Insurers need to make changes to deal with tomorrow’s market, and distributors in the independent channel should do the same.
In an interview with The Insurance and Investment Journal, Éric Brat, co-chair of the Montreal office of the Boston Consulting Group (BCG) and member of the global management team for the firm’s insurance sector, said the two groups should revise their partnership so that distributors are further supported by manufacturers.
The Boston Consulting Group has only just set up shop in Montreal, although it has had an office in Toronto for a number of years and has also had customers in Quebec for a long time. The new Montreal branch is an addition to the 80 offices that BCG already has around the world. Mr. Brat left Paris to open this branch with another colleague.
“Seen from abroad, the Canadian insurance market is a mature market with low growth, and this is the case in both life and general insurance. However, it has a small advantage over other mature markets: Canada’s population is increasing. As a result, the sector is benefiting from a small base of growth. This is better than many continental European countries, where the population is more stable,” he comments.
As a result, Mr. Brat believes that there will be continued consolidation in the Canadian market. He also expects further segmentation. “Insurers will try to balance their offering with the needs of the customer, both in life insurance and general insurance. In life insurance, we see a growing market, but one that is reaching maturity. In general insurance, maturity will arrive sooner,” he says.
However, Mr. Brat says that these two markets will experience declines in different ways. BCG is putting the finishing touches on a study of the Canadian life insurance market, and Mr. Brat agreed to reveal some of the key findings to The Insurance and Investment Journal.
Life insurance – in the long term – is a growth market, according to BCG. “The need for security and savings among Canadians is there. These are fundamentals which are strong and which are very promising in the long term. The sector, however, faces significant challenges in the short term. The challenge for Canadian insurers will be to find a way to delicately manage their short-term activities in order to achieve long-term success,” says Mr. Brat.
There is really no lack of short-term challenges in life insurance, and they are well known. Indeed, low premium growth, lower margins, customer distrust, low interest rates, and new regulatory challenges have become commonplace issues for insurers. The aging of the population will, however, offset these challenges, because it offers significant growth potential for the industry.
“Life insurers must make a shift from managing production to managing value. They must learn how deal with this shift. They are aware of this, they are beginning to do so, but they are not there yet.”
Five priorities in life insurance
In its study, BCG will present the five priorities that Canadian life insurers should focus on.
The first will be to generate a profit on their portfolio. “They are steering an unwieldy boat that is expensive in the long term, given the guarantees they currently offer. They have very low annual production, but have very significant assets that are not reflected in their annual production. So they must dedicate more resources to managing their portfolios and cash flow, and that may be done through various means such as attrition. They paid less attention to that before,” observes Mr. Brat.
The second priority represents a new challenge, that of the downward revision of the guarantees that have been offered to customers. “People are not willing to pay the true cost of guarantees they want. Insurers must readjust the guarantees to the price that customers are willing to pay and share the risk with them. From now on, the client must assume some of the risk. This will lead to product changes and an overhaul of product lines,” says Mr. Brat.
Third priority: review operations. “With declining margins, there is more and more pressure on costs. All insurance companies will go through an efficiency exercise throughout the majority of their operations.”
The fourth priority is based on the concept of “customer centricity”. “With the emergence of long-distance communications insurers will be forced to adopt a more holistic and comprehensive vision of clients, in terms of needs, amenities, and retention,” says Mr. Brat.
The final priority is by far the most important, says Mr. Brat: distribution. “Canada is set apart by the independent distribution of life insurance. Insurers must come to terms with that. They are in the same boat as their distributors. Given the changing market, they should review this partnership and rethink the foundations. Distribution must undergo a transformation at the same time as the manufacturers. This is the key point, because the distributors will have to rely on them more. Manufacturers will have to make it their mission to help their distributors,” says Mr. Brat.
Managing general agents
One feature of Canadian life insurance market that makes it more complex is the presence of managing general agents, a feature that Mr. Brat says is unique to Canada. “To realize savings, insurers, MGAs and advisors will all have to take action. This is unique in the world as a model. We find wholesalers elsewhere, but only for specialized areas. We do not see wholesalers dominate this way elsewhere, not like the way managing general agents do in life insurance in Canada.”