Brokers and insurers query regulators on proposed incentives guidance

National associations representing Canadian P&C brokers and insurers are seeking clarification and amendments to proposed regulatory guidance on incentives management, particularly around the costs of incentives within different distribution models.

In particular, both Insurance Brokers Association of Canada (IBAC) and Insurance Bureau of Canada (IBC) noted the costs of incentive arrangements vary based on the different distribution models, whether broker or direct. And yet, the guidance states the design of incentives should ensure “the cost of the product to the customer does not vary based on distribution method.”

IBC is also concerned the guidance appears to pass “complete responsibility for oversight of intermediaries to insurers.”

The Canadian Council of Insurance Regulators (CCIR) last month published stakeholder public consultation submissions, which included feedback from IBAC and IBC. The guidance said CCIR and Canadian Insurance Services Regulatory Organizations (CISRO) expect insurers and intermediaries (which include brokers, agents, MGAs, third-party administrators, etc.) to design and implement incentive arrangements that include criteria ensuring fair treatment of customers.

Broadly speaking, incentives are monetary and non-monetary compensation offered by insurers or intermediaries to their employees or persons/entities acting on their behalf. This can include commissions, bonuses, entertainment, and contest entry, among others.

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But Section 2.1.3 of the Incentive Management Guidance (IMG), as currently worded, is of particular concern to brokers and insurers. The section states: “The design process of incentive arrangements ensures that the cost of the product to the customers does not vary based on the distribution method.”

IBAC CEO Peter Braid called the guidance “both clear and practical,” but sought further clarity on the intent of the wording in s. 2.1.3. “The cost base for the delivery of an insurance product may differ depending on whether the delivery is through either the direct, agent or broker distribution channels,” Braid said in his submission.

“Variations can occur due to the costs associated with the physical delivery of the product, marketing strategies and the advice and options provided, among other considerations,” he wrote. “Currently, the costs associated with the delivery method can affect the end cost to the consumer, even for an equivalent product.”

IBC vice president of legal and general counsel Mario Fiorino said the guidance “appears to combine the oversight of incentive arrangements across insurers and intermediaries.” Considering the independent and autonomous nature of distribution models in the P&C insurance marketplace, IBC encouraged CCIR/CISRO to incorporate into the proposed IMG a “clear delineation” of roles and responsibilities between insurers and intermediaries when it comes to incentives.

“The scope of the guidance appears to pass complete responsibility for oversight of intermediaries to insurers by stating that ‘the insurer is responsible for the [fair treatment of consumers] throughout the lifecycle of the insurance product,’” Fiorino wrote. “IBC respectfully requests that CCIR/CISRO clarify the intent of the proposed IMG’s scope.”

Fiorino went so far as to request the deletion of s. 2.1.3, “owing to its potential negative impact on a customer’s right to choose the kind, level and value of service desired.” The section introduces confusion, he said. “Different methods of distribution are developed under different cost structures and, therefore, various pricing options. [S. 2.1.3.] would not apply, for example, to online discounts, which are outside the cost structure of the insurance product and which, importantly, benefit the consumer.

“IBC believes section 2.1.3 is broader than its intent and is unrelated to the management of incentive arrangements. The proposed IMG should avoid setting expectations related to methods of distribution that benefit the consumer.”

CCIR and CISRO released the proposed guidance for consultation in February, with written submissions due by Apr. 4. The IMG is intended to complement Guidance: Conduct of Insurance Business and Fair Treatment of Customers, implemented in 2018.

It’s not clear when the guidance may be implemented.

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