A series of articles that ran in The Globe and Mail in December on the Canadian life insurance industry has sparked debate in the insurance industry. Some call the articles misguided, misinformed and exploitative. Others say they pinpoint major problems in the industry. And still others say that, while elements may be misleading and exaggerated, they turn the spotlight on a number of troublesome issues, and some good may result from it.The Dec. 22 article in the series entitled, “What your broker doesn’t want you to know,” claimed that commissions, bonuses and free trips often factor into an agent’s decision to recommend certain policies to clients. These incentives, the report said, are paid by insurance companies to keep brokers coming back to them, and they take three forms: upfront commissions when the sale is made; bonuses based on the volume of business a broker does with that insurer; and perks such as trips to promote loyalty and encourage brokers to bring as many clients to that insurer as possible.
The fact that life insurance companies compete for the business of agents is common knowledge in the industry. Insurance companies provide incentives to agents to encourage clients to stay with them, said Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. in Campbellville, Ont. “Book bonuses for life agents are based on how large the agent’s book of business is, and how much business the agent did with the insurance company that year,” he noted.
The Canadian Life and Health Insurance Association, representing 63 Canadian insurers, said it doesn’t get involved in its members’ incentive practices. “It’s a competitive issue among companies, like pricing,” said Wendy Hope, CLHIA’s Ottawa-based vice-president, external relations. “What we’re concerned about is that there’s proper disclosure of incentives to the consumer, and we’re constantly upgrading our disclosure guidelines.”
And only a small percentage of agents qualify for junkets in terms of the sales they generate. “Trips are for high-flying agents,” said Bradley Sumner, a financial planner and independent life agent with Investment Planning Counsel in Kingston, Ont., “But I don’t think those who take them are compromising themselves. Agents work with companies because they like their products and the service they provide to back them up. And we need these opportunities to network with others in the industry.”
Some people work with a company because they appreciate the ease in dealing with it, Lawrence Geller added. “With today’s older population requiring a lot more health care than in the past, we’re seeing a lot of products on the market. It can be important for an agent to be able to speak to the underwriter.”
A free trip may not appear to compromise an agent’s ability to work in the client’s best interest. After all, there is an educational component, and the cost of the trip is taxable in the hands of the agent. But according to Dan Zwicker, principal with Toronto-based investment consultants First Financial Consulting Group, compensation of this kind is reflective of the conflicts of interest inherent in the financial services industry.
“In a product-driven, financially incentivized industry, the agent’s choice of product is somewhat less than unbiased,” he said, “and unless there is total compensation transparency, the client is never absolutely sure that he has received unbiased advice. Every decision the advisor makes has two dimensions to it: Is this in the client’s interest? And is this in my interest? Within a professional practice context the two considerations are sometimes incompatible.”
The insurance industry is geared towards keeping people who deal with consumers in the role of salespeople rather than insurance professionals, according to Harold Geller, a lawyer with Doucet McBride LLP in Ottawa who specializes in the financial services industry. “There are different standards of care governing an advisor selling mutual funds and a life insurance agent,” he said. “The fact that there is no KYC obligation on the part of the insurance agent suggests that insurance products are somehow inferior, not requiring the same level of professionalism as mutual funds.
“And insurance agents are not required to have the same level of entrance standards, training and continuing education as other professionals in Canada,” he added. “Yet insurance is a profession that has perhaps the greatest impact on the consumer of any profession. Today people need significant resources for retirement and they turn to financial advisors for expertise.”
In a letter to the editor of the Globe and Mail, Jim Rogers, founder and chairman emeritus of Vancouver-based Rogers Group Financial Ltd., past two-term chairman of the Canadian Association of Insurance and Financial Advisors (now Advocis) and past president of the Million Dollar Round Table, said the “lack of accountability problems” cited by The Globe and Mail reporters “are pretty well as they have laid out.”
Many elements go into the cost of an insurance policy, he noted in an interview with The Insurance and Investment Journal. “For every $1 a consumer sends an insurance company, how much of it goes to cover the risk, towards administrative costs, towards distribution? What’s wrong with the consumer asking how much you’re getting paid out of it? saying, ‘Tell me what you’re doing for your 20%’.”
“Every time an agent recommends a product that brings him more compensation, he should be required to disclose the difference in compensation he would have earned from competing like products,” Harold Geller added. “And he should be required to disclose the differences between the like products, both the benefits and the downsides. If not, there is a definite conflict of interest.”
The Globe and Mail articles may have started a process of consumer advocacy, Harold Geller said, that could result in profound change. “Groups like CLHIA and the Joint Forum of Financial Market Regulators wave their hands in the direction of consumer interests, but routinely undermine efforts to bring about a level playing field for consumers.”
Mr. Rogers applauded the articles for “shining some light on these issues. Some public good may come of it.”
And Alastair Rickard, a former life insurance company executive with Mutual Life, Clarica Life and Sun Life Financial, and founding editor of the Canadian Journal of Life Insurance, praised the Globe and Mail “for devoting serious and extensive attention to life insurance agency distribution in Canada and related issues. I cannot recall a single article in any Canadian daily newspaper presenting such an extensive look at life insurance agency distribution.”
“Articles like these are a wonderful opportunity for the industry to look itself in the face and ask, ‘Are we doing a comparable job to the professionals in other industries?’ The answer would have to be no,” Harold Geller said. (See related article p.12)