Deal or No Deal

Many brokers see inducements or rebating as “predatory” and a “race to the bottom,” while some financial institutions and insurers argue that promotional activities and free market forces ultimately benefit consumers. With recent examples of creative marketing arrangements from insurance companies and other groups, the legality of such deals really depends on regulations in various provinces.

INDUCEMENTS: GOOD OR BAD?

Inducements and rebating of premiums are marketing strategies that have deep roots in the Canadian insurance industry. Originally linked more to the sale of life insurance products, the practice received a black eye when some agents rebated premium and then collected full commission for the sale of a policy, which was subsequently discontinued or lapsed. This, and concerns about potential solvency issues among insurance companies, ushered in many of the regulations that currently exist in most provinces prohibiting or limiting inducements and rebating.

Depending on the viewpoint, inducements and rebating are either an “absolute plague on the industry,” as Insurance Brokers Association of British Columbia (IBABC) chief operating officer Chuck Byrne terms them, or “a way for companies to compete and differentiate themselves in the market,” according to Oscar Zimmerman, past chair of the Canadian Association of Financial Institutions in Insurance (CAFII) and president and CEO of Scotia Life Insurance Company.

In fact, groups like CAFII assert that incentives like reward programs are firmly embedded in our economy – and quite popular with consumers. “Consumers are very accustomed to promotional activity, such as collecting points on loyalty programs for purchases,” Zimmerman notes. “This market activity is well understood and accepted by consumers and there is no real reason to exclude insurance purchases.”

Many brokers clearly disagree. “I don’t think it is good for the consumer at all,” says Randy Carroll, chief operating officer for the Insurance Brokers Association of Ontario (IBAO). “The consumer needs to make a decision based on the product and coverage, not on the trinket or substantial inducement that could potentially sway their purchase decision.”

“We abhor the practice of rebating or inducements in B.C.,” adds Byrne. “The bottom line is that it undermines the value of the product, it undermines the pricing of the product and it undermines the value equation of the sales force and distribution of the product.”

Alister Campbell, senior vice president, planning and communications for ING Canada, believes the life insurance orientation of the original rules on rebating were simply “cut and pasted” onto the property and casualty industry. “Practically speaking, I am not sure that our industry has had a thorough discussion on where inducements and rebating fit in,” Campbell says. “If we did, I think we would correctly conclude that in a partnership between a professional broker and an informed consumer, it is unlikely that somebody will purchase more coverage than they need or at a higher price in exchange for a handful of flight points. If we told consumers we think they are lacking in information or not capable of making a decision, I think they would want to have a pretty frank discussion with us. “

LET’S MAKE A DEAL

In today’s marketplace, inducements have evolved from trinkets and toasters to more creative marketing arrangements, including air miles reward plans, affinity programs and even third-party negotiated agreements involving unions or other groups. Some of these promotional activities have recently run afoul of provincial regulations.

Last year, ING Canada launched a marketing campaign featuring the offer of 500 bonus Aeroplan miles for new business and renewal customers, in addition to the awarding of one point for every two dollars paid in premium. While the use of air miles for payment of insurance premiums is allowed under current Ontario regulations, the offer of bonus miles was considered by Registered Insurance Brokers of Ontario (RIBO) to be an inducement. In October 2006, RIBO cautioned brokers participating in the campaign to “be aware of their potential exposure to misconduct proceedings.”

ING complied with RIBO’s decision and removed the “500-point welcome” aspect of the marketing program. But Campbell says it has continued with the other offers contained in its Aeroplan program, which rewards customer loyalty – something he says consumers have asked for in focus groups that ING has conducted.

“Nationally, this program is out and it has been tremendously successful,” says Campbell, who notes that only RIBO and regulators in Manitoba objected to the marketing campaign. “Our brokers are supporting it and we have tens of thousands of customers already enrolled.”

