Financial incentives for selling insurance: The regulators’ take

Canada’s legal community is reminding the Canadian property and casualty industry about proposed new regulatory guidance for financial incentives to buy insurance.

Among the proposed expectations of Canadian insurance regulators, it will be assumed that once insurers offer brokers financial incentives to sell certain products, post-sale controls must be in place to detect unsuitable sales arising from incentives.

It is assumed the board and executives will be involved in the design of the incentives, which would be consistent with the risk appetite of the insurers. It is also expected that measures would be in place to quantify the effect of the incentive, so that insurers and brokers can measure whether the incentives are producing results that would be unfair to consumers.

In particular, market conduct regulators are focusing their concerns on the following types of incentive arrangements, among others:

1. Bonus rates tied to predetermined sales volumes thresholds without adequate consideration of the consumers.
2. Excessive incentives for cross-selling optional products compared to the incentive for selling only the primary product.
3. Broker commissions linked to premium levels or investment amounts.
4. Renewal broker commission amounts that underestimate the level of continuing services.
5. Lifetime vesting of renewal commissions to brokers, which can result in “client orphaning.”
6. Incentive arrangements that can result in fees or penalties, (e.g., exit fees) for clients.
7. Incentives paid to brokers who aren’t involved in the sale and servicing of the product.
8. Sales contests, sales quotas, bonuses and non-monetary benefits based on sales of specific products over limited period of time.
9. Contests, campaigns, promotions, loyalty or recognition programs that are designed to allow brokers to obtain bonuses, rewards (e.g., titles, gifts, goods, hospitality, trips) or privileges (e.g., access to services).
10. Any “chargeback mechanism” that would influence a broker to advise the customer to maintain a product that is inappropriate, so that the broker doesn’t have to repay compensation.

Of particular interest to brokers is that under any proposed incentive design, “the cost of the product to the customer [must] not vary based on the distribution method,” as Albana Musta of Walker Sorensen notes in an article published in Mondaq. In other words, multi-channel insurers could not offer a commission bonus to sales agents that would cause consumers to pay less for the product than if they bought that same product from an independent broker (and vice versa).

When designing the incentive, Stuart Carruthers and Andrew Cunningham of Stikeman Elliott stress “key indicators” must be established and assessed to make sure the financial incentives are aligned with the goal of treating consumers fairly.

Examples of key indicators might be:

• Sales patterns before and after a target has been met (looking for indications that a commission grid influences the selection of products sold).
• Penetration rates for cross-selling.
• High lapse rates on new business, poor persistency rates, etc.
• Claims repudiation rates and trends in reasons for rejected claims.
• Trends in sales-related complaints.

The industry has until Apr. 4 to submit comments related to the CCIR’s Proposed Guidance.

Feature photo courtesy of iStock.com/alexsl