Turf Wars

When Parliament put the finishing touches on the Bank Act revisions in early 2007, Canada’s brokerage profession breathed a collective sigh of relief, secure in the knowledge that — for another five years at least — banks would not be allowed to sell insurance products from within their local branches. Thus ended a nation-wide, collective political lobby, in which brokers were encouraged to reach out to national Members of Parliament and Members of Provincial Parliament to inform them about the value of the independent broker proposition.

That task completed, brokers across Canada appeared to focus much of their attention inward, using the time to work on issues such as marketing the profession, succession and broker ownership issues. As this was happening, brokers still heard the occasional suggestions from their broker associations, urging members to continue to stay in contact with their local, provincial and federal politicians. But after the Bank Act issue was done and gone, what would brokers have left to talk to politicians about? The End of Politics for brokers seemed imminent; exhortations to the contrary sounded like cheerleaders encouraging a collective sis-boom-bah long after the big game was over and the crowd had gone home.

Enter 2008, which appears to spell the end of the End of Politics for brokers. What once was a relatively quiet, serene political landscape has morphed into a number of regional political discussions and skirmishes. Now more than ever, brokers find themselves buffeted by the contrasting professional interests of a variety of different market participants — governments,

regulators, credit unions, insurance companies, car dealers and more. Having fought for the identity and integrity of the broker profession at the national level, brokers are now seemingly engaged in many regional, guerrilla ‘turf wars,’ battling in each province to uphold the integrity of their own professional and political turf.

BROKER OWNERSHIP AND CONTROL: CREDIT UNIONS

In both Western and Eastern Canada, credit unions are causing brokers to refine their arguments against financial institutions offering insurance products inside their local branches.

Saskatchewan credit unions, for example, are establishing insurance operations within the same buildings as their financial operations, arguing that these two functions are “separate and distinct.” Saskatchewan’s Credit Union Insurance Business Regulations state: “No credit union shall carry on business in Canada in premises that are adjacent to an office of an insurance company, agent or broker unless the credit union clearly indicates to its members and customers that the credit union and its premises are separate and distinct from the office of the insurance company, agent or broker.”

Saskatchewan’s brokers are skeptical: they believe establishing interior “glass walls” between offices is a disingenuous interpretation of the regulations. “What they are doing at the present time is allowing credit unions to run their insurance operations out of the same building and premises as their financial services, with basically just a glass wall between the two of them,” Mark Stockford, the president of the Saskatchewan Brokers Association, says. “Our argument is that, ‘No, that does not constitute separate and distinct.’ And so we are working with the regulators to get an interpretation out there that we feel is more accurate.”

Stockford says a credit union’s insurance operations should be located in a completely separate building. There should not be any adjoining walls, and no openings between its financial and insurance operations.

“Our big concern is we don’t think the consumers recognize it as ‘separate and distinct’ as it is,” says Stockford. “They [consumers] walk into the credit union to do their financial services, then they walk across the hall to do their insurance. We feel that exerts undue pressure on people to buy their insurance from the same people they get their mortgage from.”

Thus far, Saskatchewan’s brokers have provided the provincial regulator with a legal opinion on the matter. The discussions are ongoing.

New Brunswick brokers have undertaken similar discussions with their regulators, based on the news that one local credit union, the Fdration des caisses populaires acadiennes, has recently incorporated a new subsidiary property and casualty insurer, Acadia General Insurance, to sell insurance products to consumers. Acadia General Insurance reportedly plans to create 12 new offices over a period of five years.

New Brunswick’s Credit Union Act states: “No credit union shall carry on business in premises that are adjacent to an office of an insurance company, agent or broker unless the credit union clearly indicates to its members that the credit union and its premises are separate and distinct from the office of the insurance company, agent or broker.”

“Our regulations in this province, the networking regulations, talk about ‘separate and distinct’ and not using client files,” Linda Dawe, executive director of the Insurance Brokers Association of New Brunswick, says. “We want to make sure that those regulations are enforced or adhered to by the credit unions, for sure. We’ve been trying to work with government to make sure that the federation’s brokerage follows those guidelines.”

