Understanding distribution to unlock growth

^{October 2023}

“Life insurance is sold, not bought.” This is a common saying across life insurance distribution, and there’s much truth to it. Most purchasers must be educated about the value of life insurance and the product options that are right for them. The advisor’s work doesn’t stop there. After the sale, the advisor must manage client expectations through the often lengthy and opaque underwriting and fulfilment process. In recent years, carriers have introduced digital solutions to bring speed and efficiency to the buying cycle. Yet new sales, measured by policy count, are dropping, and individual insurance ownership is at historic lows. According to LIMRA, 15% fewer policies were sold in 2022 compared to 2015.¹ While it’s true that new sales by premium and face amount have trended positively over this period, we can all agree that the issue of fewer policies sold must be addressed to ensure we deliver value to Canadian families. How did we get to this point?

From the industry’s inception to the mid-to-late 1990s, most insurance carriers directly managed distribution through a captive agency model. Insurance was primarily sold by company agents organized under distribution branches. Any insurance advisor today with more than 20 years of experience was likely recruited and trained in this agency model. These captive agents were highly focused on selling individual life insurance, and the companies they represented viewed agent and policyholder satisfaction as the lifeblood of the organization. New recruit turnover was high, but once agents found success, they often stayed with the company for their entire careers.

In the mid-to-late 1990s, at the same time as the de-mutualization of almost all insurance companies, alternatives to the captive agency model began to take hold. Many captive agency-based organizations were shut down, and entrepreneurial-minded branch managers started independent Managing General Agencies (MGAs), focused on retaining the relationships and sales of the agents they recruited into the industry. Unlike captive agencies, MGAs and their advisors could choose to sell products from multiple companies. MGAs sought to secure as many carrier contracts as possible to attract and retain advisors and maximize the carriers’ grid-based financial payouts to distributors.

While the MGAs at this time were primarily regional, nationwide organizations tied to banks or investment dealers also emerged and were called “National Accounts.” Insurance specialists at these firms worked alongside in-house investment advisors to cross-sell insurance from multiple carriers to existing clients.

Over time, the MGAs consolidated. Of the 200 or so firms that existed in the early 2000s, many were acquired and rolled into what have become the “Big 4” MGAs, which account for a significant portion of all new sales and inforce blocks of business in Canada. In 2017 carriers began purchasing MGAs and a new cycle emerged with manufacturers owning brokerage-based distribution organizations. MGAs and National Accounts have fuelled industry growth, and the market share of this third-party distribution channel is now dominant, representing 87% of sales by premium at the end of 2022.²

Another change occurred through the 1990s with the disintermediation of non-life insurance products and the rise of the independent investment distribution model. Advisors began selling products previously unavailable to them, such as investment and banking solutions. Untethered from their agency models and perhaps attracted to the cross-selling potential of these newly available products, the “insurance salesperson” and “investment advisor” roles became blurred. Advisors recruited and trained as life agents could now become financial planners and offer clients holistic advice and deeper overall value.

On the surface, this approach made perfect sense since consumers of individual life insurance and individual investment products are often the same audience. However, the two product lines have contrasting sales approaches, transaction platforms, cycle times, and commission structures. One example is that while investment products can be transacted on a single platform, regardless of supplier company, each insurance carrier has its own proprietary platform and workflows. Investment sales are also perceived as “easier” – consumers already know they need to invest for retirement but don’t always know about the advantages of life insurance. So it should be no surprise that busy advisors with limited time often favour investment sales at the expense of a potential insurance sale and the process that goes along with it.

The agency distribution model drove the recruitment and training of new advisors since the ability to consistently recruit “new blood” into agency branches was essential for success. With the transition to today’s third-party distribution-dominant market, recruitment became deprioritized as the focus shifted to driving sales for the current month, quarter, or year. The new generation of financial services recruits is more likely to come from the investment or banking sectors and, hence less focused on insurance, while the advisors from the agency era are nearing retirement age.

This combination of more advisors shifting from “insurance agents” to holistic “financial planners” and traditional insurance advisors reaching retirement age has resulted in a scarcity of insurance advice in Canada. Although innovation-focused efforts to build direct-to-consumer (D2C) life insurance distribution have been created to help close the coverage gap, D2C market share remains in the low single digits in terms of both premium and policy count. This implies that the “sold, not bought” nature of individual insurance still requires advisors to guide the vast majority of consumers through the buying cycle. 

Carriers have made great efforts to modernize the product acquisition process and improve cycle times. After years of iteration, COVID-19 created a sense of urgency to keep new sales viable. This resulted in the rapid expansion of non-fluid underwriting limits, the removal of non-face-to-face sale restrictions, and the widespread adoption of e-application and e-delivery tools. While this had the desired effect of keeping business moving during the pandemic, it has not reversed the longer-term trend of fewer policies sold. In 2022, new sales significantly dropped by policy count, and the average published cycle times are around 21 days for fully underwritten policies, according to Munich Re, Canada (Life)’s 2023 Individual Insurance Survey.

Processing times will continue to improve, but more can be done. We must consider making it easier for advisors to sell our products. For advisors, perception is reality. If an advisor believes that a carrier has complicated structures, demanding workflows, and lengthy approval times, they’re not going to present that carrier’s solutions. 

The current process inefficiencies in selling individual life insurance versus other options on advisors’ product shelves expose our industry to the risk of continuing the negative policy count trend. Insurance companies’ competition for many advisors’ time and focus isn’t limited to other carriers. Instead, it involves other products available to them – and what, for one reason or another, arguably too many advisors and consumers are choosing now: “do nothing.”

We must not lose sight of distribution when building our growth strategies. New initiatives should contemplate the reality of the advisors we rely on to sell our products. Advice remains critical to any individual life insurance sale and will remain so. Remembering the “sold, not bought” premise and better understanding how customers buy our products will help us prioritize resources and projects.

Using technology to remove friction for distributors and advisors, just as we do for end-customers, will also help. We must remember that competition for distributors’ and advisors’ product shelves is not only across peer insurance companies but also includes other lines of business that may be perceived as faster or easier to sell and service.

If we can successfully remove friction from industry processes, we enable and empower distribution to reach customers and close the expanding life insurance coverage gap.