Levelling the Playing Field

The distribution revolution has been under way for the past few years and we believe that a select number of players are currently employing debatable practices in order to gain market share and benefit from a non-level playing field. What needs to be done to address these issues? What advantages do these strategies provide?

We are concerned that in three main areas, certain practices in Ontario’s insurance market appear to run contrary to the direction of existing regulations, public policy and the interests of consumers. Specific problem areas include the use of credit, creative interpretations of the definition of group marketing and the continued aggressive marketing practices of those banks with insurance arms. In the long run, the consumer will suffer the consequences at the gain of those employing such practices.

USE OF CREDIT

In recent years, the biggest push we have seen is primarily from online carriers. Our provincial broker association has obtained information that prompted it to ask the provincial regulator to confirm carriers are not using technology to access credit information behind the scenes and/or employing this information to select against certain segments of consumers. No insurer should deem it acceptable to use credit to determine with whom they do business. In rating for an automobile policy in Ontario, it is illegal to use credit to determine rate.

Brokers do not have any appetite or technical wherewithal to access a client’s credit information. Even if they did, they have both a legal and ethical obligation to place the interests of the consumer first. Accessing credit information to treat one segment of consumers differently than another would be a blatant contravention of both our legal and ethical obligations. Proponents of using credit argue it is the best predictor of future behaviour. Whether or not one agrees with this point, the current regulatory reality in Ontario is as follows: using credit — either directly or indirectly — to determine automobile rates is a blatant disregard for the current regulations that govern us all.

GROUP MARKETING

In the area of group marketing, the interpretation of what counts as a bona fide “group” is becoming increasingly creative. It has definitely gone too far when you can obtain a group rate by virtue of being able to spell the word “group.” One dilemma is that, because the filing process is less intrusive, there is no incentive for group providers to filter out risks that no longer qualify at renewal. This creates the proverbial “Hotel California” scenario, in which you can enter a group, but you can never leave.

Who suffers as a result? First, consumers who actually qualify for group rates suffer because their portfolio is potentially flooded with risks that do not have the underwriting characteristics the group was intended to lever. Also disadvantaged are those who choose to play within the rules and have in place an appropriate compliance policy to ensure filed rules are being followed. At some point, the issue of group rating will have to be addressed, whether through clarification of an existing policy or introduction of new guidelines. With the Insurance Act currently under review, perhaps the time for change is upon us.

Given the negative consequences of doing so, why would anyone work outside both the spirit and the letter of the regulations that govern our conduct? Sometimes accidents happen. Another possibility is that the potential gain of calculated business decisions outweighs the potential penalties involved. Either way, it is time for people in the industry truly concerned about this issue to speak up and encourage change.

In a recent submission to government, the Insurance Bureau of Canada (IBC) recommended that Ontario’s industry regulator, the Financial Services Commission of Ontario (FSCO), be given the ability to use administrative and monetary penalties. In Ontario, we support this recommendation, as it provides the regulator with the ability to respond more quickly with penalties that reflect the breach of regulation and serve as deterrents to similar or future behaviour — a system that would easily lend itself to a risk-based environment.

BANKS AND INSURANCE

A third issue, which has significant and broad-reaching implications, is the aggressive practices employed by those in the banking sector that are tied to an insurance provider. During the recent review of the Bank Act, the Canadian Bankers Association (CBA) lobbied for the ability to market insurance from within their branches. If this could not be granted, the banks requested, then at the very least they wanted permission to display material about property and casualty insurance within their branches. The government considered changes to the Bank Act, and then opted to uphold the current regulation that prohibited both in-branch sales and marketing of insurance products at the branch level. It is beyond the scope of this article to re-hash the public policy reasons for why such prohibitions exist. The bottom line is that, for consumers, this issue was laid to rest in 2007.

Or was it? Again, we have obtained information that warrants approaching regulators about the need to make sure banks are upholding both the spirit and the letter of these prohibitions. It remains to be seen how the regulator will react to such information. But clearly this issue is far from over. If anything, what we know causes us to believe the next time the Bank Act is opened, the debate will be far more heated than in the past. With respect to the existing Bank Act prohibitions, we asked for status quo, and in 2007 the federal government granted us the status quo. The role of the regulator is to enforce the status quo.

In an industry that continually reviews market conduct in an effort to ensure the consumer’s priority of interest remains first and foremost, how do the scenarios outlined above reflect what we are trying to accomplish? Simply stated, they don’t. It is incumbent upon the many who do abide by current regulation that governs our behavior to speak out in opposition to any few who do not. Remember that even if the actions of a minority run afoul of existing regulation, that jeopardizes the trust consumers bestow upon the majority. This is not an opportunity to speak out; it is an obligation!