Defining Ontario’s Insurance Regulation

With the creation of the Financial Services Commission of Ontario (FSCO) in 1998, the province took on the task of reconciling the interests of consumers with a patchwork quilt of industries governed by almost a dozen different set of rules. That balancing act fell squarely on the shoulders of Dina Palozzi, first commissioner, now chief executive officer and superintendent of financial services for the commission.

Palozzi came with impressive credentials: an MBA from York University and 28 years of government service, including positions in the provincial ministries of transportation, education and correctional services. But her real strength lay in the fact that, as deputy minister of revenue and financial institutions, she was directly responsible for merging the province’s insurance and pension commissions and the finance ministry’s deposit institutions division into one body. “I went from being the deputy responsible for creating a new organization to leading it,” she explains. “It was a good transition — I had the history, I understood the intent.” And, while she is proud of the smooth transition that has taken place, her sights are now set on creating the same kind of cohesion in the regulatory framework guiding the various financial sectors.

For the insurance industry, this vision translated into a 1998 discussion paper on proposed changes to insurance regulation. Recommendations included removing corporate ownership restrictions on agencies and brokerages, and removing the full-time, sole occupation requirement for agents and brokers. Palozzi restated the commission’s commitment to loosening up these restrictions in a recent address to the Insurance Bureau of Canada (IBC). Coming up with a regulatory reform package was not an easy process, Palozzi notes. This is partly because of the desire to harmonize regulations with those of other provinces and across financial sectors, she adds. “We’re finding we’re having to work with a lot of other bodies to say, ‘what kinds of things are you working on. Let’s compare notes. Let’s make sure we don’t do something stupid in terms of that rule and that rule, that both affect the same person out there who just happens to hold multiple licenses.'”

Provincial harmonization

The same applies to companies operating at a national level, struggling to meet different provincial standards. As chair of the Joint Forum of Financial Market Regulators, Palozzi wants to see regulations harmonized among the provinces. Something as simple as the standard licensing application for insurers across the country, is “a big thing for companies,” she says. “It takes their money and their effort to comply with ten different sets of requirements.”

The more complicated the regulatory framework gets, the less consumers are protected, Palozzi points out. “What I’m concerned about is what it means for the consumer in terms of possible confusion. Consumers should know who they’re dealing with. They should have information to make choices about what they’re buying. The more complex we make the rules, the more confusing it is to the individual consumer.”

FSCO found out first-hand just how complex the insurance landscape is when a proposal was submitted to create a self-regulating body for the life insurance sector. The idea of a “life agent council” had been bandied about for about a decade, Palozzi says. But lack of consensus within the industry led her to reject a proposal submitted and embark on a consultation process. “One of the first things we learned, and maybe we should have known but we didn’t, was here we are dealing with an industry that is moving to multi-licensed intermediaries, selling different products and services to consumers.”

Creating one body to regulate life insurance brokers, which would then be regulated by other bodies because they hold licenses to sell a variety of financial services, “isn’t a modern idea anymore,” she says. The focus now is on refining the rules rather than creating yet another body to administer them.

However, Palozzi has not given up on the idea of a single organization to regulate the entire insurance industry. The discussion paper’s recommendation to establish an Insurance Distribution Regulatory Board is now “on the backburner,” she admits. That said, she is adamant that a single approach will ultimately be the way of the future. “I don’t like to give the idea that it’s dead. In fact, we may have to revisit it and make it much broader than insurance distribution.”

Self-regulation options

FSCO’s future “regulatory model” may not necessarily replace existing bodies such as the Registered Insurance Brokers of Ontario (RIBO), Palozzi comments. “You could have looked at it [the discussion paper recommendation] either way — to have this model take in RIBO or to have RIBO become something broader.”

In fact, she sees RIBO’s approach as a good model for industry self-regulation. However, after the release of the Mackay Task Force Report and the federal government’s subsequent white paper on financial services reform — adding another group to the already muddy regulatory waters was not appealing. “We sat back and said, ‘Look, does it make any sense right now to create another body? How do we deal in a much more coordinated fashion with these people out here who are multi-licensed, who have to deal with different rules and different regimes?'”

Future direction

FSCO’s attention is focussed on updating the regulations. The emphasis now is to update the rules to account for changes in the way brokers do business. “As [brokers] look at the opportunities out there, and as the consumer becomes more and more sophisticated, there’s pressure on the intermediary to satisfy a range of needs.”

Submissions to the finance minister recommending the removal of sole occupation and ownership restrictions can be expected within the next couple of months, she adds. The insurance industry is also awaiting the release of FSCO’s discussion paper on “advertising selling inducements,” although an outcome is not expected before the fall. “It’s going to be an important paper. And it’s going to be contentious, because there are so many views. I know people in the brokerage community who say, ‘don’t allow any inducements, don’t even open the door’ [due to a perception direct writers will apply inducements through their powerful media campaigns]. I don’t think that’s realistic in today’s environment, and I don’t think it’s the best thing for consumers. Why shouldn’t consumers be able to have the advantage that kind of approach might provide them.”

For example, Palozzi refers to the auto market where FSCO has adopted the view that if a selling inducement controls or reduces risk, then it’s an appropriate thing to offer, but it has to be part of the cost of the overall premium. However, whether that standard can be translated to other forms of insurance remains to be seen. “If you’ve been induced to buy something you don’t need by the attraction of a television set or a toaster — should the government control that? Well yes, because you’re talking about the financial health, the financial security of its taxpayers.”

Market conduct

Market conduct is where the commission should be putting its focus, she says. This includes branching out into claims management audits required under the 1996 auto insurance rates act to take in group auto plan companies. And, this year the commission is launching market conduct reviews of life insurers, including self-assessment questionnaires. But, the balancing act of market regulation reform is not about making it more difficult for companies to do business, insists Palozzi. “Our overall goal is to protect the consumer. In order to that, we have to make sure we’re supporting a healthy, competitive marketplace. We can’t develop rules that are intended to protect the consumer, but choke the industry.”

Juggling the interests of consumers and the insurance industry is a fine balancing act says Dina Palozzi, the superintendent of Ontario’s relatively new financial services watchdog body, the Financial Services Commission of Ontario (FSCO). And with several highly charged issues on FSCO’s immediate agenda, including broker corporate ownership, multi-licensing and advertising selling inducements, Palozzi is sure of one thing: the year ahead is going to be busy.