Ontario should ask Ottawa regulate all insurers: Auditor General

Ontario’s Auditor General is suggesting that the Financial Services Commission of Ontario (FSCO) should establish formal agreements with errors and omissions (E&O) insurers to verify that life insurance agents are covered, among other recommendations made in her annual report.

It also recommends the province “establish arrangements” with the federal Office of the Superintendent of Financial Institutions to oversee insurance carriers not already overseen by OSFI and to come up with strategies to “mitigate the financial risk” to sponsors and members of defined-benefit pension plans.

The Auditor General’s 2014 Annual Report, released this week, includes value-for-money audits. It has a section on the Financial Services Commission of Ontario (FSCO), with whom 339 insurance companies are registrants or licensees.

“FSCO directly regulated only 18 of 339 insurance companies operating in Ontario,” Auditor General Bonnie Lysyk noted, adding OSFI regulates 279 of those insurers while 42 are farm mutual insurance firms, which are “examined by the Ontario Mutual Insurance Association.” FSCO currently oversees OMIA.

“It is inefficient for FSCO to oversee such a small number of companies, and it would likely be more practical to establish arrangements with OSFI to oversee all insurers,” Lysyk stated.

The auditor general is an officer of the legislature whose role includes assessing “whether procedures to measure and report on the effectiveness of programs and organizations exist and function properly.”

In her 2014 report, Lysyk recommends that FSCO establish agreements, with the E&O insurance providers of all life insurance agents, “to provide FSCO with timely information on agents’ compliance with insurance requirements, and information about consumer claims made against agents.”

All life insurance agents in Ontario are required by law to have E&O coverage in case clients suffer financial losses as a result of negligence or fraud. But FSCO “does not verify the information,” in its online licensing system database of life insurance agents, to ensure that they “have accurately reported on whether they have errors and omissions insurance.”

FSCO “relies on insurance providers to notify it of cancelled policies – even though it had no formal arrangements with the providers to do so,” Lysyk wrote in the report. “FSCO has also renewed licences of (life insurance) agents who were disciplined by other financial service regulators, those who declared bankruptcy, and those with criminal records, because it did not investigate their applications.”

FSCO directly oversees more than 55,000 registrants and licensees in the insurance sector which are not licensed by the Registered Insurance Brokers of Ontario (RIBO). In 1981, FSCO delegated responsibility, to RIBO, for direct oversight of Ontario’s independent general insurance brokers. RIBO’s powers over its members are similar to those of the Law Society of Upper Canada and the Real Estate Council of Ontario, in that RIBO has authority to issue licenses to members, set professional development requirements, administer a consumer protection fund and discipline members.

While FSCO conducts “proactive onsite examinations” of mortgage brokers, it does not do the same for other regulated firms – unless an investigation has been initiated due to a complaint. By contrast, Lysyk noted that RIBO does conduct regular on-site examinations of the brokers that it oversees and has “established a goal to examine every insurance broker at least once every five years.”

FSCO “should explore opportunities to transfer more responsibility for protecting the public interest and enhancing public confidence to new or established self-governing industry associations, with oversight by FSCO,” Lysyk recommended. “Areas that could be transferred include licensing and registration, qualifications and continuing education, complaint handling and disciplinary activities.”

FSCO should also get additional powers, over defined-benefit pension plans, in order to “better address the growing level of under-funding” in those plans in Ontario.

Lysyk recommended that FSCO get the power to terminate, appoint and act as administrator of a defined-benefit pension plan. FSCO currently has “limited powers” over administrators of “severely underfunded pension plans and plans not being administered in compliance with the Act, short of prosecution or ordering the wind-up of a plan.”

Currently, FSCO has the power to issue orders to plan administrators if they fail to follow applicable rules (such as filing documents with FSCO, making the required contributions to their plans and complying with federal investment rules). FSCO can initiate provincial offense prosecutions against plan administrators who fail to comply with FSCO orders. But currently, FSCO has “no power to appoint a new administrator to a pension plan, even when the plan administrator has not met its obligations, unless the plan is being wound up,” Lysyk noted.

As of Dec. 31, 2013, 92% of defined-benefit plans, with more than 2.8 million members “were underfunded and did not have sufficient assets to pay members their full pensions if the plans were wound up immediately,” Lysyk stated in her report this year. That percentage was up from 74% as of Dec. 31, 2005.

FSCO “should analyze the reasons” for this increase, as well as “the potential for plans to recover based on a variety of predictions of economic growth in the province over the next several years, and the financial exposure to the province should the underfunding situation not improve in the next few years,” Lysyk recommended. “It should use this information to identify and recommend strategies and changes to the legislation that could help to inform and mitigate the financial risk to sponsors and members of pension plans, as well as to legislators and taxpayers.

Auto insurance was the subject of the 2011 annual report by then-Auditor General Jim McCarter, who noted at the time that Ontario had the highest claims costs per insured vehicle of all provinces. McCarter recommended that FSCO “examine cost-containment strategies and benefit levels in other provinces to determine which could be applied in Ontario,” and Lysyk followed up on that recommendation in her 2013 report.

Last year, Lysyk noted FSCO “had gathered information through the Canadian Council of Insurance Regulators on benefit levels and coverage available in other provinces in an effort to identify cost containment strategies that could be applied” to Ontario auto insurance.

Lysyk’s 2013 report also warned that the Motor Vehicle Accident Claims Fund “had $109 million less in assets as of March 31, 2011, than it needed to satisfy the estimated lifetime costs of all claims currently in the system.” MVACF – which earns a fee of $15 from every Ontario driver upon issuance or renewal of their licence – compensates accident victims who either have no recourse to auto insurance or who are involved in accidents with uninsured or unidentified drivers.