Insurance regulators have quietly underlined fundamental problems in the application forms for the bulk of life and health insurance sold through the banks’ life insurance subsidiaries along with other creditor-type insurance product.

The Council of Canadian Insurance Regulators’ Incidental Sales of Insurance Report, released in November, says the application forms are so complex that they cause confusion, misunderstanding about the product by consumers and, ultimately, rejected claims.

“The CCIR believes it is an important consumer protection issue,” says Mario Beaudoin, an analyst with Quebec’s Autorité des marchés financiers in Montreal and chairman of the CCIR’s ISI working group. “It believes that this situation is a consequence of the complexity of the application forms and the way they expose admissibility and insurability criteria.”

As a result, some consumers are being denied coverage on the insurance policies they buy along with mortgages, lines of credit, car loans and other debt acquired from banks and other lenders.

The regulators say consumers don’t always understand the questions they answer about their health history, the implications of wrong answers and the possibility of denied coverage.

The CCIR reviewed the insurers’ eligibility questions and disclosure sections containing exclusions, restrictions and limitations (ERL) using the third-party Flesch reading ease test and found them complex.

“The ability of consumers to understand their eligibility,” the report states, “to understand ERL, as well as the different elements of disclosure contained in ISI documents, inevitably goes through an adjustment in the level of language used, structure of the qualification questions and the way the information is presented to consumers.

“Even though the bundling of medical questions can seem to be beneficial as it shortens the application forms,” it adds, “the ISI working group believes that it contributes to confusion of the consumer.”

The lack of regulatory oversight for this type of insurance has been an issue for several years, but the fact was made clearer by a Supreme Court of Canada decision delivered on May 31, 2007.

The SCC upheld the Alberta Court of Appeal’s ruling in Canadian Western Bank v. Alberta that all chartered banks were under the watch of provincial insurance regulators with respect to the insurance the banks have been allowed to sell since 1992, under changes to the Bank Act.

The SCC ruling spurred the CCIR into action and, at the end of the discussion paper, the regulators asked industry participants how best to look after clients. The submissions were made public in June on the CCIR’s Web site. The new findings were buried in the final report.

That report calls for improved application and sales documents, heightened training and supervision of the sellers of the products, a longer cooling off period for consumers and more data about the distribution channel.

“Work has been initiated with regard to complaint reporting,” Beaudoin says. “The committee in charge of getting statistical information will be established during CCIR’s January conference call. Its objectives will be known shortly afterward, but it is expected that the information compiled should provide for a better understanding of this distribution channel.”

By law, insurers in Ontario and Quebec report all complaints to provincial insurance regulators for three years. But the numbers are low and not particularly meaningful, as they are not broken down by distribution channel.

Leslie Byrnes, vice president of distribution with the Canadian Life and Health Insurance Association Inc. in Toronto, says the association has suggested the complaints be broken down by channel to establish one benchmark. “It would be useful,” she says, “to have a better handle on this product type relative to other product types.”

The fundamental issue for the industry, Byrnes says, is whether consumers are getting adequate disclosure about the product they are buying. “Is disclosure up front sufficient so that everybody understands what it is they’re getting?” she asks. “What’s covered and what’s not? Can we do a better job of giving disclosure on that area? We’re certainly working very constructively with the regulators on that.”

The report, she says, constitutes a “healthy check and balance.” Each company will be left to determine if it is doing a fair job, she adds.

Jim Bullock, an advisor and former president of the Independent Financial Brokers of Canada and registrar of the Peel Institute of Finance, made his submission to CCIR along with more than 50 others in the spring. In it, the outspoken Bullock said the creditor insurance applications invite misunderstanding. “They put together convoluted questions about conditions you’ve never heard of, and rely on your honesty,” he says. “Then they investigate you based on your medical records and, of course, they find a different story. If they find errors, they can claim material representation and can deny the claims.”

@page_break@The banks and insurers can’t be counted on to police themselves on this issue, Bullock says. They share premiums that he suspects do not get paid out as often as other forms of life insurance sold by advisors.

Regulators should ask each insurance company to disclose how many policies are denied by category and for the top three reasons, Bullock says: “Then, you’d know which products and which companies are a problem and could do something about it.”

In his original submission, Bullock called for a form of licensing for sellers of incidental insurance. He now suggests changing the law to mimic a U.S. law would have greater effect. After a policy has been in force three years, U.S. insurers are required by law to pay out the policy; they can’t disallow claims after investigations, as Canadian insurers do. As a result, insurers do better underwriting and due diligence up front. Canadian regulators could put the same pressure on insurers here, he says.

Advocis has called for licensing of some sort. Peter Tzanetakis, Advocis’s senior director of regulatory affairs, says the report was a step in the right direction. However, “the onus is entirely on the consumer to assess the suitability of the product,” he says. “It’s one thing to give [clients] a sheet of paper and it’s another for someone to sit down with them and explain the product.”

Provincial regulators can decide on which approach best meets their desired outcome. IE