Insurance investigation creeps north of the border

(October 25, 2004) A U.S. investigation into allegations of hidden commissions in the insurance industry is starting to make waves in Canada. But the probe has so far focused on the property and casualty side of the business and life agents here aren’t anticipating much negative fallout.

“I don’t think it’s an issue in the life insurance industry in Canada, and probably not in the U.S.,” says consultant Byren Innes at NewLink Group in Toronto.

Innes says compensation — though largely a mystery to the general public — is pretty uniform across the life insurance industry. “Everyone knows how everyone else gets paid.”

“The negotiation that takes place is between distributors and advisors,” he explains. “So if I’m a top broker doing millions of dollars of business with a firm, I can argue I should get more than a smaller broker down the street. That’s a volume issue. For years, there have been production bonuses paid, so the more you sell, the more you get paid.”

Last month, New York attorney-general Eliot Spitzer filed a lawsuit against insurance broker Marsh & McLellan, alleging that there is “widespread corruption” in the industry. Reports suggest other major firms, such as Aon, will also be targeted by Spitzer.

Two of Canada’s largest insurance firms, Manulife and Sun Life, have confirmed that they are conducting reviews of their sales commission practices in the light of the Spitzer probe.

But Innes says he believes Spitzer is going on a “fishing expedition.” Independent insurance agent Lawrence Geller, president of Campbellville, Ont.-based L.I. Geller Insurance Agencies, agrees, stating that unless Spitzer finds real evidence of wrongdoing, it likely won’t become an issue in Canada’s life insurance industry.

Besides, Geller adds, it’s unfair to tar all recipients of what he refers to as “incentive bonusing” with the “brush of evil.”

Geller says he has well-established relationships with a number of insurers and is paid bonuses for several reasons, including the fact that is it less expensive to process a renewal than underwrite new business, it’s cheaper to work with an agent with high production, and that experienced agents require far less assistance from sales reps and head office.

In addition, Geller says he discloses all compensation structures to clients, including incentive compensation. And he says his firm never places business based on commissions, or makes recommendations based on commissions.

However, Innes admits there are situations where compensation issues can be problematic, giving the example of three different companies offering the same commission, but with one firm adding more, such as an extra bonus or offering to send an advisor on a trip. “Then you have to ask if that advisor is acting in the best interests of his clients in recommending that company’s products.”

And then there’s the question of compensation disclosure, which has caused a ruckus in the mutual fund world.

Currently, there’s no insurance commission disclosure required in Canada at all, says Innes. “Very few advisors voluntarily disclose how they get paid.”

Innes notes that insurance commission disclosure was a major part of the financial industry reform movement in Britain several years back and Australia now has a similar regime in place.

“In the U.K., it drastically reduced the sales force, but sales and volume did not go down that much,” Innes says. “So who left? The lower-end agents who weren’t providing any value in the first place.”

“If I was a betting man, I’d say [commission disclosure] will be coming to Canada and the U.S. someday.”

And disclosure of insurance commissions could be an eye-opener for clients.

Innes points out that Canadian compensation methods are overweighted compared to the U.S, noting that the typical first-year commission is much higher. He uses the example of a universal life policy with a premium of $1,000. “I might get a 50% commission rate on that, plus a bonus of 150% on that $500, for a total commission of $1,250, 125% above what the consumer paid.”

“In the U.S., most states cap commissions at 90% in the first year so the agent never gets more than the client is paying,” he adds.

Renewal commissions can range between 1% and 20% a year, with the possibility of additional bonuses, Geller wrote recently in Advisor.ca’s online chat forum, the Talvest Town Hall. He also noted that some agents may choose to average out commissions to remove the inherent high/low nature of the structure.

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What do you think about Spitzer’s investigation? Are there possible repercussions for Canada’s life insurance industry? Share your thoughts in the Talvest Town Hall on Advisor.ca.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(10/25/04)

Doug Watt