Insuring Agreements and Utmost Good Faith

Derrick Coyle

After a 35-year career with The Dominion of Canada General Insurance Company—a once formidable Canadian insurer inexorably committed to the independent broker—the recent falling-out between the Insurance Brokers Association of Ontario (IBAO) and AVIVA Canada, over the Maple Leaf Sports and Entertainment (MLSE) affinity program, stirs memories of similar battles.

Audi Alteram Partem (Hear the Other Side)

That brokers are incensed over the confiscation of another slice of the personal lines market, is not surprising. But IBAO’s strongly worded repudiation and immediate action takes the Ontario broker organization’s disapproval to another level.

In a January 23rd press release, Colin Simpson, Chief Executive Officer of IBAO, announced the indefinite suspension of its sponsorship partnership with Aviva Canada. Aviva continues to prove that they are not a true partner to the collective broker channel in Ontario,” he asserted.

Exacerbating brokers further—on Aviva’s plan for the direct writing of personal lines insurance on behalf of a fraternity of Leafs and Raptors fans—is a concern with branding ambiguity. “Consumer awareness of the Aviva brand has been built in partnership with the broker channel over many years. The IBAO cannot continue to promote Aviva as a supporter of broker distribution in Ontario while it continues to leverage that brand against us,” Simpson said.

For Aviva’s part, Executive Vice President, Broker Distribution, Jason Storah, fast-followed with a bulletin to brokers expressing surprise with IBAO’s response. “We were not provided with an opportunity to discuss this with the IBAO nor any advance notice that a release was coming. We will continue to seek open dialogue with the IBAO but the purpose of this note is not to change their decision.”

In providing context for the initiative, Storah offered data brokers may have found more candid than reassuring. “In recent years, almost 8% ($4bn) of the entire property and casualty market in Canada has been vertically integrated out of the broker channel and directly into competitor insurers who are openly taking business away from brokers. When that happens, both brokers and Aviva lose the ability to serve those customers going forward.”

Caveat Emptor (Buyer Beware)

A few decades ago, the delivery philosophy of insurance companies was delightfully unambiguous: full support of the broker channel; or direct writer. In those days, independent brokers and broker-committed underwriters regarded the likes of Allstate and State Farm with abject curiosity and general indignation.

But the black-and-white paradigm of distribution was soon to be tinted with shades of grey. A traditional market—with an eye on demographics and a ballsy vision for product delivery—tested the waters with a direct call to seniors, and blazed a trail with the fresh prints of Belair.

Brokers were understandably outraged and a heated war of words ensued. A full withdrawal and profuse apology for such a monumental lapse of judgment was surely imminent. The ill-conceived plan would undoubtedly be abandoned, or severe and lasting consequences would be suffered.

From the perspective of competing insurers, this promised to be a windfall of epic proportions. Any market with the audacity to promote a proprietary distribution channel—in direct competition with the very brokers upon whose support they depended—would surely be dealt a heavy penalty as legions of embittered brokers ‘voted with their feet.’ Broker-committed carriers hastily prepared for a tsunami of portfolio transfers, at the self-inflicted expense of a soon-to-be chastened competitor.

Res Ipsa Loquitor (The Thing Speaks for Itself)

When standing at a crossroads of principle, what is not patently rejected is tacitly approved. There was indeed some early activity from adamant brokers re-marketing modest portfolios and moving a smattering of larger books. But when the dust of dissension settled, the impact of business displacement fell considerably short of persuasive. Instead, the seed of a multi-channel future was sown and the proliferation of schizophrenic distribution strategies, effectively ratified.

Much has changed in the world of general insurance since that tipping point. Consolidation of insurers and brokerages, the rise (and apparent fall) of banks, the threat of unconventional entrants, profound technological change, analytics driving appetite, creative affinity plans, millennial generation expectations, succession versus sale for twilight brokers, and the systematic migration of personal lines from brokers to direct channels.

While the IBAO’s denunciation of the AVIVA / MLSE arrangement brings fresh scrutiny to distribution hybrids, today’s competitive landscape is much different than during the first, game-changing developments, decades ago.

