The Canadian Council of Insurance Regulators (CCIR) has published its observations related to insurers’ management and supervision of their distribution channels. Although focused on best practices, the report is also critical.

“Between December 2001 and March 2024, the CCIR conducted several joint supervisory reviews of insurers, which identified some harmful commercial practices resulting from business model and operational deficiencies, primarily involving independent distributions channels,” the regulators write in the joint report, CCIR Cooperative Review of Insurers’ Monitoring and Supervision of their Distribution Channels. “The work carried out also revealed that issues related to the selection of distributors were present in a large majority of the insurers covered by the mandate.” 

The regulators were motivated, in part, by the growth in the use of independent distribution channels by both property and casualty and life and health companies. They note that this growth occurred at a time when fair treatment of customers (FTC) audits by insurers were notably higher in their direct and exclusive channels when compared to those done for their independent networks.

To create the summary report, in June 2024, CCIR members sent a questionnaire to 19 insurers selected based on the nature, size and complexity of their activities, to assess their adherence to the CCIR’s monitoring and supervision expectations. The assessment additionally focused on the selection of distributors and representatives, insurers’ expectations, conflicts of interest and training.

Effective systems and controls 

“According to the CCIR’s guidance, Conduct of Insurance Business and Fair Treatment of Customers (guidance), insurers are expected to have effective systems and controls in place and communicate clear strategies for selecting, appointing and managing arrangements with intermediaries as part of their overall distribution plan,” the report states. “Insurers remain accountable for the FTC obligations, even when intermediaries are involved in offering the insurer’s products.” 

The report’s criticisms include that CCIR members found many insurers had processes in place for selecting distributors and representatives but that these were not always documented or formalized. “Additionally, selection decisions were often based solely on performance metrics, such as sales volumes,” they write. “Insurers could not obtain reasonable assurance that those offering their products had the necessary knowledge and ability to ensure FTC.” 

They say good practices to adopt include documenting formalized policies and processes (a theme that is repeated frequently throughout the paper), distributor questionnaires and periodic oversight controls to ensure that the criteria applied when initially selecting distributors, continues to be met throughout the duration of the business relationship.

Defining roles and responsibilities for selecting representatives, explicitly setting these out in contracts with distributors, and establishing periodic controls for ensuring that representatives also continue to meet established criteria over time, are also recommended in the report. “Insurers remain accountable to obtaining reasonable assurance that the representatives have the necessary knowledge and ability to ensure FTC,” the paper reiterates.

Controls, including random sampling, distributor disclosures, field audits and verification processes are all also discussed.

“Document and communicate their expectations,” the paper continues. “Implement mechanisms to obtain reasonable assurance that their expectations regarding the selection of representatives are being adequately met.” 

Directors’ responsibilities 

Boards of directors, meanwhile, are encouraged to define and document the board’s responsibilities regarding FTC within incentive programs. This includes assessing the risks associated with each incentive arrangement, prior to rollout, and a periodic review of compensation and performance management structures with a view of how these impact customers. “CCIR expects fair treatment of customers to be a core component of the governance and corporate culture of insurers,” they write.

The paper also looks at conflicts of interest, saying some insurers’ controls remained deficient in some cases. It was also noted that expectations regarding conflicts of interest were not always communicated to distributors. The paper recommends using contract language which clearly outlines expectations, remedial actions and the consequences of any breach. It also suggests insurers require periodic attestations about compliance with any ethical and compliance codes the insurer might have. Field audits are also discussed alongside annual distributor disclosure processes.

Training 

In matters of training, they say insurers are expected to provide relevant information and training to intermediaries to ensure they understand the target market and product characteristics. “Have written agreements in place to clearly define the conditions, scope and limits of contracted services, clarify roles and promote the fair treatment of customers,” they write, citing the CCIR’s guidance on the matter. “Manage contracts, once in place, to ensure that intermediaries continue to be authorized and remain suitable to do business with them and are in compliance with their contract conditions.” 

They note that several insurers had no FTC-specific training to offer their intermediaries.

Good practices identified in the paper include prohibiting distributors from developing training themselves. They also recommend requiring an annual statement of compliance with the prohibition on training development.

“Clearly define respective roles and responsibilities for training development. Enhance and effectively communicate expectations to distributors regarding specific training on product characteristics, risks and target consumer groups. Implement controls to obtain reasonable assurance that the individuals involved in offering their products have sufficient knowledge to ensure FTC,” they write. “Implement formalized controls to ensure that their expectations regarding specific FTC and product training are being fully met.” 

Ongoing supervision  

Finally, the report dedicates a fair amount of attention to the matter of supervision.

They note that insurers are expected to: 

  • Assess the performance of the various methods of distribution used, particularly in terms of fair treatment of customers and, if necessary, take the necessary remedial action. 
  • Review the client files of those under their responsibility to exercise control after the fact on the quality of the advice given. 
  • Ensure that mechanisms and controls are established to identify and deal with any departure from the organization’s strategies, policies and procedures, any conflicts of interest or any other situation likely to interfere with fair treatment of customers. 

“Across all channels, a number of oversight programs included few or no FTC elements,” they write. “Establishing oversight programs based solely on the achievement of sales volumes and underwriting standards was not sufficient to enable insurers to fully meet their FTC obligation.” 

Indicator tracking, including anomalies in sales volumes, cancellations, non-renewals, lapses and claim denial rates, by product type, and more broadly, along with establishing alert mechanisms based on indicator tracking are recommended as good practices. Complaints, representatives under investigation and customer satisfaction rates are also noted as possible indicators. The paper also recommends implementing formal call monitoring and random sampling of client files.

“Some insurers had provided expectations to independent distributors regarding the supervision of representatives without implementing ongoing supervision programs themselves. The CCIR members found that, in the case of many of these insurers, expectations were not clearly defined and communicated,” they write. “Insurers were not able to obtain reasonable assurance that distributors were adequately meeting their expectations.” 

Among the recommendations the CCIR makes for rectifying supervision, monitoring deficiencies, they conclude by saying insurers should clearly define roles and responsibilities for the supervision of both distributors and their representatives. “Enhance or implement formalized processes or mechanisms for supervising distributors and representatives in order to incorporate elements relating to FTC. Formalize processes for following up on recommendations issued to distributors and representatives,” they write. “Implement robust controls.” 

The CCIR also concludes saying insurers should review the report and use it as a self-assessment reference tool. “The report is meant to help insurers clarify insurance regulators’ requirements, identify areas for improvement and measures required to strengthen FTC business practices related to monitoring and supervision of distribution channels.”