“Travel rewards could contribute to “perception of a conflict of interest”
The Canadian Life and Health Insurance Association (CLHIA) has conducted a review of how individual insurance is sold. It is recommending a number of changes which, if implemented, could change the way some advisors do business and the travel rewards they receive.
On Feb. 26, the CLHIA released a report on insurance distribution in Canada. The association reviewed sales practices across the country, and it came up with a list of things regulators could change to better protect insurance consumers.
First of all, the paper recommends that all jurisdictions both establish continuing education criteria for life licensees and require all advisors to carry errors and omissions coverage. As for who should monitor and enforce these and other standards, the CLHIA says that the regional council method fosters closer ties between regulators and both advisors and customers, and is preferable to a national self-regulatory organisation.
Councils and advisor conduct
The report goes on to recommend that these councils be granted additional powers that would allow them to not only address customer complaints about advisors by imposing sanctions, but also recommend restitution. However, the CLHIA believes that restitution should be voluntary, as is the case with other ombudsman systems that apply to other types of advisors (e.g., the Ombudsman for Banking Services and Investments).
According to the CLHIA, each provincial or territorial jurisdiction should have a code of conduct for advisors. This is not the case today, and the paper argues that there is value in having consistent standards in place across the country. The Canadian Insurance Services Regulatory Organization (CISRO) is in the best position to develop this code, says the CLHIA.
Another significant recommendation is that all insurance advisors should be required to conduct a needs analysis before selling a product. While most advisors do consider the needs of the customer and provide a copy of the information that has been gathered to the client, the CLHIA notes that this process is only formalized into regulation in Quebec.
“It is our view that the Quebec approach should be adopted across the country. A needs analysis demonstrates that the advisor has an understanding of the customer’s circumstances and needs before recommending a product to meet those needs,” concludes the CLHIA. “The duty to conduct a needs analysis and keep documentation of it would rest with the advisor, and a copy would be provided to the customer. Audits of advisors, whether they be undertaken by the regulator, insurer or distribution firm, would include looking for evidence of the needs analysis.”
Churning and travel Incentives
The paper considers the question of churning but concludes that Canada does not have the same kind of systemic problems as Australia, which recently restructured its compensation system to address the matter. While the lapse rate is 15% in Australia, the CLHIA points out that it is only 4% in Canada and says it is not clear how much, if any, of this turnover is related to churning and how much is due to replacements conducted in the client’s best interest.
Although the CLHIA has seen no evidence that conference or travel incentives negatively influence advisors’ recommendations, it recognizes that in situations where an advisor has a choice between various insurers, these incentives could contribute to a “perception of a conflict of interest”. If regulators do decide to regulate travel incentives for insurance advisors, CLHIA has three specific recommendations:
“1. Insurers that manufacture products and distribute them through independent channels be allowed to offer only trips with reasonable professional content where advisors must pay their own travel and accommodation costs. This would counter the perception that advisors are placing a product with a particular insurer in order to qualify for a trip.
2. Insurers that manufacture products and distribute them through an exclusive sales force be allowed to offer trips with reasonable professional content, and have the option to pay advisors’ expenses. In this scenario, there is no incentive to recommend one insurer’s product over another.
3. Distribution firms that operate through independent channels and have a range of insurers’ products on their shelves be allowed to offer trips with reasonable professional content, and have the option to pay advisors’ expenses, provided that such trips are not tied to placing business with any particular insurer, and there is no incentive to recommend one insurer’s product over another.”
Seg fund disclosure
Finally, the CLHIA’s paper ponders how best to disclose the distribution costs associated with wealth management products such as Individual Variable Insurance Contracts (IVICs), i.e., segregated funds. The paper describes the Canadian Securities Administrators’ (CSA) Client Relationship Model - Phase 2 (CRM2) approach to mutual fund regulation as “well-intentioned” but ultimately concludes that it is not as comprehensive or transparent as it could be because it carves out distribution costs from the full management expense ratio (MER).
“As an industry, we support more detailed cost transparency for consumers, in a manner that is meaningful and relevant to consumers,” comments the CLHIA. “This would mean disclosure of the MER and any additional costs or fees. The MER should be broken down into its component parts which, for IVICs, would be administration, distribution and insurance. Further, we believe that this standard of full cost transparency should apply to similar products, such as mutual funds.”