The life insurance industry in Canada is undergoing huge changes while attracting little mainstream news coverage.

RBC Insurance recently cancelled their distribution contracts with most of their Managing General Agencies (MGAs). They went from 83 MGAs to just 14.

Advisor.ca broke the news here

This proves the 80/20 rule (Pareto Principle) that says 80% of business comes from 20% of clients.

All the insurance advisors who placed their RBC Insurance business through those 69 axed MGAs will need to find a new home for that business in the next 60 days. They will obviously want to continue servicing their clients but now need new contracting and licensing in place ASAP to do so.  Lots of paperwork ahead.

As a result, there will be less paperwork to process at the axed MGAs, so workforce reductions at RBC Insurance and further consolidation in the MGA industry should be anticipated.

Aside from disruption and displacement within the industry, the majority of consumers are unaware of recent big changes that will continue to raise the cost of insurance and reduce access to several important products.

I posted some of the news in June here.

RBC Insurance has now slashed distribution channels and left 3 VERY big lines of business completely:

• Universal Life insurance with LCOI (level cost of insurance guaranteed for life), now just term life insurance. Gone.
• Long Term Care insurance.  There long term care product was the only one in Canada with a 50% ceiling on future price increases.  Gone.
• Level premium to age 75 or age 100 Critical Illness Insurance.  Now will only have term critical illness insurance.  Gone.

I liked all 3 and many of my clients had these policies.

The simple one word reason is PROFITS (or lack thereof).

The cost of insurance has risen sharply over the past few years (by as much as 60% for some permanent products) and will likely continue in that direction until unfolding events stop battering the earnings of insurers. Prices initially rose when reduced interest rates forced actuaries to re-price, then a global market crash called for drastic measures, followed by more re-pricing, interest rates decreased further, forcing more re-pricing…. (See the pattern?)

Other big changes: Companies are eliminating Guaranteed Minimum Withdrawal Benefits and further reducing guarantees.  Too much “guarantee” exposure on the books requires insurance companies to add more reserves to back up those guarantees, reducing the profits available for distribution to stock shareholders who are watching their share values drop on a regular basis. 

A soon to happen alignment in financial services with international accounting rules will require further allocations to company "reserves" by Canadian insurance companies to back up their long term guarantees on permanent life insurance and their guaranteed investment product portfolios. 

The banks aggressively bought into the insurance business by acquiring companies and expanding market share several years ago.  Banks are accustomed to posting positive results every quarter and they are not accustomed to losing money.

No company wants to sell products based on the lowest price - especially when the product is life insurance. Insurers cannot afford to sell policies that come as unprofitable with long term guarantees that can’t be backed up in this low interest rate environment.

Pricing pressures aside, independent life insurance companies and banks are engaged in a battle for supremacy.  Bet you didn’t know that the banks still sell more creditor insurance (eg mortgage life insurance and mortgage critical illness insurance) than all the independent insurance companies combined.  We already know that’s NOT the best kind of insurance for consumers.  Watch this expose by CBC Marketplace and make your own decision.  It’s a shame that consumers don’t know the facts and fewer advisors will tell them. 

Looking ahead, RBC Insurance and other bank insurance companies will probably adopt a sit back approach for a few years until legislators allow the banks to sell insurance directly through their banking distribution channels in a bigger way. They will be exceptionally well positioned to exploit the advantages of an existing client base and well-oiled distribution network.  The independent and trusted insurance advisors offering unbiased advice and a wide variety of products from multiple companies will be the hardest hit.  The average age of an independent insurance advisor in Canada is 57. 

What’s coming next?

There is no rush of young new advisors entering our industry, and much of the “old guard” now focuses on selling investment products.   Is this another sign that independent insurance advisors will soon be extinct? I believe it is but I’m hoping to be wrong.

I will keep you posted