In a closed-door meeting this summer, executives at one of Canada's best-known life insurance companies gathered at its headquarters to plot the latest moves in their industry's secret war.
It's a war fought with weapons that look harmless on the surface: deluxe trips to sunny destinations, offered to the independent brokers on whom the insurers rely to sell their life policies.
The executives knew they would have to spend at least $8,000 to $12,000 per broker to be competitive. And the trip had to be enticing - something on the order of a Brazilian beach getaway or a luxury trek through Asia.
At a time when low interest rates have squeezed the insurance industry's profit margins, the company knew that if the brokers weren't kept happy, they could easily shift their business to a competitor offering better compensation and perks.
Two key parameters had to be kept in mind. First, a few hours during the week-long trip had to be set aside for a seminar, so that the company could deem the excursion an educational conference. And second, the budget had to include a guest for each broker - even though this doubled the cost.
Buttering up each broker's better half was all part of the strategy. "We say, 'If you want to come here again as a guest, you better tell your guy to sell our stuff,'" said a senior executive present at the meeting.
Although the battle to win brokers' affections has become a defining characteristic of Canada's life insurance industry, it's kept well out of the sight of the consumers, businesses and corporations who are buying policies - and who, the insurers admit, are paying for the trips, too.
Regulators and the industry examined the issue six years ago, and publicly acknowledged that some practices - including how brokers are compensated - weren't in alignment with the customers' best interests. But the brokers pushed back, and little changed.
An investigation by The Globe and Mail has found that attempts to improve transparency in Canada have been thwarted by the industry's successful efforts to water down proposed reforms. Yet at the same time the industry has kept compensation details under wraps, many of its products have evolved into complex financial instruments that are hard for average consumers to comprehend.
When Canadians purchase life insurance now, their broker typically hands them an industry form letter promising that "any insurance product I recommend will be the one I deem to be best suited to meet your needs, without regard to the compensation practices of any one company."
But the promise does not reflect the reality of the business for the big underwriters, such as Manulife Financial Corp., Sun Life Financial Inc., Great-West Lifeco Inc., Standard Life Assurance Co. of Canada, and Industrial Alliance Insurance and Financial Services Inc., and the thousands of brokers across the country.
Rather than scouring the market to find the best coverage, and the best price, for the clients sitting across from them, many independent agents and brokers steer all their business to just one or two insurers, according to a number of high-ranking insurance executives interviewed by The Globe. They favour the ones that reimburse them most generously in commissions, bonuses and perks, such as those all-expenses-paid trips to break up the monotony of a long Canadian winter.
The incentives have distorted the sales process for a sophisticated product and broken the bonds of trust that the insurance industry was built on. The problem, these executives say, is becoming more acute: The industry is locked in a kind of compensation race as brokers push for ever-richer incentives and insurers know they must match or better their rivals' offerings.
Insurance broker representatives don't agree there is a problem. "I don't see consumers worried about compensation in the industry," said Greg Pollock, the head of Advocis, a Canadian association that represents advisers and agents in the financial services industry. "I don't see that there's an issue that needs to be addressed."
Authorities on compensation rules in Ontario told The Globe and Mail they have decided that consumers are better off without the details of trips, commissions and bonuses clouding their decision. And the industry has worked hard to keep it that way.
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.
The latter two are structured with one purpose in mind: to promote loyalty and encourage brokers to bring as many customers to that insurer as possible. The more the broker consolidates his clients' business with a particular insurer, the more lucrative the deal gets.
In life insurance, the upfront commissions have traditionally been high compared with other industries, because the product has always been a tough sell compared with other consumer purchases.
If a customer buys a universal life insurance policy that requires him to pay $1,000 in premiums the first year, the agent is likely to earn a commission of about $600 up front and a further $1,200 in a bonus at the end of the year, provided certain sales levels are met. That doesn't include incentives such as trips, nor commissions for keeping the policy in force in future years.
Brokers also can get paid extra for bringing in an insurer's favourite kind of customers - the kind who stay, or who don't make claims. For example, a broker who sells five group life insurance accounts for Standard Life paying total annual premiums of $3-million could earn a bonus of $30,000 if none of the clients take their business elsewhere. P&C insurers sometimes offer bonus payments for signing policies with "good customers" who file fewer claims.
The principle that a broker's first responsibility is to the client is contained in industry codes of conduct.
Don Bailey, who stepped down last month as the head of Canadian operations for Willis Group, one of North America's largest insurance brokers for corporate and business clients, says the industry and regulators need to tackle the transparency problem.
"What you see is agencies and brokers knowing what their targets are, and knowing that if I can shift this much premium volume to another carrier before the end of the month, or before the end of the quarter, then I can trigger a cheque," Mr. Bailey said. "These [sums]are not incidental. They are significant amounts of money.
"If I'm the buyer, that should put in doubt why somebody is recommending one carrier over another. Is it because they truly believe that carrier is better? Or is it because they have a big cheque coming?"
