Territorial Defence

Independent brokers in the Canadian marketplace are engaged in an ongoing tug-of-war with banks and direct writers. Issues emerge, brokers dig in their heels and pull with all of their collective might in an attempt to pull the knot in the centre of the rope, the government and regulators, onto their side of the field. In some cases, brokers gain ground. But then the rope tightens, a force yanks them back in the opposite direction and they’re forced to redefine their centre of balance. During this ongoing battle, brokers across Canada admit that they have celebrated the ground they gained, have continued to dig their heels in even further on other issues, and in some cases, they’ve loosened the grip on the rope and allowed a little more slack. Imagine two dogs snarling and barking at one another, non-stop, each defending the territory on its own side of the fence.

As you move across Canada, issues facing brokers vary from region to region. Each individual provincial association is engaged in its own tug of war. In Quebec, it’s over the incidental sale of insurance by unlicensed agents. In Manitoba, brokers are working through the implementation of a five-year renewal process for personal auto policies. B.C. and Alberta have re-negotiated their respective Insurance Acts. Ontario is facing a major set of auto reforms.

Underlying these regional issues, there are a few common fences that brokers are fiercely trying to defend. These issues pertain to the push for amendments to the Bank Act to clarify “separate and distinct” once and for all, concern about credit unions moving from the provincial jurisdiction to the federal sphere, and the use of credit scoring to underwrite personal lines persist, regardless of where a brokerage is situated in Canada.

Separate and distinct: a branding exercise

The issue of banks setting up insurance operations is not new. For years, brokers have argued that some of the banks are not operating within the intent of the federal Bank Act when they establish insurance operations adjacent to — and in some cases, separated by a glass wall from — their banking operations.

In the Insurance Business (Banks and Bank Holding Companies) Regulations, it states:

“No bank shall carry on business in Canada in premises that are adjacent to an office of an insurance company, agent or broker unless the bank clearly indicates to its customers that the bank and its premises are separate and distinct from the office of the insurance company, agent or broker.”

Brokers’ arguments that the banks were not upholding the spirit and letter of the law have transcended the issue of where the banks’ insurance branches have been physically set up; now the brokers have extended their arguments to the spheres of the Internet and the actual branding and marketing of insurance operations. The Insurance Brokers Association of Canada (IBAC) last year asked the Office of the Superintendent of Financial Institutions (OSFI) to interpret the act so that a bank’s Web site would be treated as a branch, making it illegal for the banks either to sell or market its insurance products online. OSFI declined to come to this conclusion when it responded to brokers in June 2009. Federal Finance Minister Jim Flaherty then examined the issue under the recommendation of OSFI and sided with the brokers.

Last October, Flaherty announced the government’s intention to amend the Bank Act to bring it in line with technological advances. The current version of the act, he said, was drafted in 1991, long before the Internet was being used for everyday commercial transactions. Chisholm Pothier, a spokesperson for the Office of the Minister of Finance, says that since the October announcement, the department has “been consulting extensively with the industry over the past few months on the best measures to achieve this policy objective and expect to announce these measures soon.”

In the meantime, banks have been asked to comply voluntarily. Andrew Addison, manager of media relations for the Canadian Bankers Association, says the banks have adopted a wait-and-see approach. “Clearly banks in Canada comply with all aspects of the government’s insurance regulations, including autonomous insurance branches and Web site operations [and in fact, the latter was specifically confirmed by OSFI last June]. The federal government has indicated it will be bringing in some specific measures related to Web sites, and we are waiting to see the detail.”

While that policy objective has received a groundswell of support from the independent brokerage community, there is still much work to be done, says Steve Masnyk, IBAC’s manager of public affairs.

As Minister Flaherty was making his announcement in Oct. 2009, Liberal MP Alexandra Mendes tabled Bill C-457, An Act respecting the insurance business (banks and bank holding companies).

The bill essentially picks up where Minister Flaherty left off. It calls for the Bank Act to be amended so that it states:

• “No bank shall, in Canada, promote an insurance company, agent or broker.”

• “No bank shall, in Canada, promote an insurance policy of an insurance company, agent or broker, or promote any service related to such a policy.”

• “No bank shall provide a telecommunications device that is primarily for the use of customers in Canada and that links a customer with an insurance company, agent or broker by any means, including the Internet.”

