Insurance may emerge as the next big growth area in Canadian banking, even though regulations prohibit lenders from selling via their branches and insurance brokers vehemently oppose the move.
When Canada’s biggest bankers convened last week to talk about growth plans, they noted that acquisitions were an obvious goal. More quietly, some pointed to insurance as a promising business for them.
“Now we’re looking at insurance,” Rick Waugh, chief executive of Bank of Nova Scotia said at a financial summit in Toronto. “This year we’re going to make a big push, because now we’re pushing for growth.”
Last month, just before reporting a slight dip in quarterly profit, Canada’s third-largest bank became the latest to open an insurance branch — a retail space in a shopping mall, right beside an existing Scotiabank branch — to extend the bank’s reach into the lives of consumers.
While Canada’s banks are prohibited from selling insurance via their branches — the subject of a long-running political battle with insurance brokers — the slow expansion of banks into the C$115 billion (US$107 billion) domestic insurance market has many observers wondering how far their push will go.
“It’ll take a while, but insurance is a natural fit, and one of the few areas where banks are underrepresented,” said Robert Sedran, an analyst at National Bank Financial.
Canada’s big banks have emerged from the financial crisis in better shape than global rivals, without taking government bailouts. But finding new business is an uphill battle when consumers already have a bank and rarely switch brands.
“They dominate Canada financially, so to grow any larger, they are either going to have to diversify horizontally into other businesses such as insurance, or diversify geographically into other countries,” said Ian Lee, who directs the MBA program at Carleton University’s Sprott School of Business.
While Canada’s largest banks — Royal Bank of Canada, Toronto Dominion Bank, Scotiabank, and Bank of Montreal — are all looking to grow global reach through acquisitions, they are also building insurance assets.
Hungry for growth, the banks are beefing up their insurance arms, trying to push sales on the Internet, in stand-alone insurance branches or through insurance subsidiaries, carefully skirting government regulations that aim to keep the two big financial industries — insurance and banking — separate.
Scotiabank’s first insurance branch is a page out of the book of rival Royal Bank, which has dozens of insurance offices right next door to many RBC branches. Bank of Montreal paid C$375 million [US$343 million] this year to buy AIG Life Insurance Co. of Canada, the Canadian arm of failed U.S. insurance giant AIG.
Together with TD Bank, all now offer a portfolio of home, auto or life insurance sold through multiple channels other than their many bank branches — much to the dismay of the Insurance Brokers Association of Canada, which represents what has been the dominant force in insurance sales.
“The banks are looking to try and enter into a business that everyone agreed they wouldn’t get into,” said Dan Danyluk, chief executive of the insurance group.
Danyluk is referring to the Bank Act, federal legislation that originally espoused four separate and distinct pillars of financial services — banks, brokerages, trust companies, and insurers — as a way of protecting consumers from behemoth banks. But, one by one since the 1990s, the pillars have crumbled. The big six banks now own both the trust companies and big investment houses.
“My own sense is that the gradual disappearance of the pillars is going to continue, and we’ll continue to see integration across financial services,” Professor Lee said.
But the brokers are arguing on the side of consumer protection, saying that bank customers should not have to face an insurance salesman when they’re also applying for a loan.
“All we’re saying is consumers ought to be able to make a choice without the shadow of credit over them … because when you want to get credit, you pretty much do what you need to do to get the credit,” Danyluk said.
The banks argue the consumer should get to decide. “We feel consumers have a right to choose. For consumers that want to deal with a direct insurer, through online or call centers, they should have the right. If they want to deal with a broker, that option is open to them,” Scotiabank’s senior vice-president, Mark Cummings, said in an interview.
Glitzy insurance branch openings aside, progress will have to be made politically first — and observers say the banks face a formidable opponent in the insurance brokers.
Lee and Sedran both say that while the big banks are powerful players in the Toronto-based business sector, the insurance brokers are spread across Canada and, particularly in small towns and cities, are often politically connected pillars of the community. Their lobbying pressure on Canadian lawmakers to keep banks out of direct insurance sales is relentless.
“Do I have a lot of faith in the Canadian political system? I do. I know how much work (members of Parliament) and senators do, and how smart those people are,” Danyluk said.
Michael Goldberg, a financial services analyst at Desjardins Securities, does not underestimate the brokers. “You have to ask the question: Is the current system broken? If it’s not broken, and at the same time you’ve got brokers that are vehemently opposed to change in the system, why expend political capital to fix something that isn’t believed to be broken?” he said. “In my experience, the brokers are much more effective than the banks (in terms of influence),” Goldberg said.
(Reporting by Andrea Hopkins; editing by Rob Wilson)
Topics USA Agencies Legislation Canada
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