Insurance regulators release guidance targeting unfair incentives

Insurance regulators released new guidance Wednesday to provide more clarity on incentives and conflicts of interest.

The Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations’ (CISRO) incentive management guidance is meant to complement the 2018 fair treatment of customers (FTC) guidance.

Since the FTC was released, industry participants have asked for more clarity regarding remuneration and conflicts of interest, a release from the CCIR and CISRO said.

The regulators concluded that some incentive practices may present risks to the fair treatment of customers, leading to the new guidance.

The guidance states that insurers and intermediaries must “develop policies, procedures and controls which integrate FTC outcomes into incentive arrangements,” and identify risks of unfair outcomes to customers.

It also calls on management to “establish appropriate consequences or deterrents to actively discourage behaviours” that could hurt customers.

The guidance lists components of incentive agreements that could harm customers. These include:

• ongoing commission amounts that underestimate the level of service expected;
• incentive arrangements that can result in fees or penalties (e.g., exit fees) for the customer;
• incentives paid to intermediaries who are not involved in the sale and servicing;
• excessive incentives for cross-selling optional products compared to the incentive for selling only the primary product;
• lifetime vesting of renewal commissions to intermediaries that can result in eventual client orphaning;
• sales contests, sales quotas, bonuses and non-monetary benefits that are based on sales of specific products over limited periods of time;
• chargeback mechanism influencing the intermediary to recommend the customer to maintain a product that is inappropriate or unsuitable, so that the intermediary is not required to repay compensation; and
• agreements with intermediaries that may allow insurers to influence the decisions, operations and practices of intermediaries and restrict access to markets.

The regulators signalled their intention earlier this year to ban the deferred sales charge structure for segregated funds, a move taken up by the Financial Services Regulatory Authority of Ontario (FSRA) earlier this month.

FSRA has also reviewed sales practices at managing general agents and indicated that it intends to expand regulation in the new year.

Like the FTC guidance, the new incentive guidance is principles-based and allows insurers and intermediaries “to devise strategies, policies and controls in support of fair customer outcomes based on the nature, size and complexity of their business activities,” the release said.

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