• “No bank shall carry on business in Canada in premises that are adjacent to an office of an insurance company, agent or broker.”

As of press time, the bill has only had its first reading in the House of Commons. Masnyk believes it contains some much-needed clarification and specification.

“It should be clear to consumers that one has nothing to do with the other,” he says. “I guess the test is asking the consumer what they think when they walk by these branches side-by-side. As long as it’s clear to the consumer that these two operations are separate and distinct, then it’s okay. But we don’t believe that’s what’s taking place.”

The issue extends to the actual branding by the banks of their insurance operations, he continues. “The banks are trying very cleverly to brand both operations as the same. They even have glass walls and glass doors leading from one branch to the next. The same colours, the same logos, the same insignias; that’s very confusing to the consumers.”

Darryl McKay, president of the Insurance Brokers Association of Saskatchewan (IBAS), agrees. “If [the banks] are going to make their Web sites separate and distinct, and their physical branches separate and distinct, then maybe a logo change would be good, too,” McKay says. “From a consumer’s standpoint, at least the consumer would be able to make their decision process a little less pressured. If they’re taking a loan from the bank, then a pressure exists to get their insurance from the same bank. By creating two completely different brands, that might help alleviate that pressure.”

Enter the Credit Unions

Credit unions selling insurance has become a sort of analogous issue to the banks retailing insurance, albeit more acutely in certain parts of the country. Until now, though, credit union operations have not been allowed to incorporate federally. Historically, for the most part, they remained regional, local players.

David Schioler, CEO of the Insurance Brokers Association of Manitoba (IBAM), says so far in his province, credit union ownership of brokerages has not become a major issue. But IBAM is keeping a close eye on the situation. With credit unions, he says, “you have the same issues in terms of tied selling and the sharing of banking information to sell insurance and so on, as you do with the banks,” he says. Schioler noted that one credit union in Manitoba has included with clients’ banking statements flyers that advertise its insurance services.

Geo rges Leger, president of the Insurance Brokers Association of New Brunswick, says that until now, credit unions in that province have been a bit of a “thorn in the side” of brokers. A couple of years ago, the provincial government gave French credit unions a broker’s license. While IBANS has been lobbying the government to re-consider this decision, they have not met with much success, Leger says.

“I know credit unions own brokerages in other provinces, but this is the first of it in this province,” he says. “And when [the credit union] released its business plan, there were all kinds of references within it that they were going to use credit information and so on to target clients, which is against the networking regulations that are part of the Credit Unions and Caisse Populaires Act in this province. We are certainly opposed to that, because that’s unfair competition.”

In March 2010, Flaherty’s federal budget included an announcement that may lend credit unions a little more weight in insurance operations. In its budget documents, the Department of Finance Canada says it intends to introduce a “legislative framework to enable credit unions to incorporate and continue federally, which will promote the continued growth and competitiveness of the sector and enhance financial stability.”

The announcement was made with the intention of allowing the credit unions to compete more fairly with their bank counterparts. But, by extension, the announcement may also mean increased competition for the broker channel by allowing credit unions to compete more aggressively in the insurance sphere.

While alarm bells aren’t exactly sounding over the announcement, brokers are maintaining a watchful eye on the situation. Randy Carroll, CEO of the Insurance Brokers Association of Ontario, says it was an “interesting” announcement. Still, he notes, if credit unions apply to go federal, they may be foregoing benefits they currently enjoy in the provincial realm. In Manitoba, for example, Schioler observes that credit unions are governed provincially by a Memorandum of Understanding, which was signed with the Insurance Council back in 2004-05. Basically, the memorandum represents an agreement that credit unions will compete fairly with stakeholders in the insurance sector. But if a credit union in Manitoba were to incorporate federally, it would be subject to the Bank Act instead, which contains restrictions on insurance sales.

Manitoba’s provincial memorandum does not include any enforcement mechanisms, penalties or sanctions. As of now, although credit unions fall within the provincial jurisdiction, no formal legislation or regulations exists governing their sale of insurance. IBAM is currently working with provincial stakeholders to create such a piece of legislation.

Leger says IBANB is also lobbying its provincial government to enhance regulations of credit unions in that province to bring them in step with federal regulations of the banks.

