Protection Through Paperwork

Reading the Canadian Council of Insurance Regulators’ (CCIR) latest consultation paper on ‘Managing Conflicts of Interest’ brings to mind a story about an absurd aspect of compelled disclosure, as told by Uruguayan writer Eduardo Galeano.

Galeano relates the story of when he attempted to flee Uruguay’s dictatorship of 1973-84. He applied for a visa to the United States and the U.S. embassy sent him the appropriate visa forms, which included the following question: ‘Do you plan to assassinate the president of the United States?’

Concluding the question must be a joke, Galeano checked the box marked ‘Yes.’ His application was denied.

If only disclosure forms and regimes could so easily and successfully root out corruption wherever it might be found, regulators wouldn’t need to spend so much money on auditors or enforcement officers.

In Canada, insurance regulators are proposing that insurers and brokers must create and make public disclosure forms that apparently have the power to root out conflicts of interest where they can’t be defined or even found. (Recall the CCIR already acknowledged it had no evidence of any illegal contingent profit arrangements within the Canadian insurance industry.)

The exercise is motivated by Canadian insurance regulators desire to demonstrate they are protecting Canadian consumers from the kinds of illegal industry activities uprooted by New York state attorney general Eliot Spitzer. To this end, the Canadian regulators have articulated three basic principles the industry can expect to see in future legislation, bylaws, and industry codes:

* An intermediary must place the interests of policyholders and prospective purchasers of insurance ahead of his or her own interests.

* Consumers must receive disclosure of any actual or potential conflict of interest that is associated with a transaction or recommendation.

* The recommended product must be suitable for the needs of the consumer.

All in all, the principles are basic enough, and virtually everyone in the industry agrees they are noble and worthy.

But what exactly is a ‘conflict of interest?’ No definition is offered in the CCIR’s latest consultation paper. In the absence of such a definition, how can insurers and brokers prove to regulators, consumers, risk managers or the courts they are in compliance with these three basic principles?

One obvious solution is that brokers and insurers might protect themselves through a disciplined regimen of documentation and disclosure.

To do this, forms and Web sites will have to be created. Consumers, many of whom probably don’t care, will be informed about the nitty-gritty details regarding broker corporate interests, ownerships and contingent profit arrangements (which are not disclosed to the brokerage staff , ironically enough, so they won’t act in a conflict of interest).

True, Joe Consumer down the street will have more information about his insurance quotes than ever before – how the quotes were prepared and researched, why the quotes were appropriate or inappropriate for Joe, how and why some quotes could be perceived to be in a conflict of interest, etc.

But just how detailed this documentation must be is still up in the air. As one B.C. broker noted, if something isn’t contained in a disclosure form that should have been, will brokers and insurers become exposed to the full weight of regulatory sanctions? “If I drive on the roads, I know what the speed limits are because they’re posted,” he said. But the limits of disclosure are not posted in the CCIR proposal.

As a result, there is a very real possibility disclosure will become onerous. Brokers and insurers who don’t want to run afoul of unstated conflicts of interest – real or imagined – will no doubt wish to document as many aspects of their business with consumers and insurers as they can. This will use up a lot of time and resources, although the CCIR is already on record as saying it doesn’t believe this to be true.

The conundrum remains, however: If regulators can’t – or won’t – define a conflict of interest, will compelled disclosure really provide any additional protection or benefit to consumers?

Do regulators honestly believe that somebody will check ‘Yes’ in the box next to the question that reads: “Is this quote made for the benefit of the insurer/broker company, and against the interest of the insured?”