Two consumers are considering purchasing an auto insurance policy. One, perhaps in his early 50s, telephones a broker and arranges to meet in person to discuss and secure coverage. The other, a new driver in her early 20s, checks the web for prices and chooses the best rate, filling in forms and binding coverage online. Despite the different buying habits, are both customers getting the same level of regulatory protection?
That’s the question the Canadian Council of Insurance Regulators (CCIR) set out to explore in an issue paper that was released last January. “Consumers should enjoy the same protection, regardless of the means of communication chosen,” states the paper, Electronic Commerce in Insurance Products. “Canada does not have an oversight framework that is specific to the online distribution of insurance products.”
The CCIR’s Electronic Commerce Committee called for submissions from interested parties — and got a slew of responses by mid-June from brokers, direct insurers, associations and others. Touching on a number of key regulatory themes in the online world, the paper clearly hit some hot buttons among insurance industry players. Broker groups, in particular, see clear warning signs when it comes to online consumer protection.
“The product is complex and even though some insurance providers are promoting the product like a commodity that can be purchased in a box or off the shelf, that is far from the case,” says Randy Carroll, chief executive officer of the Insurance Brokers Association of Ontario (IBAO). “Consumer protection needs to be the focus when it comes to e-commerce. Understanding what has been purchased and more importantly what has not been purchased must be part of any transaction, be it online or otherwise,”Carroll says.
“The commoditization of insurance does not protect consumers,” notes the submission from the Insurance Brokers Association of British Columbia (IBABC). “Losing the cost of a DVD or a plane ticket is an inconvenience; losing the value of a house is financially and personally devastating.”
Not surprisingly, direct insurers and agency writers have a different view of the need for regulations in the online world.
“We believe that consumers should be allowed to use the model of their choice for insurance transactions,” says Alain Thibault, president and chair of the Canadian Association of Direct Response Insurers (CADRI). “We do not want to see any unnecessary barriers or obstacles that will get in the way of that choice. We think the insurance research and transaction process, no matter what the medium, should be as easy and seamless as possible,” Thibault adds.
“CAFII supports consistency of regulation across channels,” the Canadian Association of Financial Institutions in Insurance states in its submission to the CCIR. “The regulatory frameworks that are now in place have been, and can continue to be, adapted for the internet distribution channel.”
RISE OF INTERNET
The spotlight by CCIR on electronic commerce is a reflection of the growing popularity of the internet for price-comparison shopping, research and, in some cases, purchasing of insurance products. It is estimated that Canadians spend more time on the internet than other industrialized countries, outpacing the United States and the United Kingdom in 2011, notes information from ComScore. Industry Canada reports that in 2009, 80% of Canadians aged 16 and older, or 21.7 million people, used the internet for personal reasons, up from 73% in 2007. Online transactions were more prominent than in 2007, with 50% of home users ordering goods or services over the internet.
In an informal survey, CADRI members reported that in 2011, they provided almost 1.7 million quotes online, mainly for car insurance. As well, the association noted that sales resulting from online quotes are increasing as a percentage of total sales (i.e. original quote provided online to the consumer). Some companies report that more than 40% of their new business is originating from online quotes.
With all this activity, issues are emerging when it comes to the risks inherent in electronic commerce. The CCIR listed seven main areas where regulations may be needed to ensure that consumers:
• have access to additional information/advice;
• know they are dealing with a regulated entity;
• have and understand the necessary information about the products;
• have the opportunity to review the accuracy of information they provide;
• are aware of the terms and conditions;
• can rely on the transaction; and
• know that their personal information is secure.
Arguably, the most contentious suggestion in the CCIR paper is the notion a “licensed intermediary review the insurance application completed by a consumer to ensure that the product in question suits the consumers’ needs.” While this is only one of many possible regulatory solutions floated by the committee, it garnered plenty of attention among direct response insurers. Other CCIR consumer protection measures included having the relevant information and advice available on the provider’s website and having an online provider enable consumers who visit its website to contact a licensed intermediary at any time.
“In terms of consumer protection, there has to be some principles, but we don’t think it should favour one form of distribution,” Thibault says. “There is no guarantee that if you talk to someone, you are going to get the right information. The information should be provided by a regulated entity, but we feel that the information can be provided by that entity in a way that reflects consumers’ choice of their insurance model. Phone or face-to-face are not the only ways to provide information to consumers.”
In fact, Thibault comments that online web information tools are getting more sophisticated and effective at educating consumers through comparison charts, scenario building, simulations and reflective questions.
