Reading between the lines

Regulators are in a tough spot.

They must represent the interests of all; at the same time, they must issue laws that restrict or expand the rights of a few.

Regulators are therefore mindful that they do not give opponents any ammunition for potential conflict of interest accusations prior to issuing policy directives or laws. For this reason, when regulators issue documents prior to making recommendations, they often – understandably – write reports without conclusions.

There is a certain kind of art to reading these regulatory reports. As we all know, reading policy documents requires the use of a manual that translates Bureaucratese into simple, straightforward language.

In this spirit, we turn to the recently published, ‘Summary of Responses on the Consultation Paper on Relationships Between Insurers and Sales Intermediaries – Achieving Best Practices.’

The Industry Practices Review Committee (IPRC) of the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) published this much – awaited document in November 2005.

To sum up, this is the regulators answer to everything the Canadian insurance industry has been telling them over the past year about disclosure and transparency issues.

The bulk of the IPRC’s report is 13 pages. On the face of it, the report draws no conclusions: “The IPRC will now be turning its attention to the five themes outlined in this paper to determine whether any recommendations should be made.”

Translation: We are now working on the recommendations.

Each of the report’s five themes revolves around a particular question. The report contains the respondents’ – read: the insurance industry’s – answers to these questions, followed by IPCR analysis.

Here is a Canadian Underwriter guide to interpreting the IPCR analysis, as excerpted from the report.

Theme 1: Is there need for a regulatory review?

Excerpted IPRC Analysis: Regulators and the industry have taken steps to address consumer confidence by managing potential conflicts of interest… However, regulatory requirements and industry association codes are not uniform across the country. At a minimum, there is an opportunity to further harmonize the best practices across Canada.

Translation: “We will soon be rolling out disclosure and transparency regulations for insurance brokers and companies across the country. It’s ‘Dealer’s Choice’ as to which of the existing standards we will use as our national model.”

Theme 2: Should independence be defined?

Excerpted IPCR analysis: If all the intermediaries are held to the same ethical standards, then it may not be necessary to define ‘independence’ as a rule to distinguish roles between different intermediaries. However, the number of markets intermediaries represent differs, and consumers need to be aware of this.

Translation: “Independence should be defined in law, but existing laws don’t do a good job of this and we don’t want to contribute to the legal mumbo-jumbo. It would be much easier to make sure agents and brokers follow the same ethical and disclosure standards across the country when they indicate to consumers how many companies they represent.”

Theme 3: Should legislation or regulation require that the client’s interest come first?

Excerpted ICPR analysis: Given the range of duties currently imposed by common law, council by-laws or regulations requiring the priority of the clients interest, the IPCR would like to better understand why some respondents believe formalizing such a requirement on a harmonized basis would increase their costs or why they feel it would be difficult to enforce.

Translation: “We intend to regulate in this area. We’ve heard the insurance industry’s opposition on this matter, but we simply don’t buy it. Perhaps the insurance industry can make its points on this matter clearer, so that we can refute these arguments in our forthcoming regulations….”

Theme 4: Do performance-linked benefits or other financial links lead to conflicts of interest?

Excerpted ICPR analysis: The ICPR believes the potential conflicts of interest that may arise through these incentives and financial arrangements can be managed in a way that is practical, economically sensible, and reflective of best practices.

Translation: “Our new regulatory framework – including mandatory disclosure standards – will help companies ‘manage’ these apparent conflicts.”

Theme 5: Is the current level of disclosure to insurance consumers adequate and consistent across jurisdictions?

Excerpted ICPR analysis: The role of documented product suitability recommendations by the agent or broker to address the client’s needs and to outline the extent of market search will be explored further by the ICPR.

Translation: “Memo to brokers and agents: you’re going to have to document and tell your clients why you picked a particular product for them. And you’ll have to show them you did more than just go down the street and get a single quote from Joe Blow at Insurance Company Z.”