Canadian insurance regulators are considering a series of tough new rules for the industry, a development that is causing widespread concern among insurance advisors and their associations.

A paper released June 2 by a combined industry practices review committee of the Canadian Council of Insurance Regulators and Canadian Insurance Services Regulatory Organizations asks stakeholders to consider three possible regulatory changes:

> A legislative or regulatory requirement ensuring that client interests come before those of intermediaries.

> Bonuses from insurers should be restricted by introducing legislation or regulation with “appropriate controls and qualifications,” such as maximum dollar amounts and frequency.

> Enhanced disclosure of compensation, ownership and other financial interest through legislation or regulation.

The paper says any changes would be geared toward reducing “actual and potential” conflicts of interest in the insurance marketplace. It also says regulators are simply asking for feedback.

“The paper does not make any recommendations,” says Grant Swanson, executive director of the licensing and marketing conduct division of the Financial Services
Commission of Ontario.

However, the strong wording of the proposals has insurance advisors and trade and industry associations concerned about the potential impact on their business.

Advisors, Advocis, the Independent Financial Brokers of Canada and the Canadian Life and Health Insurance Association are quick to point out there is no evidence of improper insurance sales activity in Canada. In fact, the paper states: “No evidence of illegal insurance activity was found.”

This is part of the reason advisors and their associations are concerned. “Throughout the industry, there was a real sense of surprise and, in some cases, shock at some of the prescriptions,” says Greg Traversy, president of Ottawa-based CLHIA. “They did not happen to match the diagnosis.”

Sara Gelgor, vice president of regulatory affairs at Toronto-based Advocis, echoes this sentiment: “We’ve struggled to find the [regulators’] rationale, given there is no driving evidence to change the status quo.”

Another reason for their concern is the impact such rules would have on the industry. In particular, say advisors and the associations, restricting performance-linked bonuses could result in decreased service by existing advisors on long-term insurance contracts, and might discourage new advisors from getting into the business.

Responses to the consultation paper were to be submitted by early August — a short deadline in the midst of summer, which added to the advisors’ and associations’ frustration.

Swanson says about 65 submissions have been received from “a cross-section of people
— from consumer associations, individual advisors, trade associations and third parties.”
The responses will be posted on the CCIR Web site (www.ccir-ccrra.org) by the beginning of September.

The CCIR and CISRO are meeting on Sept. 29. Meanwhile, says Swanson, they will “digest the submissions and do any follow-up work flowing from the submissions.” He says the regulators have also had several meetings with most of the trade and industry associations.

Swanson points out: “This is a discussion process, not a recommendation process.” Prior to finalizing any recommendations that might be made, he says, a consultation process would be held.

This whole discussion began last fall when the CCIR and CISRO decided to survey both the life and health and property and casualty sectors of the insurance industry about their sales practices. In the resulting consultation paper, the regulators cite as their inspiration U.S. regulatory action last year against allegedly illegal bonus payments in the U.S.
insurance marketplace.

“The regulators decided, in light of [the investigation by New York Attorney General Elliott] Spitzer, to create a survey,” says Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. of Campbellville, Ont. But, he adds, their survey found that Canada’s life and health insurance industry “has safeguards in place, and there is no evidence of conflict of interest.”

Moreover, advisors and associations agree that initiatives have already been undertaken to improve disclosure. For example, in December 2004, CLHIA released a disclosure package aimed at building consumer trust and confidence. It covered increased consumer awareness (for example, Internet access to insurance company publications), product disclosure, compensation review, travel incentives and intermediary disclosure.

That initiative came on the heels of Ontario’s Regulation 347, which passed in October 2004 and focuses on disclosure. In particular, it states that an agent “shall disclose in writing to a client or prospective client, any conflicts of interest or potential conflict of interest of the agent that is associated with a transaction or recommendation.”

@page_break@The CLHIA says Ontario’s regulation has been disseminated throughout the country.
Traversy says this goes a long way toward achieving the consumer-protection goal set by regulators without going through the cumbersome process of attempting to get uniform amendments passed to insurance legislation in each province.

Gelgor also points out that the industry is already implementing regulatory initiatives, such as
Ontario’s Regulation 347. “It’s become the baseline across the country, [even though] it might be above what the advisor’s provincial regulator requires,” she says.

And, she says, Advocis and other trade associations currently have codes of conduct that require their members to put clients’ interests ahead of their own.

John Whaley, executive director of the Mississauga, Ont.-based IFB, notes in an August 3 letter to the CCIR that the IFB code of ethics states: “It is paramount that a broker shall place the interest of his/her client ahead of all other interests.”

As Whaley points out, a “combination of provincial regulations governing market conduct, along with the host of industry initiatives that define ethical standards, already provide a national focus and an opportunity for harmonization with minimal disruption to the existing system.”

Codifying client-interest primacy and enhanced transparency as law or regulation would duplicate what is already in place. Instead, Whaley suggests, the CCIR and CISRO could provide support for existing measures.

Gelgor trumpets a concern held by individual advisors about the possible restriction of bonus practices. Many advisors, she says, base their income on revenue received to maintain and service long-term contracts of 10, 20 and even 30 years.

“Advisors are taking calls at nine at night and on Sunday,” she says. They won’t want to do that if they’re not being properly paid.

If there’s no bonus or renewal revenue, advisors will cut off service, says Geller.
Further, adds Gelgor, regulators purposefully decreasing revenue streams will discourage potential new advisors from getting into the business.

This kind of regulatory change could result in “a profound restructuring of the industry,” says Gelgor.

Again, Geller agrees. Independent advisors write most of their business through managing general agents, which deal with several insurers, he says: “The MGA gives a bonus based on business put through the MGA. How can that be a conflict of interest if the MGA deals with several companies? If this [regulatory option] is brought in, it will bring back the captive system.”

Jim Bullock, registrar of the Peel Institute of Applied Finance in Toronto, says company presidents get bonuses. “The front-line troops should get bonuses, too,” he says.

Consumer concern about bonuses “is not even on the radar screen,” Traversy says.

“Perhaps some misunderstanding underlies [the option geared toward restricting bonuses], he says. However, he adds, there is no anecdotal evidence that this is a problem for consumers. The CLHIA provides consumers with a toll-free customer service centre for client complaints.

Since the CCIR/CISRO paper came out, Traversy says, the CLHIA has had several conference calls with superintendents of insurance across the country. “We feel there is a sense of constructive co-operation, despite the fact that the launching point left a number of us surprised,” she says. IE