Less is More

The sale of insurance as a part of consumer goods transactions has increased significantly during the past few years. Manufacturers, distributors and retailers all view the sale of extended warranties and service contracts, as well as other types of insurance products, as an important source of additional profit. It is becoming more difficult for consumers to purchase any type of goods or service without being offered some form of warranty or insurance coverage. This coverage is usually offered at the point of sale by an unlicensed person.

In November 2008, the Canadian Counsel of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organization (CISRO) jointly released An Incidental Selling of Insurance Report. The purpose of the report was to provide recommendations with respect to whether additional regulation by provincial and federal insurance regulators was necessary regarding the incidental selling of insurance products by unlicensed persons.

The CCIR began reviewing the incidental sale of insurance with respect to licensing and consumer issues in 2007. On Feb. 27, 2008, the CCIR and CISRO jointly released a consultation document in order to get input from industry and consumer associations. The consultation document defined an “incidental seller of insurance” as follows: “a person who, in pursuing activities in a field other than insurance, offers as an accessory, for an insurer, an insurance product which relates solely to goods sold or services offered by the person or secures a client’s enrollment in respect of such an insurance product.”

It is important to distinguish between various types of insurance products that are sold by incidental sellers. Some products, such as lost luggage or towing services in the event of an accident, are not important to the consumer and are often provided for little or no additional cost. As a result, there should be less need for regulation of the sale of these types of coverage. However other products, such as extended warranties on automobiles and consumer electronic products, may cost hundreds of dollars and might include significant limitations of coverage.

Examples of sales by incidental sellers of insurance include the following:

• automobile extended warranties (considered to be insurance in some provinces and not in others);

• warranties on consumer products such as electronics;

• insurance coverages offered as part of credit cards;

• insurance coverages provided by automobile clubs;

• pre-need funeral insurance offered by funeral homes; and

• travel insurance offered by travel agencies.

The definition of an “incidental seller of insurance” in the report does not include an employer “enrolling” an employee under a group life policy since it was not considered to be an offer of insurance. Banks and other lenders that sell group creditor insurance to cover the amounts due on loans in the event of death, disability or job loss are also not covered by the report. Banks and other lenders have an insurable interest with respect to the amounts of loans that are outstanding. As a result, they can offer coverage to their customers under group policies they have obtained.

The report also did not cover warranties. However, for all practical purposes, a third party warranty is an insurance product regardless of how it is regulated in a particular province. The fact that warranties are not directly regulated as insurance in some provinces such as Ontario complicates the regulation of sellers of these products. However, the reality is that warranties are basically insurance products and the sale of them by unlicensed persons may still result in consumer issues that require some form of regulation.

REPORT RECOMMENDATIONS

The report identifies the fundamental question with respect to evaluating the appropriateness of an incidental sale of insurance as follows: “Is the consumer in a position at the time of sale to make an informed decision about his purchase?” The purpose of the report was to provide overall recommendations that would enable each insurance regulator to make its own decisions with respect to how to regulate the incidental sale of insurance. The most important conclusion of the report is that it does not call for the blanket licensing of incidental sellers of insurance. As a result, the report basically recommends that the status quo of not requiring incidental sellers of insurance to be licensed should be maintained. This conclusion has already received significant criticism from various groups including the Insurance Brokers Association of Canada (IBAC).

IBAC wishes to see licensing required for all incidental sellers of insurance products. IBAC’s concern is that unregulated and unlicensed sellers of insurance products are not necessarily sufficiently knowledgeable regarding the insurance products they are selling to enable consumers to make an informed choice. IBAC is basically arguing that a level playing field should exist for all sales of insurance products.

The report provides four basic recommendations as follows:

Improve the application forms and other documents

Many incidental insurance products include exclusions, restrictions and limitations that are difficult for consumers to understand. There are also concerns about the ability of consumers to understand their eligibility for insurance coverage.

The report recommends the use of plain language wordings in all documents provided to consumers.

