Insurance: Adjusting the rules

“We’ve been expressing some concerns about the over sight of incidental sales of insurance for quite some time,” says Greg Pollock, president and CEO of Toronto-based Financial Advisors Association of Canada (a.k.a. Advocis). “There’s sort of a vacuum when it comes to oversight of the sale of these products.”

But some industry players warn that regulators must be careful to avoid hampering the accessibility of insurance coverage for certain segments of the population.

Three provincial regulators are taking steps to adjust the rules surrounding the sales of incidental insurance products, which provide coverage related solely to another product or service and often are sold by individuals whose primary role is not related to insurance. Examples include creditor’s life and disability insurance, often sold by bank branch employees; travel insurance, often sold by travel agents; and funeral expense insurance, often sold by funeral directors.

Most recently, Manitoba implemented new rules, in force as of June 1, that require organizations that sell incidental insurance products to hold a restricted insurance agent licence. Under the new licensing regime, these organizations must have errors and omissions insurance coverage, appoint a designated official to supervise insurance activities and ensure that anyone selling insurance on behalf of the organization is knowledgeable, competent and suitable, among other requirements.

Similar licensing regimes already exist in Alberta and Saskatchewan. In some provinces, such as Ontario, however, there is no specific licensing regime pertaining to sales of incidental insurance.

Two other provinces are considering making regulatory changes in this area.

In Quebec, the Ministry of Finance has proposed establishing a regulatory framework for distribution of insurance without a licensed representative, specifying that insurers are responsible for ensuring all distributors of their products abide by the rules.

In British Columbia, a review of financial services legislation by the Ministry of Finance asked whether the B.C. Insurance Council should have powers to licence and regulate sellers of incidental insurance or if the province should adopt a restricted licensing model similar to Manitoba’s.

The provincial developments come after the Canadian Council of Insurance Regulators (CCIR) recommended various changes to the incidental insurance distribution channel in 2008 to ensure the sales process enables consumers to make informed decisions.

Advisor groups such as Advocis and Mississauga, Ont.-based Independent Financial Brokers of Canada (IFB) are encouraged to see regulators addressing this issue. Both associations consider the sale of insurance by individuals who are not subject to the same requirements and oversight as licensed representatives to be unfair.

“What we need is a level playing field with respect to the sale of these products,” says Pollock.

The restricted licensing regimes in some provinces represent a step in the right direction, says Susan Allemang, head of regulatory and policy affairs with the IFB.

“We certainly support some kind of licensing regime,” she says, “because at least then you get some accountability and some oversight.”

Ideally, however, Allemang adds, the IFB would like to see regulators require licences for each individual who sells insurance rather than just for firms.

“We’d like to see accountability on both individuals and agencies,” she says, “where it may be easier to enforce or discipline an individual.”

However, the Canadian Life and Health Insurance Association Inc. (CLHIA) argues that restricted licences provide adequate enforcement capabilities.

“In the event that a problem arises about the sales practices for a product, the regulator can take recourse with the restricted licensee,” says Leslie Byrnes, vice president, distribution and pensions, with the CLHIA, in an email to Investment Executive.

Insurance advisors such as Peter Lantos, an independent financial advisor in London, Ont., question whether those selling incidental insurance have adequate training and knowledge of the products.

“Insurance products are becoming more and more complicated everyday,” says Lantos. “I don’t think it matters what kind of insurance you sell – it’s something that should be done by a full-time licensed person who knows the products and the clients.”

Another key concern with incidental insurance is the possibility of so-called “tied selling.” Consumers could be led to believe that if they buy one product, such as a mortgage, they also must buy the insurance for it.

“It’s an easy add-on,” says Bradley Sumner, an advisor with Investment Planning Counsel Inc. in Kingston, Ont. “It could be the wrong information provided to clients.”

Furthermore, incidental insurance sellers don’t have the capacity to present clients with alternative types of coverage that might be more suitable.

“In some instances, it’s our belief that there are superior products available in the marketplace,” says Pollock. “These alternatives are not put in front of the client at the time that they’re purchasing the incidental insurance product.”

However, a submission by the Canadian Association of Financial Institutions in Insurance (CAFII) to the CCIR’s 2007-08 consultations on the issue argues that the existing incidental insurance distribution framework ensures coverage is accessible to Canadians who need it, and warned against imposing rules that could restrict consumer options. “Creditor’s group insurance provides Canadians with the opportunity to obtain protection that they might not otherwise have,” according to CAFII’s submission to the CCIR. “It’s especially valuable for lower- and middle-income households [that] remain underserved by the traditional [insurance] agent and broker channels.”

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