Similarly, CAFII opposes any requirement of intermediary review of online insurance products or applications. “Given that clients have chosen to do their research and transaction on the internet rather than face-to-face and telephone, mandating the use of a licensed agent would add redundancy and costs and go against clients’ needs and wants,” the association notes. “Requiring a licensed agent to review an application is particularly problematic as it would mean that clients may be delayed or prevented from completing their transaction,” it adds.
“Risk mitigation techniques for distributing insurance without an intermediary have been developed and can be utilized in internet distribution,” CAFII points out. “These techniques include plain language communication of key facts, advice tools, free-look features, complaint-handling protocols, privacy requirements and claims handling.”
The Co-operators indicated it has “concern with the recommendation that insurers have licensed intermediaries review each application… Who is legally bound if a problem results; the reviewer or the applicant? Most questions are simple. ‘Yes’ and ‘No’ answers. It will be difficult for the reviewer to discern much from such limited information.”
The company adds that a grey area could exist where the consumer may “unintentionally shift risk to the reviewer and, therefore, may not be as diligent in answering questions. Moreover, there may be some confusion with the policy effective date. If the reviewer has concerns with an area of the application, but cannot reconnect with the client in a timely fashion, is the policy not valid until the review is complete?”
In its submission to the CCIR, State Farm Canada argued that a licensed intermediary review of online applications would create an uneven playing field. “Imposing a requirement that providers attempt to ensure that all online purchases suit consumer needs by having a licensed individual review each purchase for suitability could actually impose a more onerous standard on providers in the online environment than in other environments, which we believe would be inappropriate,” stated Barbara Bellissimo, senior vice president and chief agent - Canada for State Farm Insurance.
However, brokers contend the complexity of the insurance product, coupled with the self-fill applications of online websites, pose a high risk of consumers making errors, misunderstanding coverage, overlooking optional protection and binding policies without review.
IBAO’s Carroll cites the example of optional increased accident benefits in Ontario auto insurance, which may not be properly identified in an online transaction. “IBAO is of the view that if advice by a licensed intermediary is a requirement in the physical world, the same obligation and involvement should exist in the virtual world,” Carroll says. “Also, an insurance product should not be finalized online without interaction from a licensed intermediary,” he adds.
STANDARD OF CARE
“It’s easy for online sellers to create websites with images and language evoking ‘relationships,’ leading consumers to reasonably assume they are getting the standard of care that has been inherent in face-to-face insurance transactions with intermediaries for decades,” IBABC noted in its submission.
“No one wins, except perhaps lawyers, when those customers suffer uninsured losses and learn the hard way that they didn’t have the coverage or the advocacy they thought they had, perhaps because they didn’t tick the right box or read and fully understand the fine print.”
In particular, B.C.’s broker association wants to see more attention paid by regulators to what actually constitutes a “legal insurance contract” over the internet. The submission lists some key questions:
• Has the consumer entered into a contract when he lands on the seller’s website?
• Is it when he hits the “I accept” button at the first screen, the last screen, when the credit card payment has been authorized, or on delivery and final acceptance of contract documents?
• Is a signature required?
• What types of electronic signatures are acceptable?
• Are the rights and obligations of other named insureds adequately handled?
• How might the terms of usage of the website be used to commit a customer to terms for the insurance contract of which he may be unaware?
Some of the uncertainty around the actual purchasing and legal binding of an insurance contract led the Insurance Brokers Association of Alberta (IBAA) to suggest a “cooling off “ period for consumers to reflect on their virtual buying decision.
“Transactions undertaken on the internet when an intermediary is not present for a significant portion (of the) process often results in decisions made with insufficient information,” the IBAA notes. “A cooling off period allows for second thoughts and the obtaining of additional information to ensure the product purchased meets the insurance needs of the consumer.”
In addition, the Insurance Brokers Association of Nova Scotia (IBANS) identified a topic unaddressed by the CCIR discussion paper: professional liability in the case of online sales. “There is some question of accountability and consequence in the event of a consumer who purchases online without receiving advice and subsequently has a claim impacted or denied,” IBANS stated in its submission. “Is this an errors and omissions situation and, if so, whose E&O coverage, if any is to be afforded, would answer?”
Amidst these concerns, the CCIR suggested in its discussion paper a host of other possible consumer protection measures that may apply to online insurance. These varied from ensuring consumers know they are dealing with a regulated entity by posting required information about the company online (and possible links to regulator sites) to imposing legal obligations on providers’ websites for disclosure of necessary product information to addressing personal information and security risks.
SIGNED AND SEALED?
Another interesting point raised by the CCIR is whether or not electronic forms and signatures for certain transactions, such as termination of insurance contract by insurer or designation of beneficiary, should supplement paper-based processes. For example, a termination of insurance contract is required to be sent via registered mail. In recent revisions to the provincial Insurance Act, both Alberta and British Columbia kept this requirement intact, although some suggest that electronic forms and signatures are just as, if not more, valid as paper forms.