For RIBO CEO Jeff Bear, the amount of the ‘bonus’ reward is not the issue. “We have had programs in the past where the offer on the bonus miles was substantially more than that, I think in one case it was 5,000 miles,” says Bear. “But the amount of the miles doesn’t matter. It is the principle. We wouldn’t look at it on the basis of, well, 500 air miles is meaningless.”

Carroll was also involved in the negotiations with ING. He says the prohibition on inducements is straightforward in Ontario. “In the ING case, the reward was nominal, but there is nothing in the Insurance Act that allows for nominal inducements,” he says. “Inducements are excluded, plain and simple.”

Another recent example of an inducement involved the Canadian Auto Workers (CAW) union, Aviva Canada’s subsidiary company Traders, and broker Breckles Insurance. In September 2005, the CAW negotiated an agreement with Ford Canada, GM and DaimlerChrysler for members to receive a $1,000 auto insurance discount if they purchased or leased eligible vehicles. The only hitch at the time was that the insurance could only be purchased through Breckles and Traders, which administered the CAW group home and auto insurance program.

IBAO strongly voiced its concern about this arrangement in late 2005 and into 2006. “It steered the business based on an inducement,” says Carroll. “I understand it was part of a bargaining agreement, but when it steers a product to a single insurance company through a single broker, that is where the concern comes in.”

Aviva Canada responded to broker concerns and negotiated with the CAW to remove the single source restriction on insurance. “Our view is that the $1,000 insurance benefit should apply regardless of where the insurance is purchased,” said Igal Mayer, president and CEO of Aviva Canada in a letter to brokers. “This is consistent with Aviva’s position of supporting maximum consumer choice, and supports the broker channel.”

The negotiations, which involved IBAO and the recommendations of RIBO and the Financial Services Commission of Ontario, were successfully concluded in June 2006. “We were satisfied with our persistence and the persistence of Aviva Canada to convince the CAW to open it up,” say Carroll. “The consumer can now make an informed choice of what is best for them in regards to a service provider – whether it be an agent, broker or direct writer for that matter.”

INDUCEMENTS: FLOODGATES REMAIN CLOSED

The ING and CAW/Traders examples are just two of many marketing schemes and arrangements swirling around the property and casualty insurance marketplace. Carroll says his association has been involved in closed-door negotiations with several insurers in the past few months related to marketing campaigns.

“We have been pleased with some of the suppliers we have worked with over the past couple of months that have come up with schemes they thought were acceptable,” says Carroll. “We were able to meet with them and it didn’t hit the press because we had discussions and they understood there were concerns on the broker side.”

What is strictly prohibited in Ontario is either completely or partially permissible in other provinces. Alberta r
epresents the other end of the spectrum, with provincial regulators lifting restrictions on rebating or inducements in the mid-1990s. Insurers and brokers are allowed to offer incentives to buyers, but this has not unleashed a flood of marketing activity, according to Independent Insurance Brokers Association of Alberta (IIBAA) CEO Harold Baker.

“It is clearly not happening to a major extent here,” Baker notes. “There has been the odd broker who has tried it, but in discussion with those brokers, quite frankly, there has been little success.”

There are several possible reasons for the relatively sparse activity in Alberta in spite of a more flexible regulatory environment, including thin margins for broker commissions and the reluctance of insurance companies to “give away their money,” according to Baker. “But I think the main answer is that consumers are more discriminating in terms of how they buy insurance. They are not going to base a decision on their coverage, liability and future health care on a toaster.”

Baker also notes that reward or customer loyalty plans are the most likely area of inducement for insurance in the near future. “The simplest thing to do appears to be the companion award programs, whether through banks, credit unions or airlines. That seems to be where most of the inducements come from,” he says.

In B.C., Byrne says activity related to inducements has slowed down as well. He notes this is the case even though the province brought in amendments to the Financial Institutions Act in 2004, allowing for rebating of up to 25% of the face value of the policy. The broker’s association has long argued for a “test of materiality” when it comes to inducements and rebating to distinguish between smaller promotional items and significant discounting. It did not, however, work out as planned.

