Sales contests, bonuses, including contingency commissions, access to a select club or events for top salespersons are all incentives at a high risk of being conflict of interests, stated Quebec regulator the Autorité des marchés financiers (AMF) in an issues paper published on July 20.
The report classifies different forms of compensation and incentives in the life insurance industry according to the risk of conflict of interests associated with them. So, salaries and service fees are considered to have a minimal risk of conflict of interests, while upfront (first-year), level, trailing and renewal commissions pose a medium risk.
The AMF says that sales competitions are often related to the sale of a particular product or product category or the performance of the representative, so that the representative may be tempted to concentrate production only in an area which would increase his chances of winning a trip or prizes.
The report also highlights the Canadian Life and Health Insurance Association (CLHIA) study in 2016, which states that in situations where advisors have a choice between various insurers, conference incentives could contribute to the “perception of a conflict of interest ".
The AMF says that since the publication of the report, some insurers have announced the termination of sales contests involving travel and conferences. The regulator adds that a comprehensive assessment of the risks associated with all incentives must continue.
Bonuses promote prioritization of an insurer's products
Bonuses directly linked to the amount of premiums and a performance threshold pose a high risk of conflict of interest, says the AMF.
The regulator cites the example of profit-sharing programs, such as contingency commissions. It says the latter often have very difficult targets, which may influence an intermediary as to the choice of products or the insurer to propose to a customer. The AMF underlines that the amounts of these bonuses can be significant.
Consultation with industry stakeholders
In order to continue its work on incentives and to observe the measures in place or recommended, the AMF has launched a consultation with the various stakeholders in the insurance industry. They have been invited to answer a series of 17 questions on the categories of incentives and how they are applied in the different distribution channels. Those interested in making their views known are invited to do so before October 15, 2017.
This issues paper is part of the process of implementing the Sounds Commercial Practices Guideline initiated by the AMF in 2013. It is based on the self-assessment submitted to 219 insurers licensed in Québec. To learn more, read the AMF’s issues paper Managing Conflicts Interest Risk in Relation to Incentives.