Insurers routinely rely on a distribution network made up of insurance intermediaries, including managing general agents, brokers and agents, for the sale of insurance products. Each province/territory has exclusive authority over the conduct of business in the insurance market and each province/territory has its own regulatory approach for the conduct of business. Notwithstanding differences in regulatory approaches, there is a common expectation that insurance consumers will be treated fairly.
Insurers have the ultimate responsibility for the fair treatment of insurance consumers; however, recent guidance from the Canadian Council of insurance Regulators ("CCIR") and the Canadian Insurance Services Regulatory Organizations ("CISRO") introduces principles and expectations for the implementation and management of incentive programs in the distribution of insurance products, and clarifies that both insurers and intermediaries are expected to follow it.
Background
In Sept. 2018, the CCIR and CISRO released joint Conduct of Insurance and Fair Treatment of Customers Guidance ("FTC Guidance"). The FTC Guidance was based on Insurance Core Principals of the International Association of Insurance Supervisors. CCIR and CISRO provided the FTC Guidance to support insurers and insurance intermediaries in achieving the fair treatment of customers and to strengthen public trust and consumer confidence in the Canadian insurance market.
The FTC Guidance, in part, addressed remuneration, reward strategies, and evaluation of performance in the insurance market and the contribution to achieving outcomes in terms of fair treatment of customers. Following the release of the FTC guidance, industry participants indicated to regulators that more clarity was needed with respect to expectations surrounding how insurers and intermediaries conduct business and, more particularly, sales incentive programs.
In response to industry inquiries, on Nov. 30, 2022, the CCIR and the CISRO released the Incentive Management Guidance ("IMG"). The IMG is a joint CCIR and CISRO guidance that is intended to provide additional details and guidance with respect to Incentives.
Although the IMG sets out expectations for Incentive Arrangements to not undermine FTC, it recognizes that insurers and intermediaries compensate employees and other persons or entities acting on their behalf in the sale and servicing of insurance products.
The IMG provides insurers and intermediaries with the necessary latitude to determine the requisite strategies, policies, processes, procedures and controls in order to facilitate achieving such results and to apply them based on the nature, size and complexity of their activities, while considering representatives' regulatory obligations in order to facilitate achieving the customer outcomes reflected in this guidance.
The IMG defined "Incentives" as monetary and non-monetary compensation offered by insurers or intermediaries to their employees and other persons or entities acting on their behalf in the sale and servicing of insurance products.
The IMG set out four principles with respect to Incentives:
(1) Governance: Overall responsibility for FTC is at the level of the board and/or senior management who design, approve, implement and monitor adherence to policies and procedures aimed at ensuring that customers are treated fairly.
(2) Design and management of Incentive Arrangements: Insurers and intermediaries are responsible for the customer experience. If incentive arrangements are properly designed and implemented, they can reduce the risk of unfair outcomes to customers.
(3) Risks of unfair outcomes to customers: Insurers and intermediaries are expected to regularly identify and assess the risks of unfair outcomes to customers, which are more likely to be present when insurers, intermediaries or any persons and entities acting on their behalf pay or receive incentives for practices that fail to achieve expected FTC outcomes.
(4) Controls: Insurers and intermediaries should have controls to facilitate:
- Detecting unsuitable sales, inappropriate sales and inappropriate practices resulting from incentive arrangements in order to make the required corrective action
- Determining residual risks of unfair outcomes to customers
- Ensuring the design and implementation of incentive arrangements achieve expected outcomes for FTC
CISRO and CCIR stated in the IMG that the IMG applied to insurers and intermediaries who pay compensation and/or design incentive arrangements. While noting that insurance intermediaries cannot be absolved of their own responsibilities, CISRO stated in the IMG that the insurer, as the ultimate risk carrier, is responsible for the fair treatment of customers.
Insurers and brokers expected to comply with IMG
Last month, CCIR and CISRO issued a Q&A document regarding the IMG (the "Q&A"). The Q&A addressed a number of questions regarding the shared responsibility of both insurers and brokers designing incentive programs that "avoid or properly manage conflicts of interest." CISRO and CCIR clarified in the Q&A that there is no intention that insurers direct the incentive programs of their brokers.
The Q&A document expressly states that, "The IMG does not prohibit any incentive practice." It also makes clear that incentives need not be merely monetary. Examples of incentives where they are inducements to sell an insurance product include: non-cash benefits such as travel, goods, hospitality, entertainment, titles, memberships, contest entry, insurer client referrals and access to services related to performance targets.
Finally, the Q&A document clarifies that the IMG is "principle-based guidance" that provides the necessary latitude to determine strategies, policies, processes, procedures and controls to achieve the four principles identified in the IMG. CISRO and CCIR clarified that the IMG does not prohibit any particular incentive practice.
Takeaways
The effective date of the IMG was Nov. 30, 2022 (the date of its release). CCIR and CISRO expect insurers and intermediaries to implement effectors to incorporate the IMG into the design and management of their incentive arrangements. In implementing any incentive program, insurers and intermediaries must also be aware of provincial/territorial legislation that may prohibit the payment of compensation to unlicensed intermediaries or any other provision that addresses unfair or deceptive practices. For example, in some provinces, legislation may require disclosure of incentives paid within the distribution network.
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