'White sandy beaches'
Free trips are used by the insurance companies to tell brokers about their products, but they are also tools for instilling loyalty, ensuring that brokers are not tempted to direct business to rival firms, especially in the life insurance industry. The insurance companies detailed this strategy to The Globe and Mail.
Like consumers who sign up for loyalty programs or use premium credit cards, life agents accumulate points as they sell policies for a particular firm.
"I know some agents who say, 'Okay, I'm going to do business with [another] company this year because they've got this convention somewhere, or it's too difficult to meet your criteria to go to your convention,'" said Bruno Michaud, senior vice-president of administration and sales at Industrial Alliance. "At the end of the day, we see a convention for advisers as an award for the advisers for doing business with us. And it's a good occasion to develop a stronger sense of belonging to the company."
In the standard disclosure letter given to consumers at the time of purchasing a life insurance policy, there is a line stating: "From time to time, some companies may offer other types of compensation such as travel incentives or education opportunities."
But well out of the consumer's sight, internal industry documents obtained by The Globe and Mail detailing these perks are fashioned conspicuously like vacation brochures for luxury golf outings, cruises and sightseeing trips. Industrial Alliance's pamphlet shows photographs of crashing waves and exotic flowers, and invites brokers to "enjoy sunny skies while relaxing on sweeping white sandy beaches… Soak up the rays in a world-class resort." RBC Insurance's 'California Dreamin' conference was held at a resort near San Diego.
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.
The ensuing backlash revealed a broker community unequivocally opposed to these ideas. One of many groups to argue against the changes was the Insurance Brokers Association of B.C. Citing a lack of consumer complaints on the matter, the group implied there was no difference between selling insurance policies and furniture or cars. "Name any industry and you'll find mechanisms in place for motivating the sales force," the association wrote in its response to the committee.
Advocis, the Financial Advisors Association of Canada, warned that new restrictions would bind the industry in red tape.
If brokers had to explain complex commissions, such as contingent payments, it would be unduly confusing for the consumer, the group warned. And altering the overall incentive structure could disrupt the workings of a multibillion-dollar industry.
The pushback from the broker community worked. By the time of its final report in 2008, the committee's three key recommendations had been watered down. It no longer backed the idea that "clients first" should be enshrined in regulations, or that limits should be placed on commissions or perks. But the industry would have to start disclosing to the consumer any possible conflicts of interest.
Advocis endorsed the proposals, saying the industry was in fact already adhering to them. And on Dec. 8, 2008, the council of insurance regulators declared the debate over, and thanked the committee for "a job well done."
Brokers are expected to make customers aware of actual or perceived conflicts of interest, but this disclosure takes many forms.
"As you likely already know, agents and brokers in the life insurance business in Canada are compensated by commissions, bonuses and other inducements from the companies we do business with," says a letter that one broker group makes available to clients. Customers are asked to sign the letter, which describes "incentive-based compensation" as an "industry-wide practice," but makes no mention of specific figures.
This is enough disclosure, says Greg Pollock, the head of Advocis. "For the most part, we believe that the current structure of compensation in this country works well."
When it comes to auto and home insurance, the Insurance Brokers Association of Canada, which speaks for 33,000 property and casualty brokers, said its code of conduct requires brokers to disclose compensation - if a consumer asks. "The broker is required to divulge the method by which he is being compensated," said Steve Masnyk, a spokesman for the Insurance Brokers Association of Canada.
For instance, the broker might disclose that he or she will be paid a commission of between 10 and 15 per cent of premiums. Insurers also make general disclosure statements about compensation, usually on their websites, but details are limited.
The Registered Insurance Brokers of Ontario, the self-regulatory body for property and casualty brokers in Canada's largest province, also requires members to hand out a disclosure form that discusses compensation without divulging numbers.
But RIBO still uncovers cases in which agents do not have copies of the disclosure statement they are supposed to provide, through audits it conducts every three to five years. Tim Goff, manager of complaints and investigations at RIBO, says there is "95 to 99 per cent" compliance among brokers on this form.
The Insurance Council of British Columbia, meanwhile, has encountered cases where a broker has told a consumer incorrect information after the consumer asked for details of their compensation.
Mr. Bailey, the former head of an insurance broker, suggests the current system is not enough.
"[Brokers]should declare to the buyer: 'Just so you know, I represent the insurance company and not you. And I'm making significantly more money than you think I am,' " Mr. Bailey said. "Just disclosing the conflicts, in our mind, does nothing."
The 2008 detente with regulators signalled the campaign to head off reform succeeded. The industry diluted the suggested fixes down to a small number of voluntary measures.
"If you look at the system, the compensation, the way it all works, you'd be protecting it too," said a senior executive at a major insurer. "You don't want people asking questions, you don't want to disclose it, you don't want them to know you're going on a trip - because it's pretty good."