Two of Canada's biggest life insurers found out the hard way that perks distort the market. Senior executives at both firms told The Globe and Mail they raised the price of a universal life policy, only to watch sales of their other products - including the ones whose prices hadn't changed - take a hit. The price increase made the product harder to sell. Brokers told one of the companies that the price change meant it just wasn't worth their time to stay up to date on the insurer's other products.
The competitive pressure to provide incentives comes at a time when more Canadians need impartial advice on their insurance options. For example, Ontario has just decreased the amount of medical benefit coverage that insurers must offer drivers, but consumers can now choose to buy additional coverage. That leaves drivers in the province having to make important decisions on their policies this year. When it comes to life insurance, competition for the coveted baby boomer market has prompted life companies to release a wider array of products, adding more complexity to an industry that is already difficult for many consumers to navigate without the help of an expert.
Yet the brokers have convinced regulators that the inability of Canadian consumers to grasp complicated financial matters is exactly why they shouldn't have to provide detailed disclosure of compensation, according to discussions with insurers, regulators and brokers.
Brokers push back
Critiques of the current compensation system are seldom heard. Consumers Association of Canada says that, owing to limited resources, it is not looking into the matter. The issue is invisible in the political arena.
Proponents of the industry's compensation structure nevertheless say criticism of perks and commissions is overblown. In their view, contrary to what the public might believe, a broker's main job is to prod people to buy life insurance and to plan for their financial futures - not to shop around. "If they spend all their time trying to find the absolute lowest price, chances are they're not spending their time on what they're truly being paid to do," says the top executive at one insurer. "Which is help bring the person to action on something they wouldn't have done on their own."
Mr. Schaafsma of the City of Surrey and his fellow risk managers are a rare voice of dissent. He says that upfront commissions are acceptable, if they are disclosed. However, the hidden perks and back-end commissions are a problem.
"You get a trip to Hawaii - that's a benefit that isn't going to the consumer, it has to flow into the price," he says.
Earlier this year, his professional association, the Risk and Insurance Management Society, issued a paper calling for better disclosure.
The paper, however, has had no tangible impact on igniting a debate that insurance brokers would prefer to avoid - and one that they skillfully extinguished earlier this decade.
The Canadian Council of Insurance Regulators, the umbrella group for provincial regulators, began to probe how insurance is sold in late 2004. The move came after a crackdown was announced in the United States to deal with allegations that a small number of U.S. brokers had rigged the sale of P&C policies to boost their commissions.
The committee found that while some brokers may argue that bonuses and perks do not influence their advice to clients, they may "appear … to result in a potential conflict of interest."
The committee made three proposals. It recommended new legislation or regulation to clarify that the client's interest was to be placed first. It proposed to limit "performance-linked benefits" to insurance brokers, including contingent commissions that are hidden from the consumer. Finally, the committee said there should be greater disclosure of ownership and other financial ties between a broker and an insurer, including the common practice of insurers lending money to brokers to expand their businesses.