A joint report by the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) threatens performance-linked bonuses made to life insurance advisors. The proposal has sent a shockwave through the industry.
In early June, the CCIR and CISRO released a consultation paper called Relationships Between Insurers and Sales Intermediaries and simultaneously launched a public consultation to receive stakeholder comments. The report, prompted by the investigations of New York state attorney general, Eliot Spitzer, was based on a survey of life and property & casualty insurers that gathered information about their relationships with intermediaries. Unlike Spitzer’s investigation, however, the Canadian regulators state that their survey did not reveal any illegal behaviour similar to that found in the US.
Despite this conclusion, the report sets out three policy option proposals. One of them has advisors worried for the future of life insurance brokerage as it exists today.
The proposal is to introduce legislation or regulation to restrict insurers from offering “performance-linked benefits to their sales intermediaries…the restriction could be absolute or it could be limited by introducing appropriate controls and qualifications on these benefits.” This would include volume bonuses applied to sales and renewals. The consultation paper says this proposal could be applied to “only independent intermediaries who hold themselves out as being independent; or all intermediaries where possible.”
“If they go in this direction, it’s going to deal our industry a crushing blow,” says Lawrence Geller, president of L.I. Geller Insurance Agencies. “They will definitely wipe out 50% of the revenues of my own firm! Some of these commissions are linked to transactions that go back more than 15 years.”
There are all sorts of bonuses: contingent commissions (applied on volume and paid in monthly, quarterly or annual instalments), renewal commissions, bonuses on group contracts, etc. The regulators did not explicitly specify which types of bonuses they consider unacceptable.
Perception of conflict
The regulators wrote that certain business practices may contribute to a perception of conflicts of interest in the marketplace. They insist on the importance of impartiality and independence among financial intermediaries, and point out that the absence of independence may have a negative impact on consumer confidence in the insurance industry.
Playing with market forces
Steve Howard, president and CEO of Advocis, an association for financial planners, views bonuses as a natural component of the capitalist system. “If you tamper with bonuses, you are fooling with Mother Nature.” Bonuses are an integral part of the way of life in the business world, he explains. Removing bonuses will trigger a radical destabilization of the industry. And if that happens, it would not generate savings for consumers because bonuses paid to independent brokers represent only 1.2% of insurers’ total distribution costs. Insurers will not pass along these savings to insured, Mr. Howard predicts. Instead, they will use this opportunity to increase their bottom line.
Mr. Geller, like many others, believes that eliminating bonuses and adding new regulations will leave independent brokers with no choice but to charge more to offset their losses. Mr. Geller considers that the tone and content of the report point to a fundamental lack of understanding of how the life insurance industry works: “This report seems to be written by specialists …in P&C insurance! Take the case of general agents, most of their compensation comes from bonuses paid to intermediaries. If these bonuses are eliminated, how will they survive? Did the regulator even think about this consequence?” Mr. Geller questions.
“I am sick to death of this regulatory environment: as a broker, it’s increasingly difficult to do business,” said David Barber, outgoing president of the Independent Financial Brokers (IFB). “They are constantly adding constraints, which translate into additional costs for clients, in the name of consumer protection. No regulation can adequately protect the public from fraud. Should the majority have to pay for one or two suckers who don’t do the usual checks before they get ripped off? Does that make any sense?”
Mr. Barber anticipates a possible backlash resulting from regulators’ excess zeal, which could undermine their efforts. “Prime Minister Tony Blair intervened publicly by criticizing the zeal of British regulators. Momentum is building against the American regulators, following Mr. Spitzer’s crackdown. The pendulum has swung too far in their direction and other countries are now putting on the brakes.”
“The insurance industry is different from that of securities,” he added. We have developed multiple forms of protection, in place for a hundred years. The guarantees offered by segregated funds are one example.”
Savings and rate hikes
“The regulators are not taking into account the whole reality,” Mr. Howard contends. “The bonuses paid to brokers represent only a portion of the distribution costs. As for disclosing bonuses, regulators need to insist that all administrative costs, including the insurer’s portion, be disclosed.”
Other sources consider that any regulation of bonuses must be applied equally to agents working exclusively for one insurer, not just to independent brokers. “When I look at this regulators’ report, I realize that it does not really reflect the issues that are affecting our industry today,” Mr. Howard adds.
Is the problem real or imaginary?
“What appalls me most is that the regulators state in their report that they found nothing illegal,” Mr. Geller explains. “They affirmed publicly that everything is on the straight and narrow in the industry. But they want to add useless and even detrimental regulations. They want to give the impression that they are doing something to protect the public. But their understanding of the industry is questionable.”
Mr. Geller predicts that if the controversial proposals are adopted, the regulators and government should brace themselves for a slew of class action lawsuits by advisors.