Spokespeople for major insurers including Manulife , Sun Life , Great-West Lifeco , and Standard Life declined to comment on the issue and referred the questions to the Canadian Life and Health Insurance Association. Frank Swedlove, the association's president, said in an e-mailed statement that "the issue of conflicts of interest - real or perceived - arising from compensation is one that the life and health insurance industry, and its regulators, take very seriously."
But several high-ranking executives at Canada's largest insurance companies talked to The Globe and Mail about the lack of disclosure and the problems it has created. They only did so on condition of anonymity, because they feared that by speaking publicly they could face a backlash from the brokers who sell their products.
"We've gone out and said we want to discontinue the incentives, but essentially the brokers won't give you policies if you did that," one senior executive said.
"The incentives breed a type of behaviour that's not good for the industry."
While the industry's workings are opaque to consumers, the picture is much clearer to professionals like Jeff Schaafsma, chief risk officer for the city of Surrey, B.C. He is an expert in buying insurance, and must manage file cabinets full of complex policies to cover everything from city employees to construction sites.
"If you come in from the outside and look at the insurance industry, you think, 'How could this be so unregulated?' " Mr. Schaafsma says.
"And you think, why would people accept this - handshake deals, and millions of dollars moving around and not really understanding how it's moving? The premium goes up, the premium goes down, and nobody knows why."
Canadians pay about $15-billion in life insurance premiums each year, and another $40-billion in premiums on property and casualty (P&C) policies, primarily for home and car insurance. Last year about 757,200 individual life insurance policies were sold, averaging $271,600 each. New individual policies sold today are almost twice the size they were 10 years ago.
Billions of dollars in commissions flow every year from these sales. Canadian-based life insurers paid $7.2-billion to agents worldwide in 2009, up 26 per cent from $5.7-billion at the end of 2005. A significant proportion of that money was paid to agents in Canada. Foreign-based life companies paid nearly $600-million in commissions in this country, up slightly from $590-million in 2005. Canadian property and casualty insurers shelled out another $3.74-billion in commissions in 2009, which rose 17 per cent since 2005, according to data the companies file with the Office of the Superintendent of Financial Institutions.
Many of the incentives have little, if anything, to do with serving the customer; rather, they're paid by insurance companies to keep the brokers coming back to them.
"For claiming to be independent and working in the best interests of their clients, brokers keep their cards quite close to their chest in terms of what they're being paid and by whom," Mr. Schaafsma said. "It's the wild west."
Commissions, bonuses, perks
Until the early 1990s, major life insurers like Manulife and Sun Life sold the majority of their policies through in-house sales agents, dubbed "captives." But in the past two decades, the industry has evolved dramatically as insurers increasingly looked to outsource sales in order to reduce overhead.
As much as 70 per cent of all life insurance policies now sold in Canada are handled by independent brokers who are compensated primarily through commissions and perks. The agents often work through intermediaries known as managing general agents, which can contract several hundred brokers at one time, giving them more clout with the insurers. The vast majority of P&C sales also occur through brokers.
A good insurance broker in Canada can earn $100,000 annually, but it is not uncommon for take-home incomes to be significantly higher.
Insurance companies use three kinds of incentives to entice agents and brokers to direct business to them. There are upfront commissions when the sale is made; back-end commissions, usually called bonuses or "contingent" commissions, which are often based on the volume of business a broker does with that insurer; and perks.
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