In Canada, some provincial and territorial insurance regulators prescribe certain disclosure requirements to prospective clients in connection with fees and commissions charged by property and casualty, life, and accident and sickness agents.
While premiums are required to be disclosed at the time of entering into an insurance contract with the insured, there are certain charges beyond premiums that may, or may not, require disclosure pursuant to provincial insurance legislation in Canada. In addition, a disclosure that is required by law may also require the use of a prescribed form of disclosure that agents are required to use. Broker and agent uncertainty with respect to their disclosure obligations regarding fees and commissions may include questions such as the following:
- What type of fees are required to be disclosed?
- Do broker and agent disclosure obligations include commissions?
- Are certain fees included as part of the premium?
- Is disclosure required before or after entering into the insurance transaction?
- Is disclosure required in writing?
- Are there thresholds for disclosure of fees?
- What, if at the time of the insurance transaction, there are certain fees that are unknown?
The answer to these questions depend on the type of license held by the agent or broker and the applicable province or territory (jurisdiction) in which the agent or broker conducts business.
What is included in premiums, fees and commissions?
Generally, in the context of an insurance transaction, a commission is the receipt of remuneration for acquiring certain insurance business on behalf of an insurer. A commission is typically built into the premium amount presented to a prospective client. Certain jurisdictions require commissions be disclosed, while others do not require such disclosure. For example, an agent or broker licensed in Manitoba would not be required to disclose receipt of a commission resulting from an insurance transaction. Conversely, an agent or broker that completes an insurance transaction in Newfoundland would be required to disclose the receipt of a commission to the consumer in a prescribed form.
As for fees, they may be regarded as anything beyond the payment of premiums, such as administrative charges. The applicable legislation in certain jurisdictions specifically defines and describes what is included in fees, commissions, and premiums. In addition, certain jurisdictions provide thresholds in connection with fee disclosure requirements; brokers and insurers must be aware of the disclosure requirements and nuances across the jurisdictions in which they conduct insurance business. Some jurisdictions mandate that certain fees are included in the final premium payable by the consumer, while others distinguish between fees and premiums, which ultimately results in a separate disclosure and set of requirements to adhere to with respect to additional fees charged to the consumer. For instance, the Insurance Act (Saskatchewan) indicates that a “fee” does not include the premium payable pursuant to a contract of insurance, yet the Insurance Act (Yukon) provides that the definition of ‘premium’ includes administration fees, among others, paid for the administration or servicing of an insurance contract. Additionally, similar to disclosure of commissions, disclosure obligations concerning fees differs among jurisdictions, but the vast majority of jurisdictions require disclosure of such fees.
The Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) published guidance with respect to the Conduct of Insurance Business and Fair Treatment of Customers. Such guidance describes, among other things, the expectations of CCIR and CISRO with respect to client disclosure obligations. It is expected that customers receive any information about key features of an insurance contract, including fees. Despite the nuances across provincial legislation with respect to fees, CCIR and CISRO have indicated that fees must be disclosed to consumers in the context of an insurance transaction. Information regarding what is included in such fees, whether premiums include certain fees, the forms of disclosure required in relation to commissions and fees, thresholds for disclosure – each differentiate across jurisdictions.
Prohibited practices, client complaints, and possible limits on compensation arrangements
Licensed insurance professionals should always remember that they are prohibited from engaging in unfair, coercive or deceptive insurance practices. Depending on the facts and circumstances arising from a client complaint, the failure to disclose fees and commissions may be perceived as unfair, coercive or deceptive insurance practices. As licensed professionals, insurance agents and brokers must be knowledgeable of their disclosure obligations in connection with fees and commissions in the jurisdictions which they conduct business, ensuring that they are avoiding unfair outcomes to customers and insureds.
As a final note, licensed insurance professionals should be aware that CCIR and CISRO recently issued draft guidance titled Incentive Management Guidance, which is currently subject to public consultation. If adopted, this principles-based guideline will set out expectations for insurers and intermediaries whom are engaged in the payment of compensation or the designing of incentive arrangements related to the sale and servicing of insurance products. While beyond the scope of this publication, licensed insurance professionals should familiarize themselves with this guidance, as it will have an impact, if adopted, on the manner by which fees and other incentive arrangements are structured, designed, and paid.
For more information regarding fee and commission disclosure requirements by province or territory, please contact Derek Levinsky or Taschina Ashmeade in the Corporate and Regulatory Insurance groups at Dentons.