New guidance targets unfair incentive practices in insurance

In the wake of a decision to scrap deferred sales charge segregated funds amid consumer protection concerns, insurance regulators are now proposing guidance on designing compensation structures that ensure customers are treated fairly.

The Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) proposed guidance on the design of incentive arrangements in the insurance sector.

The proposed guidance, which is out for public comment, is designed to ensure that industry compensation structures adhere to the principles set out in existing guidance on treating customers fairly that was adopted in 2018.

Since then the industry has asked for further guidance on how to apply the regulators’ fair treatment principles to incentive structures. And the regulators concluded that some existing industry practices “may present risks to the fair treatment of customers, and that there was insufficient evidence that these risks were being properly managed.”

As a result, the regulators developed the proposed guidance, which is “principles-based and provides insurers and intermediaries with the discretion necessary to devise strategies, policies and controls in support of fair customer outcomes based on the nature, size and complexity of their business activities,” the regulators said.

The sorts of incentives that may raise concerns include “excessive” cross-selling incentives, commissions linked to premium level/investment total, arrangements that create exit fees/penalties for clients, and bonus rates that rise with sales volumes, among others, the guidance said.

“Insurance intermediaries play an important role in the fair treatment of insurance customers,” said Éric Jacob, chairman of CISRO, in a release.

“While insurance intermediaries are compensated for the services they provide, the proposed guidance will help to ensure that the risks that arise from compensation are properly managed.”

The proposed guidance is out for comment until April 4.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.