2006 General Meeting Assemblée générale 2006 Chicago, Illinois

1. PD 29 – Cost of Distribution and Its Future in Canada Speakers: Byren Innes John McKay Pierre Vincent 2006 General Meeting Assemblée générale 2006 Chicago, Illinois

2. The future of life insurance distribution in Canada Agenda • Evolution of distribution • Important factors • Today’s advisor • Tomorrow’s advisor • The future

3. Evolution of distribution

4. Evolution of distribution From Captive to Independent to Semi- Captive? From Single Channel to Multiple Channels?

5. Primary Distribution Channels in 1990 • Career • Managing General Agent (MGA) • Company Owned Brokerage Office • Personal Producer General Agent (PPGA)

6. Primary Distribution Channels in 1990 • Career • Recruit, train, support, motivate • Compliance • Agents are employees • Agents represent 1 company • Actively recruit agents • High fixed cost

7. Primary Distribution Channels in 1990 • Career Distribution System • Managing General Agent • Independent • Responsible for training, recruiting, support, motivate, compliance and some administrative functions • Variable compensation: high first year bonus and service fees • Brokers are independent (may be tied to MGA by contract)

8. Primary Distribution Channels in 1990 • Career Distribution System • Managing General Agent (MGA) • Company Owned Brokerage Office • Brokerage manager is an employee • Broker is independent

9. Primary Distribution Channels in 1990 • Career Distribution System • Managing General Agent • Company Owned Brokerage Office • Personal Producer General Agent • Large independent advisor who does business directly with LifeCos • Variable compensation: commission and bonuses

10. Career in 1990 • Single company representation • LifeCo responsible for all functions

11. MGA in 1990 • MGA represents a few companies • Broker can work with 2-3 MGAs • New recruits – often from career

12. Career in 2006 LifeCo: • Enters into strategic partnerships • Wants control of “independent agent” • Offers multiple proprietary solutions Strategic Partners

13. MGA in 2006 • Represents multiple companies • Multiple locations • Wants control of independent broker • Some start training new recruits

14. MGA in 2006 • Represents multiple companies • Multiple locations • Wants control of independent broker • Some start training new recruits

15. Primary Distribution Channels in 2006 • Career • MGA • Company Owned Brokerage Office • PPGA • Bank owned investment dealers (IDA) • Financial Planning Firms (MFDA) • Banks • Direct (TV, phone, mail, internet,...) • Affinity Groups • Worksite marketing • Recruiting organizations • ....

16. Important Factors

17. Considerations when selecting distribution channels • Access to market and consumers • Cost • Control • Growth Potential • Risk

18. Access to market and consumers • What is the target market? • How can this target market be reached most effectively? One example ... Target market: self-employed professionals with income protection needs How to reach: Professional association, specialized DI brokers

19. Cost of Distribution • Fixed versus Variable • Who assumes the marketing risk? • Economies of scale • Cost of technology / communication • Volume bonuses for distributors • Cost of training and support required

20. Change in distribution cost Average marketing expenses per $100 of new premium*: Economies of scale Multiple products Lower recruiting costs Economies of scale Higher bonuses Higher fixed costs Increased competition *: LIMRA – Canadian Distribution System Costs Study (2000 and 2004)

21. Cost comparison – Direct Mail Average marketing expenses per $100 of new premium: Assumption: • Average premium is $100 • Cost per package is $1.00

22. Distribution Control • Independence versus control/ownership • Higher level of control • Easier to influence behavior • Less price sensitive • More predictable sales • Higher fixed cost? • Less entrepreneurial spirit? • Lower commission • Easier to justify some investments

23. Growth Potential Desire for LifeCos to increase profit yearly =>continuous need to increase sales • Which market offers the highest growth potential? • Which distribution channel is expanding the most? • Is the growth sustainable? • How much investment is required?

24. Growth Potential for Career Channel Observations: • Less companies • Less recruiting • Ageing advisors • Not a well publicized career path

25. Growth Potential for MGA Channel Observations: • Fewer agents to attract from career • Minimal recruiting/training of new brokers • Ageing brokers • Reduced margins • Consolidation • Increased cost of compliance, technology, ...

26. Growth Potential for IDA Channel Observations: • Attractive for high-end clients • Access to clients with needs and money • Desire by the firms to provide financial planning services and sell insurance

27. Growth Potential for MFDA Channel Observations: • Financial Planner is sexier than Insurance Agent • Mutual funds is their core product but they are starting to sell more insurance • Many clients with money • Advisor is younger

28. Growth Potential for Bank Channel Observations: • Access to many clients • Lower end, middle class • Currently training many financial planners

29. Risk management • Diversification – single/multiple channels • Independence has a price • Independence has benefits • Size of distributors and influence • Price competitiveness and sales volume

30. Today’s Advisor

31. Demographics of insurance advisor • Average age: 50+ • Prefers to work with clients in his/her age group • Many consider retirement • Who will serve the younger clients? • Few new recruits • Financial Planner is younger

32. Tomorrow's Advisor

33. Training of new advisors # of hours to become a plumber: 1,500 hours # of hours to become a Financial Security Advisor: 120 hours

34. Who is recruiting & training new Advisors • Career companies • Banks (financial planners) • A few large MGAs • Colleges (new programs) • Independent distribution companies The small # of new advisors is a big issue...

35. The Future

36. The crystal ball says... • Banks’ market share will increase • LifeCos will use multiple channels • LifeCos would like more influence on distribution networks • Distributors’ consolidation will continue • More college programs for new advisors • Financing of block of business • Level Compensation? • Distribution cost will not decrease...