Fed up with disreputable representatives, life insurance companies in Canada have launched a major campaign aimed at purging the industry of unsavoury business practices. The goal: to identify, hunt down and expel advisors that engage in reprehensible business practices.
With numerous companies behind them, three insurers – Empire Life, Industrial Alliance and Transamerica Life Canada – are leading the charge. All have resolved to tighten the screws by severing business relations with representatives whose business practices are dubious or worse.
This initiative got underway this spring in Quebec when regional executives from the three insurers decided to join forces to stamp out fraud. They say they are backed by their head offices that will oversee the spread of this campaign throughout Canada.
The insurers are following the lead of the Canadian regulatory authorities that for the past two years have been actively taking steps to increase the transparency of business practices in the life insurance industry, mainly in the hopes of restoring the industry’s reputation in consumers’ eyes.
The move to adopt more heavy-handed measures against fraud artists was the brainchild of Richard Charette, director, sales and distribution, Quebec, at Empire Life. Mr. Charette is also the president of the Sales Executive Committee of Quebec. This purely advisory committee is an informal round table where companies share common concerns. Nearly 85% of insurers active in Quebec belong to the committee, which engineered the new anti-fraud strategy.
Why the sudden interest in tackling this long-standing problem? “Financial scandals such as Norbourg, and the financial losses incurred by managing general agents were the last straw,” Mr. Charette says. “At some point, you sit up and say: enough already.”
Insurers are cracking down in particular on six practices the committee considers reprehensible. “Reprehensible practices are serious offences. We’re not talking about forgetting to analyze financial needs,” Mr. Charette notes.
Misdeeds that will no longer be tolerated include acts of fraud committed against consumers, insurers and managing general agents, “serious and repeated complaints” lodged by consumers against a representative, serial bankruptcies, premium rebating and systematic replacement, Mr. Charette confirmed.
Many coercive measures will be applied without hesitation, the insurers involved revealed. For one, Transamerica is threatening to haul representatives that renege on certain commitments into court. The insurer will sue representatives that systematically contract debt on commissions paid to managing general agents, but whose clients cancel the policy within 24 months of its coming into force.
“We will sue these representatives to recover the amounts they owe us,” says Pierre Vincent, vice-president, sales, Quebec region, at Transamerica. “These commissions were paid in good faith,” he added. “It is up to the brokers to do their part and refund the commissions if the contract is cancelled.”
Over the past few years, Transamerica had been letting some representatives that allegedly committed reprehensible practices off the hook. Legal action was reserved for major cases like the Bricault affair in the 1990s (see inset text on page 10), Mr. Vincent explains.
“In the past, we believed that lawsuits were not always worth it, especially when the representatives had no assets to seize,” Mr. Vincent says.
That stance has changed in the face of mounting financial losses caused by crooked representatives. “Now, we’re ready to invest the necessary amounts to ensure that dubious practices by some brokers are brought to light.”
Even representatives without assets are not immune from lawsuits, Mr. Vincent warns. His objective: to prevent them from hopping between insurers and distributors.
Transamerica’s parent corporation Aegon Canada wants to send the market a clear message, says Doug Paul, executive vice-president, sales and marketing. “We are going to take them to court even if we do not get our money back. This issue is not a simple matter of money. It’s a matter of principle. Those who think that there will be no consequences are making an incorrect assumption,” he stresses.
Mr. Paul adds that Transamerica is determined to step up its efforts to nab swindlers. “We will be more vigilant, especially in the cases where it is clear there has been fraud and misrepresentation,” he warns.
He pointed out that the vast majority of financial advisors are honest folks that serve their clients impeccably. Only a minority indulge in reprehensible practices, he believes. These bad apples tarnish the reputation of the whole profession, Mr. Paul pointed out, adding that the situation is unfair for most representatives and that it is high time that the problem be eradicated.
At Empire Life, Les Herr, vice-president, distribution and strategy, individual insurance, confirms that this issue is prompting serious soul-searching. Even so, up to now, the only measure put in place to flush out wrongdoers is reporting them to the regulatory agencies.
Empire Life plans to brainstorm on measures to counter this problem during meetings over the next few months. In the meantime, Mr. Herr confirmed that Empire Life will continue to refuse to deal with representatives that the courts find guilty of fraud.
Beyond that, Mr. Herr believes that crooked representatives must be barred from reacquiring a permit even after their sanction is served. He is calling on the regulatory bodies to endorse this approach and urges them to put more teeth into their sanctions slapped on fraud artists.
One measure the insurers are taking to eradicate fraud is to cancel the contracts of any renegade representatives.
“At Empire Life it has already begun! I have already cut some business relations,” Mr. Charette confirmed. He pointed out that the contracts between Empire and its representatives contain a cancellation clause, which he has no compunctions about using when necessary. “I am not obliged to do business with anyone. Our contracts have a clause that states that we can terminate our business relations upon 30 days’ written notice.”
