Insurers under the microscope

Depending on what regulators learn from the information collected, the initiative could result in new rules or stronger oversight for insurance advisors.

In early February, the Toronto-based Canadian Council of Insurance Regulators (CCIR) introduced a new form, the Annual Statement on Market Conduct, which insurance carriers now are required to complete annually. The form collects in formation about the procedures each carrier has in place relating to the fair treatment of consumers, such as disclosure practices and advisor auditing.

The new form also asks for detailed data on the business conducted during the previous calendar year, including: the number of policies issued and premiums written; the number of policy lapses and cancellations; the distribution firms the carrier works with and the volume of business done with each firm; the amount of commissions paid; the number of claims received and the top reasons for denied claims; and details about each customer complaint received.

The goal is to harmonize the collection of market-conduct data among CCIR members (which include the provincial insurance regulators across the country), and help regulators better understand market practices, according to Patrick Déry, the CCIR’s chairman.

“The data on market conduct that will be collected will assist CCIR members in being more proactive in areas such as identification of trends and emerging risks,” Déry states in an email to Investment Executive. “Regulators will use this information to provide further insight and context when identifying supervisory priorities or developing supervisory plans, which will, in turn, result in increased consumer protection.”

The exercise means insurance advisors and managing general agencies could find their sales practices under greater scrutiny.

“[The new documentation] will either give the regulators comfort that the current system is working to a large extent or will identify gaps or areas that need to be strengthened,” says Susan Allemang, head of regulatory and policy affairs at the Independent Financial Brokers of Canada in Mississauga, Ont. “If [the data] show that there are areas that pose higher risks, then I would expect that the regulators would take action – they’ll take steps to address those deficiencies.”

Advisor compensation is one area that could come under the regulatory microscope. The questionnaire asks whether insurers, when determining commissions and incentives, take into consideration factors such as policy lapses, number of complaints and the amount of contact an advisor has had with clients after the sale of a policy.

The focus on incentives is not surprising, Allemang says, because the potential conflicts of interest stemming from industry incentive programs is an issue that has been identified in the past and addressed by the industry itself.

“There’s a general movement in the insurance industry to re-evaluate all of these programs and consider them in light of the focus on the fair treatment of customers,” she says.

Completing the annual statements will be no easy task. Although insurers already report some of the information requested for the new statements – such as customer complaint information – other data have not been collected previously, says Craig Anderson, assistant vice president and senior counsel at the Toronto-based Canadian Life and Health Insurance Association Inc. (CLHIA).

“There is information being sought here that wasn’t necessarily being tracked by all of our member companies,” he says. “Member companies will have to begin changing their systems so that they can collect and report on that data.”

Adding to the challenge is the tight May 1 deadline for submitting the first statements.

“That’s not a ton of time, particularly when you’re going through something for the first time,” says Erica Hiemstra, assistant vice president, distribution, at CLHIA.

Not all insurers are required to complete the statement initially, however. Only certain insurers, including those that make up the top 80% of the market, will be required to complete the statements in the first year. In future, however, according to Déry, all insurers will be required to participate in the initiative.

Those insurers that fail to comply could face enforcement action, including administrative monetary penalties, from CCIR members.

Déry acknowledges that the initiative is likely to be daunting for insurers, especially at the beginning: “The CCIR anticipates that the lack of familiarity with the annual statement may lead to apprehension among some insurers. In addition, we understand that some insurers may not be currently collecting the data being sought by the annual statement.”

The regulators expect insurers to begin collecting and tracking the requested data if they do not already do so, according to Déry. In instances in which the data is unavailable in the initial year of completing the statement, insurers must provide a plan explaining how the data will be made available in the future.

The new statements are part of an effort to help regulators bring their supervision of market conduct into alignment with international best practices and standards. CLHIA supports that goal, according to Hiemstra.

“It’s a proactive regulatory initiative,” she says. “As far as our members are concerned, we believe insurance companies have practices in place … [that] support fair customer outcomes. And, that’s the goal here.”

The exercise of completing the annual statement, in itself, could lead to stronger measures related to the fair treatment of customers by prompting insurers to consider the processes and practices they have in place, says Eric Wachtel, national chief compliance officer at IDC Worldsource Insurance Network Inc. in Mississauga, Ont.

“For some companies, it may cause them to decide to enhance what they’re currently doing,” Wachtel says. “Generally, I think [the new initiative] is a good thing.”

The fact that the initiative harmonizes collection of data across the industry is positive, Anderson says; “It’s beneficial to the industry that the information is coming in in one manner, one form, in a harmonized manner rather than getting slightly different variations from different regulators across the country.”

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