To date, New Brunswick’s broker association has initiated a grassroots effort to lobby MLAs and requested an audience with the premier, Shawn Graham, to express their concerns.

Credit unions also seem to be making a splash in Alberta, where provincial legislation does not allow credit unions to sell or promote insurance brokerages at all — at least, for now. Section 46(6) of the Alberta Credit Union Act states: “A credit union or a person acting in the person’s capacity as a director, officer or employee of a credit union shall not act as an insurer, insurance agent or adjuster, within the meanings respectively ascribed to those expressions by the Insurance Act.” Alberta’s prohibition is a stricter approach to credit unions than the direction taken by legislation in Saskatchewan and B. C., where credit unions are allowed to own insurance brokerages and sell and promote insurance products under limited circumstances.

Harold Baker, CEO of the Insurance Brokers Association of Alberta, fears his province’s regulatory prohibition may soon come tumbling down, a casualty of the current ‘free trade’ negotiations between Alberta and B. C. “As a result of the recent and ongoing discussions, there’s a door opening for credit unions to have mobility between provinces, with the government’s desire to ensure that business powers are equitable,”Baker says. “So in other words, if they are going to allow a British Columbia credit union to come into Alberta and do business, they will allow them to ensure that the business powers for that British Columbia credit union exist on the same playing field here in Alberta. Conversely, if they want to encourage a credit union to go into British Columbia, they have to give them certain business capacities. Well, obviously one of the things that we’re concerned about is the ability for a credit union to own and operate an insurance brokerage.”

Alberta has been negotiating with B. C. about the elimination or reduction of trade barriers between the two provinces for the past several years. This year, in 2008, the provinces have reached a stage in their discussions involving financial services. Baker feels the Alberta government has some sympathy for the position of eliminating its prohibition to create a level playing for B. C. credit unions. In response, Alberta brokers point to analogous restrictions existing in Canada’s free trade agreement with the United States and Mexico that serve the purpose of maintaining the integrity of certain economic segments within Canada.

“We think it’s important to understand that where it’s in the b est interests of Albertans, [the province] can have a prohibition,” Baker says. “It does not have to be part of a free trade agreement. I mean that’s the substance of NAFTA, right? There are restrictions and there are areas or sectors that are not part of the agreement, and we think this is an important part of what needs to be discussed in the free trade agreement between Alberta and British Columbia.”

BROKER OWNERSHIP AND CONTROL: INSURANCE COMPANIES

Ontario’s broker association is also waging a political battle around the ownership and operation of brokerages. In this context, it’s a battle to prevent insurance companies from owning more than a 50% controlling interest in an insurance brokerage. At its 2007 annual convention in Toronto, the Insurance Brokers Association of Ontario (IBAO) stepped up its campaign against insurers buying brokerages, announcing its intention to involve the regulators in the debate if need be. Specifically, the IBAO asked the provincial brokers’ regulator, the Registered Insurance Brokers of Ontario (RIBO), to adopt a ‘control-in-fact’ test to assess the independence of insurance brokers in Ontario. “Brokers that do not meet the control-in-fact standard should be regulated as agents,” said IBAO president Rod Hancock in a speech to delegates at the association’s annual general meeting in Toronto on Oct. 19. Second, Hancock said, “the insurance intermediary market must be regulated by a single independent body, and that RIBO is best suited to that role.”

Prior to 2002, Ontario had a ‘control-in-fact’ test enforced by the Financial Services Commission of Ontario (FSCO). That rule prevented non-broker entities from owning more than 49% controlling interest in an insurance brokerage. The regulation was officially eliminated in 2004. Sources say the regulation was eliminated in part because there were too many ways for non-brokers such as insurers to get around it; also, disclosure of brokerage ownership was deemed an acceptable means to achieve the same purpose served by the regulation, which was to ensure consumer protection.