Representatives that were dishonest with a competitor will also lose their contracts at Empire, Mr. Charette pointed out. “I deny contracts to representatives that have ethics cases pending, or those found guilty of fraud.”
“If they have gotten into trouble somewhere else, there’s a risk that they would do the same with us. And even if they didn’t do anything wrong at Empire, I will not sit back and wait for it to happen,” he continued.
Industrial Alliance is doing the same. “We have also begun to curtail contracts of some representatives. There are people that I personally have barred,” explains Bruno Michaud, senior vice-president, sales, Quebec and Atlantic provinces at Industrial Alliance, and president of the mutual fund subsidiary Investia.
“Some brokers I’ve met, I’ve already said: no thanks we don’t want to get involved in these practices. I’ve even refused to issue insurance policies,” Mr. Michaud said.
He insists that the network should not view these measures as a ruthless witch hunt. When insurers are forced to end a contract, “they do not rub their hands in glee,” he says.
Before annulling a contract, insurers meet with the representatives to hear their version of the story, Mr. Michaud explained. “We’re not despots. We don’t come into the office in the morning saying ‘today we’ll chop off X or Y’s head.’ We discuss with the representatives, the managing general agents and all our partners.”
“When we end a contract, we have good reasons for doing so. We check first with our internal attorneys to make sure everything is on the straight and narrow,” he continued.
Insurers also plan to scrutinize the source of new business generated by representatives, Mr. Vincent reveals. “We will be paying closer attention. If we receive complaints from an insurer or managing general agent, or even another broker, we will closely monitor the business of the broker accused,” Mr. Vincent says.
“What we look for is sudden changes in their business. We then try to pinpoint the source of the business and the cause of the sudden changes,” he explained.
Charges for transfers
Industrial Alliance is now levying administrative charges ranging from $200 to $300 on managing general agents that agree to transfer a book of business from a representative dealing with a competitor. This measure was taken to prevent representatives that are heavily in debt toward a managing general agent from shirking their obligations by transferring the business to a competitor.
“We have put in place protection for managing general agents: to stop representatives from flitting around. They will no longer be able to produce and put anyone in debt,” Mr. Michaud says.
“It’s a waste of time. I had a fulltime employee that did only transfers,” Mr. Michaud explained. “We ask managing general agents to pay $250. The agent is then free to pass this cost along to the broker.”
Mr. Charette confirmed that Empire Life will soon adopt a similar policy. “Many representatives bounce from firm to firm, not necessarily because they are in debt or have a bad reputation. There’s a lot of wheeling and dealing, one MGA pays 120% in first-year commissions, the other 130%. Representatives wander around way too much,” he says.
“It’s the insurers that have to do all the digging,” Mr. Charette adds. “Because MGAs sign everything that comes along: they’re not very worried about losses and liability. Often, they don’t even see it: the administrative assistant takes care of it. Then we get stuck doing all the work,” he complained.
Aside from lawsuits, termination of contracts and charges, the sales executive committee also weighed other solutions. None, however, were officially adopted by insurers.
These avenues include a systematic re-evaluation of representatives’ skills.
“I have a good selection system for new representatives,” Mr. Charette explained. “But you also have to consider re-evaluating the skills of representatives that have done business with us for 7, 10 or 15 years. Some of them have gone bankrupt or have slid into dubious business practices.”
He recounted how even representatives that have been in business for 20 years can backslide. “Old timers are sometimes tempted to head down the wrong path. They have visions of easy money, and, for whatever reason, they get off track.”
Mr. Charette admits that the solutions are not easily put in place. “For example, I cancelled a contract with a representative here in Quebec City. This representative then contacted one of our offices in Ontario, which gave him a contract. I had to start over, to bring my own colleagues up to speed.”
The front-runners say they are confident that their fellow insurers will fall into step with their campaign to hunt down the miscreants. MGAs are also taking action to crack down on fraud (see text on page 10).
“I think there is a consensus around the table on this principle. We all agree that we sometimes do business with undesirable representatives, even though we shouldn’t. There are several good reasons why not: it’s expensive and it tarnishes our image. Everyone agrees that we have to put an end to this,” Mr. Charette concluded.
Mr. Michaud, of Industrial Alliance is on the same page. “I think that we all agree that it is not in our best interest to keep rotten apples within our organizations. At least 85% of insurers active in Quebec sit on the committee. The large players are there. I think we’re all taking this approach seriously.”
“We want to grow profitably. That is why it’s important to look at the quality of our business,” says Mr. Vincent of Transamerica. “And when you see everything that goes on, we want to make sure our distributors are still there for the long haul. We don’t want clients to be disgruntled because of brokers’ reprehensible actions.”