“Unfortunately that turned against us in the last debate, when the government took the idea of a ‘materiality test’ and made it a ridiculously high number to meet somewhere in the middle of what advocates of rebating wanted and what we as brokers wanted, ” Byrne says. “It was completely arbitrary.”

IBABC is continuing its discussions with regulators to amend this part of the Insurance Act. But, thus far, the approach has been to “let sleeping dogs lie,” Byrne says. “The act is in some ways confusing and people are not entirely sure what it does and doesn’t allow. The other fact is that people who want to market this way pretty quickly realize it does not make financial sense.”

The province’s public insurer, The Insurance Corporation of British Columbia, restricts any kind of rebating or inducements on auto insurance policies. “That is an automatic kill-switch here for inducements in auto insurance,” notes Byrne. “On the habitational and commercial side, someone is always trying to dig up a new idea or build a new mousetrap, but they are typically flashes in the pan.”

BROKERS’ BOUNDARIES

Even if inducements are a hit-and-miss game, several brokers say they have to be vigilant of marketing schemes. Bear says regulations in Ontario have been in place for so long that most parties are clear on the rules. Even still, the organization gets questions about what exactly constitutes rebating (a discount of the premium that appears on the face value of a policy) or an inducement (the offer of a thing of value as an incentive to purchase an insurance product). RIBO’s professional development committee does have to make judgement calls from time to time, according to Bear.

“It may well be that certain risk management-type inducements are acceptable, and we have made calls on alarm systems and things of that nature,” he says. “For inducements, we have capped it for general purposes if it is less than $100. We would look at the circumstances. Most of it arises with a broker having a booth at a trade fair or something like that, such as giving away pens. We don’t get too excited about that anymore.”

Larger companies with “deep pockets” tend to garner more concern from brokers. “Even though some of the examples are not excessive inducements, our feeling is if you open the door a crack, you run the risk of leaving the issue wide open for abuse down the road,” says David Hare, president of Petley-Hare Insurance Brokers and a member of the IBAO executive involved in recent negotiations with insurance companies. “If you allow it in, it really makes it tough for the small business person on the front lines.”

RACE TO THE BOTTOM

This point is echoed by IBABC, which noted in a recent document: “Rebating creates a race to the bottom that guarantees that only those with the deepest pockets will win.”

For Carroll, the main criterion is whether the inducement is related to quoting for business, which is allowable in Ontario, or tied to the actual purchase or renewal of a policy, which is prohibited. “You see a lot of true marketing schemes, where you have insurance companies that are offering ‘x’ amount of dollars or trips or incentives to obtain quotes,” he says. “But if it is tied to the sale, that is where the issue lies.”

Groups like CAFII argue this distinction is selective and that all prohibitions on rebating and inducements should be removed. “We prefer an open and competitive marketplace with regulatory streamlining wherever possible to help manage costs of compliance,” says Zimmerman. “Companies should not be restricted in their ability to offer beneficial promotions that encourage and reward consumers for considering and purchasing insurance products.”

Campbell would also like to see restrictions lifted, but for the benefit of the brokers. “Fundamentally in our minds, these loyalty programs and other innovations we offer give our brokers an ability to compete with direct writers and the banks, which work really hard on their Web sites to attract customers through points programs,” he says. “Helping brokers compete against new channels is going to require more innovation, not less.”

The question of what kinds of inducement or rebating deals are permissible is, and will continue to be, contingent upon regulations in specific provinces. But how far insurance companies and financial institutions are willing to push the envelope may also be reflective of market conditions – in terms of growth targets and market share.

“Companies are having a tough time gaining market share, and it’s no secret that not too many insurers actually hit targets for 2006,” notes Carroll. “So trying to come up with new and inventive ways of gaining market share, that is where things come to light in a soft market.”