“We told the Minister of Justice (who oversees both credit unions and insurance files) that a credit union to us is a bank. They do everything that a bank does, so they should abide by the same rules as the banks. And if the banks are being told federally that they can not sell or market insurance at the same place as credit is granted, then that should be enforced here too.”

Should a credit union decide to incorporate federally, Pothier says, “subject to an appropriate transition period, credit unions that elect to be federally-regulated will be subject to the same rules and regulations governing the sale and promotion of insurance products” as the banks.

The issue has the potential to grow even more complicated, says Schioler. Should credit unions start incorporat- ing nationally (because they want to operate across boundaries), that might completely take them out of provincial jurisdictions. “For the longest time, it’s been believed to be the case that insurance is an area that falls under a provincial jurisdiction, whereas banking falls under federal jurisdiction,” he says, adding that this originates with the division of powers outlined in the Constitution Act. While insurance was never mentioned in the constitution, over time and through case law development, the argument was made that it belongs in the provincial sphere — because insurance falls under property and civil rights.

“Let’s just take it all the way,” says Schioler. “Let’s say that all of the credit unions decide that they want to incorporate federally and operate across provincial boundaries. Wouldn’t that start taking insurance, at least to that extent, out of provincial jurisdiction?” The end result might be two separate heads of government overseeing organizations involved in insurance activities. Imagine, for example, the federal government governing credit unions, while the provincial governments oversee everything else with respect to insurance — including brokers. “That could cause some complications,” Schioler says.

A lot that would have to happen to get to that point, Schioler says. But it isn’t entirely beyond the realm of possibility or reason. “The main thing right now is that we have to make sure that the credit union-owned brokerages would be playing on a level playing field as brokerages, and also operating under the same set of rules that protect consumers,” he says. “Brokers offer choice and aren’t using financial information on someone in the capacity to grant someone or not grant someone a loan if they don’t buy their insurance product.”

Credit Scoring

The use of financial information — more specifically, credit scores — in the underwriting of personal lines has become a thorny issue across the country. The issue not only separates brokers from banks and credit unions, it separates brokers from each other.

Some provincial broker associations have taken a hard stance against it, making the argument that the use of credit scores puts consumers at a disadvantage. Too often a person’s credit score is negatively affected by something — the loss of a job or a divorce, for example — that has no bearing on whether or not they constitute a good insurance risk. Others brokers argue that not allowing insurers access to credit scores puts the insurance industry at a disadvantage when competing with banks or direct writers.

The Canadian Council of Insurance Regulators (CCIR) has formed a subcommittee on insurers’ use of credit scoring, with the intention of eventually drafting standards for its use. The council’s initiative is in its infancy; as of press deadline, the committee is primarily gathering information and consulting industry stakeholders, both in Canadian jurisdictions and American jurisdictions, to try to determine a solution that satisfies all stakeholders.

Jim Hall, the sub-committee’s chair, told Canadian Underwriter that among the objectives of the committee is the eventual drafting of a public consultation paper.

A springboard for the discussion will no doubt be the Insurance Bureau of Canada (IBC)’s Code of Conduct for Insurers’ Use of Credit Information. Released earlier this year, the voluntary code contains 10 general guidelines governing insurers’ use of credit-based insurance scores for the purpose of quoting, underwriting and rating. [For an outline of the principles contained in the code, please see the article on Page 24 in this issue.]

The IBC’s code and the CCIR’s investigation into the use of credit scoring appear to be too little too late for some provincial governments. For example, New Brunswick’s provincial government announced amendments to the province’s Insurance Act in February that would prohibit the use of credit scoring “in all classes of insurance.” The announcement was followed a month later with the release of the province’s Consumer Advocate for Insurance’s 2009 annual report. In the report, the Consumer Advocate cited the use of credit scoring in personal property lines as an emerging issue.

“The use of credit scoring by insurance companies as an underwriting tool for personal property is not a new practice but it’s becoming more and more prevalent, especially in the house insurance market,” the report said. “We have serious concerns with this practice and we feel very strongly that it is not in the best interest of consumers seeking to purchase or renew their insurance.”

Roughly one year earlier, Newfoundland and Labrador’s Consumer Advocate Tom Johnson voiced similar concern. He told CBC he’s not sure why an insurer would need access to a person’s credit score to underwrite their personal lines.

