E-INSURANCE: BREAKING DOWN REGULATORY BARRIERS

With the recent approval of federal and provincial laws paving the way for the development of e-commerce, property and casualty insurance regulators in Canada face the tough decision of whether or not online buyers need the extent of “hand holding” that has traditionally been applied to consumer insurance purchases. Despite the new legislative offerings which have opened the door to legalized electronic contracts, some insurers are concerned that outdated requirements contained in the various provincial insurance acts will continue to take precedence in law, thereby negating any advantages given to other e-retailers. Faced with this uncertainty, and the currently exceedingly high cost of operations in meeting the requirements of the provincial regulators, insurers believe there is a danger that the industry will fall behind in research and development in the e-commerce race before the “online buying wave” even begins.

The provincial regulatory barriers have to be broken down before online buying of insurance can become a realistic marketplace, many insurance companies say. And, despite recent government moves to legally recognize “electronic signatures”, a concern exists within the p&c industry that these “broad e-commerce laws” – such as the federal government’s “Uniform Electronic Commerce Act” under Bill C-54 – will not hold up against the existing insurance acts which maintain restrictive wordings requiring the physical delivery and signature of policies.

Kanetix.com is an online company which recently drew attention to the “legal shadows” currently pertaining to Internet insurance selling. Formed in late 1999, Kanetix claims, “we are Canada’s first and only online insurance marketplace”. The company regards itself to be an online information portal providing product details and price quotations on a broad range of financial services, including property and auto insurance. Should a buyer express interest, the request is processed through to the product provider in question, and no contractual agreement is concluded on the Kanetix site.

Among the concerns regulators have with Kanetix is that one of the company’s major stakeholders is Canada Life which is also one of the product vendors represented (in total, Kanetix represents more than 28 life and p&c insurers). Public disclosure of vendor shareholding in operations such as Kanetix which claims to be offering independent information to consumers, is an issue, confirms Jim Hall, the superintendent of insurance for Saskatchewan. Hall also sits on an e-commerce investigation committee of the Canadian Council of Insurance Regulators (CCIR).

Another disagreeable factor over how Kanetix operates is whether or not the online portal is actually retailing insurance, and should therefore under the existing insurance laws be licensed across the provinces it operates in. Kanetix’s founders Gregory Ellis and George Small stand by their corporate statement that they are merely an “information provider” supplying comparative pricing information to consumers. So far, regulators in Ontario, the Atlantic provinces and Alberta have agreed (in some cases reluctantly) that Kanetix is operating within the confines of law.

Regulators’ perspective

Understandably, insurance company commentators in this article note, regulators have to ensure that their prime mandate, namely the protection of consumer interests, continues to be effectively enforced in a new commercial era where the borders of “jurisdiction” are being rapidly erased.

A case in point is a complaint brought before the Financial Services Commission of Ontario (FSCO) last year where a consumer had purchased coverage over the Internet and, having suffered a loss, found that the claim had been refuted by the insurance company. The underwriter in question turned out to be registered in New York and the company had used a standard U.S. policy exclusion not applicable in Canada. This raised the issue of applicable jurisdiction in terms of location of the insurer versus that of the coverage of the policy.

Insurance regulators have also expressed concern over whether the latest e-commerce laws, which in a broad manner are intended to unshackle online retailing, should be applicable to insurance contracts as consumers have always been afforded greater protection when purchasing financial services (for instance, the “cooling off period” before a contract becomes legitimate).

To address some of these issues, the CCIR formed an investigative committee last October to research and make recommendations on consumer protection with regard to online buying. “Regulators have done a good job of ensuring that Canadian consumers are protected when making traditional insurance transactions. We now have to extend that protection to transactions made over the Internet,” comments CCIR chair Winston Morris.

Hall, who sits on the CCIR regulatory committee, says privacy of consumer information exchanged over the Internet is one of the big issues as well as the accuracy of information supplied by vendors. He does not, however, believe that the insurance acts have to be rewritten to clear the way for online insurance buying (Hall stresses that his views are his own and not necessarily that of the committee). “I think industry standards are required to gain clarity…If the industry adopts guidelines and best practices [to online selling], we won’t necessarily require a rewriting of the insurance acts.”

The new e-commerce laws have to be seen as an immediate and “short term solution” to liberate online selling, says Brian Reeve, a senior partner at Cassels Brock & Blackwell. As such, the regulations pertaining to insurance will eventually have to be brought up to speed, but in the meantime, Reeve expects the regulators will apply a “progressive attitude” to their interpretation of the existing laws in context to the e-commerce legislation. “I think a lot of insurers will be conservative in their approach [to online selling] until someone goes to court [the outcome setting a precedent to the legal interpretation of the laws].”

Barriers to business

A research report titled “Barriers to Business” compiled on behalf of the Canadian Association of Direct Response Insurers (CADRI) by consultant Lawrie Savage points out that the existing insurance acts in terms of their legal interpretation do, in many cases, restrict true electronic selling without physical follow-up of documentation. The report in question is a review of the Ontario Insurance Act and highlights specific wordings restricting e-insurance. “The objective of the review is to identify sections of the Act which, by their wordings, tend either to preclude or to impair the efficiency of modern electronic methods in the business of insurance.”

