGAs must enhance their efficiency, particularly by adopting new, more efficient technologies.
“Most of the insurers want to grow their sales volume. There is a natural outcome of this increased competitiveness: insurers are trying to limit the number of MGAs with which they do business, in order to realize savings. At the same time, they want to trim management, marketing and distribution costs.”
Mr. Bissonnette expects the number of MGAs in Canada to plunge by half. The survivors will then have the means to upgrade their technological infrastructure and launch training programs similar to those of insurers with a captive sales network. “Techniques such as coaching, mentoring during meetings with clients and systematic referrals, widely used 30 years ago, will resurface,” he predicted.
Madeleine Lafontaine, vice-president and general manager at LFS Financial Services and speaker at the conference, says that if MGAs consolidate, the independence of the advisors may fall by the wayside. “Will consolidators want to deal with one supplier in particular? It’s possible, but advisors will then face a more limited choice of products. Independence is not being threatened right how, but there is an imminent risk of the number of products shrinking,” she said.
“If ever the industry should consolidate to the point that there are only ten insurers and five managing general agents, advisors would have less of a choice and diminished negotiating power.”
Ms. Lafontaine added that MGA consolidation is mirroring insurer consolidation. This phenomenon is hardly surprising, she noted. Insurers are demanding a higher business volume from each MGA that wants to deal with them. “In this context, MGAs simply have no choice but to expand. They have to do so via acquisitions, because organic growth is no longer enough.”
MGA consolidation may affect advisors’ negotiating power, she admitted. “But advisors will be forced to address this new paradigm.” In this context, a banner-type organization (affiliate group sharing resources and a brand name for the association) would be the best of both worlds, she said to the audience. This strategy offers the advantage of multiple carriers as well as the training resources of career agencies.
Not surprisingly, expectations that a new wave of consolidation may hit MGAs – and the impact it may have on advisors’ independence – have spread like wildfire.
When the conference topic was announced before the Convention, participants on the advisor chat list, For Advisors Only, voiced concern for the future of the industry.
Tim Fitzpatrick, president of CoVirt, a software firm for MGAs, sparked a lively debate with what he thinks are the main short-term issues for MGAs. He said he sees continued consolidation, new compensation incentives for financial advisors, the redefinition of advisor independence, and the imposition of investment fund compliance regulations on life insurance as key issues.
Byren Innes, senior vice-president and director of NewLink Group, a consultant for MGAs and insurance companies based in Ontario, thinks the consolidation trend will continue. “The 150 and more MGAs will shrink to under 100, maybe even more dramatically,” he said. “The remaining players will be either bigger with a strong regional or national view.”
Today, many MGAs are watching in dismay as insurers delegate the burden of training advisors, as well as transferring many other responsibilities to the distribution channels.
“Insurance companies have downloaded responsibilities to the MGA that the company used to bear, the primary one being training,” argues Jim Bullock, registrar at the Peel Institute of Applied Finance. Mr. Bullock says that he personally uses the services of the MGA to provide him with legal help on specific issues and for support on actuarial issues.
He adds, “When the MGAs are squeezed, one of the variable expenses they cut is training and when advisors are less adequately trained they do a less effective job with the client. None of us wants to be less than effective with our clients.”
Mr. Bullock highlights that advisors have legal responsibilities toward their clients, and can even be sued for letting them down. He cites one case where the advisor made some serious mistakes on the application form and as a result, the client died with no life insurance in place. The advisor is now being sued.
A long time coming
All year , The Insurance Journal collected comments that sustained those points of view.
“Companies have cut corners on certain services and are paying MGAs to stand in for them. This is a growing phenomenon and a trend that’s here to stay,” said Robert Benson, general manager at a Transamerica Life Canada agency in Montreal.
Dave Hébert, vice-president of business development at MGA BBA Financial Group, complained that insurance companies don’t have programs to help MGAs integrate young advisors new to the industry.
Mr. Hébert considers it risky for MGAs to train new advisors. “Once an advisor is trained, he’s a prime target for headhunters at other companies. Also, if a MGA pays its advisors less because it is investing more in training, the competitors will snap them up quickly.”
Donald Murphy, an associate at Beaudoin Murphy, a firm working under the banner of AXA Financial Services, said that it is an open secret that MGAs browse through advisors’ events to hook them through “bonuses they can’t refuse.” Mr. Murphy avoids working in concert with large MGAs on insurance cases out of fear that they will pillage his network.
This abundant advisor migration means that MGAs have to start from zero with new advisors, which simultaneously drives up their expenses.
Technology is another contributor to the growing costs that are eating into MGAs’ profit margin, Mr. Murphy continued.
As for the issue of independence, Mr. Murphy believes that advisors are not as independent as in the past. A growing number of firms tend to deal with a limited number of suppliers. “If you offer only six or seven companies, you can’t say that you offer the best price on the market,” he explained.
At insurers whose distribution networks tolerate independence, concentration has been brewing for quite some time. For example, networks such as AXA Financial Services or Transamerica agencies tacitly demand that their advisors consider at least some concentration.
In fact, this trend is accentuating more than ever, said Mr. Benson. “Today concentration is much greater than ten years ago,” he said. As spending spirals due to the race for the most attractive pay, liability insurance premiums explode and administration costs rise in tandem… the firm can no longer afford to scatter its business.”
Mr. Benson sees an upside to concentration, even for independent MGAs. “Concentrating business at a handful of suppliers lets MGAs obtain a larger bonus for themselves, and for their advisors.” This is because insurers offer bonuses that are pegged to business volume.