Saturday, August 26, 2006

Life Insurance Companies vs. Banks

Financial Post, John Turley-Ewart, 26 August 2006

Canada's insurance industry is in moral decline.

Financially it is sound. Policies are being honoured as usual, dividends are being paid, and insurance stocks are having a good run. But the business ethics on offer from some of the industry's guiding lights give pause. The battle by insurance companies to keep other financial institutions from retailing insurance through their branches has revealed the sector's unseemly side.

Take the most recent example. The Ontario government will not allow credit unions, which fall under provincial legislation, to own insurance brokerages and retail insurance through their branches, a practice already permitted in Quebec.

The reason borders on the bizarre: The Ontario government found that "there was no consensus on this issue between the credit-union sector and the insurance industry." This effectively gives insurance companies a veto over credit unions retailing insurance, a decision grounded in banana-republic values rather than liberal-democratic ones.

Insurance companies and brokers see it differently, of course. The continuing dominance brokers have over retailing is good for customers, according to Randy Carroll, the chief operating officer for the Insurance Brokers Association of Ontario. "Trying to mix credit with insurance doesn't make any sense," he said last week. "As a consumer, the last thing I want to do is try to negotiate my mortgage and feel obliged that I have to place my house insurance with that same company."

In May, Paul Desmarais Jr., co-CEO of Power Corp. of Canada, which owns Great West Life and, through it, Canada Life and London Life, complained that if banks use their data banks to market life and health insurance through their branches it would be "coercive."

Just a week before that, Dominic D'Alessandro, chief executive of Manulife Financial Corp., stated in these pages: "I don't know why the prohibition on selling insurance products within bank branches has survived. Is it because there are concerns that the banks would exploit their unique relationship with borrowers and engage in tied selling?"

This constant mantra should not be dismissed lightly. Banks and credit unions do not engage today in the tied selling of credit and investment products that they retail in branches. Why would they suddenly turn to tied selling if allowed to sell insurance in branches?

The logical extension of the insurance sector's campaign is that your local mild-mannered bank and credit union managers are untrustworthy rogues. Where is the evidence for any such allegations?

In Ontario, tied selling has been illegal under current provincial legislation for 10 years. Art Chamberlain, a spokesman for Credit Union Central of Canada, says that to the best of his knowledge there has not been one conviction under this legislation.

Tied selling also violates the federal Bank Act. Since 2002, section 459.1 (1) outlawing tied selling has been on the books. Compliance with the law is enforced by both federal regulators and the Financial Consumer Agency of Canada, which since 2002 has found but one case of tied selling -- just one. This amounts to a damning indictment not of banks but of insurance industry leaders who, in their quest to protect their turf, have lost their moral compass, stoking damaging doubts about the integrity of bankers and credit unions.

Tied selling rules are too vague, some in the insurance industry argue. Advocis, which represents 12,000 insurance brokers and financial advisors, tried to make this case in its June response to Finance Canada's 2006 Review of Financial Sector Legislation. It wants Ottawa "to more clearly define what constitutes undue pressure or coercion. [And] ... to develop regulations which would clarify for consumers the types of behaviours which are not permitted."

It is a preposterous argument. What part of "coerce" does Advocis not comprehend? The definition of the word is unequivocal: "To compel by force, law, authority or fear."

What insurance-sector leaders are doing is not just unethical from a business standpoint but misleading. Banks are regulated federally and insurance companies are subject to both federal and provincial regulation, which puts insurance companies at a disadvantage. That is a valid concern. The answer is one national regulation system, but the insurance sector thinks it will lose that argument and has resorted to demagoguery dressed up as concern for consumers' interests, regardless of the impact it has on the good name of Canadian banks and credit unions.

There is no known evidence to suggest local credit unions and bank branch managers are criminally inclined. If the insurance industry has information to the contrary, it's time to put up. To do otherwise gives consumers cause to ask one question: If Canadian brokers and insurance companies will bend the truth to keep rivals at bay, what will they do to sell an insurance policy?