On July 11, 2023, the Alberta Superintendent of Insurance (the Alberta Superintendent) and the Alberta Insurance Council (the AIC and together with the Alberta Superintendent, the AB Regulators) issued Interpretation Bulletin 08-2023 titled Adoption of CCIR/CISRO Incentive Management Guideline (the Bulletin). The Bulletin sets out the AB Regulators’ expectations regarding incentive arrangements for licensed insurers and insurance intermediaries operating in Alberta. This includes the AB Regulators’ adoption of the Incentive Management Guideline (the IM Guideline) released by the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) on November 30, 2022.
The AB Regulators require all insurers and insurance intermediaries operating in Alberta to immediately commence embedding principles from the IM Guideline into their respective organizations, if they have not already done so. The deadline for insurers and insurance intermediaries to meaningfully embed such principles is April 1, 2024.
This article summarizes (i) the AB Regulators’ expectations with respect to insurers and intermediaries’ adoption of the IM Guideline, as set forth in the Bulletin, (ii) a summary of the IM Guideline and (iii) penalties for insurers’ and intermediaries’ non-compliance with the Bulletin.
The Bulletin: Expectations and penalties for non-compliance
Under the Bulletin, AB Regulators expect that insurers and intermediaries operating in Alberta apply the principles established in the IM Guideline in their development and implementation of performance management programs and incentive arrangements regarding the sale and/or servicing of insurance products. In addition, the AB Regulators expect insurers and intermediaries to use the principles set out in the IM Guideline to inform their policies, procedures and controls and to apply the IM Guideline based on the nature, scope and size of their respective businesses.
The AB Regulators also note that compliance with the IM Guideline includes effectively managing conflicts of interest and prioritizing customers’ interests as further described in the Fair Treatment of Customers Guidance previously issued by the CCIR and CISRO (the FTC Guidance).
Summary of the IM Guideline
The IM Guideline establishes the expectations of the CCIR and CISRO for the management of incentive arrangements in connection with the sale and servicing of insurance products. The IM Guideline is meant to compliment the FTC Guidance and aims to ensure that incentive arrangements align with the fair treatment of customers. The IM Guideline applies to all insurers and insurance intermediaries that pay compensation and/or design incentive arrangements in connection with the distribution of insurance products.
The IM Guideline sets out four expectations of CCIR and CISRO that require compliance by insurers and intermediaries. Such expectations are discussed in greater detail below.
1.CCIR and CISRO expect insurers and intermediaries’ governance and business culture to place fair treatment of customers principles (FTC) at the center of decisions concerning the way incentive arrangements are designed and managed.
Insurers and intermediaries are required to, among other things, develop policies, procedures and controls which ensure FTC outcomes are integrated into their incentive arrangements. In addition, incentive arrangements should be reviewed periodically with appropriate input from applicable business functions. It is important to note that the responsibility for FTC rests with an organization’s board of directors and/or senior management.
2. CCIR and CISRO expect insurers and intermediaries to design and implement incentive arrangements that include criteria ensuring FTC.
The foregoing expectation creates implications for the design and management of incentive arrangements. Accordingly, the design process for incentive arrangements should ensure that:
- Any incentive paid is consistent with the level of service expected and provided throughout an insurance product’s life cycle;
- Performance targets are clearly defined and measurable and are aligned to ensure they adhere to FTC; and
- The cost of the insurance product does not vary depending on the distribution method used.
The IM Guideline sets out a number of considerations for the management of incentive arrangements by insurers and intermediaries once implemented, including using sufficient information and key indicators in order to identify potential risks of unfair outcomes to customers as a result of a particular incentive arrangement. Such information and key indicators consulted may include the following:
- Sales patterns before and after a target has, or has not, been met;
- Variations in the mix of products sold (to see if the commission grid influences the selection of product sold, if they consistently select one product over another);
- Penetration rates for cross-selling, where indirect interest can be distinct from the client’s interest;
- High lapse rates on new business;
- Poor persistency rates compared to persistency targets;
- Accumulated chargeback debt;
- Claims repudiation rates and the reasons for rejected claims;
- Recurring sales related complaints; and
- Bias towards selling products that carry a higher level of incentive.
3. CCIR and CISRO expect insurers and intermediaries to regularly identify and assess the risks of unfair outcomes to customers that may arise from incentive arrangements so that either appropriate controls can be introduced or the incentive arrangements can be adjusted.
The IM Guideline notes that unfair outcomes for customers resulting from incentive arrangements are more likely to be present when insurers, intermediaries or any persons or entities acting on their behalf pay or receive incentives for practices that fail to achieve expected FTC outcomes. In order to address this, insurers and intermediaries should regularly review their incentive arrangements to understand if they contain any particular features that increase the risk of unfair outcomes for customers.
4. CCIR and CISRO expect insurers and intermediaries to establish effective post-sale controls to identify inappropriate sales resulting from incentive arrangements
CCIR and CISRO maintain that effective post-sale controls should facilitate insurers and intermediaries in (i) detecting unsuitable sales resulting from incentive arrangements, (ii) determining certain residual risks of unfair outcomes to customers and (iii) ensuring the design and implementation of incentive arrangements achieve the expected FTC outcomes.
Implications for insurers and intermediaries doing business in Canada
The Alberta Regulators’ consider the fair treatment of customers fundamental to sound market conduct practices and expect insurers and their intermediaries to apply the principles set out in the IM Guidance in their development and implementation of performance management programs and incentive arrangements related to the sale and servicing of insurance products.
The Alberta Regulators expect that the implementation of the IM Guidance principles begin immediately and are meaningfully embedded in organizations by April 1, 2024. During this time period, we recommend that all insurers and intermediaries carefully review their policies, procedures and controls to ensure that the principles set out in the IM Guidance inform such policies, procedures and controls and that the application of the IM Guidance is based on the nature, scope and size of their respective businesses. It is important to note that the IM Guideline is supplemented by additional rules and regulations set out in statutes or guidance from provincial regulators.
The Bulletin also provides the following penalties for insurers’ and intermediaries’ non-compliance with the IM Guideline:
- An insurer may be fined up to CA$200,000 per contravention (where the insurer’s non-compliance is of a continuing nature, each day or part of a day is considered a separate offence for the purpose of determining the above-noted fine).
- Insurance intermediaries may have their certificates of authority revoked, suspended, or refused and/or may face fines of up to CA$5,000 per occurrence of a contravention of the applicable sections of the Insurance Act (Alberta).
Dentons Canada’s corporate and regulatory insurance team would be pleased to assist insurers and insurance intermediaries (including MGAs, brokers and agencies) with regulatory advice and guidance with respect to incentive arrangements’ compliance with the IM Guideline and the laws of the applicable provinces and territories.