Improve the training and supervision of sellers

The report recommends that training programs for incidental services of insurance should focus on enabling the seller to understand the product, eligibility requirements and the extent of the coverage. The report also provides that insurers should ensure sufficient procedures are in place to train and supervise the incidental sellers of insurance products.

Provide consumers with an opportunity to assess purchase of the product

The report advocates a sufficient cooling- off period to allow consumers to assess the suitability of the product based on their total financial position, rather than solely with respect to the risk created by acquisition of a specific good or service. The current practice in the industry is to provide a 10-day cooling-off period during which the product can be refunded. The report suggests that a longer cooling-off period be provided.

Obtain statistical information

In order for insurance regulators to be able to identify problem areas, it is important that relevant and reliable statistical information — including the tracking of complaints — be obtained on a timely basis. The report calls for a better system for tracking these types of statistical information.

ALTERNATIVE REGULATORY APPROACHES

The report does not deal with the limited licensing that is provided in some provinces for certain types of insurance. For example, in some provinces it is possible for travel agents to obtain an insurance license limited to the sale of travel insurance. An individual is required to take a course and an exam that are limited to travel insurance. Normal educational requirements for an insurance broker are waived for a travel agent who wishes to sell only travel insurance. This type of limited license is logical because a travel agent is normally in a better position to be able to provide detailed information about a travel insurance policy based on work experience than is an insurance broker.

Many types of insurance products sold on an incidental basis have a low cost and provide relatively limited amounts of coverage. As a result, they are not products that most insurance brokers would be interested in selling.

One interesting statistic in the report is that 65% of Canadian families do not have an insurance broker. As a result, it appears insurance regulators were relucta nt to impose a mandatory requirement for the licensing of all incidental sellers of insurance, since it might deny access to insurance coverage to many Canadians.

In many cases, a knowledgeable seller of a consumer product or service is also in the best position to sell the applicable insurance coverage. For example, a funeral director may be in a good position to provide the necessary advice for the sale of a pre-need insurance policy to cover the cost of a funeral.

There have always been types of incidental insurance products that may technically count as insurance, but insurance regulators have nevertheless decided that these products do not need to be sold by licensed insurance brokers. For example, automobile clubs have traditionally offered a number of services such as towing in the event of an accident. Credit cards have offered coverages including accident insurance and coverage for lost luggage during trips.

SUMMARY

It is unlikely that any significant changes will be made in how incidental sellers of insurance are regulated over the next few years. However, unlicensed sellers are increasingly selling a large number of products on an incidental basis. As a result, more consumer issues may emerge over time. Insurance regulators have taken a practical approach in the past and decided that the non-regulation of incidental sellers of insurance has in most situations been to the benefit of Canadian consumers.

If an insurer chooses to use an unlicensed incidental distribution channel for the sale of insurance, then it is really dealing directly with the public. As a result, a greater onus should be placed on the insurer to provide clear information about the coverages offered to consumers and to take additional steps beyond what would be done when brokers are involved.

Another complication is that insurers are prohibited from paying commissions for the sale of insurance to unlicensed persons. As a result, the incidental seller of an insurance product should not receive any compensation from an insurer. However, many incidental sellers of insurance receive compensation from insurers, often characterized as an administrative services fee rather than as a commission.

Most consumer issues likely arise from a misunderstanding by consumers about what is actually covered and the steps that must be taken to make a valid claim. Better disclosure of the most important terms and conditions of a coverage sold by an incidental seller of insurance would assist in reducing the number of complaints from consumers.

It is clear that a blanket requirement for all sellers of incidental insurance products to be licensed would be both impractical and also not in the best interest of consumers. However, many industry groups, including Insurance Brokers Association of Canada, have raised valid concerns with respect to the varying knowledge and professionalism that exists among unlicensed sellers of incidental insurance. An approach that would expand the number of types of insurance products for which a limited license could be obtained might be a reasonable compromise, balancing the interests between the sellers of consumer products and consumers.