Insurance industry organizations are seeking clarification of principles set out in a “consumer protection document” released by the Newfoundland and Labrador Ministry of Government Services, particularly the one that mandates commission disclosure.

The CPD states: “Consumers have a right to know compensation arrangements that agents, brokers or representatives have for the product purchased, including the amount of commission being paid for the transaction.”

In a press release issued in response to the CPD in late January, Advocis lauded the province for its effort to provide meaningful consumer protection, but noted it is the “only province proceeding with commission disclosure.”

The province says consumers should be aware of costs.

“Advisors should explain as much as possible. It’s a transparency issue,” says Winston Morris, Newfoundland and Labrador’s superintendent of insurance. His office is part of the Ministry of Government Services.

Consumers know the commissions they pay when they buy a house or a mutual fund, Morris says. It’s part of a consumer’s “right to know,” he says.

Commission disclosure and performance-linked benefits, in particular, were among the most hotly debated issues in the consultation process conducted by the Canadian Council of Insurance Regulators through its industry practices review committee, which began in mid-2005 following a New York State crackdown on fraudulent bid-rigging in the insurance industry.

In the IPRC’s initial paper, released June 2, 2005, the idea of restricting performance-based bonuses was floated. In response, advisors argued that bonuses and renewal revenue form a key part of their revenue stream, as payment for maintaining long-term contractual relationships.

In its third consultation paper, released in February 2006, the IPRC set out three basic principles: put clients first; ensure product suitability; and disclose conflicts of interests. It said at the time it was satisfied that implementing the three principles should effectively address any concern over remuneration-based conflict of interest.

Newfoundland’s CPD, entitled Principles for the Sale of Insurance, however, appears to have gone even further than IPRC principles, say industry organizations. (For details, see www.releases.gov.nl.ca/releases/2007/gs/0125n05.htm. )

Advocis will be consulting with the province to find out its objectives, says Sara Gelgor, vice president, regulatory affairs, at Advocis.

Aside from the commission disclosure issue, the CPD appears to be “a one size fits all,” says J.P. Bernier, vice president and general counsel for the Canadian Life and Health Insurance Association. The CPD has elements that apply to life insurance, as well as property and casualty, he notes.

For example, he says, the CPD calls for the “full range of deductibles” to be disclosed, which is not something that applies to life insurance.

Because the opening line says “this document” must be provided to a policy purchaser, CLHIA members are discussing what this will mean.

“To what extent will we be able to modify ‘this document’? What is the expectation of the Newfoundland and Labrador government?” Bernier asks.

As the CPD is principles-based rather than a legislative or regulatory measure, says Gelgor, “I suspect it’s drafted in a way that provides some flexibility — leaving the principles with the industry to apply and implement.”

Advocis will be talking with other industry groups to decide if additional steps are needed to respond to the initiative, says Gelgor.

The CPD expands on CCIR principles, says Morris: “It goes into more detail. In our view, it’s not a conflict.”

Within the CCIR, authority rests with individual regulators, explains Grant Swanson, the IPRC’s chairman and executive director, licensing and market conduct division, for the Financial Services Commission of Ontario: “They are free to make their own decisions.”

Morris says that rather than just setting out the three CCIR principles, his office decided to put out a document encompassing all the principles of insurance sales.

He says putting the document in consumers’ hands will give them the ability to ask questions when they are buying policies. It will also promote industry compliance.

Morris agrees there are some elements that apply to life insurance and others that apply to P&C insurance. “If they don’t apply, they don’t apply,” he says. “So be it.”

Implementation is anticipated by July, with an implementation review to be conducted in about two years. IE