As the next group of products under scrutiny by various regulators, insurers and intermediaries should be aware of proposed guidance recently released by The Canadian Counsel of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO). The proposed Incentive Management Guidance is intended to provide illustrations and guidance on how incentive arrangements related to the sales and servicing of insurance products should be designed in order to meet the expectations of the existing CCIR-CISRO Guidance involving the fair treatment of customers, which came into force in 2018. Since that time, insurance regulators have determined that some practices may present risks to the fair treatment of customers and that additional guidance is needed.

The proposed guidance is principles-based and provides flexibility to design policies and controls to support fair customer outcomes based on the nature, size and complexity of the activities of insurers and intermediaries. “Intermediaries” include individual agents, brokers and business entities authorized to distribute insurance products and services, including managing general agencies. In the guidance, “incentives” include both monetary and non-monetary compensation offered by insurers and intermediaries to their employees and other persons acting on their behalf in the sale and servicing of insurance products. Among other expectations, CCIR and CISRO note that insurers and intermediaries’ governance culture must place the fair treatment of customers at the center of decisions concerning the design and management of incentive arrangements. It is also suggested that as part of the management of these arrangements, appropriate deterrents should be established to actively discourage behaviours that could cause unfair outcomes to customers, and provide arrangements for recovering, when appropriate, the compensation once it has been paid out. Post-sale controls should also be established to identify inappropriate sales resulting from incentive arrangements.

An appendix to the guideline contains examples where certain components of incentive arrangements (without appropriate controls) may increase the risk of unfair outcomes for customers. Examples include:

  • arrangements with excessive incentives for cross-selling optional products;
  • bonus rates that increase with predetermined sales volumes thresholds without adequate consideration to the fair treatment of customers;
  • lifetime vesting of renewal commissions to intermediaries which can result in eventual client orphaning; and
  • incentive arrangements which can result in penalties (e.g. exit fees) for the customer.

Earlier this month, the same regulators announced their position on the use of Deferred Sales Charges in segregated fund contract sales. They further indicated that insurers should refrain from new DSC sales with an eye on the June 1, 2022 ban of mutual fund DSC sales and expect a transition to stopping such sales on seg funds by June 1, 2023. They also indicated an intention to consult on other upfront commissions in individual variable insurance contracts later this year.

Comments on the proposed guidance are due April 4, 2022.

February 28, 2022