CLHIA-ACCAP

6 C: REMUNERATION MODELS FOSTER FAIR OUTCOMES FOR CUSTOMERS; CONFLICTS OF INTEREST ARE MINIMIZED AND DISCLOSED International standards are that remuneration structures should be designed to encourage responsible business conduct, and that insurers and advisors need to manage potential conflicts of interest, either through avoiding the conflict or through disclosure. Recognizing that life insurance is a valuable asset for most customers but is a product that is sold rather than bought, the remuneration system generally used is commission-based, e.g., the advisor is paid by the manufacturer when a product is placed with them. Any remuneration system needs to fairly reward advisors for their work and avoid incenting them to make recommendations not in the best interests of the customer. In Canada, the potential for conflicts of interest (or the perception of such) is managed in a twofold way -- first, by fostering needs-based selling and making recommendations that are suitable to the customer, and second, by advisor disclosure about the insurers that they represent and how they are paid. This is reinforced through CCIR's principles for managing conflicts of interest, and supported by industry practices and guidelines. There are some international jurisdictions that have taken more extreme approaches, like banning commissions on certain products. These have generally been in response to specific mis-selling scandals that highlighted weaknesses in regulatory or industry structures or cultures in those jurisdictions. At least one other jurisdiction (Australia) is capping upfront commissions to address a "churning" problem, where one policy is replaced by another with questionable customer benefit, but a new commission is generated for the advisor. In this section, we consider three areas that could give rise to conflicts of interest (or a perception of such) if not properly managed: (i) replacements of life insurance policies; (ii) travel incentives related to the placement of policies with life insurance companies; and (iii) disclosure of distribution costs for wealth products. (i) Replacements As noted, Australia is restructuring its compensation system to address a churning problem. Does a similar problem exist here? Do current practices support customers' interests or are changes needed? The reality is that Canada does not have a systemic churning problem. The lapse rate (percentage of policies that are dropped, often in order to be replaced by another policy) in Australia is 15%. By contrast, Canada's lapse rate is 4%, and it's not clear how much -- if any -- of this is related to churning. Unlike churning, good replacements are driven by the customer's interest because their circumstances have changed or a different kind of policy offers better benefits, e.g. where new policies offer unique features not previously available or when insurance rates have dropped. Good practices already in place in Canada through regulation and industry guidelines help to ensure that when a policy is replaced, it is in the customer's interests to do so. Regulators require that the advisor provide the customer with a Life Insurance Replacement Declaration, which outlines eleven questions to be considered. The advisor is also required to provide a written detailed explanation of the advantages and disadvantages of replacing the policy. Insurers impose a "charge-back" period where advisors are required to repay their commissions if a policy is replaced within a specific time period. As well, insurers

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