Does brokerage independence really matter?

In a world of accelerating brokerage mergers and acquisitions, as well as multiple business models, brokerage independence still matters, delegates attending the National Insurance Conference of Canada (NICC) in Vancouver heard last Tuesday.

But private equity ownership of a brokerage is less likely to lead to conflicts of interest than insurance company ownership of a brokerage, some panellists observed.

Bob Tisdale, the owner of JR Tisdale Consulting Services, moderated the panel called, Maintaining in Distribution Amid M&A – Does it Really Matter?

Both at the opening and end of the presentation, Tisdale conducted informal online polls with the audience, which was largely made up of brokers. Both times, brokers voted roughly 63-65% in support of the statement that brokerage independence still matters.

“Sounds like people have their minds made up,” Tisdale quipped at the end of the session.

Tisdale was formerly president and CEO of Pembridge Insurance, an insurance company that strategically sold through the broker channel. He laid out the devil’s advocate argument that brokerage independence doesn’t really matter anymore. He noted mergers and acquisitions have introduced many new successful business models into the mix – for example insurance-owned and private-equity owned brokerages.

Tisdale cited several historical examples of brokers aggressively promoting their independence, with several of the initiatives falling by the wayside over time.

For example, he cited the Broker Independence Program (BIP), also known as the “Bipper” program, in which independent brokers could use the national BIP symbol in their communications.

During discussions about the Bipper program at the Insurance Brokers Association of Canada, Tisdale said, it was proposed that “we’ll get companies who are supporting broker independence to pay more for the advertising program, but only brokers who were truly independent could use the symbol,” he said.

“Well, that really went nowhere, because I think at the time a lot of associations were looking at the need to keep brokers in, and the revenues at the provincial association, so…that didn’t happen.”

Name change

And then, provincial broker associations all changed their names so the word “independent” no longer appeared in their names, Tisdale noted. Arguments for that included the need not to alienate provincial association broker members who were not independent.

All that aside, broker independence remains valuable, brokers on the panel said.

Lorie Phair, president of Canadian Broker Network, said brokerage members in the CBN network believed independent brokerages were better aligned with the consumer, because business strategy decisions are free from considerations of particular insurer solutions or products.

“We do think it [independence] matters,” Phair said. “In order to be a member of CBN, you have to be an independent brokerage. We have a very detailed constitution which outlines expectations….

“We define independence as where control remains with the owner-operators of the business, so, the day-to-day operations of the brokerage, but also the strategic direction of the brokerage, too — where it’s going, where the investments are going to be.

“Outside investment is totally fine. Brokerages today are far more complex than they were 20 years ago, even 10 years ago, so no problem with that, but it’s all about control. We believe the interests of the customers are more in alignment with an independent brokerage. It doesn’t have to deal with potential inherent conflicts of outside control — and that can be control from insurers, from private equity firms, or financial institutions.”

Panellist Sean Martin is the managing director and head of financial institutions and financial technology at Raymond James. He presented one counterargument, which is that all financial institutions are regulated, which prevents any brokerage owner from acting in the best interests of consumers.

“In most situations, people are buying financial products…because there’s an element of understanding that, whoever that institution is, regardless of how they they’re owned or who owns them, that there is a fiduciary obligation for that individual to put that consumer in the right product,” said Martin. “And whoever you’re dealing with on the front lines [of the brokerage], it’s unlikely that those people have been influenced based on the ownership.”

But Aly Kanji, CEO of InsureLine, said Ontario’s self-regulating body for brokers, the Registered Insurance Brokers of Ontario (RIBO), issued a bulletin in April mandating that brokerages must inform consumers if they are owned by an insurer.

“[RIBO is] going to start enforcing it as of Oct. 1,” Kanji said. “They’ve given sample scripts, sample emails, and sample language that people can use, because the regulator thinks it is important for the consumer to know that they’re buying insurance from a brokerage that’s recommending a product that’s controlled by the owner of the brokerage.”

Advocacy impact

Kanji further argued independence not only matters when it comes to offering advice on products, but it also impacts the brokers’ ability to advocate for the client.

“The advocacy component of the broker[‘s] role is one of the reasons why consumers go and buy from a broker, as opposed to buying from a direct writer or buying from an agency.

“And when you have a conflict of interest, where an insurer owns the brokerage, what is the likelihood that an employee of a brokerage that’s owned by an insurer is going to go and advocate against that insurer, against their employer, against their owner, with respect to a claim situation?

“Or [what if] a claim is denied, and probably [the broker] thinks it ought not to be denied, but now they’re arguing against their owner and their employer? I think those types of conflicts of interest raise questions around whether or not independence matters.”

In some ways, the conflicts of interest are not as sharp with private equity ownership of a brokerage, as some panellists observed.

“I think if you have an individual who owns a broker, or you have a private equity group that owns a broker, I think largely both of those individuals are mercantile, and they’re trying to run their business and manage client interests and their own financial interests,” said Martin. “I don’t think it’s that much different.

“Maybe, maybe, scale. Maybe, as a broker gets bigger on the margin, they’re making decisions that are perhaps tilted more towards their financial benefit than their clients of the broker. [Contingent profit commissions] get bigger as you get bigger, so maybe some dynamic there.

“But I think most of that, to me, would fall into just the consolidation part of the industry. Consolidation is happening. Scale is happening. I think there’s more good things and bad things, for all those problems. So I don’t think private equity ownership is that much different to contemporary [independent brokerage ownership].”

Phair agreed, saying “there’s likelihood for more influence from insurer ownership” than in a private equity model, in terms of a conflict of interest. But she noted independent brokerages tend to take a different approach when investing their capital.

“Owner-managed, owner-controlled brokerages tend to be a little more patient,” she said. “They tend to invest in things that are relevant to their consumers. It might be staff, it might be education — they have different timelines than private equity-owned businesses.”

Paul Jackson, head of customer and market management at Zurich Canada, noted scale is important for contemporary brokerages. The challenge for brokerage consolidators, he said, is to find a way to take out costs, redundancy and duplication, and pass that back to the consumer in the form of reduced premiums.

“There are two ways that could go,” said Jackson. “If you’re consolidating into a sort of federation and not taking the cost out, then either you need more commissions from the insurance companies to make that economic model work, or you can tale the costs down and overall pass the value down to the consumer.”

Feature image courtesy of iStock.com/Urupong