2014 09 - FSCO / FSRA - Report - Life Insurance Product Suitability Report - 52p

  • (p1) - As a regulator, it is important for FSCO to understand what is occurring in the marketplace and to take a more proactive approach to market conduct regulation, rather than wait for problems to arise.
  • (p1) - results from the Questionnaire - best practices on product suitability at the point of sale
  • (p2) - There is also currently a focus by all levels of government on financial literacy, specifically making sure people understand what they are buying. Financial literacy is considered an important skill that enables consumers to make informed decisions, thereby helping to promote a strong and stable financial system.
  • (p2) - This was an information-gathering exercise for FSCO to be better informed of industry practices. It was not based on complaints received, nor any concerns or problems identified.
  • (p2) - For the purposes of the review, product suitability referred to:
    • the appropriateness of the product for the client’s needs and circumstances;
    • most appropriate product based on products or contracts available to the life insurance agent at the point of sale; and
    • the affordability by the client.
  • (p2) - The review also did not take into account the suitability of advice related to the investment strategy of any associated product.
  • (p2) - principles for managing conflicts of interest in the insurance industry:
    • Priority of Client’s Interest;
    • Disclosure of Conflicts or potential Conflicts of Interest; and
    • Product Suitability.
  • (p2-3) - <WishList? -  In June 2007, FSCO sent a questionnaire regarding “Managing Conflicts of Interest” to a randomly selected sample of 1,400 Ontario agents to determine the extent to which the principles were being applied and the way in which they were being applied and documented.
    • The results of that survey of agents indicated a high level of implementation of activities and practices at the point of sale, which supported the three principles.
    • Regulators expected that the life insurance industry would continue to promote these principles and that implementation would increase.
    • This was an underlying premise for developing the 2013 Questionnaire.
  • (p3) - FSCO engaged representatives from Advocis, Canadian Association of Financial Institutions (CAFII), Canadian Association of Independent Life Brokerage Agencies (CAILBA), Canadian Life & Health Insurance Association
    (CLHIA), Independent Financial Brokers of Canada (IFB), OmbudService for Life and Health Insurance (OLHI) and Ombudsman, Compliance and Complaints Officers of several insurers.

    • FSCO also considered stakeholders’ views on best approaches to assess what occurs at the point of sale.
  • (p3) - FSCO received information during the consultative process and reviewed industry practices described in the document The Approach: Servicing the Client Through Needs-Based Sales Practices.
    • The Approach was developed collaboratively by Advocis, CAILBA, CLHIA and IFB, and published in October 2007.
    • Based on the above, FSCO prepared a flowchart representing what could be considered the best practices for a typical individual life insurance sales process.
    • In order to determine how the actions of agents match these best practices, which were identified during the stakeholder consultations, FSCO also prepared a questionnaire to gather information on the practices of individual life insurance agents at the point of sale.
  • (p4) - March 10, 2014, FSCO reopened the Questionnaire to allow additional responses from noncomplying agents. As a result, the final response rate improved to 92 per cent.
  • (p4) - Observations - Stakeholder Consultations
    • 1. Sales Process Best Practices - FSCO consulted with seven stakeholder groups who were asked to:
      • describe the typical individual life insurance sales process when a life insurance agent meets face-to-face with a potential policyholder; and
      • outline the best practices for determining product suitability during this process
    • As described by stakeholders, the best practices of life insurance agents, from the initial meeting with a client until the policy is issued, are largely reflected in the needs-based sales practices described in The  Approach. The general principle of The Approach is that the recommended product or service must be appropriate for the needs of the client, as determined
      by a needs-based assessment done by the advisor and/or identified by the client, to the extent to which the client has chosen to provide their financial and personal information.
    • (p6) - At the end of this process, the client should have all the necessary information to make an informed decision.
  • 2. Financial Literacy
    • According to the Financial Consumer Agency of Canada, financial literacy means having the knowledge, skills and confidence to make responsible financial decisions. Within that definition,
      • Knowledge refers to an understanding of personal and broader financial matters;
      • Skills refers to the ability to apply that financial knowledge in everyday life;
      • Confidence means having the self-assurance to make important decisions; and
      • Responsible financial decisions refers to the ability of individuals to use the knowledge, skills and confidence they have gained to make choices appropriate to their own circumstances.
  • Stakeholders were also consulted on the life insurance agent’s role in supporting the financial literacy of their clients.
    • The general view was that life insurance agents are responsible for educating their clients about life insurance related matters, particularly with respect to the product options available and the recommended product.
      • ⇒ Provision of any additional financial information would be the role of a financial planner, not an insurance agent. However, some agents were of the view that financial literacy should be addressed during the needs and risk assessments.
  • (p6) - 2013 Life Insurance Agent Questionnaire 
  • 1. Responses to the Questionnaire
    • The 2013 Life Insurance Agent Questionnaire was sent via email to 1,348 randomly selected Ontario licensed life insurance agents on October 15, 2013. Completion of the online. Questionnaire was mandatory pursuant to sections 442.1 “Inquiries” and 442.3 “Duty to Provide Information” of the Insurance Act, and the selected agents were required to complete the Questionnaire by November 15, 2013.
    • The survey and responses can be found in Appendix 2.
  • (p7) - The Questionnaire, which was designed to determine how closely the actual practices of agents match the industry practices identified during the stakeholder consultations, consisted of 39 questions and was divided into the following 5 categories:
    1. Agent Profile;
    2. Knowledge of Clients and Products;
    3. Recommendation and Documentation;
    4. Disclosure of Conflicts and Potential Conflicts of Interest; and
    5. Financial Literacy of Clients.