Blogs & Comment

Banks and insurance: The love that dare not speak its name

If financial institutions were characters on a soap opera, the show would unfold somewhat like this:

Scene 1 The bank and an insurance product are in a dark hallway where they can’t be seen. They’re about to embrace, but the insurance product stops short.

Bank: Please don’t. I can’t live without you anymore.

Insurance: But you know we can’t. What if someone sees us?

Bank: Who? The Insurance Brokers Association of Canada?

Insurance: Well, yes. The insurance industry is mighty powerful and I don’t want to be turned into some lowly mutual fund product.

Bank: Forget them! If we’re going to compete with the really big banks one day, the government will have to let us sell insurance, not to mention merge with other banks. So it’s no use to resist.

Insurance: I want to, but I can’t.

Banks: Fine. I’ll just build an insurance office under a different name, right next to my regular branch and then I’ll show your industry who’s boss. Don’t come crawling back to me when you have a change of heart!

End scene.

Oh the glorious drama. OK, so it’s hard to make banks and insurance sexy, but, for those who are into this sort of thing, the ongoing battle between the two financial sectors is as gripping as any episode of The Young and The Restless.
Right now the government won’t allow banks to sell insurance products. Of course, the big five want to sell insurance as it is a multi-billion dollar industry. Because the industry makes so much dough, they’ve got a lot of pull in Ottawa, which means banks won’t be selling insurance any time soon.
But you can’t stop a financial institution from doing what it wants, so, instead of waiting until the rules change, some banks have found a loophole in the law they’ve set up insurance offices, under a subsidiary, right next to their regular branches.
The latest outfit to do this is Scotiabank. Under the new ScotiaLife Financial moniker, which was revealed yesterday, the bank is able to sell home, auto, life and health insurance products. RBC has also gone this route, and it’s been very successful its insurance business rose by 53% last quarter and the bank is planning to build about 100 insurance offices next to existing branches.
Seems strange, huh? Why the no-insurance rule for banks, when it’s not illegal to sell products through a subsidiary? To make things a bit more confusing, banks are allowed to use the Internet to market and sell insurance products. In June, financial regulators ruled that websites aren’t the same thing as a branch, and therefore the ban on banks from selling insurance doesn’t apply. So now Canadians can purchase insurance from their bank’s website. (And this might be what really hurts the insurance industry. The Canadian Bankers Associationreports that 445.7 million transactions were made online last year, up from 13.2% in 2007. ABM transactions dropped 3.8% to 954.7 million. The web could soon and already is for many people becoming the banking method of choice.)
Clearly, the banks are making a mockery out of this rule, and in turn the Canadian government. Can they sell insurance or can’t they? (Obviously it’s the latter, even though they’re technically not supposed to.)
It’s time the Conservatives change the regulations and allow banks to sell insurance through their branches. This would give consumers even more choice and allow the banks to compete globally. In fact, it’s really only a matter of time until the rules change, because if they don’t there’s a risk that Canada’s banking sector will fall behind. Banks are getting bigger, even as many crumble in the U.S., and if our financial institutions can’t merge or sell insurance outright they won’t be able to compete on the world’s stage.
The Conservatives have said they won’t loosen the restrictions, so until that happens (and if the Cons don’t do it, who will?) the banks will be forced to get more creative, ultimately making an even greater farce out of this now out-of-date rule.