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Going for broker

Enterprise magazine
Shannon Rupp

They say opposites attract, but in the financial world it might be better to say that opposites complement. While you couldn’t find two more disparate businesses than banking and insurance – one is about managing the margins, while the other is a fee-for-service -- the combination is a natural fit for credit unions looking to ensure the bottom line.

“It gives us diversity in our revenues and insurance is core to our members needs. We’re interested in the good fiscal health of our customers first,” says Rick Parent, president of Coast Capital Insurance, in British Columbia, where credit unions have been able to buy insurance brokerages for more than 20 years. “But if we’re going to be sustaining challenges in the market we need non-interest sensitive revenues.”

In 2007 about a third of Coast Capital Savings “other income” -- $20,931,000 of $71,145,000 – came from general insurance. While giving credit unions some respite from the tyranny of margins, Parent points out that credit union standards for integrity and trust have also had a good impact on the insurance business. About half of the insurance-side clients are non-members who benefit from the credit union philosophy of putting the customer’s interests first.

Traditionally insurance is one of the four pillars of wealth management, along with trust companies, banks, and investment brokers and there was a belief (backed up with legislation) that these businesses had to remain separate in order to protect consumers. Independent insurance brokers fearing their markets are being threatened still make this argument. They raise the concern that banks, rich in assets, have the potential to turn into the financial equivalent of big box stores, killing competition and using unfair tactics, such as coercive tied selling.

When Saskatchewan joined the provinces that allow credit unions to purchase brokerages (in 2004), Dan Danyluk, CEO of the Insurance Brokers of Association of Canada wrote, in Canadian Underwriter magazine, that the change would not improve the lot of consumers.

“We are the people who sell 80 percent of general insurance in Canada. We are the insurance consumers’ advocate. By law, our first agency responsibility is to the clients we represent,” Danyluk said. 

In arguing to keep “the four pillars separate,” independent brokers tend to conflate banks and credit unions despite the different mandates. That lobbying technique that has worked successfully in Ontario where credit unions, like banks, are still prohibited from selling insurance directly.

But the strengths that Danyluk claims for independent brokers – providing personal service in small towns and remote areas – are among the credit unions’ established advantages. Unlike independent brokers, who are entrepreneurs driven by the profit-motive, credit unions never forget their first allegiance is to their members.

Parent says that approach has been good for consumers in general, as credit unions have often bought out the less professionally run brokers. Meanwhile, the most skilled independents have continued to thrive. In B.C. Parent says the relationship between the two types of insurance providers is amicable, despite some of the national rhetoric.

Terry Taciuk, president of Vancity Insurance Services agrees that credit unions have set the bar for trust in providing services, including insurance, and he notes the “people before profits” philosophy that guides credit unions is ideal for selling insurance.

“We have increased competition in the insurance industry and we have helped professionalism. We are known as trustworthy when it comes to giving financial advice,” Taciuk says, adding that the CU’s resources means they can provide a credit union level of service including well-educated staff.  

Taciuk adds that the credit unions’ culture of integrity is the consumers’ greatest protection when it comes to buying insurance from an institution that is also a lender. He believes it has driven credit union brokerages to deliver a higher standard of service.

For consumers, he believes that trust, coupled with the convenience of one-stop-shopping has been key in making insurance brokerages successful within the credit union system.

The two provinces that first allowed credit unions to provide members with insurance have proven that the institutions run by owner-members actually have an edge in serving clients.

 

In Quebec, Mouvement Desjardins is both the province’s largest deposit taking institution and its largest life insurer. There, caisses populaires have been able to add brokerages to their business since the 1940s and they were able to add credit unions as retailers by the 1980s.

Legislative advantages in Quebec mean that consumers get better service with substantial savings. Fully licensed insurance agents staff the branches, and consumers have the option of bundling their insurance and banking services into packages that come at a better price.

Consumer research commissioned by Mouvement Desjardins shows that caisses populaires have been instrumental in providing essential insurance to groups that are known to neglect it. About half of young couples just starting families, for example, reported that their first insurance purchase was through their credit union. The same research noted that about half of consumers prefer to get their insurance advice from someone recommended by their trusted financial institutions.

