“There’s a train wreck coming” regarding servicing increasingly complex life insurance policies that the industry as a whole is not set up to accommodate, an Advocis seminar was told. But it is up to advisors to make sure they have all the documentation they need in case regulators and family come calling.In a wide-ranging presentation, Graham Carter, president and CEO of Toronto-based CAP Advisors Inc., said many insurance contracts have become very complicated to sell, service and manage.
With “dozens and dozens” of investment options, Carter said he finds that he explains every year to clients why a particular product was selected and its future intent. While meetings with clients do provide an opportunity to build trust and outline a subject, Carter said these ongoing explanations on one single subject seem to be unique to the insurance business.
Servicing and managing some of the more complex products is becoming more difficult partly because of the age when many clients are asking for life insurance, he said.
He noted that he had recently written up a joint life insurance contract for a 78-year-old couple and a single life insurance policy for a two-year-old and another for a one-year-old.
Carter said he doesn’t believe he’s unusual in this respect, saying the models some of the insurance companies now present to brokers and agents go to age 125. Regardless of whether it’s the older couple or the young children, servicing those contracts takes on a whole new meaning, he told Advocis members.
For example, during the young child’s lifetime, there could be many changes to beneficiaries, the investments and dividend choices within those policies.
“I think this notion of servicing life insurance is not something that we as an industry, including the companies, are set up to do,” said Carter. “There’s a train wreck coming with respect to servicing insurance, especially as we [brokers and agents] retire. Do we have someone coming in and taking over our businesses – or do we throw it back to the insurance companies and say: ‘We are going to Scottsdale or Naples for the next six months?’ What happens?”
Carter said this is compounded by the number of files already on his desk: orphan files; policies that someone who used to work for a company serviced; policies that the broker sold, plus policies the broker sold and another broker now services, or policies that the insurance carriers have asked the broker to service. “How are we supposed to look after all of this? I don’t think right now the insurance companies or the regulators have a really good understanding of how many different types of files we have in our offices.”
But he said it’s becoming crucial to keep more and better files because both insurers and regulators are demanding it. Regulators, said Carter, ask which policy has been selected for a client as well as why that particular policy and the cost, and there better be documentation to back all of that up. Even a single policy that becomes joint may be lead to questions from regulators. “Regulators, companies and clients are going to be scrutinizing this part of the business more in the future than they have in the past.”
Carter said insurance advisors can add value to their profession and clients by specializing rather than trying to be all things to all people – a situation he had trouble dealing with at first. “My first two or three years in the industry I didn’t tell my wife I was in the insurance industry – I told her I was a ‘financial planner.’ And now it’s come full circle.
Specialize and find partners
“We try and cloud what we do by being holistic [but]… you have to specialize and you have to partner with law firms and accounting firms because they aren’t looking for people to do what they do. They’re looking for people who sell life insurance. “
He said specialization is particularly important for those who want to deal with complex policies such as testamentary trusts, holding companies and foundations.
However, he cautioned insurance advisors about agreeing to act as a client’s executor. While many clients see their advisor as a trusted individual, the whole area of being an executor of an estate, especially a complicated estate that may take years to unravel, may be seen by some to be a conflict of interest.
Even acting as a “consultant” to an executor may be considered a conflict if a fee is charged. Even then, said Carter, it could be years before advisors get that money.
“Agents really have to think about this long and hard as to whether they are qualified and whether they want to do this as part of their business model,” he said.
Both Advocis and the Canadian Life and Health Insurance Association say they have not been involved in the issue of whether insurance advisors can become executors or powers of attorney for their clients.
However, the Investment Industry Regulatory Organization of Canada (IIROC) brought in rules in December 2013 that any IIROC-registered individuals cannot act as an executor for a client unless the client is related and it has been disclosed and pre-approved in writing by the dealer member. IIROC has extended the deadline for unwinding current agreements that do not comply with the current rules to the end of December of this year.
Provincial regulators, like the Financial Services Commission of Ontario (FSCO), don’t have any prohibitions in the Insurance Act as to whether insurance advisors can be executors and/or powers of attorney for their clients, said Malon Edwards, a senior communications officer with FSCO.
Disclosure of conflicts
A number of years ago, the Canadian Council of Insurance Regulators, in consultation with industry stakeholders, developed three principles designed to promote consumer confidence in the insurance industry, including disclosure of conflicts or potential conflicts of interest to clients.
“FSCO maintains that the three principles for managing conflicts of interest are still relevant today in governing the actions of insurance agents,” Edwards said in an email.