“The termination of insurance contracts could be done by electronic means as easily and safely as paper format,” The Co-operators stated in its response to CCIR. “It can be argued that electronic means are as effective, and as likely to come to the consumer’s attention, as a registered letter.”
State Farm’s Bellissimo pointed out that “several U.S. states have recently enacted legislation that allows insurers to communicate with consumers completely electronically, including electronic delivery of cancellation and non- renewal notices.”
While regulations for online sales of insurance do not currently exist in Canada, certain provinces, such as Ontario, have enacted general electronic commerce legislation. Other jurisdictions, such as the U.K. and the European Union (E.U), have set out regulatory structure and oversight for the sale of both online insurance and financial services products.
In the U.K., the Financial Services Authority (FSA) regulates e-commerce and distance contracts though rules of conduct that apply to firms and brokers, as noted in the CCIR paper. It provides “key rules” for general insurance brokers that set out requirements for distance contracts pertaining to information provided to consumers, the ability for consumers to receive the contract on paper, the right of consumers to change the means of distance communication used and information made accessible to the consumer about the name of the firm, geographic location and its registration with the regulatory body.
The E.U. has also implemented regulations for e-commerce in financial services through a 2002 directive that applies to all member states. The directive states:
“Because of their intangible nature, financial services are particularly suited to distance selling and the establishment of a legal framework governing the distance marketing of financial services should increase consumer confidence in the use of new techniques for the distance marketing of financial services, such as electronic commerce.”
The directive creates a set of obligations for the service provider related to information about the provider, the financial service offered and information about the contract. It also sets out rights for the consumer, including required information about redress procedures and the right for customers to withdraw from the contract within 14 days (or 30 days for certain life insurance products), subject to certain terms and conditions.
Broker groups, such as IBABC and IBAO, say that they would support such regulatory measures in Canada. “We support modernization, which increases competition and leads to serving consumers more effectively,” Carroll comments. “However, we caution against moving too quickly to the internet without significant controls being in place to protect the public interest and maintain confidence in the insurance sector.”
Direct insurance groups and companies indicated in their CCIR submissions that they are not opposed to a framework governing online distribution of insurance per se, but would prefer principle-based regulations that promote best practices.
“Electronic commerce will continue to evolve quickly and other forms of transactions, such as mobile delivery, may become more prevalent in the near future,” CADRI noted in its submission. “In this environment, it will be difficult for CCIR members to ensure that the regulatory framework remains current unless a principles-based framework is adopted. A principles-based framework can be more easily harmonized across jurisdictions,” the associated noted.
“Both insurers and consumers can equally benefit from the expanded use of the internet,” The Co-operators observed. “This can be achieved through best practices and regulation where required.”
For example, the provision of basic product information “should be considered more of an insurance best practice, as opposed to a regulatory requirement,” the company suggests. “Moreover, it would be extremely difficult for a regulator to define, monitor and enforce such provisions with the variety and complexity of products in the market.”
Social media, while not a specific focus of the CCIR electronic commerce issue paper, was cited in several submissions as an emerging area of electronic commerce that will involve increased consumer and insurer interaction.
“Even electronic communication via email or a web-based secure messaging system is no longer cutting-edge,” State Farm’s Barbara Bellissimo observed. “Many consumers want to deal with insurers via text message or through mobile apps. Legislation should be technology-neutral and allow us to communicate with our customers in the method they prefer, while effectively accounting for information security and privacy concerns.”
FEEDBACK UNDER REVIEW
In terms of future directions for the CCIR Electronic Commerce Committee, the regulatory body has received 25 submissions to its issue paper and is currently reviewing the feedback. “If CCIR agrees that significant issues exist, the committee will develop recommendations for regulatory changes,” the council notes on its website. It has not outlined a timeframe for this process.
“To date, we are in a holding pattern waiting to see what the CCIR recommendations are based on the input that they have received,” Carroll says. “I am not aware of when we will see that report.”
Judging by the submissions and level of interest in the topic, there is an emerging sense that the initial discussions should translate into clear and consistent principles that govern all online sales of insurance products.
“The consumer protections already inherent in insurance transactions should not be compromised for the sake of an online delivery method,” IBABC observed in its submission. “Customers may not be demanding a regulatory framework, but they expect that it will be there.”
The larger question is whether or not regulators can devise a broad and flexible enough set of guidelines to regulate a rapidly changing electronic commerce environment, while ensuring consumer protection in the virtual world.
That will be a formidable task in the months and years ahead.