Looking at the current regulatory environment and the swift pace of change, Stephen Frank, who became president and CEO of the Canadian Life and Health Insurance Association last July, describes it as “almost without precedent.”
“We’ve got a new capital regime coming into place next year, which is a fundamental change from decades prior. At the same time we’re struggling and working through how to implement a new accounting regime. Either of those on their own would be significant change for the industry, but both are coming at the same time,” said Frank in an interview with The Insurance and Investment Journal. “We’ve got dialogue and questions around our distribution model in Canada. How should we be incenting agents and advisors? How should we be overseeing them? What’s the right amount of disclosure? What form should that take? Those things go right to the heart of how we distribute – and support our clients.”
Then there are discussions about the appropriate use of various kinds of information in the underwriting process, tax changes, and more. “When you look at the regulatory environment, there’s just an awful lot coming at us at the same time and when you think through where that could land us in five years, it’s pretty clear we’ll be in a different environment, a different industry than we are today.”
Beyond the regulatory change, the insurance industry is also dealing with a changing market with the emergence of fintech, changing expectations of how consumers want to interact with insurers, and the persistent low interest rate environment in Canada and globally. “So there’s market things happening, there’s regulatory things happening – we’re in the middle of that, saying how do we help our members not just react, but how do we help shape that? How do we be proactive?”
The CLHIA, which represents Canada’s life insurance companies, has been taking a hard look at these issues in recent months and establishing its priorities in terms of where it wants to focus its resources over the next couple of years. Asked what is of greatest concern, Frank said, “It jumps out immediately that we need to be on top of the whole question of how we distribute our product,” such as the need for increased oversight over distribution channels. He adds that this priority also includes agent/broker compensation issues, in particular incentives and disclosure.
The industry, he says, needs to challenge itself on these issues. “We need to look at our own operations and say, ‘Where can we do a little bit better and are we really confident we’re doing everything we need to do?’” Some of the CLHIA’s proposed new guidelines and approaches are the industry’s way of stepping up with some solutions to these issues, Frank says.
Shaping the debate
“It’s part of that effort to try to shape the debate, be part of the solution and be proactive and not simply wait for regulators to identify problems. We don’t want to have that kind of relationship with the regulators in Canada where we’re just sitting back and saying everything’s fine and reacting as things come. So we’re trying to be a partner in this and making sure we’re treating customers fairly.”
With respect to the oversight issue, Frank says presently it is “very difficult for an insurer to have full visibility into advisors who are selling their product.” This visibility is needed because insurers are accountable for their products’ distribution.
“What you need at its most simplest is if an insurer is going to be attesting to the probity of their agents – if they’re going to be attesting that my agents are doing all the right things – we need to know what the agents doing.”
What the CLHIA has put forward is to create a licensing regime for MGAs under which an advisor would have a lead or primary MGA, but would still be able to work with multiple MGAs. However, the lead MGA would have the power to collect information on that advisor’s business activities from other MGAs. This solution would avoid forcing a one-to-one relationship between advisors and MGAs, yet still provide a central location to get a complete view of an advisor’s business, explains Frank. Then, insurers who work with the advisor could have access to the totality of this information.
“At the end of the day, you have to have a way for someone to get their arms around everything an advisor’s doing, to bring that to one place, so we can look and check that what they’re doing meets all the standards.”
The CLHIA has started having discussions on this issue with the MGA community and the MGA association CAILBA, says Frank. He adds that the CLHIA is open to other ideas on how to do better in this regard. “We’d love to have this discussion. I think we’re at the very, very early stages on that.”
He adds that this issue is an example of one where it would be better for the industry to try to address the oversight gap rather than to wait for a regulatory response. A response that comes from the industry, he says, might include a better understanding of the reality of the market and be better for everyone.
Frank emphasizes that this concept would not involve downloading insurers’ accountability to MGAs. “There’s no question that we remain accountable for people distributing our product, that’s not a question. Do we have the tools and visibility to allow us to do that? Our recommendation is one approach, but we’re going to need some kind of ability to collect that information going forward.”
Raised regulatory expectations are driving the industry’s desire to be more proactive, says Frank. In this changing environment, the focus is on treating customers fairly. “There are very clearly heightened expectations on us. It’s not like 20 years ago and we need to move beyond saying we’ve ticked a bunch of boxes. There are behaviours and other things that regulators want to see demonstrated in the market.”
The advisor compensation issue is a critical one, he adds. “We’ve got to get it right. It’s obvious it’s important that we understand what incentives we’re creating in the way that we pay people for good and bad.”
The current compensation model ensures that people of modest means are getting advice and that it’s worth the efforts of advisors to talk to someone who has $5,000 or $10,000 to invest, he says. “We see in other jurisdictions where they get the balance wrong. We’ve got to get that right and we want to be part of that discussion and that dialogue.”
He points to the United Kingdom and Australia where the decision to ban embedded commissions resulted in unintended consequences. “What we would generally observe is there has been a pullback of the level of advice available for those of modest means. I don’t think anyone disputes that that is what’s happening. That’s certainly the experience of our members (who have operations in those jurisdictions). You don’t want to reproduce that in Canada.”
While these kinds of regulatory discussions are advanced on the securities side of the business, on the insurance side they are in the early stages. Segregated fund disclosure, though, is currently under review by the CCIR.
At this point in the discussions, the CLHIA’s view on the compensation issue is that maintaining flexibility and choice for the consumer is important, says Frank. “I don’t think we’d want to see a door slammed on anything.”