The broker ownership issue came to a head just a few weeks after the IBAO convention. Royal & SunAlliance’s direct writing subsidiary, Johnson Inc., in early November 2007 acquired Kingston-based brokerage Thomson Jemmet Vogelzang. Following the news, Dominion of Canada General Insurance Company and Aviva Canada, both citing the importance of maintaining the independence of the broker channel, cancelled their contracts with the Kingston brokerage.

Randy Carroll, CEO of the IBAO, says his association is currently in discussions with insurers about the brokerage ownership and control issue. Should these negotiations “hit the brick wall,” he says, the IBAO is poised to lobby politicians and regulators to institute new regulations concerning the ‘control in fact’ of a brokerage. Carroll notes establishing ‘control in fact’ relies on using a range of criteria, including the percentage of ownership, the owning company’s participation in the brokerage’s board decisions, the right of first refusals concerning business decisions, etc.

“We would really prefer not have to go to either [FSCO or RIBO],” Carroll says. “We would rather have those insurers [that own brokerages], because they are the minority, actually work with us and come up with an agreement in principle.” Having said that, Carroll says, if no agreement is reached, that’s when the regulators must be called in.

“We continue our discussions with insurers, but at the same time we continue making sure we keep our regulators informed,” Carroll says. “We have to make an informed decision in 2008 as to whether or not there’s a possibility as an industry to resolve this, or whether we just throw our political lobbying into effect and start to talk to our MPPs across the province so they understand what the concern is and then push for the change. That’s where we are right now. We have to make that decision and I would say that decision would have to be made over the course of early spring leading up to the summer of 2008.”

PUSH FOR LEGISLATION: POLITICIANS

At the same time IBAO is pushing for legislative change, B. C. brokers and Newfoundland brokers are pushing for legislative change as well.

For some time, B. C. brokers have been lobbying alongside the Insurance Bureau of Canada (IBC) for changes to the province’s Insurance Act. British Columbia’s politicians recently undertook a re-write of the Insurance Act, prompted by a 2003 Supreme Court of Canada decision in which the court observed the limitation periods for individual perils in B. C. did not square with the contemporary reality of multi-peril policies. The B. C. Insurance Act, the Supreme Court said in its decision, was ” incapable of coherently addressing the modern multi-peril policy. It may have made good sense in the 1930s, when insurance was offered in discrete packages, each containing its own special type of coverage, [but] it makes much less sense now … In an insurance era dominated by comprehensive policies, it is imperative that Canada’s Insurance Acts specifically and unambiguously address how these statutes are to operate and the rules by which comprehensive policies are to be governed.”

B. C.’s insurance industry has been negotiating with the province for some time, and is now keenly observing the clock. Brokers are concerned about a scheduled provincial election in early 2009 that could derail or further delay efforts to make the required legislative changes.

“We met with the caucus back in October and we’ve had meetings with ministry officials over the last several years, and we’re urging them to get the Insurance Act re-write passed this spring session,” says Ted Lewis, the president of the Insurance Brokers Association of B. C.”The old act is so out of date …That’s a really big issue for us, and it affects all of the insurers as well and the consumers, because it’s in the best interests of everybody to get a new act. That for us is a big issue and we’ve been pushing it. Every indication is that it will hit the spring session and that’s why we’re pushing it, because there’s an election scheduled for May 2009. If it doesn’t happen this session, it’s unlikely it would happen until after the next election. We just think this is in the best interest of everybody consumers, insurers, brokers, the courts, everybody.”

Will the re-write be ready in time for the spring? It’s not a good sign that B. C. brokers have not yet seen any draft legislation. To date, they have only made comments on the government’s consultation paper, the basic principles of which they generally support. But, as Lewis points out, the “devil is in the details,” and brokers would prefer to see any draft legislation prior to its introduction into the B. C. legislature in spring.

