Does broker independence really matter?

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

However, some panelists noted that owning a private equity brokerage is less likely to lead to conflicts of interest than having an insurance company own a brokerage.

Bob Tisdale, owner of JR Tisdale Consulting Services, moderated the panel titled: Maintaining distribution in the face of mergers and acquisitions – does it really matter?

At both the beginning and end of the presentation, Tisdale conducted informal online surveys with the audience, which largely consisted of brokers. In both cases, brokers voted approximately 63-65% in favor of stating that broker independence still matters.

“It looks like people have already made up their minds,” Tisdale joked at the end of the session.

Tisdale previously served as president and CEO of Pembridge Insurance, an insurance company that strategically sold through the brokerage channel. He made the devil’s advocate argument that broker independence no longer really matters. He noted that mergers and acquisitions have brought many new, successful business models to the mix – such as brokerages owned by insurers and private equity.

Tisdale cited several historical examples of brokers aggressively promoting their independence, with several initiatives being abandoned over time.

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

Tisdale said that during discussions about the Bipper program at the Canadian Association of Insurance Brokers, it was proposed that “we will make companies that support broker independence pay more for the advertising program, but only truly independent brokers will be able to use the symbol program,” he said.

“Well, that really was going nowhere because I think at the time a lot of associations were considering the need to retain brokers and provincial association revenue, so… that didn’t happen.”

Name change

And then all the provincial broker associations changed their names, so the word “independent” no longer appeared in their names, Tisdale noted. It was argued that members of the provincial brokers’ association who were not independent should not be alienated.

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

Lorie Phair, president of the Canadian Broker Network, said CBN network members believe that independent brokerages are better suited to consumer needs because business strategy decisions do not take into account an insurer’s specific solutions or products.

“We really think it (independence) matters,” Phair said. “To become a member of the CBN, you must be an independent brokerage house. We have a very detailed constitution that sets out expectations….

“We define independence as where control remains in the hands of the owner-operators of the enterprise, and therefore the day-to-day operations of the brokerage, but also the strategic direction of the brokerage – where it is going, where investments are going to be.

“Outside investment is fine. Today’s brokerage is much more complex than it was 20 or even 10 years ago, so that’s fine, but it’s about control. We believe that clients’ interests are more aligned with an independent brokerage. It does not have to deal with the potential inherent conflicts of external control – and that may be control by insurers, private equity firms or financial institutions.”

Panelist Sean Martin is Managing Director and Head of Financial Institutions and Financial Technology at Raymond James. He offered one counterargument that all financial institutions are regulated, which makes it impossible for a brokerage owner to act in the best interests of consumers.

“In most situations, people buy financial products… because there is an element of understanding that regardless of who the institution is, regardless of how it is owned and who owns it, there is a fiduciary duty to provide the consumer with the right product.” – said Martin. “And regardless of who you’re dealing with on the front lines (at the brokerage), those people are unlikely to be influenced by ownership.”

However, Aly Kanji, CEO of InsureLine, said Ontario’s broker self-regulatory body, Registered Insurance Brokers Ontario (RIBO), issued a bulletin in April requiring brokerages to inform consumers if they are owned by an insurer.

“(RIBO) will start enforcing it from October 1,” Kanji said. “They have provided sample scripts, sample emails and sample language that people can use because the regulator believes it is important for the consumer to know that he or she is purchasing insurance from a brokerage that recommends a product controlled by the owner of the brokerage.”

Propaganda influence

Kanji further argued that independence matters not only when offering product advice, but also impacts brokers’ ability to represent a client.

“The advocacy element in the broker(s) role is one of the reasons consumers go and buy from a broker rather than buying from a direct issuer or buying from an agency.

“And in the case of a conflict of interest where an insurer owns a brokerage house, what is the likelihood that an employee of a brokerage house owned by the insurer will come forward and file a lawsuit against that insurer, against their employer, against their owner, with respect to a claims situation?

“Or (what if) the claim is denied and probably (the broker) feels it shouldn’t be denied, but now he’s at odds with his landlord and employer? “I think these types of conflicts of interest raise questions about whether independence matters.”

In some respects, conflicts of interest are not as acute for private equity-owned brokerages, some panelists noted.

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

“Maybe, Maybescale. Perhaps as the broker becomes more and more marginal, he makes decisions that are perhaps more geared towards his financial benefit than the broker’s clients. (Contingent profit commissions) get bigger as they grow, so maybe there will be some momentum there.

“But I think most of it, in my opinion, will be about industry consolidation. Consolidation is taking place. Scale is happening. With all these problems, I think there are more good and bad things. So I don’t think private equity ownership is much different than modern ownership (ownership of an independent brokerage).”

Phair agreed, saying “there is likely to be a greater influence of insurer ownership” than in the private equity model when it comes to conflicts of interest. However, she noted that independent brokerages typically take a different approach to investing their capital.

“Owner-managed and controlled brokerages tend to be a little more patient,” she said. “They tend to invest in things that are relevant to their consumers. It could be staffing, it could be education – they have a different time frame than private equity-owned companies.”

Paul Jackson, director of client and market management at Zurich Canada, noted that scale is important for today’s brokerages. The challenge for broker consolidators, he said, is to find a way to eliminate costs, redundancies and duplication of efforts and pass them back to the consumer in the form of reduced premiums.

“There are two ways it could go,” Jackson said. “If you consolidate into something like a federation and don’t remove costs, you either need more commissions from insurance companies to make this economic model work, or you can price the costs down and generally pass the value on to the consumer.”

Stock photo courtesy of iStock.com/Urupong