Insurance regulators published new guidance on Wednesday to provide greater transparency around incentives and conflicts of interest.
Canadian Council of Insurance Regulators (CCIR) and Canadian Insurance Services Regulatory Organizations (CISRO) tips on motivation management aims to complement the 2018 Fair Treatment of Customers (FTC) Guidelines.
Since the FTC’s issuance, industry participants have asked for greater clarity regarding compensation and conflicts of interest, as stated in the CCIR and CISRO release.
Regulators have concluded that some incentive practices may pose risks to the fair treatment of customers, leading to the issuance of new guidance.
The guidelines state that insurers and intermediaries must “ddevelop policies, procedures and controls that integrate FTC results with, among others:incentive arrangements” and identify the risk of unfair consequences for customers.
It also calls on management to “eestablish appropriate consequences or deterrents to actively discourage behavior” that could harm customers.
The guidelines list elements of incentive contracts that may harm clients. They include:
- ongoing commission amounts that underestimate the expected level of service;
- incentive arrangements that may result in the imposition of fees or penalties (e.g. exit fees). Client;
- incentives paid to intermediaries not involved in sales and service;
- excessive incentives for cross-selling of optional products compared to the incentive to sell only the basic product;
- lifetime acquisition of renewal commissions to intermediaries, which may result possible orphaning of the client;
- sales competitions, sales limits, bonuses and non-monetary benefits based thereon selling specific products for limited periods of time;
- Chargeback mechanism influencing the intermediary to recommend the client in order to maintain a product that is unsuitable or inappropriate, so that the intermediary there is no obligation to return compensation; AND
- contracts with intermediaries, which may enable insurers to influence the decisions, actions and practices of intermediaries and restrict access to markets.
Regulators signaled earlier this year their intention to ban deferred sales charge structures for segregated funds, a move that was followed up by the Financial Services Regulatory Authority of Ontario (FSRA) earlier this month.
The FSRA also reviewed general agent management sales practices and indicated it intends to expand regulation in the new year.
Like the FTC’s guidance, the new incentives guidance is principles-based and allows insurers and intermediaries “to develop strategies, policies and controls that support fair customer outcomes based on the nature, size and complexity of their business activities,” the release said.