Ex Gratia (Out of Grace)

There may be a lesson found in the experience of the company from which I retired, one week before the announcement of its sale. I suspect there would be a level of industry agreement that The Dominion ranked among the most steadfast supporters of the independent broker channel.

Its distribution philosophy was clear: the company would live or die on its commitment to the independent broker. At the extreme, that translated to the rueful forfeiture of hard-earned commercial business, in principled defiance of personal lines portfolios sold to a competitor. Whatever The Dominion’s autopsy report may reveal, the fortunes of any broker-exclusive insurer is inextricably linked to the measure of reciprocal support.

Today there is an oddly similar environment for brokers facing an eroding personal lines market. The $4 billion of ‘vertically integrated’ personal lines business Storah references, is not about to return. In fact, it will likely grow as an increasing number of direct writing entities excise their share, and growth-driven broker-exclusive holdouts—in the context of modest organic opportunity—resign themselves to exploring alternatives.

It would be no stretch to anticipate future exposure of commodity-level commercial business, to multi-channel appetite.

Uberrima Fides (Utmost Good Faith)

If there was ever a chance of suppressing the flame of multi-channel distribution, all those years ago, the warranty on the extinguisher has long-since expired.

As much as there may be visceral compulsion for brokers to transfer portfolios from multi-channel markets to broker-exclusive carriers, that is often impractical. These markets carry large shares of the broker’s book and are critical relationships on business merits. They are among the industry’s most competitive, financially stable, talent rich, technologically advanced, incentive savvy, product innovative, markets.

And therein lies the leverage that makes such a paradox of allegiance possible.

It is a strange business planning dynamic when a broker’s SWOT analysis plots a major market in both the “Opportunities” and “Threats” quadrants.

Ironically, Storah could hardly have described the competitive reality—for independent brokers and broker-exclusive insurers—more precisely than in the justification for his own organization’s direct writing initiatives:

Aviva has to create ways to access customers without always exposing ourselves to the continued erosion through vertical integration of the broker channel – especially when there is no reason to believe that this trend will change.”

Independent brokers and broker-exclusive insurers bear the weight of that erosion with every direct writer extraction.

For brokers vulnerable to existing and future direct personal lines channels, the solution may lie somewhere between protest cancellation and begrudging tolerance. The foil may be found in the counter-leverage of the increasingly valuable commercial portfolio.

Quid Pro Quo (Something for Something)

In outlining Aviva’s five pillars of distribution, Storah ranks the broker channel, first, noting it accounts for 80% of total writings. A more telling measure, from the broker’s perspective, may be the percentage of broker commitment in relation to the insurer’s total personal lines writings.

For the sake of simplicity, and referring to no specific insurer, let’s contrast a multi-channel market with a personal lines book evenly split between brokers and direct writings, to a carrier exclusively committed to independent brokers.

In personal lines, the hypothetical multi-channel market is a 100% supporter of the independent broker 50% of the time, and a full competitor the remaining 50%. The broker-exclusive carrier is a 100% supporter of the independent broker, 100% of the time.

If there is a constant in business, it is the potential to effect change though balance sheet persuasion. Numbers reach leaders and leaders drive policy. Though the ultimate gesture of disapproval; the cancellation of contracts, is unlikely, ebbing the flow of personal lines from brokers to existing multi-channel carriers—and dissuading the entry of new ones—requires some form of tangible deterrent.

When multi-channel insurers can expropriate a percentage of the brokers’ personal market opportunity and profess to be loyal partners of brokers, it follows that brokers can reward broker-exclusive markets with commensurate proportions of the multi-channel’s commercial opportunity, and remain equally loyal partners of the hybrids.

In short, it is entirely consistent for brokers to leverage the power of a commercial book by redirecting new and to re-market business, in proportions relative to the directly written personal lines component of the multi-channel carrier.

We will never know if a more resounding repudiation of that experiment of multi-channel distribution, almost thirty years ago, would have preserved the broker’s domain and extended the life of a 125-year Canadian company. But if history proves anything, it is that encroachment without consequence invites more of the same.

The brokers’ potential to influence marketplace boundaries will depend largely on converting symbolic and rhetorical indictment into an aggregated business impact that registers with decision-makers and exerts pressure on the paradigm.

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