Beginning this year, financial advisors should expect to see a growing number of life insurance companies demanding that sales representatives provide written disclosure to consumers about their business relationships with insurers. By making written disclosure a required sales practice, these insurers hope to prevent regulators from forcing more onerous disclosure rules upon the industry.
This disclosure trend is expected to gain momentum in 2006 revealed Canada Life, Empire Financial Group and Desjardins Financial Security (DFS) at the 2005 Insurance and Investments Convention, held by The Insurance Journal in Montreal in November.
In taking these steps, the insurers are choosing to follow the disclosure recommendations issued by the Canadian Life and Health Insurance Association (CLHIA) in August. There are five points to this program.
First and foremost, life and health insurance representatives should disclose to their clients the names of the financial institutions they do business with.
They should also state the nature of their links to the insurance companies. In addition, representatives should advise clients whether they are on commission. They should not, however, be obliged to disclose amounts.
Representatives should also disclose whether they receive non-monetary compensation, which offers them the chance to win trips or qualify to attend insurance conventions.
And finally, potential conflicts of interest for representatives and clients alike should be made clear to consumers.
Each of these aspects should be outlined in a written statement as provided for in recent Canadian legislation. However, the industry currently has no standard disclosure form. Representatives can use the form letters made available to them by the insurers. They can also adapt these letters in accordance with the type of work they do.
Canada Life is actively working to implement its own method for business practice disclosure, which will be introduced in 2006, says Phil Marsillo, the company’s senior vice-president, individual distribution operations, who was a speaker at the convention.
Mr. Marsillo shared the stage with colleagues Les Herr, vice-president, distribution and strategy for Empire, and Denis Berthiaume, senior vice-president, individual insurance, at DSF and president of SFL Management.
Working with MGAs
Mr. Marsillo confirms that in January the insurer plans to hold meetings on this subject with a number of managing general agents (MGAs), he said. “We want to be sure that we’re all on the same page,” he states. “We want to provide agents and brokers with the tools they’ll need to be well prepared.”
Great–West Life, parent company of Canada Life, is making disclosure mandatory. Over the past several months, Great-West has sent its representatives a letter to this effect, and The Insurance Journal has obtained a copy of the letter, which states:
You must integrate a disclosure letter into your business by the 2006 business year. Completed disclosure letters for clients to whom you have provided Great-West products should be retained as part of the client profile.
“We are currently working to put in place a disclosure process,” explains Mr. Berthiaume of DFS. “We have not yet determined the effective date, but it will definitely be in place in 2006.” He adds that the initiative is the result of discussions held among CLHIA insurers.
“At the moment, we are examining procedures that will be aligned to those adopted by the rest of the industry,” continues Mr. Berthiaume. “For example, consistency is needed in the disclosure forms. We don’t want to be more severe than other insurers. This is the sort of thing we are discussing with the CLHIA.”
“Sales incentives, meaning the fact that representatives can participate in promotions, have posed an enormous challenge for the industry. We have therefore decided to act on this quickly,” he says.
In recent months, Empire has also sent its representatives information on what must be disclosed. “Disclosure is not something new. They need to consider that at this stage they have an obligation to disclose according to these guidelines,” Mr. Herr told The Insurance Journal.
In the coming weeks, Empire will also publish an article in its internal newsletter to stress to representatives the importance of respecting the disclosure exercise.
David Barber, past president of Independent Financial Brokers of Canada (IFB), welcomes the insurers’ initiative. “We fully support this initiative…We envision this practice to become generally accepted by all brokers in the Canadian industry,” he says.
Mr. Barber also stresses that the Canadian Insurance Act has always required the industry to disclose business relationships to consumers. “Disclosure has always been a requirement by law. But no effort had been made by the industry to be in compliance with it. But now that the law requests that disclosure has to be done in writing and not only verbally, the industry has decided to follow,” Mr. Barber points out.
Avoiding imposed regulations
In adopting its own standards, the Canadian life insurance industry is also seeking to prevent the country’s regulatory authorities from imposing their own rules. According to the industry, such a move would add to the regulatory burden of this economic sector and hamper its growth.
“We want to encourage representatives to disclose,” states Mr. Herr of Canada Life. “They should not see our intentions as an intrusion into their business practices; instead, they need to understand that our disclosure standards are less rigid than what the regulatory bodies could impose.”
“There’s no question that we prefer to act ourselves rather than see the Autorité des marchés financiers (AMF) legislate in this regard,” agrees Mr. Berthiaume, who wants to avoid a recurrence of the scenario that surfaced in the Quebec property and casualty insurance sector, where the AMF recently intervened.
The AMF is continuing its examination of Quebec’s life and health insurance sector. In fact, in recent months, the organization has sent a questionnaire to this effect to many of the province’s insurers.
Meanwhile, regulators in the rest of Canada also have disclosure on their agenda. Presently, the Industry Practices Review Committee (IPRC) is carrying out consultations to see whether recommendations will be made to bring in new disclosure regulations (see box). The IPRC is a joint initiative of the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organization (CISRO).
“The industry has taken it upon itself to come up with means of proper disclosure,” says Terri DiFlorio, president of Hub Financial, one of Canada’s largest MGAs. “I firmly believe that if we do not act on these suggestions, the regulators will act. And if they act, their requirements will be more onerous than those of the CLHIA.”
Since December 2004, on the heels of the crusade led by New York State attorney general, Eliot Spitzer, to clean up business practices of financial institutions in the U.S., the CLHIA has been focusing on current Canadian practices.
According to the CLHIA, the disclosure requirements are intended to increase consumer confidence in the life and health insurance industry, which has been badly shaken by the proliferation of scandals in some financial sectors over the past few years.
Claude Di Stasio, an assistant vice-president of the CLHIA, is pleased to see that insurers intend to follow the association’s recommendations. She hopes that this practice will gain many followers in the coming months.
Certain aspects still in limbo
Despite industry consensus on the necessity to disclose business practices to consumers, a number of points remain in limbo.
Insurers and MGAs have not yet reached agreement on their respective roles and responsibilities in the control process to ensure that representatives have fulfilled their disclosure duty to their clients.
According to Mr. Marsillo, it is the MGAs and not insurers who should ensure that representatives have satisfactorily fulfilled their disclosure obligations. “It’s really up to the MGAs to conduct this work,” states Mr. Marsillo. Why? “Because MGAs have the closest contact with representatives and deal with them on a more regular basis.”
However, Ms. DiFlorio, who also sits on the board of the Canadian Association of Independent Life Brokerage Associations (CAILBA), sees things quite differently.
She explains that CAILBA is examining many scenarios surrounding the implementation of a control mechanism. Discussions among the organization’s board members have focused on the responsibilities of insurers in this matter. “Our talks have a lot to do with having the carriers be the police in this issue and include a disclosure form in their application,” says Ms. DiFlorio.
If a disclosure form is included as suggested, the client signature would then confirm that the representative has fulfilled his or her obligations, adds Ms. DiFlorio. “Another option would be to include a form in the section of the document where representatives indicate that they have made the appropriate disclosure,” she explains.
Mr. Marsillo maintains that such a form will not be added to Canada Life insurance forms, at least not yet.
Empire and DFS have not yet decided just how an inspection of business practices will proceed. “We don’t yet know if we will introduce a separate form to be signed by the client, or if we’ll incorporate one directly into our insurance policies,” says Mr. Herr.
“One thing is for sure,” he says, “someone is going to have to monitor this. Either the MGAs or the insurers are going to have to monitor it. Someone will have to do it!”