In completing a search of the Ontario legislation using the following phrases or words “in writing” or “written”, “signed” or “signature”, “by hand”, “by mail”, and “by personal service”, Savage found numerous references to the above, but notes that references to “writing” do not on their own exclude electronic versions of a contract. “…we believe an electronic version of a document is ‘in writing’. In our view the phrase ‘in writing’ means that text must be written down as opposed to ‘verbal’. We see nothing in the phrase itself to suggest that ‘in writing’ means, for example, written on paper as opposed to written on a computer disk or other electronic medium.”

However, Savage points out, when “writing” in conjunction with other phrases are combined, there would indeed appear to be legal barriers blocking the course for a legitimate electronic insurance contract. For instance, he refers to section S124 of the Act as an example: “All the terms and conditions of the contract of insurance shall be set out in full in the policy or by WRITING SECURELY ATTACHED to it when issued, and, unless so set out, no terms of the contract or condition, stipulation, warranty or proviso modifying or impairing its effects is valid or admissible in evidence to the prejudice of the insured or beneficiary.” The wording used definitely indicates a “physical reference” of “securely attached”, he notes, which suggests that both the policy and policy terms will have to exist in a hard copy format. This, and similar “physical references” such as “by mail”, which are contained throughout the Ontario legislation has created ground for legal uncertainty, Savage says.

CADRI has used Savage’s report to lobby the various provincial insurance regulators for reform, confirms the association’s president Benoit Long. He points out that most of the insurance acts were drafted at a time when e-commerce was unimaginable. Uncertainty on the legislative front has definitely been a formidable factor deterring insurers from taking their online sites the next step further to actual selling, he confirms. “No one has been able to take this beast by the horns.” Long adds his voice to those concerned over the effectiveness of the new e-commerce legislation in relation to the insurance acts. And, he adds, “we’re not alone, many brokers in Ontario are pushing the envelope as well”.

Direct insurer views

“The political reality suggests that we are not going to see sweeping regulatory change, but we are taking small steps,” says Andrew Rogacki, president of RBC Insurance. The problem is really a complex interwoven web of interactions, Rogacki observes, with the players ranging from the consumer, regulators, insurers and intermediaries. “I’m usually one of the more aggressive [proponents] when it comes to freeing the market, but this [online insurance buying] is really new, so caution is required from every side.”

Explaining some of the complications concerning online selling of insurance, Rogacki notes that, just from a regulatory standpoint, the issue goes beyond consumer protection and includes taxation. “How do you tax online transactions, and an argument exists that since there’s no specific source of the transaction that it shouldn’t be taxed at all.” Other drawbacks to the e-insurance problem is developing effective underwriting and claims management tools, while online buying volume currently does not justify the investment by insurers into the electronic marketplace. “When you put all of this into a bag and shake it up, then you can understand why the regulators are being careful,” he adds.

Many of the problems being experienced with online selling of insurance are not knew to direct insurers, says Colin Brown, a vice president at west coast-based Canadian Direct Insurance. The same issues of policy paperwork clearance exists with call-center operations, and the need to carry through with manually issued policy documents adds significantly to the cost margin. And, he adds, the business volume really is not there, “we’re as an industry basically nailing our feet to the floor on the e-commerce question as the lack of viable business combined with the regulatory hoops that have to be jumped through simply make it not worth the effort of developing online engines”.

Notably, Brown observes, several U.S.-based online insurance quoting services have recently run into financial problems because of the operational costs involved relative to the low level of online buying. “We’ve investigated the possibilities, and it would take several hundred thousand dollars invested to develop an online buying system – the potential business presently does not justify it.”

Although the latest e-commerce legislative offerings are mostly irrelevant to the current state of online insurance buying, Brown does feel that the regulators are showing a willingness to move ahead. “There is a concern that the insurance legislation is outdated, but our own discussions with the B.C. insurance regulator have been very positive, there is an awareness that the insurance legislation has to be updated.” Overall, Brown believes the next step forward will have to be driven by consumers. “The deciding factor [regarding the feasibility of online buying] will be a significant push on the public side. But, there’s no question that if the business volume was there, we could achieve significant cost savings by cutting out documentation follow up [after a sale has been made electronically].”

The problem of provincial regulatory barriers goes beyond “the future of e-insurance” comments Jeff Contant, president of Direct Protect’s parent company HB Group. One of the biggest hurdles in the path of direct writers has been provincial licensing for both underwriters and intermediaries. The group recently had to cut back on Ontario staff with non-resident licenses serving its Alberta business as the cost of operations including ongoing education became excessive, he adds. “It became more cost-effective for us to pay for the housing of staff in Alberta.”

The “bricks and mortar” requirements placed on insurers by the provincial regulators, as well as the lack off harmonization of those rules, are the real barriers to business which have to be overcome, Contant states. While insurance e-commerce is currently not there in the numbers, this situation will change, he warns, which will refocus the debate on the current inadequacies written into the insurance laws. And, he predicts, “it’s not a case of if, but when, computers will be used to deal with interactions in an intelligent manner and there won’t be an intermediary involved in the transaction. This is when we’ll have a real issue over e-commerce and the realities of the market versus the legislation – at that point, the entity [insurance engine] will have to be licensed.”