The managing general agency channel is experiencing a period of fundamental change on many levels, says Paul Brown, chairman and CEO of IDC Worldsource Insurance Network and the outgoing president of the Canadian Association of Independent Life Brokerage Agencies (CAILBA). As a result, MGAs will have to adapt the way they do business to be successful in this new environment, he adds.
One of the main challenges in this market is the aging of the baby boomer demographic, says Mr. Brown. Over the last 20 years, MGA distribution has grown dramatically with many insurers divesting themselves of their captive agencies and developing their distribution models around independent advisors. “What drove that I think, quite bluntly, is demographics – the baby-boom generation of motivated, independent, upwardly mobile advisors.”
Boomer advisors built successful businesses dealing with a base of baby-boomer clients. These advisors have been able to take advantage of the significant growth in wealth of that demographic and a proliferation of product innovation in life insurance, investment, estate planning and retirement planning, explains Mr. Brown. It’s been a great growth period for the industry and the MGA community has thrived alongside the advisors.
“We’ve kind of ridden this whole wave and it has taken us to where we are today.”
However, the question of where the next generation of insurance advisors will come from – a topic of concern for the last 15 years or so – has seen no real resolution. “It’s still an issue. Most advisors are 55 plus. You still have 60, 70 and 80-year-old advisors doing lots of business, but that’s going to start to dwindle. The challenge will be where is the business of the future going to come from?”
Mr. Brown noted that some MGAs have built infrastructure to recruit and develop ‘green pea’ advisors but he is not aware of there being any meaningful data that shows whether these programs have had a substantial effect on bringing in new advisors into the industry and developing them. “You hear anecdotal evidence, but there’s no quantifiable evidence that there are huge inroads being made.”
A challenge for MGAs in providing effective recruitment and training programs is the heavy cost involved. “In the independent model, the compensation was really turned upside down and the fact is that most of the compensation goes to the advisor – probably rightfully so – but that also creates a quandary for the MGA where they don’t really have the revenue base or the resources to invest in trying to build new advisors, so it’s a challenge.”
John Hamilton, president and CEO of Financial Horizons Group, agrees that the aging advisor demographic is a key industry concern. But, he believes that the major MGAs, such as his company, are addressing this problem by actively recruiting new people into the business and providing training and incentive programs, as well as offering to work with senior advisors on their succession plans.
He also believes that some life companies may begin to help out. “I think you’ll see a major change over the next two to three years on the recruiting of new people into the business.”
Mr. Hamilton says he thinks this will happen as a cooperative effort between insurers and MGAs. “We’re not there yet, but I’d say we’re heading there.”
Gary Mandel, president of Independent Financial Concepts Group (IFCG) believes that it would be a wise strategy for insurers to support MGAs’ recruitment efforts. He pointed to Empire Life as one company that is helping IFCG with its program. “They work with us to help train advisors…I haven’t found any other company that is willing to spend the time or the money.”
Fresh recruits at IFCG are first taught Empire’s product line, along with certain products from a few other carriers. Although recruits are not obliged to sell Empire’s products, the insurer does tend to build lasting relationships with the advisors it helps train, explains Mr. Mandel. “Because Empire is willing to support us in this role they are getting business.” (For more on MGA recruitment efforts, see online story on EXTRA).
Mr. Brown of IDC Worldsource says the changing product landscape is another part of the fundamental shift occurring in the industry. The economic, interest rate and regulatory environments are putting pressure on insurers and causing them to withdraw, modify or lessen the competitiveness of certain products. This is making it more difficult to provide solutions in some situations, says Mr. Brown.
“The insurance industry, we’ve had a pretty good ride over the last 20 years, and now I think we’re into a new normal and we have to adjust our expectations and adjust our business models to adapt to it.”
If regulatory changes such as IFRS (new international accounting standards) continue to be implemented and the low interest rate environment persists, Mr. Brown thinks that the “new normal” will see insurers continue to ratchet up product pricing. He says that already these guaranteed products are starting to be “rendered irrelevant” and that there will be a move away from a guaranteed security type of offering to products in which the client is going to take on some of the risk. This may be done through adjustable premiums, participating whole life products, or seg funds with watered down guarantees that make them more like mutual funds, adds Mr. Brown.
Such product changes will be a challenge for the advisors who’ve built their businesses selling such guarantees. It will be hard for them “to change gears and all of the sudden sell products which are variable,” adds Mr. Brown. “That’s not something they can just turn a switch and start doing,” he says, adding that the products relative to other solutions won’t be as attractive to clients.