John Penney, president of the Newfoundland and Labrador Insurance Brokers Association, says he believes his provincial government will be following in New Brunswick’s footsteps with an all-out ban. “We’ve taken the position as the broker association that we understand the actuarial validity of credit scoring, but we don’t necessarily believe that it is in the best interest of the consumers.”

Blake Craig, president of the Insurance Brokers Association of Prince Edward Island, agrees with Penney. He acknowledges that credit scoring might be an effective underwriting tool. But “I think the problem is that people’s credit can be affected by a number of negative life situations,” he said. “You can check around for a new mortgage, you can have family illness requiring a lot of funds, you can get separated or divorced, and that can affect your credit, but it doesn’t necessarily make you a worse insurance risk.” [The IBC’s code does address these kinds of emergency situations.]

Craig recalls stories on P.E.I. in which a credit check was done, and homeowners’ renewal rates were offered at double the past year’s rate. The “only apparent reason was that it had to do with their credit,” he said. Lorne Perry, president of the Insurance Brokers Association of British Columbia, shares similar concerns, noting that more and more it seems to be used in personal property lines.

In Ontario, the Financial Services Commission of Ontario (FSCO) added some legislative muscle to its current prohibition on the use of credit scoring in automobile insurance as part of its auto insurance reforms. IBAO’s Carroll believes the province should adopt the same approach as New Brunswick, with an all-out ban.

Carroll notes it is illegal to drive without insurance in the province, and so it would be an unfair practice to require a credit score to write this kind of insurance. But although a similar legislative restriction is not in place in homeowners’ lines, it’s still more or less a requirement that a person has insurance on his or her home.

“It’s pretty mandatory for me to carry insurance on my house in order to carry a mortgage,” he said. “I don’t really have a choice. If it makes sense to protect consumers from insurance companies having access to their credit information on the auto side, then it still makes sense to protect them from having the same insurer have access to their credit information as it relates to their homeowner’s policy.”

Elsewhere, the issue is not cut-and-dry. Schioler says IBAM has not taken an official stance on the issue because there’s a lack of consensus within the broker community. Some argue that banning the use of credit scoring will put the insurers being distributed through the broker channel — and thus the broker channel itself — at a competitive disadvantage with other financial service providers that use it.

In Quebec, credit scoring in all personal lines has been common practice for roughly seven or eight years, Louise Mathieu, president of the Regroupement des cabinets de courtage d’assurance du Québec. And so far, she believes the benefits have outweighed the risks associated with it.

“In Quebec, we have been living with this for seven or eight years now. At the time that it was introduced, we had to face the fact that the direct insurers or the banks were using it. As the broker and the regular insurance company, if they did not start to use credit scoring we were losing all of the good clients to the directs. If you can’t beat them, join them. That’s what they say. So, that’s what the brokers in Quebec did at the time. We live with this. It’s okay for us in Quebec.”

If the use of credit scoring is approved, Schioler says, effective regulation will be key. “While we don’t necessarily agree that credit scoring is an essential tool, it is an available tool,” he says. “And if it’s going to be instituted and utilized across the board, then we just have to make sure that everyone knows what the rules are and are held accountable to those rules.” One good rule would be: credit scoring should only be used to provide discounts on premiums to consumers who have a good credit rating, Schioler says. It should not be used to deny someone coverage if they have a bad credit rating.

“It can be used to attract and retain clients,” he says. “It could be used to provide good and proper pricing for clients. If insurers don’t intend to use it to deny coverage, then that would make sense.”

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I guess the test is asking the consumer what they think when they walk by these bank branches and the banks’ insurance operations side-by-side. As long as it’s clear to the consumer that these two operations are separate and distinct, then it’s okay. But we don’t believe that’s what’s taking place.

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If the banks are going to make their insurance Web sites separate and distinct from their banking operations, and their physical branches separate and distinct from their insurance operations, then maybe a logo change would be good, too.

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Let’s say that all of the credit unions decide that they want to incorporate federally and operate across provincial boundaries. Wouldn’t that start taking insurance, at least to that extent, out of provincial jurisdiction? That could cause some complications.

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It’s pretty mandatory for me to carry insurance on my house in order to carry a mortgage. I don’t really have a choice. If it makes sense to protect consumers from insurance companies having access to their credit information on the auto side [i. e. because auto insurance is mandatory], then it still makes sense to protect them from having the same insurer have access to their credit information as it relates to their homeowner’s policy.