SETTING THE STANDARD: Regulators tackle the Internet

As insurers dip their toes into the vast ocean of e-commerce, regulators are donning their lifeguard gear in an attempt to protect consumers and the industry itself from the potential dangers lurking there. At home and abroad, the as yet unknown hazards of online sales are being examined and framework rules put in place. Issues of market conduct, licensing and jurisdiction are posing special concerns that need to be addressed before the e-commerce wave hits.

Although the online selling of insurance currently accounts for a modest percentage of overall volume, some individual insurers are placing considerable emphasis on this form of distribution. These insurers are betting that with exponential growth in Internet usage, the convenience of online shopping, and continuing improvements in electronic security, it is only a matter of time before e-sales of insurance products really take off. This is the environment in which insurance regulators in Canada and internationally are beginning to examine the special problems of electronic distribution of insurance products.

The International Association of Insurance Supervisors (IAIS), of which Canada as whole, and Ontario and Quebec specifically, are members, has recently enunciated three key principles that regulators should keep in mind in connection with electronic distribution. These include:

Rules should be consistent with those that apply to the sale of insurance generally;

Standards of transparency and consumer disclosure should be fully maintained;

Supervisors should work co-operatively with particular attention to safeguarding of personal privacy and outsourcing risks.

The above points are clearly not very detailed principles, but considering the stage of the discussions and the fact that IAIS represents over 100 member jurisdictions, the objectives identified are not a bad place to start. In Canada, the Canadian Council of Insurance Regulators (CCIR) has established a committee, chaired by Jacques Henrichon of Quebec, to look at electronic distribution. In the U.S. some state regulators have dedicated personnel who are surfing the net, checking out the insurance offerings that are being made available to consumers in their jurisdictions. The National Association of Insurance Commissioners (NAIC) is working with the American Council of Life Insurers (ACLI) to determine the feasibility of formal accreditation of websites that meet regulatory standards.

Obviously a starting point from a regulatory perspective is to ensure that insurers are not utilizing electronic means to distribute their products within a jurisdiction in which they are not licensed. Both solvency oversight and market conduct supervision are based on a fundamental licensing assumption that one is able to limit consumer contact to only those insurers which meet the criteria established by the jurisdiction involved.

One of the amazing benefits of the Internet is that virtually any site in the world is accessible from any other place in the world. Thus a basic challenge for regulators is to make sure that the fundamental licensing assumption continues to be valid in a virtual world.

A simple way to determine whether this is the case is to require that every web offering include a mechanism which makes it impossible for persons outside of specified jurisdictions to effect a transaction. Thus when a consumer inputs his or her address, the program responds to indicate that coverage cannot be provided because he or she does not live in a jurisdiction in which the insurer is licensed. This explains the “surfing” being carried out in U.S. state insurance departments – they are searching for sites that do not include this type of mechanism.

Of course the question remains, “what does the regulator do when a rogue site is found?” The information could be emanating from anywhere in the world and there are no ready means of blocking an electronic transmission into a particular jurisdiction. At the moment, one of the main defenses will have to be consumer education. If e-sales of insurance are really going to become significant, consumers will want to have ways of verifying that they are dealing with entities that are meeting the legal requirements within their jurisdiction. This leads to the NAIC/ACLI accreditation idea mentioned above. If some type of icon or seal of approval can be developed that cannot be easily duplicated by anyone wishing to flog their wares over the Internet, then it may be an effective way to offer a degree of consumer protection. However, at present the technology is not yet at a stage where the icon approach can be implemented.

Another possibility is the use of “pop-up” icons that request consumers to “click here” for additional information. This is the technology that comes into play, for example, when you do a search for a used car – suddenly various ads for cars, car parts and so on begin to pop up on the screen. In the case of insurance sales one would be invited to click here to go to the regulator’s website, where the names of the insurers authorized to provide coverage within the jurisdiction would be listed. While this would offer some degree of protection to the consumer, it clearly would not be foolproof.

In the foregoing comments we have focused on the problem of protecting consumers from unscrupulous insurance providers. But looking in the other direction, what is the potential for e-based sales in terms of ability to provide excellence of product delivery?

On a recent project our firm has been working with regulators and industry representatives to identify areas which, from a market conduct perspective, are critical to the delivery of high quality financial services. These include:

Know the client and client needs;

Professional behavior;

No misrepresentation in holding out, advertising;

High standards of knowledge, continuing education;

Maintenance of proper financial records, accountability;

Confidentiality of information;

Disclosure of key information to consumer;

Avoidance of conflicts of interest;

Avoidance of unfair practices;

Efficient and effective complaint procedures.

There is really nothing new here, but it is a convenient checklist of desirable market conduct parameters. Well-designed websites have the potential to meet all of these criteria. For example, the reason it is important for an intermediary to understand the client’s needs is that this provides some assurance that the product will actually respond to those needs.

To this end an online seller can potentially provide the consumer with sophisticated computer-based analytical techniques that will assist with a comprehensive self-assessment of needs and corresponding product matches. In terms of something like “professional behavior”, the website is there for all to see. Does it provide important information that will assist consumers to understand the product and make informed choices? Does it do so in an unbiased and professional way? It is far easier to assess a website in this regard than to assess the performance of an intermediary who is chatting with the client at his or her kitchen table. Is there any evidence on the website of misrepresentation or unfair practice? Does the website spell out what the consumer should do in the case of a complaint or other problem? All of these things are in plain view and can be fairly assessed by both consumers and regulators.

If, and when, online sales of insurance do take off, the online providers will be positioned to respond to all of the above market conduct areas in ways which are unrivalled at the present time. However, lest anyone think these possibilities represent (yet another) forecast of doom for the brokerage community, there are key reasons this is unlikely to be the case. Firstly, there will always be a need for good people to help the consumer directly, sometimes even as an adjunct to a website. Secondly, brokers can be expected to increasingly employ these same electronic methods to conveniently reach their customers.