In B.C., where credit unions entered insurance broking in the 1980s, legislation has been carefully worded to restrict the possibility of tied selling. Generally brokerages are adjacent to, but separated from, the credit union itself with separate storefronts, or in some cases as little as a glass wall between them. (Although some older insurance sellers may be inside the credit union due to grandfathering in accordance with earlier legislation.)   Credit union employees may offer referrals or, with customer consent, pass financial information that helps insurance agents tailor policies to consumers’ needs. Most provinces permit credit unions to owner brokerage subsidiaries, with similar prohibitions. Alberta has stricter regulations and CUs are limited to owning life insurance brokerages, although that may change as credit unions merge across borders and the B.C. and Alberta governments discuss inter-provincial free trade. 

“Insurance is a business of relationships and credit unions already have a relationship with their members,” says Jim Sigurdson, of Coastal Community Insurance.

“It’s been profitable for credit unions – for the most part – but it has also been a steep learning curve,” says Sigurdson, who has worked on both sides of the fence.

He remembers making the leap from independent broker to credit union employee in 1989 when his family firm was bought out by what was then Maple Ridge Credit Union.  

B.C. credit unions were among the first venturing into the world of insurance, and he was amused to realize that one executive was only half-joking about his surprise over the challenges of going from banker to broker.

“He said, `I was told that an insurance agency would run itself and make nothing but money,’ ” Sigurdson recalls, with a chuckle.

The second-generation insurance man says the one thing that credit unions didn’t anticipate was the culture clash between the two types of businesses, and the implications that has for the bottom line.

“Most independent insurance brokerages are small, entrepreneurial family businesses that are not conducive to the corporate structure of credit unions – they like to run their business their way. They weren’t interested in reporting to CEOs and boards of directors,” he says.

So credit unions would buy a profitable brokerage, and expect the former owner to stay – only to find he made a quick exit.

“For independent business owners the fun is often in the challenge of finding more ways to put money in their own pockets and few stick around to manage for the credit unions.”

But insurance is a complex industry, so that loss of experience can be a blow to a new owner who isn’t used to the risk management business. Those experienced in investing and lending can be caught off guard by sudden changes that have an immediate impact on insurance. For example, a recent study by Ernst and Young notes that climate change is the single greatest strategic risk facing the property and casualty insurance industry, suddenly relegating the biggest risk of the last decade, demographic changes, to second place.

Sigurdson notes that those new to the venture don’t always realize that they will be managing a different type of employee. Staff require extensive education and licensing, and because most independents are small businesses the average salaries are lower than those of credit union employees.

“It takes about three weeks to train a teller but the salaries on the insurance side are lower, Sigurdson says. “We need to improve salaries to attract and keep qualified salaried people, otherwise they’ll look over and see comparable work that pays better.”

For credit unions taking the plunge into insurance, Sigurdson has a few tips. Remember to hire skilled staff. Brokerages require employees who are educated and licensed, and who can be both sales people and managers. They need ongoing education. Salaries need to reflect both their expertise and what employees in comparable jobs in the credit union are earning.

“Brokerages become difficult to staff if they feel like second class citizens in the overall corporation.”

Sigurdson adds that it’s wise to remember that insurance is fundamentally different product. Credit unions manufacture the lending and savings products they sell, but brokers bring customers and products together. Their job is to find the right policies for the consumer’s needs.

“But that is an advantage too. Because we don’t manufacture the products, there is no conflict of interest,” he says. “Unlike banks, which manufacture their own [insurance] products and sell them directly to customers.”

He adds that new brokerages can expect to loose a few of the old customers who, philosophically, prefer to deal with small businesses.

But with sufficient attention to the pitfalls, Sigurdson says there’s no doubt that insurance is an excellent business for credit unions.

“Consumers get good value and good service, and we’re providing them with a trusted advisor,” Sigurdson says. “We’re legally obligated to act just like an independent broker.”

1 Sep 2008