Terri DiFlorio, president of Hub Financial agrees that product change is a serious issue. She says that MGAs and advisors are now dealing with more product changes in a six-month-period than they would have seen during a 10-year-period before. “To sum it up, I could probably say the biggest challenge is change and the amount of change that is going on right now.”
She says product change has had a “tremendous impact” on both MGAs and advisors.
As an example, she says the administration tasks involved with keeping up with product change deadlines and effectively communicating them to advisors who may be working on cases that could be impacted “is a challenge in and of itself.”
She adds that sales are also being impacted by the pricing hikes. “Certainly it has affected our sales – not to any great extent, but if this continues, I think we’ll see a big affect there.”
Regulation and compliance
Paul Isaacson, president of Daystar Financial Group points to the potential for increasing compliance regulations as a new reality that is having a significant impact on the MGA distribution channel, particularly for smaller firms that do not currently have a compliance regime in place. He also thinks that increased regulation will also impact the aging advisor base to some degree. “Some of the older more established advisors, in many cases they lose a little bit of connection to what’s going on out there in the market and what’s required from them.”
Mr. Isaacson says he anticipates that MGAs will eventually have a regulatory requirement to audit their advisors in terms of how they conduct their businesses. “I think we will have some responsibility and accountability to make sure that people are conducting business properly.” An example of this type of supervision could be tracking whether advisors are maintaining continuing education credits, he says.
In British Columbia, he points out, MGAs now have increased responsibility over advisors. “In B.C., for example, if we think an advisor is not equipped to do what he is supposed to do for whatever reason; it’s really on our shoulders to report that to the Insurance Council of B.C.. That’s just new.”
He believes that MGAs will have to become more proactive in terms of having compliance regimes in place and that this will be written into contracts from suppliers.
While large firms like Daystar have the resources to meet these requirements, this won’t be easy for the smaller firms to achieve. “Most MGAs are not really in a position today to really execute on that front,” says Mr. Isaacson.
This kind of pressure will continue to drive consolidation in the MGA market, he believes. “Scale and volume are becoming really important in our business, similar to how they became important in the broker-dealer business about 10 or 15 years ago. It got to a point where if you didn’t have scale, you weren’t in the business, so I think the MGAs are going down the same road there.”
Does Daystar have plans to make acquisitions? “We’re in the hunt. It would have to be a proper fit for us, but certainly if the opportunity was right and it was a strategic fit for us, we’d be interested.” He wouldn’t comment on whether the company was in any acquisition negotiations at the present time.
Mr. Brown also thinks that regulatory issues, such as the movement for insurance companies to close monitor their MGAs and for MGAs to know their advisors, will also lead to further consolidation among MGAs. “Some agencies will probably say, ‘Now might be the time to get out because we don’t want to have to ramp up our operations to account for all of this, but I think it is kind of a natural progression of the business.”
Slimmer profit margins also partly explain why the MGA channel is experiencing increased consolidation, adds Mr. Brown. “If you’re going to have slimmer margins, you’ve got to have scale, but I think that even for larger MGAs it will be a challenge because their business model is built on a certain level of margin that will be hard to achieve in the future. So we’re going to have to adapt to that reality as well,” says Mr. Brown.
Demographics are also helping to drive consolidation, adds Mr. Brown. Most of the owner-operators in the MGA channel are well into their 50s or early 60s and now starting to look at their own succession.
Mr. Mandel, who describes IFCG as a mid-sized MGA operating in the Toronto region, says his company plans to grow. One of the main reasons that MGAs are looking to increase scale through mergers and acquisitions is to sustain contracts with insurers, he explains. “I believe in the long run that the insurance companies are going to raise the bar…They’ll put higher volume demands (on MGAs) to keep contracts.”
Until now, IFCG has grown through advisor recruitment and has never acquired another MGA. However, Mr. Mandel says he is interested in growing through an acquisition or merger that would be an enhancement to the firm’s model. He did not want to comment on whether he is currently involved in acquisition negotiations.
Mr. Hamilton of Financial Horizons says merger and acquisition activity is still quite active. “I think everybody is trying to decide what side of the scale they’re on, whether they’re going to acquire or be acquired…But some of them in the middle don’t know which way to go.”
There will be factors that will push these MGAs one way or the other, explains Mr. Hamilton such as the owner’s age and succession plan. For example, if he has a son or daughter who may be interested in taking over the business someday, he may decide to stay in business.
Financial Horizons, which has a stated goal to grow to 10,000 advisors and is presently at 6,000, is still interested in making further acquisitions, confirms Mr. Hamilton. No deals are imminent, he says. “We have a number of lines in the water.”