In Newfoundland and Labrador, brokers are seeking to eliminate, rather than encourage, a government initiative. Specifically, insurance brokers want the Newfoundland government to eliminate its 20% tax on insurance premiums. For the past 10 years, in fact, the province’s insurers and brokers have argued the tax is too high and puts Newfoundland businesses at a competitive disadvantage with businesses operating in other jurisdictions. Brokers and insurers collect the tax from consumers and pass it along to the government, putting them in the unenviable position of justifying a tax that brokers and insurers alike would rather see eliminated.

“We’re daily having to justify that tax when it’s something that we have no control over,” says Robert Dunne, the president of the Insurance Brokers Association of Newfoundland. “We can understand that it’s an issue we have to fight on behalf of consumers, because it’s something we have to explain [to them] every day in terms of why [their] insurance premiums are as high as they are…

“At this point, we have requested the elimination of the tax. We have also requested that the government come to the table and talk to us about that. But, they haven’t responded to our written request.”

Dunne remains pessimistic about the possibility of any relief. “We feel that the provincial government is going to ignore it at this time,” he says. “They’re likely going to take a stand that if they do anything on reducing the taxes, then it’ll mean a reduction of provincial revenue and [there would have to be] a reduction in services or some other way to find the tax to make up the loss revenue.”

PRODUCTS AND SERVICES: GOVERNMENT AND CAR DEALERS

Prince Edward Island brokers also find themselves in a position of having to justify the unintended outcome of a government proclamation over which the brokers had no control. Prior to the provincial election in May 2007, the government of the day announced its intention to introduce a new Stay Safe Drivers Discount, an auto insurance discount that would be in addition to any other existing insurance discounts.

As announced, the specifics of the discount were left vague. The government did not legislate insurers to offer the discount, which was intended for “inexperienced drivers.”The category was presumed to include young drivers as well as drivers new to the country. It was left up to individual insurers how to apply the discount — including whether driver training would be factored into the discount, or whether the discount would be delivered on a “sliding scale” (i. e. drivers with three years of experience would receive a different discount than drivers with no training).

After the May election, the new government under Premier Robert Ghiz announced in September 2007 that, as of Jan. 1, 2008, the new discount would be offered. Thus far, however, only a few direct writers and only one carrier distributing through the broker channel, the Dominion of Canada General Insurance Company, offers the Stay Safe Driver Discount in Prince Edward Island, says Karen Doiron, the president of the Insurance Brokers Association of P. E. I.

What happened?

“[The provincial government] went to the facility association and the facility association declined to offer a risk-sharing pool for P. E. I.,”Doiron says. “I think most of the insurance companies were hoping that [FA] would come through, and were waiting for that to happen before they went forward with the discount. But [facility association said] the volume in P. E. I. is too small to offer a risk-sharing pool. They felt that it could be done without the costs involved for a risk-sharing pool.”

The problem now, says Doiron, is that the government has announced the new program, which is voluntary, insurers have not taken it up, and brokers have been left holding the bag, explaining to the consumers why the Stay Safe Driver Discount is only available in limited supply.

“The government was concerned,” says Doiron. “They wanted information on what is currently happening, the implementation [of the discount] and our present views on whether the discount can be successfully implemented with the current arrangement.”

Doiron says the association has contacted the province’s insurers and “we’re quite optimistic that by the end of this year, we will see the discount in place…The concern is that when the spring comes, out comes all of those vehicles and summer jobs and young drivers. We hope the discount is going to be available by then rather than in the fall.”

Quebec brokers, represented by the Regroupement des cabinets de courtage d’assurances du Qubec (RCCAQ), are similarly engaged in political lobbying around a product offering. In this situation, the product is not offered by government or insurance companies, but rather by car dealers. And at the heart of the matter is whether the offering is an “insurance” product at all.

A document produced by the Insurance Bureau of Canada, the Groupement des assureurs automobiles and Option consommateur, ‘All About Automobile Insurance,’ outlines the difference between a ‘Replacement Cost’ endorsement (offered by insurers and brokers) and a ‘Replacement Warranty’ (offered by Quebec’s car dealers).

