Canada: Leveraging the P&C Distribution Channel for Success – Part One

Last Updated: January 21 2011
Article by Allan Buitendag and Paul MacDonald

Aligning business models to support customer-driven innovation and growth is the most significant transition facing the insurance industry today. In this first part of a two-part article, we examine developments in market share of the property and casualty (P&C) insurance distribution channels. In the second part, we address how demographics and channel access impact insurer results.

Insurance companies utilize two main distribution channels: the independent channel, where products are sold by independent agents or brokers representing several companies; and the direct channel, where products are sold through captive agents, by mail, telephone, the Internet and other means. Many insurance companies pursue a straddling strategy, simultaneously operating both independent and direct channels.

A significant amount of academic research has been devoted to reviewing property and casualty insurance distribution, in particular to investigating the persistent co-existence of multiple channels. The "efficient market theory" suggests that a channel with cost advantages should eventually overcome a more costly channel. While several research studies show that the independent channel has higher costs to the insurer than the direct channel, there is no definitive conclusion on why the independent channel endures.

Popular opinion on the future of the independent channel is similarly mixed. Some point to a steady drop in broker market share in North America as evidence of the channel's inevitable decline, while others claim the market is simply seeking a new equilibrium in response to recent changes in the macro-and micro-environment.

Applying linear regression to net premiums written in Canada over the last 11 years, the data suggests that the independent channel1 is losing market share to the direct channel at a rate of approximately 0.43% per year. At that rate, the independent channel's 2009 market share of 64% will drop to about 60% by 2019. However, viewing the same data by line of business reveals other insights into the independent channel:

  • Automobile Insurance – losing approximately 0.81% market share per year
  • Personal Property Insurance – losing approximately 1.27% market share per year
  • Commercial Property Insurance – gaining approximately 0.13% market share per year
  • Liability Insurance – gaining approximately 0.82% market share per year

With the slight exception of liability insurance, the data remains insensitive to the hard and soft market insurance cycle; although the rate of change is small, it appears to be steady. If we apply the efficient market theory to the data, it suggests that the cost advantages of the direct channel are slowly winning over the less efficient independent channel for automobile and personal property insurance.

Therefore, absent a transformative event in the economic model of the independent channel, this theory also implies that insurers selling automobile and personal property insurance should be considering an exit strategy for their use of the independent channel as a distribution methodology.

But if the direct channel has intrinsic cost advantages, why has the rate of change in market share been so slow? Despite known cost differences between the channels, research has found that little meaningful variation exists in profitability. This appears to be supported by evidence in Canada – as the table below shows, there is less than a 1% variation in the combined expense ratio between the independent and direct channel.

Consequently, from an insurer's perspective, cost alone does not appear to provide significant explanatory power for the trend in market share. But is the trend currently evident in Canada representative of all jurisdictions? Interestingly, in Germany the independent channel is gaining market share despite insurers owning the client list in both the independent and direct channels.

Arguably, there is a natural balance for both the independent and direct channel, and as a result, factors other than cost explain their co-existence. If this is true, it may not be the right time or place for insurers to consider applying an exit strategy.

Researchers have analyzed many factors in an attempt to explain the co-existence of these distribution channels including: the degree of lateral and vertical integration, insurer size and geography, product complexity, consumer search and transaction costs, profitability, ownership of client lists, consumer uncertainty, channel compensation and service quality. While synthesis of such varying factors is challenging, the research identifies several characteristics generally shared by insurance companies active in each channel.

According to these findings, a client requiring complex commercial insurance products is more likely to use the services of a broker who can:

  1. Identify and explain the type of coverage required;
  2. Match the need of the client with the appropriate market;
  3. Assist in managing the claims avoidance, mitigation and resolution processes; and
  4. Maintain an ongoing relationship to minimize the renewal costs associated with remarketing.

On the other hand, a client who requires a simpler personal lines product may feel comfortable with simply the information provided by online quote comparison tools and may seek to purchase a lower cost product directly from the insurer.

More so than insurer costs, it is this consumer preference that drives insight into the question of channel usage. Put quite simply, the two channels co-exist because they serve different segments of the market. A client selecting the independent channel likely has different needs than one selecting the direct channel even if the insurance coverage ultimately purchased is nearly identical. Over time, consumers will self-select channels that are appropriate to their needs. Insurance companies applying a singular cost-reduction philosophy between channels or even across a single channel without regard to client segmentation risk alienating their clients. Insurers lacking insight into consumer needs or, failing that, the requisite channel choice will find themselves struggling to achieve organic growth.

PwC's 2009-2010 Global Sales Survey supports this finding. The responses identified three key takeaways:

  • Sales excellence is a differentiator. We found that developing companies continually struggle with fragmented customer segmentation, channel, and coverage strategies that limit their actual and potential penetration in the marketplaces they target. Developing companies also remain product-centric rather than client-centric.
  • Leaders focus on developing more advanced selling capabilities. Companies that deliver greater results focus on better understanding customer needs and tailoring solutions to those needs; developing companies focus on qualifying opportunities and increasing the number of qualified opportunities.
  • There are significant opportunities for improvement. We believe that both leading and developing companies do not adequately leverage the right dimension of data, resulting in issues such as channel confusion and opportunity loss due to gaps in client management.

Overall, many companies are caught between two conflicting objectives: deliver greater organic revenue while reducing overall costs. The results of PwC's Sales Effectiveness study revealed that 86% of leading organizations believe that the ability to see "one view of the customer" improves sales performance compared to 50% of developing organizations. Meanwhile, 78% of leading companies feel that they know the cost of their relative sales channels while only 42% of developing companies agree.

Customer needs, preferences and buying behaviors are changing and thus so are insurance distribution market shares. Changing customer demands and intense competition are forcing insurers to rethink their customer strategy. Aligning business models to support customer-driven innovation and growth is the most significant transition facing the insurance industry today; consumers want to choose how they interact with insurers, including seamless transition between web, agents and call centers.

For automobile and personal property insurance, direct channels will continue to capture incremental market share from the independent channel as consumers increasingly demand channel access alternatives. Better market segmentation and sales management can help drive profitable growth and sustainability in the independent distribution channel. For commercial and liability insurance, independent channels will remain the dominant distribution methodology - a perfect opportunity to consider reducing the additional costs inherent to this channel.


1. The independent channel in this analysis excludes ICBC, SAF and Lloyd's.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions