Members of the Canadian insurance industry are being asked to comment on proposals that could change the way the industry is regulated.

The Canadian Council of Insurance Regulators is looking for reaction to proposals for “privilege” and “whistle-blowing” — two aspects of the new model of regulation, known as “risk-based self-assessment.”

Under the new model, companies will be expected to undertake candid self-assessments, and report any risks that must be corrected and monitored by the regulators.

For example, says J.P. Bernier, vice president and general counsel of the insurance industry organization, the Canadian Life and Health Insurance Association, the regulator will be able to use a company’s self-assessment to review its state of solvency, any compliance deficiencies and any gaps in its governance structure.

The shift should enable regulators “to focus their supervisory attention on higher-risk companies and pay less attention to low-risk companies,” says the CCIR. “[It will] also encourage insurers to introduce voluntarily good governance practices that reduce insurers’ risk of non-compliance.”

The privilege protection is intended for documents created by an insurer in the process of complying with risk self-assessment. It would prohibit litigants in a civil lawsuit from demanding that the insurer provide the documents.

The whistle-blower aspect of the CCIR proposals suggests protection should be provided for anyone who volunteers information about wrongdoing by an insurer, insurance agent, broker or adjuster to a regulator or government body that can take action against any one of these insurance market participants.

Both these protections are intended to be part of an international shift to “a new supervisory system for insurance companies,” Bernier explains. “The insurance companies [will] have the duty of care at the board of directors level, to manage their systems. [The new system will help them] to fulfil that obligation to minimize risk.”

Industry comment must be made by the end of this month. Both Advocis and the Independent Financial Brokers of Canada are considering a December 2005 CCIR discussion paper on the issues, but neither organization is commenting yet.

“The self-assessments will be collected from the bottom up and be given to the board, which will then correct any problems — setting a timetable to make any necessary corrections,” Bernier says.

With the privilege protection proposal, the CCIR is trying to strike a balance between self-assessment monitoring, which is intended to provide an increased level of protection for consumers, against the ability for potential litigants to prove an insurer’s wrongdoing.

While this type of protection may seem anti-consumer, regulators defend their suggestion that privilege is necessary because they “came to realize from insurer representatives’ comments that completion of voluntary or mandatory self-assessments could be negatively affected by the potential for self-assessment information to be [used against] insurers in civil actions against insurers.”

Such documents could be highly self-incriminating. “Statutory privilege is being considered as a means to promote compliance with market conduct standards by supporting self-assessments,” says the CCIR in its discussion paper.

In order to work, privilege has to apply whether the relevant documents are in the hands of the regulator or the insurers. Most provinces already have privilege protection against “freedom of information” requests for sensitive regulatory information that are made to insurance regulators. “The regulators are asking that the same information [be] protected while in the hands of the private sector,” says Bernier.

The new privilege provisions would not protect an insurer in the context of regulatory or criminal proceedings. For example, privilege could not be used to stop a regulator’s investigation of an insurer.

The whistle-blower protection is useful to a self-assessed risk-based regulatory system, says the CCIR: “It will help the regulator in making its system more effective.”

The CCIR suggests whistle-blowers should be provided with immunity from liability to pay any damages. On a practical level, the CCIR recognizes that whistle-blowing may result in the loss of a job or a contractual relationship, but its protection proposal extends only to civil immunity.

However, since the whistle-blower’s identity might not be revealed until the documents provided by the whistle-blower are released, the CCIR is considering privilege legislation “for the communication provided to the regulator.”

As a warning to people who might engage in whistle-blowing that has no factual basis, the CCIR states the proposed protection would not be available “if the information was not provided in good faith.” IE

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