Both contracts are similar, but they are not identical, the document notes. “For example, in the event of a total loss, insureds that have a ‘replacement cost’ endorsement can usually purchase a new vehicle of like kind and quality regardless of the make of the car. Those who have bought a replacement warranty must purchase the same make of vehicle from their dealer as the vehicle involved in the accident.” In addition, to benefit from a replacement cost endorsement, policyholders simply need to continue their premium payments; warranties, however, must be re-purchased upon expiry.

RCCAQ notes the purchase of warranties can get rather pricey for consumers — and quite lucrative for car dealers. “There is a lot of money involved because, with the dealers’ [replacement warranty], that coverage can cost [Cdn]$1,200 for four years’ protection,” says RCCAQ executive director Johanne Lamanque. “They make a lot of money with these types of sales features. They have profits of more than 50-60% on each replacement warranty sold.”

Car dealers also have an edge over brokers in selling the warranties because consumers meet car dealers earlier in the sales process. For example, consumers will be working with car dealers to purchase the car prior to meeting with a broker to buy the insurance for the car. As a result, consumers will not be able to benefit from the advice of an independent broker on options that exist for buying a replacement cost endorsements available from carriers.

“RCCAQ pleads that [the warranty] has to be distributed by brokers, not by car dealers, in order to get a better protection for the consumer,” says Lamanque. “If the consumer gets the right explanation [about coverage], they can make the right choice. But when you buy a car, you talk to the broker usually at the end of the process.”

RCCAQ in 2006 entered into discussions with the AMF about replacement warranties, arguing they were insurance products; as such, car dealers were not licensed to sell them.

THE NATIONAL SCENE: REGULATORS

The discussion around replacement warranties figures prominently in a recent announcement by the Canadian Council of Insurance Regulators (CCIR) that they intend to review what they call the “incidental sale of insurance.”Which brings us back to the national scene, where Canada’s insurance regulators are now contemplating how best to make the move from a rules-base approach to a principles-based approach for regulating the financial services industry. The discussions are front and centre on the Insurance Brokers Association of Canada (IBAC)’s current agenda.

“Job 1 at IBAC is to try and understand the regulatory and legislative environment in which we have to operate, because insurance is such an important part of the economy that we know we are going to continue to be very highly regulated,” says Dan Danyluk, IBAC’s CEO. “One of the challenges with things like principles-based regulation is to make sure that it’s practical. We have some reservations about that.”

But the country’s current political and regulatory environment might be complicating the expression of those reservations. IBAC is working within an environment currently predisposed to increasing — not decreasing — financial services regulation. “We’ve just seen a huge failure, a major failure, in the subprime mortgages in the United States,” Danyluk notes. “I understand that’s not insurance, but the reality is consumer confidence in the United States, from what I read, has been shaken. We want to make sure that any regulatory change that we make is done in a way that we don’t throw out the baby with the bathwater.”

And so, while lobbying around Bank Act may have been temporarily suspended, the political life of Canada’s brokers appears to be in full gear. Everywhere in Canada, brokers are fully engaged in the politics of asserting their professional value and in tegrity. In many situations, this involves defending against intrusions on their professional turf by a variety of different players, including governments, regulators, credit unions, insurance companies, car dealers and more. It’s the end of the End of Politics as we know it, but do brokers feel fine?

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“What they are doing at the present time is allowing credit unions to run their insurance operations out of the same building and premises as their financial services, with basically just a glass wall between the two of them. Our argument is that, ‘No, that does not constitute separate and distinct.'” — Mark Stockford, president, IBAS

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“Brokers that do not meet the control-in-fact standard should be regulated as agents.” — Rod Hancock, president, IBAO

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“We’ve had meetings with ministry officials over the last several years, and we’re urging them to get the [B. C.] Insurance Act re-write passed this spring session.” -Ted Lewis, president, IBABC