Byren Innes, senior vice-president of NewLink Group Inc., a Toronto-based industry research firm, says a major and often overlooked factor driving consolidation in the MGA market is the growing competitive threat of the national accounts firms who are selling enormous amounts of insurance.
National accounts firms (securities and mutual fund dealers) now account for 15% of total life insurance sales in Canada, says Mr. Innes, whose research is based on his company’s annual statistical survey based on data from distributors.
The top 11 of these firms, for which Mr. Innes has statistics, now have 71% of their mutual fund or securities advisors licensed to sell insurance. This adds up to about 10,000 life-licensed advisors working with 163 insurance specialists.
Not in order of sales volume, NewLink lists the top 11 national account firms, in terms of life sales, as: Dundee, Investment Planning Council, Assante, TD Waterhouse, Investors Group, ScotiaMcLeod, CIBC Wood Gundy, BMO Nesbitt Burns, Raymond James, RBC Dominion Securities and Wellington West. Other big players in this market, for which he did not have current statistics, are: National Bank Financial, Berkshire and Credential Financial.
These companies, on average, are doing about $5 million in life first year commissions (FYC), which translates into $15 million in gross revenues. A few of them are doing double these numbers. “There are very few traditional life MGAs in Canada doing this kind of business,” comments Mr. Innes. “These firms are huge; they dwarf what a normal MGA would do.”
The biggest MGAs in Canada are well aware of the competitive threat from the national accounts firms and that is one reason they are aiming to get even bigger, says Mr. Innes. But he doubts that the average MGA recognizes the extent of the competition they are facing from these firms. “MGAs are not just competing against the MGA down the street in Saskatoon. They’re competing against the national accounts firms.”
Investors Group, notes Mr. Innes, has about 3,000 life-licensed financial advisors. “They sell more insurance than some life insurance companies.”
Competing for advisors
The resources that these national accounts firms have at hand can also help them attract advisors away from MGAs, adds Mr. Innes. Roughly 80% of life insurance advisors today have a secondary licence, usually to sell mutual funds, many to sell securities. When life advisors start focusing more of their business on wealth management, they are faced with a choice of where their allegiance lies – with their longtime MGA through which they’ve been placing their life business, or with the investment firm that has all the latest technology and also offers a life insurance platform, allowing them to consolidate their business, observes Mr. Innes.
Regulation also plays in the favour of national accounts firms over MGAs. On the investment side, regulation enforces that the advisor’s business must go through one dealer. Meanwhile, on the insurance side, there is no regulation stating how many MGAs an advisor can deal with. “So I have an MGA relationship by choice and an investment relationship by regulation.”
NewLink’s data shows that across Canada, insurance advisors have 1.6 MGA relationships on average. Of this, 90% of their business goes through one MGA and 10% goes through another.
Several other factors are also forcing MGAs to grow, says Mr. Innes. MGAs often say that insurers are downloading more and more responsibilities onto them, but Mr. Innes sees it in another light. “It’s not really a question of downloading. The world has changed and MGAs have more expenses.” These expenses include pricey web-based and back-office technologies that didn’t exist before, which require IT expertise to maintain; increased compliance requirements and the need to have a privacy officer on staff. In addition to this higher overhead, advisors want more money and service, explains Mr. Innes.
In a nutshell, the situation now is that the MGAs are doing a lot more work than before, but they aren’t getting paid more money from insurers to compensate.
The insurance industry has been doing a steady $1 billion in new life premiums per year for over 10 years, Mr. Innes says. While more policies are being sold than previously, they are being sold at lower prices. Term insurance rates have come down about 40% which means that advisors have to almost double sales to stay equal. Meanwhile, the MGAs are processing applications for the same policy amount that 10 years ago might have earned them $500 and is now worth only $300 in compensation from insurers. Meanwhile during that time, expenses have doubled. “That’s where we’re at,” says Mr. Innes.
Of the $1 billion industry sales total, Mr. Innes says the career shops would be doing about 30% of business in Canada; direct brokerage (PPGAs) 15%; national accounts 11% (this excludes Dundee’s volume which is included with the MGA statistics); 7% other; and 37% goes to MGAs.
That leaves $370 million to MGAs and the top five of these firms are doing about $30-$50 million each. So what’s left over for the other 100 or so remaining MGAs to divvy up? Not that much, says Mr. Innes.
According to NewLink’s research, the top six life insurance sellers in Canada, not in order of sales volume, are: PPI Financial Group, Hub Financial, Dundee, RBC Dominion Securities, Wood Gundy and BridgeForce Financial Group (with the six MGA members’ sales volume taken as a whole). Four of these top sellers, Mr. Innes points out, are publicly traded companies. Access to capital is a key factor in enabling these firms to expand. If they want to make acquisitions, buy new technology systems, etc., “they can do it tomorrow,” observes Mr. Innes.
So what’s a traditional MGA to do? Whether big or small, they have to identify their value proposition to brokers. MGAs cannot be all things to everyone, Mr. Innes says. “If you’re going to survive, you are going to have to figure out what you’re offering and to whom.”
Some MGAs will take the approach of offering advisors comprehensive services to help them grow their business, while offering good compensation, whereas others will offer little support and the highest compensation. “It’s the smorgasbord of services vs. the dollar.”
Providing advisors with the technology service they want such as 24/7 web access to their business and integrated compensation management has become a minimum standard, he warns. If an MGA does not offer this kind of technology, “their advisors can walk across the street and get it.”