Insurance industry under scrutiny

By Stéphane Desjardins | November 19 2004 05:10PM

A shock wave is rippling through the insurance industry as Canadian regulatory authorities insist on unprecedented disclosure of business practices.

On April 5, an anonymous letter was sent to New York State Attorney General Eliot Spitzer. The letter described how contingent commissions are paid at Marsh & McLennan, a global insurance brokerage firm. The letter underlined the potential conflict of interest resulting from the industry practice of insurers’ compensating advisors for sending business along.

Two days after receiving this letter, the Attorney General’s office lobbed the first subpoena at Marsh & McLennan. The repercussions of this gesture have since been felt in several countries.

In Canada, the regulatory authorities are also reacting to media exposés in recent months. Working in tandem with the Canadian Council of Insurance Regulators (CCIR), the authorities drew up questionnaires that were sent in early November to hundreds of firms and insurers across the country.

“We have to watch the global financial markets closely, and act accordingly to protect our population,” said Grant Swanson, executive director of licensing and market conduct with the Financial Services Commission of Ontario (FSCO).

Similarity in Quebec: “Our president, Jean St-Gelais, already confirmed that we must be able to act quickly and determinedly in case of crisis. That’s what we’re doing,” Philippe Roy, said spokesperson for the Quebec Autorité des marchés financiers (AMF).

In Ontario, even before the questionnaires were sent out, insurers and advisors had already decided to act in order to get a lead on critics that are clamouring for increasingly stringent disclosure practices for compensation in the industry (see opposite text).

Advisors up in arms

Many Canadian property and casualty (P&C) insurance advisors contacted by The Insurance Journal consider regulators’ and the public’s reaction to the Spitzer affair exaggerated. “They are hanging us without a trial, and we didn’t do anything wrong,” insists Richard Gulliver, president of national brokerage Hub International Limited. “It’s unfair.”

Mr. Gulliver admits that public debate over advisor compensation is a good idea. Yet “advisors are being accused of accepting illegal commissions, which is completely false. The insurance industry should not have to pay collectively for a few isolated cases.”

The executive hopes that the regulatory authorities will quickly do what they have to do and move on to something else.

“I just completed this notorious questionnaire and I will try to keep a polite tone,” said André Lussier, president of Lussier Insurance Firm and Financial services. “I think that right now a genuine witch hunt is under way. This questionnaire is nothing less than an Inquisition!”

“We’re also watching a show staged by the Attorney General (Eliot Spitzer), who whipped up a sensationalist stir based on an isolated event,” stated Mr. Lussier. “On top of that, we’ve got a regulator that is driven by an astounding urgency to take action. This whole story will lead to much more regulation, which will ultimately imperil the survival of many brokerage firms. Advisors that abide by professional standards and that have their clients’ interests at heart will be penalized. I would swear that the [Quebec regulator] never received a complaint from any consumer whatsoever since this affair began.”

Scepticism in life sector

In the life insurance sector, a similar response by regulators was pending at press time. “This operation is completely farfetched with respect to life insurance,” commented Lawrence Geller, president of L.l. Geller Insurance Agencies and moderator of the electronic forum For Advisors Only. “The dynamics in life have nothing to do with those of P&C insurance. Commissions do not raise the same problems in our sector.”

“There are many aspects of the life insurance industry that consumers are unaware of,” pointed out Jim Bullock, advisor and registrar at Peel Institute of Applied Finance.

Clients know that brokers receive a commission, he explained, but they have no idea of its size and its makeup. “Some advisors find themselves in a situation where they have to channel a large portion of their premiums to a single insurer if they want to obtain performance bonuses.”

He thinks that an inquiry would sound the death knell for gifts and tropical cruises lavished by insurers. He accepts this revolution good-naturedly, maybe because a similar one has already swept through the mutual funds sector.

Mr. Geller agrees. “In my 30 years of experience, I have gone south six times on insurers’ tab,” Mr. Geller said. “Only once was it a vacation. All the other times, they made us work like horses.”

“I think that the regulatory authorities are making such a hullabaloo to demonstrate that they are doing something useful,” Mr. Bullock continued. “They are trying to show that they are applying the laws. But in reality, many regulations are not being enforced.”

Mr. Geller gave the example of a regulation that requires Ontario life advisors to undergo accounting audits by the regulatory authorities or their insurers. “In 30 years, I was never audited by anyone. Sometimes, the regulatory authorities are completely ridiculous. And what’s happening these days is just par for the course.”